For the transition period from ____________ to _____________

202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387

(Address of principal executive offices)(Zip Code)

(574) 267-6144

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 [ ]

Indicate by check mark whether 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 Act). (check one):

Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer[ ] (do not check if a smaller reporting company) Smaller reporting company [ ]

Number of shares of common stock outstanding at JulyOctober 31, 2008: 12,288,64812,307,998

LAKELAND FINANCIAL CORPORATION

Form 10-Q Quarterly Report

Table of Contents

PART I.

PART II.

PART 1

LAKELAND FINANCIAL CORPORATION

ITEM 1 – FINANCIAL STATEMENTS

LAKELAND FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

As of JuneSeptember 30, 2008 and December 31, 2007

(in thousands except for share data)

(Page 1 of 2)

(continued)

LAKELAND FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

As of JuneSeptember 30, 2008 and December 31, 2007

(in thousands except for share data)  

(Page 2 of 2)

  The accompanying notes are an integral part of these consolidated financial statements.

LAKELAND FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Three Months and SixNine Months Ended JuneSeptember 30, 2008 and 2007

(in thousands except for share and per share data)

(Unaudited)

(Page 1 of 2)

(continued)

LAKELAND FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Three Months and SixNine Months Ended JuneSeptember 30, 2008 and 2007

(in thousands except for share and per share data)

(Unaudited)

(Page 2 of 2)

The accompanying notes are an integral part of these consolidated financial statements.

LAKELAND FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the SixNine Months Ended JuneSeptember 30, 2008 and 2007

(in thousands)

(Unaudited)

(Page 1 of 2)

(Continued)

LAKELAND FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the SixNine Months Ended JuneSeptember 30, 2008 and 2007

(in thousands)

(Unaudited)

(Page 2 of 2)

The accompanying notes are an integral part of these consolidated financial statements.

LAKELAND FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JuneSeptember 30, 2008

(Table Amounts In thousands)

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

This report is filed for Lakeland Financial Corporation (the “Company”) and its wholly owned subsidiary, Lake City Bank (the “Bank”). All significant inter-company balances and transactions have been eliminated in consolidation. Also included is the Bank’s wholly-ownedwholly owned subsidiary, LCB Investments II, Inc. (“LCB Investments”). LCB Investments also owns LCB Funding, Inc. (“LCB Funding”), a real estate investment trust.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three-month and six-monthnine-month periods ending JuneSeptember 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The 2007 Lakeland Financial Corporation Annual Report on Form 10-K should be read in conjunction with these statements.

NOTE 2. EARNINGS PER SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Stock options for 72,00087,000 and 8,00014,000 shares as of JuneSeptember 30, 2008 and JuneSeptember 30, 2007, respectively, were not considered in computing diluted earnings per common share because they were antidilutive. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements. The common shares included in Treasury Stock for 2008 and 2007 reflect the acquisition of 100,946105,473 and 96,020 shares, respectively, of Lakeland Financial Corporation common stock that have been purchased under a directors’ deferred compensation plan. Because these shares are held in trust for the participants, they are treated as outstanding when computing the weighted-average common shares outstanding for the calculation of both basic and diluted earnings per share.

��

NOTE 3. LOANS

Changes in the allowance for loan losses are summarized as follows:

NOTE 4. SECURITIES

The fair values of securities available for sale were as follows:

          As of JuneSeptember 30, 2008, net unrealized losses on the total securities available for sale portfolio totaled $4.6$6.7 million, which included gross unrealized gains of $2.1$3.5 million. As of December 31, 2007, net unrealized gains on the total securities available for sale portfolio totaled $246,000. Management considers the unrealized losses to be driven by the current unsettled economic situation which has resulted in lower market interest rates and novalues for securities which are not backed directly or indirectly by the federal government. No loss is expected to be realized unless the securities are sold.sold, and the Company’s current intent and ability is to hold them until maturity. All of the securities are backed by the U.S. Government, government agencies, government sponsored agencies or arewere AAA rated by Standard and Poor’s or Aaa rated by Moody’s exceptat the time of purchase, (except for certain non-local municipal securities. The Company has purchased approximately $111 millionsecurities) and are outside the scope of corporate sponsored collateralized mortgage obligations during 2007 and 2008, which are secured by first lien fixed rate residential mortgage loans. These securities are currently rated AAA by Standard and Poor’s and/or Aaa by Moody’s.EITF 99-20’s requirement to consider current market cash flow expectations. None of the securities have call provisions (with the exception of the municipal securities) and payments as originally agreed are being received. Management is not aware of any information that would indicate that full principal will not be received.

