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

SUMMARY

The Company's net income for the three months ended June 30, 2008, increased to $848 thousand, or $.40 per diluted share, compared to $613 thousand, or $.29 per diluted share, for the quarter ended June 30, 2007. For the six month period ended June 30, 2008, net income and earnings per share were $1.7 million and $0.80 per diluted share, respectively, compared to $1.0 million and $0.49 per diluted share, respectively, for the same period in 2007. Higher net income for the quarter and six months ended June 30, 2008, reflects recovery from losses realized in connection with sales of investment securities in 2007 as well as unrealized losses resulting from the marking-to-market of our investment portfolio in 2007. These losses are explained in more detail in the Company's Form 10-Q for the period ended June 30, 2007.

Total assets increased $23.5 million from $368.3 million at December 31, 2007 to $391.8 million at June 30, 2008. Cash and due from banks decreased to $7.5 million at June 30, 2008, from $8.7 million at December 31, 2007. The available-for-sale investment securities portfolio increased from December 31, 2007, by $22.6 million to $86.6 million at June 30, 2008, primarily from the purchase of $30 million of investment securities offset by monthly pay-downs. Net loans, excluding loans held for sale, at June 30, 2008, increased $6.9 million to $230.2 million since December 31, 2007. Other real estate owned decreased $337 thousand over the same period. Since December 31, 2007, total deposits have decreased $4.7 million to $241.7 million at June 30, 2008, while borrowings have increased $29.2 million over the same period primarily to cover the purchase of investment securities. Total stockholders' equity increased $121 thousand to $35.9 million at June 30, 2008 from $35.8 million at December 31, 2007.

Overall asset quality for the Company at June 30, 2008, remains stable. Although the Company experienced some declines in certain asset quality measures during the first quarter of 2008, which reflected the general slowing of the national economy and the local economies in which it operates, asset quality measures in the second quarter of 2008 remained substantially in line with the levels at March 31, 2008. Non-performing assets to loans and foreclosed real estate increased to 1.86% at June 30, 2008 as compared to .92% at December 31, 2007 and 1.82% at March 31, 2008. The Company expects its portfolio management process, including its underwriting standards and early involvement in problem loans will allow the Company to identify early any further weakening of asset quality during the current economic downturn.

Financial Condition

Assets

The Company's total assets increased $23.5 million from $368.3 million at December 31, 2007, to $391.8 million at June 30, 2008. The increase was primarily due to growth in the loan portfolio of $6.9 million and an $18.8 million increase in the investment securities portfolio from purchases of additional investment securities.

Investment Securities

The Company's investment securities portfolio at June 30, 2008, consists of mortgage-backed and municipal securities. Investment securities that are deemed to be held-to-maturity are accounted for by the amortized cost method while securities in the available-for-sale category are accounted for at fair value with valuation adjustments recorded in the equity section through other comprehensive income/ (loss).

Management determines the classification of its securities at acquisition. Total held-to-maturity and available-for-sale investment securities were $140.6 million at June 30, 2008, representing an increase of $17.4 million since December 31, 2007. The increase in securities was due to investing public demand deposits received as a result of a successful bid on local county deposits. Additionally, the improved market allowed the Company to prefund future cash flows that are expected from the current portfolio. Under its prefunding strategy, the Company obtains short-term funding, typically from the Federal Home Loan Bank ("FHLB"), to acquire investment securities and then uses the cash flows generated by such securities in the subsequent two to three quarters to repay the short-term funding. The Company employs this prefunding strategy from time to time to take advantage of favorable interest rate spreads between the short-term funding and the investment securities purchased with such funding. Equity securities increased $1.3 million due to the purchase of FHLB stock held by the Company which was required due to the increase in FHLB borrowings in connection with the above described prefunding strategy. Equity securities are comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $3.0 million, the Company's investment in its statutory trust of $155 thousand and ECD Investments, LLC membership interests of $100 thousand.

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

COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)

                               06/30/08          12/31/07
Mortgage-Backed Securities   $ 103,275,807     $  84,741,030
Obligations of State and
Political Subdivisions          38,063,668        38,004,634
       Total                 $ 141,339,475     $ 122,745,664

Loans

Net loans held to maturity increased $6.9 million during the first six months of 2008. Increases in loans of $12.3 million in the Company's Baton Rouge, Louisiana market offset a decrease in loans of $2.3 million in the Company's Vicksburg, Mississippi market and a decrease of $3.1 million in loans in the Company's Natchez, Mississippi market. Further declines are expected to occur in the residential real estate portfolio, primarily in the Natchez market, as management plans to replace cash flows from these loans with higher yielding commercial loans mainly in Baton Rouge. Although management has been implementing this shift from residential real estate loans to commercial real estate loans for some time and believes that loan yield should improve in the process, it is aware that this transition will place pressure on loan volumes and in fact total loan volumes may decline throughout the remainder of the year.