          The securities portfolio includes approximately $111 million of corporate sponsored collateralized mortgage obligations purchased during 2006, 2007 and 2008, which are secured by first lien fixed rate residential mortgage loans. These securities were rated AAA by Standard and Poor’s and/or Aaa by Moody’s at the time of purchase and thus are outside the scope of EITF 99-20. Most of the investments are still rated AAA/Aaa, but one has been downgraded to AA by Standard and Poor’s, and three others have been downgraded to Aa1, A2 and Baa3, respectively by Moody’s. The Company with the assistance of an outside expert, analyzes projections for all CMO's that includes projections of future delinquencies/foreclosures in the underlying collateral under various scenarios and under various prepayment assumptions. Based on the analyses, the projections indicate that all contractual principal and interest payments are expected to be collected over the life of the CMO's, and no other than temporary impairment has been recorded.

          The Company does not own any preferred stock in Freddie Mac or Fannie Mae, and has never invested in the preferred stock of those entities. Moreover, the Company does not have any investments in equity securities in its investment portfolio. The Company does not have a history of actively trading securities, but keeps the securities available for sale should liquidity or other needs develop that would warrant the sale of

securities. While these securities are held in the available for sale portfolio, the current intent and ability is to hold them until maturity.

NOTE 5. EMPLOYEE BENEFIT PLANS

Components of Net Periodic Benefit Cost

          The Company previously disclosed in its financial statements for the year ended December 31, 2007 that it expected to contribute $0 to its pension plan and $13,000 to its SERP plan in 2008. As of JuneSeptember 30, 2008, $0 had been contributed to the pension plan and $13,000 to the SERP plan. The Company does not anticipate making any additional contribution to its pension plan or SERP plan during the remainder of 2008.

NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS

The Company adopted FASB Statement of Financial Accounting Standards No. 157 (SFAS No. 157), “Fair Value Measurements”on January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In February 2008, Financial Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” was issued that

delayed the application of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, until January 1, 2009. The Company adopted the provisions of SFAS No. 157 except for those nonfinancial assets and nonfinancial liabilities subject to deferral as a result of FSP No. 157-2. The adoption of SFAS No. 157 did not have any material effect on the Company’s operating results or financial condition.

On October 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3)”.  FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective immediately upon issuance, and includes prior periods for which financial statements have not been issued. The Company’s adoption of FSP 157-3 did not have any material effect on the Company’s operating results or financial condition.

The Company adopted FASB Statement of Financial Accounting Standards No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” on January 1, 2008. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option for any financial assets or liabilities as of JuneSeptember 30, 2008.

          The Company adopted Staff Accounting Bulletin No. 109 (SAB No. 109), “Written Loan Commitments Recorded at Fair Value through Earnings” which supersedes SAB 105, “Application of Accounting Principles to Loan Commitments” which stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the

loan. SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also states that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. The adoption of this standard did not have any material effect on the Company’s operating results or financial condition.

In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 161 (SFAS No. 161), “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This Statement amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of: how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS No. 161 on January 1, 2009, and does not expect the adoption to have a material impact on the financial statements.

NOTE 7. FAIR VALUE DISCLOSURES

          As discussed in Note 6. “New Accounting Pronouncements”, effective January 1, 2008 the Company adopted SFAS No. 157, which provides a framework for measuring fair value under GAAP.

          The Company also adopted SFAS No. 159, on January 1, 2008. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company did not elect the fair value option for any financial assets or liabilities, does not have any material derivative instruments, does not participate in any significant hedging activities and the Company valued securities available for sale at fair value prior to the adoption of SFAS 157 and 159, therefore there is no transition adjustment resulting from the adoption of SFAS 157 and SFAS 159.

         SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

         Securities available for sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models utilizing significant observable inputs such as matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). There were no transfers from or into Level 1, Level 2 or Level 3 during the third quarter of 2008.

          Also, the Company may be required, from time to time, to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair-value accounting or write-downs of individual assets. The table below presents the balances of assets measured at fair value on a nonrecurring basis:

          Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $23.7$19.5 million, with a valuation allowance of $5.8$3.8 million, resulting in an additional provision for loan losses of $1.4$2.4 million for the period.quarter ended September 30, 2008. In addition, $17,000$8,000 in impairment of mortgage servicing rights, measured using Level 3 inputs within the fair value hierarchy, was reversed during the first half ofquarter ended September 30, 2008. The $17,000$8,000 reversal was recorded in loan, insurance and service fees.

NOTE 8. PARTICIPATION IN THE TREASURY CAPITAL PURCHASE PROGRAM

          On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA), which provides the U. S. secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the Act is the Treasury

Capital Purchase Program (CPP), which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3 percent of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The Company is evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and subject to approval by the Treasury.

NOTE 8.9. RECLASSIFICATIONS

Certain amounts appearing in the financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassification had no effect on net income or stockholders’ equity as previously reported.

Part 1

LAKELAND FINANCIAL CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

and

RESULTS OF OPERATIONS

JuneSeptember 30, 2008

OVERVIEW

Lakeland Financial Corporation is the holding company for Lake City Bank. The Company is headquartered in Warsaw, Indiana and operates 43 offices in 12 counties in northern Indiana. The Company earned $10.0$15.3 million for the first sixnine months of 2008, which was unchanged fromversus $14.4 million in the same period of 2007.2007, an increase of 6.1%. Net income was positively impacted by a $3.2$6.8 million increase in net interest income as well as an increase of $1.8$2.9 million in noninterest income. Offsetting these positive impacts was an increase of $2.6$4.6 million in the provision for loan losses and an increase of $2.3$3.4 million in noninterest expense. Basic earnings per share for the first sixnine months of 2008 and 2007 were $0.82$1.25 per share.share, versus $1.18 per share for the first nine months of 2007. Diluted earnings per share reflect the potential dilutive impact of stock options granted under the stock option plan. Diluted earnings per share for the first sixnine months of 2008 and 2007 were $0.81$1.23 per share.share, versus $1.16 for the first nine months of 2007.

Net income for the secondthird quarter of 2008 was $4.8$5.2 million, a decreasean increase of 8.6%19.5% versus $5.3$4.4 million for the comparable period of 2007. The decreaserise in net income was driven by a $2.1 million increase in the provision for loan losses, as well as a $1.2 million increase in noninterest expense. Offsetting these negative impacts was an increase of $1.8$3.6 million in net interest income as well as an increase of $668,000$1.1 million in noninterest income. Offsetting these positive impacts was an increase of $2.0 million in the provision for loan losses, as well as a $1.1 million increase in noninterest expense. Basic earnings per share for the secondthird quarter of 2008 were $0.39$0.43 per share, versus $0.43$0.36 per share for the secondthird quarter of 2007. Diluted earnings per share for the secondthird quarter of 2008 were $0.39$0.42 per share, versus $0.42$0.35 per share for the secondthird quarter of 2007.

RECENT DEVELOPMENTS

Recent events in the U.S. and global financial markets, including the deterioration of the worldwide credit markets, have created significant challenges for financial institutions such as the Company. Dramatic declines in the housing market during the past year, marked by falling home prices and increasing levels of mortgage foreclosures, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. In addition, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions, as a result of concern about the stability of the financial markets and the strength of counterparties.

In response to the crises affecting the U.S. banking system and financial markets and attempt to bolster the distressed economy and improve consumer confidence in the financial system, on October 3, 2008, the U.S. Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”). The Stabilization Act authorizes the Secretary of the U.S. Treasury and the Federal Deposit Insurance Corporation (the “FDIC”) to implement various temporary emergency programs designed to

strengthen the capital positions of financial institutions and stimulate the availability of credit within the U.S. financial system. Pursuant to the Stabilization Act, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

On October 14, 2008, the U.S. Treasury announced that it will purchase equity stakes in eligible financial institutions that wish to participate. This program, known as the Capital Purchase Program, allocates $250 billion from the $700 billion authorized by the Stabilization Act to the U.S. Treasury for the purchase of senior preferred shares from qualifying financial institutions. Eligible institutions will be able to sell equity interests to the U.S. Treasury in amounts equal to between 1% and 3% of the institution’s risk-weighted assets. In conjunction with the purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock from the participating institutions with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the U.S. Treasury’s standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds equity issued under the Capital Purchase Program. Many financial institutions have already announced that they will participate in the Capital Purchase Program. The Company is evaluating whether to apply for participation in the CPP. Participation in the program is not automatic and subject to approval by the Treasury.