Gross loans to total assets decreased to 58.8% at June 30, 2008, compared to 60.6% at December 31, 2007. At June 30, 2008, the loan to deposit ratio was 95.3% compared to 90.6% at December 31, 2007. The following table presents the Bank's loan portfolio composition at June 30, 2008, and December 31, 2007.

COMPOSITION OF LOAN PORTFOLIO
                                         06/30/08          12/31/07
Commercial, financial & agricultural   $  24,530,000     $  25,884,000
Real estate-construction                  47,326,000        45,097,000
Real estate-1-4 family residential        65,219,000        68,041,000
Real estate-other                         86,129,000        76,520,000
Installment                                6,844,000         7,550,000
Other                                        182,000           261,000
Total loans                            $ 230,230,000     $ 223,353,000

The Company's loan portfolio at June 30, 2008, had no significant concentrations of loans other than in the categories presented in the table above.

Bank Premises

There have been no material changes in the Company's premises since year-end, although the Company has recently purchased a site for a new branch facility in Baton Rouge, Louisiana, as described in "Liquidity and Capital Resources" below.

Asset Quality

Non-performing assets which include non-accrual loans, loans 90 days or more delinquent and foreclosed real estate, increased $2.6 million to $4.3 million at June 30, 2008, from $2.1 million at December 31, 2007. The ratio of non-performing assets to total assets increased to 1.09% at June 30, 2008, from .56% at December 31, 2007, while the ratio of non-performing loans to total loans was 1.68% at June 30, 2008, compared to .59% at December 31, 2007. The increase in non-performing assets from December 31, 2007 to June 30, 2008 was primarily related to three commercial loans totaling approximately $2.6 million. Two of these loans were discussed in detail in the Company's Form 10-Q for the three months ended March 31, 2008. Payment of approximately $1 million was received on one of these loans in the second quarter of 2008. This reduction was offset, however, by the nonaccrual classification of a commercial real estate credit facility of approximately $1 million in the second quarter of 2008. Since June 30, 2008, the Company has charged off an aggregate of $365 thousand with respect to two of the three commercial loans mentioned above and has initiated foreclosure proceedings against these borrowers. The Company considers its reserves with respect to these three credits to be adequate as of June 30, 2008, and after taking into account the subsequent charge-offs. A breakdown of nonperforming assets at June 30, 2008, and December 31, 2007, is shown below.

BREAKDOWN OF NONPERFORMING ASSETS

                                                                     06/30/08        12/31/07
                                                                     (dollars in thousands)
Non-accrual loans by type:
Real estate                                                        $      2,930     $      992
Installment                                                                  81             87
Commercial and all other loans                                              605            223
Total non-accrual loans                                                   3,616          1,302
Loans past due 90 days or more                                              254             12
Total nonperforming loans                                                 3,870          1,314
Other real estate owned (net)                                               410            747
Total nonperforming assets                                         $      4,280     $    2,061
Nonperforming loans as a percent of loans, net of unearned
interest and loans held for sale                                           1.68 %          .59 %

Allowance for Possible Loan Losses

The allowance for loan losses is established as losses are estimated through a provision for loan losses charged against operations and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. The allowance is subject to change as management reevaluates the adequacy of the allowance. Management's judgment in determining the adequacy of the allowance is inherently subjective and is based on the evaluation of individual loans, the known and inherent risk characteristics and size of the loan portfolios, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience, review of regulatory authority examination reports and evaluations of specific loans and other relevant factors. Each loan is assigned a risk rating between one and nine with a rating of "one" being the least risk and a rating of "nine" reflecting the most risk or a complete loss. Risk ratings are assigned by the originating loan officer or loan committee at the initiation of the transactions and are reviewed and changed, when necessary, during the life of the loan.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are considered impaired. Loan loss reserve factors are multiplied against the balances in each risk rating category to arrive at the appropriate level for the allowance for loan losses. Loans assigned a risk rating of "five" or above are monitored more closely by management. The general component of the allowance for loan losses groups loans with similar characteristics and allocates a percentage based upon historical losses and the inherent risks within each category. The unallocated portion of the allowance reflects management's estimate of probable but undetected losses inherent in the portfolio; such estimates are influenced by uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. The methodology for determining the adequacy of the allowance for loan losses is consistently applied; however, revisions may be made to the methodology and assumptions based on historical information related to charge-off and recovery experience and management's evaluation of the current loan portfolio.