Also on October 14, 2008, using the systemic risk exception to the FDIC Improvement Act of 1991, the U.S. Treasury authorized the FDIC to provide a 100% guarantee of newly-issued senior unsecured debt and deposits in non-interest bearing accounts at FDIC insured institutions. Initially, all eligible financial institutions will automatically be covered under this program, known as the Temporary Liquidity Guarantee Program, without incurring any fees for a period of 30 days. Coverage under the Temporary Liquidity Guarantee Program after the initial 30-day period is available to insured financial institutions at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing deposits. After the initial 30-day period, institutions will continue to be covered under the Temporary Liquidity Guarantee Program unless they inform the FDIC that they have decided to opt out of the program. The Company has determined that it will participate in the portion of the Temporary Liquidity Guarantee Program that guarantees deposits in non-interest bearing accounts, but has elected not to participate in the portion of the Temporary Liquidity Guarantee Program that guarantees newly-issued senior unsecured debt.

Under the Troubled Asset Auction Program, another initiative based on the authority granted by the Stabilization Act, the U.S. Treasury, through a newly-created Office of Financial Stability, will purchase certain troubled mortgage-related assets from financial institutions in a reverse-auction format. Troubled assets eligible for purchase by the Office of Financial Stability include residential and commercial mortgages originated on or before March 14, 2008, securities or obligations that are based on such mortgages, and any other financial instrument that the Secretary of the U.S. Treasury determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, is necessary to promote financial market stability. The U.S. Treasury has not issued any definitive guidance regarding this program and the Company’s management has not determined whether or not it will participate.

Under the Stabilization Act, the U.S. Treasury is also required to establish a program that will guarantee principal of, and interest on, troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities. The program may take any form and may vary by asset class, but it must be voluntary and

self-funding. The U.S. Treasury has the authority to set premiums to reflect the credit risk characteristics of the insured assets. The U.S. Treasury has solicited requests for comments on how the program should be structured but no program has been implemented to date. The Stabilization Act also temporarily increases the amount of insurance coverage of deposit accounts held at FDIC-insured depository institutions, including Lake City Bank, from $100,000 to $250,000. The increased coverage is effective during the period from October 3, 2008 until December 31, 2009.

It is not clear at this time what impact the Stabilization Act, the Capital Purchase Program, the Temporary Liquidity Guarantee Program, the Troubled Asset Auction Program, other liquidity and funding initiatives of the Federal Reserve and other agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the Company’s future financial condition and results of operations.

The preceding is a summary of recently enacted laws and regulations that could materially impact the Company’s results of operations or financial condition.  This discussion is qualified in its entirety by reference to such laws and regulations and should be read in conjunction with “Supervision and Regulation” discussion contained in the Company’s 2007 Form 10-K.

RESULTS OF OPERATIONS

Net Interest Income

For the six-monthnine-month period ended JuneSeptember 30, 2008, net interest income totaled $30.0$47.3 million, an increase of 12.0%16.7%, or $3.2$6.8 million, versus the first sixnine months of 2007. This increase was primarily due to a $285.4$303.5 million, or 17.0%17.8%, increase in average earning assets to $1.965$2.005 billion. For the three month period ended JuneSeptember 30, 2008, net interest income totaled $15.5$17.3 million, an increase of 13.3%25.9%, or $1.8$3.6 million. The increase was primarily driven by a $324.8$339.7 million, or 19.2%19.5%, increase in average earning assets. In addition, net interest income was positively impacted in the nine-month and three-month periods ended September 30, 2008 by the collection of $1.2 million in loan interest income as a result of the payoff of an impaired commercial credit, which had been in nonaccrual status. Excluding the $1.2 million collection, the Company’s net interest income for the third quarter would have been $16.1 million, versus $13.7 million for the comparable period of 2007, an increase of 17.1%

Given the Company’s mix of interest earning assets and interest bearing liabilities at JuneSeptember 30, 2008, the Company would generally be considered to have a relatively neutral balance sheet structure. The Company’s balance sheet structure would normally be expected to produce a stable or declining net interest margin in a declining rate environment. As the Company’s balance sheet has become more neutral in structure, management believes that future rate movements will have less impact on net interest margin than historically,

although other factors such as deposit mix, market deposit rate pricing and non-bank deposit products could have a dramatic impact on net interest margin. The Company’s mix of deposits has shifted to more reliance on certificates of deposits, specifically public fund deposits and brokered deposits, and corporate and public fund money market and repurchase agreements, which generally carry a higher interest rate cost than other types of interest bearing deposits.

During the first sixnine months of 2008, total interest and dividend income increased by $1.1$2.0 million, or 1.9%2.2%, to $58.6$89.6 million, versus $57.5$87.6 million during the first sixnine months of 2007. This increase was primarily the result of an increase in average earning assets. The tax equivalent yield on average earning assets decreased by 9193 basis points to 6.1%6.0% for the six-monthnine-month period ended JuneSeptember 30, 2008 versus the same period of 2007. During the secondthird quarter of 2008, interest and dividend income decreasedincreased by $247,000,$875,000, or 0.8%2.9%, to $29.0$31.0 million, versus $29.3$30.1 million during the same quarter of 2007. The decreaseincrease was primarily due to a 116 basis point decreasethe result of an increase in theaverage earning assets. The tax equivalent yield on average earning assets decreased by 94 basis points in the secondthird quarter of 2008, to 5.8%6.0% from 7.0%6.9% in the same period of 2007.

          During the first sixnine months of 2008, loan interest income decreased by $667,000,$973,000, or 1.3%, to $49.9$75.8 million, versus $50.5$76.7 million during the first sixnine months of 2007. The decrease was driven by a 118120 basis point decrease in the tax equivalent yield on loans to 6.3%6.2%, versus 7.4% in the first sixnine months of 2007, somewhat offset by a $232.6$246.3 million, or 17.0%17.8%, increase in average daily loan balances. During the secondthird quarter of 2008, loan interest income decreased by $1.4 million,$306,000, or 5.5%1.2%, to $24.4$25.9 million, versus $25.8$26.2 million during the secondthird quarter of 2007. The decrease was driven by a 149125 basis point decrease in the tax equivalent yield on loans to 6.0%6.1%, versus 7.5%7.4% in the secondthird quarter of 2007, somewhat offset by a $254.2$273.7 million, or 18.3%19.4%, increase in average daily loan balances. Loan interest income in the nine months and three months ended September 30, 2008, was positively impacted by $1.2 million as a result of the payoff of an impaired commercial credit, which had been in nonaccrual status.

The average daily securities balances for the first sixnine months of 2008 increased $52.4$63.5 million, or 17.6%21.2%, to $350.0$363.4 million, versus $297.6$299.9 million for the same period of 2007. During the same periods, income from securities increased by $1.9$3.4 million, or 28.6%33.4%, to $8.6$13.6 million versus $6.7$10.2 million during the first sixnine months of 2007. The increase was primarily the result of the increase in average daily securities balances, as well as a 3740 basis point increase in the tax equivalent yield on securities, to 5.3%, versus 4.9% in the first sixnine months of 2007. The average daily securities balances for the secondthird quarter of 2008 increased $66.8$85.3 million, or 22.3%28.0%, to $366.3$389.8 million, versus $299.5$304.5 million for the same period of 2007. During the secondthird quarter of 2008, income from securities was $4.6$5.0 million, an increase of $1.2$1.5 million, or 35.1%42.6%, versus the secondthird quarter of 2007. The increase was primarily the result of the increase in average daily securities balances, as well as a 4446 basis point increase in the tax equivalent yield on securities, to 5.4%, versus 4.9% in the secondthird quarter of 2007.

Total interest expense decreased $2.1$4.8 million, or 7.0%10.2%, to $28.6$42.3 million for the six-monthnine-month period ended JuneSeptember 30, 2008, from $30.7$47.1 million for the comparable period in 2007. The decrease was primarily the result of a 7991 basis point decrease in the Company’s daily cost of funds to 3.0%2.9%, versus 3.8% for the same period of 2007. Total interest expense decreased $2.1$2.7 million, or 13.3%16.4%, to $13.5$13.7 million for the secondthird quarter of 2008, versus $15.6$16.4 million for the secondthird quarter of 2007. The decrease was primarily the result of a 100116 basis point decrease in the Company’s daily cost of funds to 2.8%2.7%, from 3.8% for the same period of 2007.

On an average daily basis, total deposits (including demand deposits) increased $83.4$107.9 million, or 5.8%7.4%, to $1.534$1.570 billion for the six-monthnine-month period ended JuneSeptember 30, 2008, versus $1.450$1.462 billion during the same period in 2007. The average daily balances for the secondthird quarter of 2008 increased $106.1$156.6 million, or 7.3%10.5%, to $1.553

$1.642 billion from $1.447$1.485 billion during the secondthird quarter of 2007. On an average daily basis, non-interest bearing demand deposits decreased to $218.2$219.2 million for the six-monthnine-month period ended JuneSeptember 30, 2008, versus $221.9$224.3 million for the same period in 2007. The average daily noninterest bearing demand deposit balances for the secondthird quarter of 2008 were $218.5$221.2 million, versus $227.3$229.1 million for the secondthird quarter of 2007.