Based upon this evaluation, management believes the allowance for loan losses of $2.5 million at June 30, 2008, which represents 1.07% of gross loans held to maturity, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans. At June 30, 2008, total reserves included specific reserves of $1.0 million, general reserves of $1.0 million and unallocated economic reserves of $500 thousand. At December 31, 2007, the allowance for loan loss was $2.4 million, or 1.09% of gross loans held to maturity.

The provision for possible loan losses is a charge to earnings to maintain the allowance for possible loan losses at a level consistent with management's assessment of the loan portfolio in light of current and expected economic conditions. During the six month period ended June 30, 2008, the Company's provision for loan losses increased by $40 thousand to $240 thousand compared to the same period in 2007. This increase is a result of a $40 thousand increase in the provision in the second quarter of 2008 as compared to the second quarter of 2007. The additional provision was added in response to increases in net charge-offs from $135 thousand as of June 30, 2007, to $201 thousand as of June 30, 2008. The increase in net charge-offs primarily occurred during the first quarter of 2008. Net charge-offs totaled $175 thousand in the first quarter of 2008 and $27 thousand in the second quarter.

The Company regularly reviews the allowance in an effort to maintain it at an adequate level and provide necessary data to maintain a proper provision expense to earnings. Based upon this evaluation, and considering the net charge-offs in the first six months and anticipated charge-offs in the third quarter of 2008, management currently believes that the provision for possible loan losses of $40 thousand per month will be adequate for the remainder of the year to provide coverage for possible loan losses that may be inherent in the portfolio. The following table details allowance activity for the six months ended June 30, 2008, and June 30, 2007:

ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES


                                                                     06/30/08        06/30/07
                                                                     (dollars in thousands)
Balance at beginning of period                                     $      2,431     $    2,344
Charge-offs:
Real Estate                                                                (317 )          (75 )
Commercial                                                                  (65 )          (74 )
Installment and other                                                       (32 )          (40 )
Recoveries:
Real Estate                                                                  17              1
Commercial                                                                  147             23
Installment and other                                                        48             30
Net (charge-offs)/recoveries                                               (202 )         (135 )
Provision charged to operations                                             240            200
Balance at end of period                                           $      2,469     $    2,409
Allowance for loan losses as a percent of loans, net of unearned
interest & loans held for sale                                             1.07 %          .97 %
Net charge-offs as a percent of average loans                               .09 %          .05 %

Potential Problem Loans

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

Deposits

Total deposits decreased $4.7 million from $246.4 million at December 31, 2007, to $241.7 million at June 30, 2008. The decrease in deposits is due primarily to the intentional decrease of brokered and public fund deposits amounting to $6.1 and $4.9 million, respectively, since the beginning of 2008. The Company from time to time uses the brokered certificate of deposit market and public funds as an asset liability management tool. These deposits generally are gathered on a bid basis and considered wholesale in nature. As interest rates continued to fall in 2008, the Company decided to use other means of funding such as FHLB borrowings. Additionally, the decrease in these wholesale funds was offset by increases in what the Company considers core deposits in the amount of approximately $7.5 million.

COMPOSITION OF DEPOSITS

                                  06/30/08          12/31/07
Non-Interest Bearing            $  48,580,909     $  47,305,927
NOW Accounts                       23,110,230        24,056,081
Money Market Deposit Accounts      41,970,580        34,449,399
Savings Accounts                   18,026,181        17,310,284
Certificates of Deposit           110,009,825       123,272,459
Total Deposits                  $ 241,697,725     $ 246,394,150

Borrowings

Total bank borrowings, including FHLB advances, federal funds purchased and customer repurchase agreements, increased $29.2 million from $77.4 million at December 31, 2007 to $106.6 million at June 30, 2008. The majority of the increase was the result of the Company increasing its FHLB advances to finance the purchase of additional investment securities, as described earlier. Included in the increase were the Company's customer repurchase agreements which grew $3.3 million. Because of the nature of a customer repurchase agreement, the Bank must include these liabilities as borrowings rather than local customer deposits. These contracts are primarily made with local customers to sweep overnight funds from their deposit accounts. Management believes these accounts perform more like core deposits rather than wholesale borrowings.

Capital

Stockholders' equity totaled $35.9 million at June 30, 2008, compared to $35.8 million at December 31, 2007. The Company posted earnings of $1.7 million which were offset by $818 thousand primarily in unrealized losses in the available-for-sale investment portfolio and $762 thousand in dividends paid.

Losses in the available-for-sale investment portfolio included in comprehensive income are considered declines due to interest rates and are therefore only a temporary impairment of the security.

Components of comprehensive income are excluded from the calculation of capital ratios. The Company maintained a total capital to risk weighted assets ratio of 16.46%, a Tier 1 capital to risk weighted assets ratio of 15.52% and a leverage ratio of 10.72% at June 30, 2008. These levels substantially exceed the minimum requirements of bank regulatory agencies for well-capitalized institutions of 10.00%, 6.00% and 5.00%, respectively. The ratio of shareholders' equity to assets decreased to 9.2% at June 30, 2008, compared to 9.7% at December 31, 2007, primarily from the increase in total assets.

Off-Balance Sheet Arrangements

There have been no significant changes in the Company's off-balance sheet arrangements during the three months ended June 30, 2008. See Note B and Note E to the Company's consolidated financial statements for a description of the Company's off-balance sheet arrangements.

Results of Operations

Net Income

Net income for the three months ended June 30, 2008, increased to $848 thousand, or $0.40 per diluted share, compared to $613 thousand, or $0.29 per diluted share, for the same period in 2007. Returns on average assets and average equity were .89% and 9.31%, respectively, for the three months ended June 30, 2008, compared to .67% and 7.26%, respectively, for the same period in 2007. The increase reflects recovery from losses realized in connection with sales of investment securities in 2007 as well as unrealized losses resulting from the marking-to-market of our investment portfolio in 2007, as discussed above.

For the six months ended June 30, 2008, net income was $1.7 million, or $0.80 per diluted share, compared to $1.0 million, or $0.49 per diluted share, for the same period in 2007. This increase, similar to the increase for the three months ended June 30, 2008, was due to the recovery from losses on sales of investment securities and the mark-to-market investment portfolio losses experienced in 2007.

Net Interest Income and Net Interest Margin

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

Net interest income decreased $19 thousand to $3.4 million for the three months ended June 30, 2008, as compared to the same period in 2007. Net interest income improved as average earning assets increased by $13.7 million to $364.9 million. However, offsetting the volume increase in average earning assets was a decline in interest rate spread. The Company's interest rate spread, which is the difference in the weighted average interest rate on earning assets less the weighted average interest rate on interest bearing liabilities, declined 3 basis points to 3.14% for the quarter ended June 30, 2008, compared to 3.17% during the same period in 2007. Also contributing to the decline were lower fees on loans for the three months ended June 30, 2008, compared to the same period in 2007. Net interest margin declined to 3.74% from 3.91% for the same comparable periods.

For the six months ended June 30, 2008, net interest income increased $50 thousand to $6.7 million compared to the same period in 2007. Average earning assets increased $8.7 million to $359.0 million. This increase in volumes in the first six months of 2008 contributed $30 thousand toward the increase in net interest income. The interest rate environment also provided a positive impact in the first six months of 2008, as the interest rate spread increased slightly and added $20 thousand to net interest income. Fee income also improved in the second quarter of 2008 over the first quarter adding to year to date net interest income. Net interest margin decreased to 3.76% for the six months ended June 30, 2008, compared to 3.82% in the same period in 2007.

Non-Interest Income

Non-interest income increased by $467 thousand and $1.1 million for the three and six month period ended June 30, 2008, compared to the same periods in 2007. As mentioned above, the increases are primarily the result of the recovery from losses realized in connection with sales of investment securities in 2007 as well as unrealized losses resulting from the marking-to-market of our investment portfolio in 2007. Other factors include increases in service charges on deposit accounts of $42 and $48 thousand for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007.

Non-Interest Expense

Non-interest expense includes salaries and benefits, occupancy, equipment and other operating expenses. Non-interest expense for the three months ended June 30, 2008, increased $59 thousand to $2.8 million compared to the same period in 2007. Increases in personnel costs were partially offset by decreases in occupancy and equipment expenses.

Non-interest expense of $5.7 million for the six months ended June 30, 2008, was equal to the same period in 2007. During 2008, personnel costs increased $261 thousand to $3.2 million compared to $2.9 million in 2007. This increase was partially offset by lower foreclosed real estate costs of $150 thousand in 2008. Higher personnel costs primarily reflect recruitment in the lending and cash management-treasury areas.

Income Taxes

The Company recorded income tax expense of $290 thousand for the three months ended June 30, 2008, compared to $136 thousand for the same period in 2007.Income tax expense for the six months ended June 30, 2008, was $576 thousand compared to $169 thousand during the same period in 2007. The increase in both periods was related to adjustments regarding the adoption of Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," in 2007.

Liquidity and Capital Resources

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

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

. . .