On an average daily basis, interest bearing transaction accounts increased $69.3$67.6 million, or 18.1%16.7%, to $452.9$471.5 million for the six-monthnine-month period ended JuneSeptember 30, 2008, versus the same period in 2007. Average daily interest bearing transaction accounts increased $82.6$64.5 million, or 20.8%14.6%, to $479.5$508.1 million for the secondthird quarter of 2008, versus $397.0$443.6 million for the secondthird quarter of 2007. When comparing the sixnine months ended JuneSeptember 30, 2008 with the same period of 2007, the average daily balance of time deposits, which pay a higher rate of interest compared to demand deposit and transaction accounts, increased $19.3$47.1 million, primarily as a result of increases in other time deposits. The rate paid on time deposit accounts decreased 7092 basis points to 4.4%4.2% for the six-monthnine-month period ended JuneSeptember 30, 2008, versus the same period in 2007. During the secondthird quarter of 2008, the average daily balance of time deposits increased $34.5$102.1 million, and the rate paid decreased 93133 basis points to 4.2%3.8%, versus the secondthird quarter of 2007.

Due to strong loan growth and additional relationship opportunities, the Company continues to focus on public fund deposits as a core funding strategy. In addition, the Company intends to actively considerhas increased its usage of brokered certificates of deposits as appropriate and necessary as a result of loan growth.growth and overall liquidity and funding management. On an average daily basis, total brokered certificates of deposit decreased $9.1$10.8 million to $58.4$70.1 million for the six-monthnine-month period ended JuneSeptember 30, 2008, versus $67.5$80.9 million for the same period in 2007. During the secondthird quarter of 2008, average daily brokered certificates of deposit were $72.5$93.2 million, versus $44.5$107.2 million during the secondthird quarter of 2007. On an average daily basis, total public fund certificates of deposit decreased $22.3increased $7.4 million to $262.7$259.4 million for the six-monthnine-month period ended JuneSeptember 30, 2008, versus $285.0$252.0 million for the same period in 2007. During the secondthird quarter of 2008, average daily public fund certificates of deposit were $233.0$252.8 million, versus $278.2$187.2 million during the secondthird quarter of 2007. PublicThe variability in public fund deposits have generally decreasedis primarily due to the ongoing challenges in the state of Indiana related to the reapportionment of real estate property taxes.taxes and the intense competition for these funds. Due to delays in issuing real estate property tax bills, public fund entities have generally havehad lower balances of investable funds.funds in 2008.

Average daily balances of borrowings were $381.6$387.0 million during the sixnine months ended JuneSeptember 30, 2008, versus $187.7$195.8 million during the same period of 2007, and the rate paid on borrowings decreased 173185 basis points to 3.1%3.0%. The increase in average borrowings was driven by increases of $110.8$115.0 million in notes payable, $38.8 million in federal funds purchased and $44.3$43.7 million in securities sold under agreements to repurchase.repurchase and $32.6 million in federal funds purchased. During the secondthird quarter of 2008 the average daily balances of borrowings increased $213.2$185.8 million to $417.5$397.6 million, versus $204.3$211.8 million for the same period of 2007, and the rate paid on borrowings decreased 199207 basis points to 2.7%2.8%. On an average daily basis, total deposits (including demand deposits) and purchased funds increased 16.9%18.0% and 19.3%20.2%, respectively, when comparing the six-monthnine-month and three-month periods ended JuneSeptember 30, 2008 versus the same periods in 2007.

As a result of the unprecedented activity in the financial markets during the third quarter of 2008, the Company has reviewed its liquidity plan and has taken several actions designed to provide for an appropriate funding strategy in this unsettled environment.  These actions include: actively communicating with correspondent banks who provide federal fund lines to ensure availability of these funds; expanded use of brokered certificate of deposits, which have been readily available to the Company at competitive rates; allocation of collateral at the Federal Reserve Bank for potential borrowings under their programs; increased usage of FHLB advances at advantageous rates and an increased focus on attractive core deposit programs offered by the Company. 

The following tables set forth consolidated information regarding average balances and rates: