UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011March 31, 2012

OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

LAKELAND FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 

 
Indiana0-1148735-1559596
(State or Other Jurisdiction(Commission File Number)(IRS Employer
of Incorporation or Organization) Identification No.)


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 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  _

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). (check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes _    No X

Number of shares of common stock outstanding at October 31, 2011:  16,214,019April 30, 2012:  16,324,665


 
 
 

LAKELAND FINANCIAL CORPORATION
Form 10-Q Quarterly Report
Table of Contents

PART I.

  Page Number
Item 1.
Financial Statements
1
Item 2.
Management’s Discussion and Analysis of
 
 
Financial Condition and Results of Operations
4047
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
5659
Item 4.
Controls and Procedures
5660

PART II.

  Page Number
Item 1.
Legal Proceedings
5761
Item 1A.
Risk Factors
5761
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5761
Item 3.
Defaults Upon Senior Securities
5761
Item 4.
Removed and ReservedMine Safety Disclosures
5862
Item 5.
Other Information
5862
Item 6.
Exhibits
5862
   
Form 10-Q
Signature Page
5963


 
 
 

PART1
LAKELAND FINANCIAL CORPORATION
ITEM 1 – FINANCIAL STATEMENTS


LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2011March 31, 2012 and December 31, 20102011
(in thousands except for share data)
 
 
(Page 1 of 2)

September 30, December 31,March 31, December 31,
2011 20102012 2011
(Unaudited)  (Unaudited)  
ASSETS      
Cash and due from banks $             54,832  $             42,513 $           138,524  $             56,909
Short-term investments46,446 17,62828,503 47,675
Total cash and cash equivalents101,278 60,141167,027 104,584
      
Securities available for sale (carried at fair value)464,072 442,620476,209 467,391
Real estate mortgage loans held for sale5,444 5,6064,540 2,953
      
Loans, net of allowance for loan losses of $52,073 and $45,0072,128,935 2,044,952
Loans, net of allowance for loan losses of $52,757 and $53,4002,172,705 2,180,309
      
Land, premises and equipment, net31,660 30,40535,020 34,736
Bank owned life insurance39,714 38,82640,335 39,959
Accrued income receivable8,895 9,0749,477 9,612
Goodwill4,970 4,9704,970 4,970
Other intangible assets112 15386 99
Other assets42,358 45,17944,247 45,075
Total assets $        2,827,438  $        2,681,926 $        2,954,616  $        2,889,688





    


(continued)







 
1
 










LAKELAND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2011March 31, 2012 and December 31, 20102011
(in thousands except for share data)
 
 
(Page 2 of 2)

September 30, December 31,March 31, December 31,
2011 20102012 2011
(Unaudited)  (Unaudited)  
LIABILITIES AND EQUITY      
      
LIABILITIES      
Noninterest bearing deposits $           323,666  $           305,107 $           346,658  $           356,682
Interest bearing deposits2,032,693 1,895,9182,137,212 2,056,014
Total deposits2,356,359 2,201,0252,483,870 2,412,696
      
Short-term borrowings      
Federal funds purchased0 10,000
Securities sold under agreements to repurchase139,016 142,015125,165 131,990
U.S. Treasury demand notes2,560 2,037
Other short-term borrowings0 30,000
Total short-term borrowings141,576 174,052125,165 141,990
      
Accrued expenses payable12,795 11,47617,118 13,550
Other liabilities1,893 2,3181,537 2,195
Long-term borrowings15,040 15,04115,038 15,040
Subordinated debentures30,928 30,92830,928 30,928
Total liabilities2,558,591 2,434,8402,673,656 2,616,399
      
EQUITY      
Common stock: 90,000,000 shares authorized, no par value      
16,211,319 shares issued and 16,140,533 outstanding as of September 30, 2011   
16,169,119 shares issued and 16,078,420 outstanding as of December 31, 201087,015 85,766
16,315,600 shares issued and 16,237,670 outstanding as of March 31, 2012   
16,217,019 shares issued and 16,145,772 outstanding as of December 31, 201188,010 87,380
Retained earnings176,154 161,299188,014 181,903
Accumulated other comprehensive gain6,800 1,350
Treasury stock, at cost (2011 - 70,786 shares, 2010 - 90,699 shares)(1,211) (1,418)
Accumulated other comprehensive income6,241 5,139
Treasury stock, at cost (2012 - 77,930 shares, 2011 - 71,247 shares)(1,394) (1,222)
Total stockholders' equity268,758 246,997280,871 273,200
      
Noncontrolling interest89 8989 89
Total equity268,847 247,086280,960 273,289
Total liabilities and equity $        2,827,438  $        2,681,926 $        2,954,616  $        2,889,688



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



 
2
 




LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2012 and Nine Months Ended September 30, 2011 and 2010
(in thousands except for share and per share data)

(Unaudited)

(Page 1 of 2)

Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2011 2010 2011 20102012 2011
NET INTEREST INCOME          
Interest and fees on loans          
Taxable $        26,390  $        26,381  $        78,555  $        77,676 $        26,191  $        25,865
Tax exempt                114                   22                 357                   60                112                 121
Interest and dividends on securities          
Taxable             3,217              4,033            10,635            12,374             2,764              4,057
Tax exempt                692                 669              2,068              2,022                697                 689
Interest on short-term investments                  18                   19                 114                   60                  11                   18
Total interest income           30,431            31,124            91,729            92,192           29,775            30,750
          
Interest on deposits             7,090              7,194            20,868            20,642             6,761              6,685
Interest on borrowings          
Short-term                159                 150                 477                 587                113                 171
Long-term                361                 563              1,084              1,633                404                 360
Total interest expense             7,610              7,907            22,429            22,862             7,278              7,216
          
NET INTEREST INCOME           22,821            23,217            69,300            69,330           22,497            23,534
          
Provision for loan losses             2,400              6,150            10,900            17,426                799              5,600
          
NET INTEREST INCOME AFTER PROVISION FOR          
LOAN LOSSES           20,421            17,067            58,400            51,904           21,698            17,934
          
NONINTEREST INCOME          
Wealth advisory fees                866                 784              2,613              2,409                914                 818
Investment brokerage fees                741                 676              2,093              1,692                800                 731
Service charges on deposit accounts             2,036              2,205              5,938              6,265             1,881              1,963
Loan, insurance and service fees             1,259              1,100              3,595              3,094             1,189              1,076
Merchant card fee income                253                 263                 775                 846                316                 234
Other income                362                 491              1,380              1,506                665                 372
Mortgage banking income                440                 774                 594                 939
Mortgage banking income (loss)                592                  (49)
Net securities gains (losses)                   (1)                     4                (167)                     4                    3                (198)
Other than temporary impairment loss on available-for-sale securities:          
Total impairment losses recognized on securities                 (33)                  (85)                (154)                (337)               (510)                (121)
Loss recognized in other comprehensive income                    0                     0                     0                     0                    0                     0
Net impairment loss recognized in earnings                 (33)                  (85)                (154)                (337)               (510)                (121)
Total noninterest income             5,923              6,212            16,667            16,418             5,850              4,826


(continued)




 
3
 


LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2012 and Nine Months Ended September 30, 2011 and 2010
(in thousands except for share and per share data)

(Unaudited)

(Page 2 of 2)

Three Months Ended Nine Months EndedThree Months Ended
September 30, September 30,March 31,
2011 2010 2011 20102012 2011
NONINTEREST EXPENSE          
Salaries and employee benefits             8,611              7,659            24,802            22,729             9,075              8,173
Occupancy expense                746                 711              2,373              2,199
Net occupancy expense                885                 875
Equipment costs                536                 517              1,600              1,568                617                 554
Data processing fees and supplies                729              1,004              2,820              2,930                841              1,112
Credit card interchange                    0                   31                     2                 144
Other expense             2,857              3,707            10,023            10,532             3,262              3,454
Total noninterest expense           13,479            13,629            41,620            40,102           14,680            14,168
          
INCOME BEFORE INCOME TAX EXPENSE           12,865              9,650            33,447            28,220           12,868              8,592
          
Income tax expense             4,418              3,129            11,046              9,459             4,242              2,627
          
NET INCOME $          8,447  $          6,521  $        22,401  $        18,761 $          8,626  $          5,965
          
Dividends and accretion of discount on preferred stock                    0                     0                     0              3,187
       
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $          8,447  $          6,521  $        22,401  $        15,574
       
          
BASIC WEIGHTED AVERAGE COMMON SHARES    16,208,889     16,138,809     16,201,900     16,112,108    16,280,416     16,195,352
          
BASIC EARNINGS PER COMMON SHARE $            0.52  $            0.40  $            1.38  $            0.97 $            0.53  $            0.37
          
DILUTED WEIGHTED AVERAGE COMMON SHARES    16,324,058     16,232,254     16,309,814     16,205,133    16,439,243     16,285,161
          
DILUTED EARNINGS PER COMMON SHARE $            0.52  $            0.40  $            1.37  $            0.96 $            0.52  $            0.37




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





4









LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2012 and 2011
(in thousands)

(Unaudited)

   Three months ended March 31,
   2012 2011
Net income $            8,626  $            5,965
Other comprehensive income   
 Change in securities available for sale:   
  Unrealized holding gain (loss) on securities available for sale   
    arising during the period               1,250                  (121)
  Reclassification adjustment for (gains)/losses included in net income(3) 198
  Reclassification adjustment for other than temporary impairment510                   121
  Net securities gain activity during the period               1,757                   198
  Tax effect                 (746)                    (12)
  Net of tax amount               1,011                   186
 Defined benefit pension plans:   
  Net gain(loss) on defined benefit pension plans110 (233)
  Amortization of net actuarial loss                    44                     35
  Net gain /(loss) activity during the period                  154 (198)
  Tax effect                   (63)                     81
  Net of tax amount                    91                  (117)
      
 Total other comprehensive income, net of tax               1,102                     69
      
Comprehensive income $            9,728  $            6,034


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




 
45
 

LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the NineThree Months Ended September 30,March 31, 2012 and 2011 and 2010
(in thousands except for share and per share data)
(Unaudited)

        Accumulated    
        Other   Total
  Preferred Common Retained Comprehensive Treasury Stockholders'
  Stock Stock Earnings Income (Loss) Stock Equity
             
             
Balance at January 1, 2010  $           54,095  $           83,487  $         149,945  $                   (5,993)  $           (1,540)  $          279,994
Comprehensive income:            
  Net income                   18,761                    18,761
 Other comprehensive income (loss), net of tax                              9,675                    9,675
    Comprehensive income                          28,436
  Common stock cash dividends declared, $.465 per share                    (7,489)                    (7,489)
  Treasury shares purchased under deferred directors' plan            
    (10,254 shares)                      195                      (195)                         0
  Treasury shares sold under deferred directors' plan            
    (4,477 shares)                      (90)                          90                         0
  Stock activity under stock compensation plans (54,108 shares)                      580                           580
  Stock compensation expense                   1,212                        1,212
  Redemption of 56,044 shares preferred stock             (56,044)                      (56,044)
  Accretion of preferred stock discount                 1,949                  (1,949)                             0
  Preferred stock dividend paid and/or accrued                    (1,251)                    (1,251)
Balance at September 30, 2010  $                    0  $           85,384  $         158,017  $                    3,682  $           (1,645)  $          245,438
             
Balance at January 1, 2011  $                    0  $           85,766  $         161,299  $                    1,350  $           (1,418)  $          246,997
Comprehensive income:            
  Net income                   22,401                    22,401
 Other comprehensive income (loss), net of tax                              5,450                    5,450
    Comprehensive income                          27,851
  Common stock cash dividends declared, $.465 per share                    (7,546)                    (7,546)
  Treasury shares purchased under deferred directors' plan            
    (10,187 shares)                      233                      (233)                         0
  Treasury shares sold under deferred directors' plan            
    (30,100 shares)                    (440)                        440                         0
  Stock activity under stock compensation plans (42,200 shares)                      395                           395
  Stock compensation expense                   1,061                        1,061
Balance at September 30, 2011  $                    0  $           87,015  $         176,154  $                    6,800  $           (1,211)  $          268,758
      Accumulated    
      Other   Total
  Common Retained Comprehensive Treasury Stockholders'
  Stock Earnings Income Stock Equity
           
           
Balance at January 1, 2011  $           85,766  $         161,299  $                    1,350  $           (1,418)  $          246,997
Comprehensive income:          
  Net income                   5,965                      5,965
 Other comprehensive income, net of tax                                 69                         69
    Comprehensive income                          6,034
  Common stock cash dividends declared, $.155 per share                  (2,510)                    (2,510)
  Treasury shares purchased under deferred directors' plan          
    (4,585 shares)                    103                      (103)                         0
  Stock activity under stock compensation plans (24,500 shares)                    266                           266
  Stock compensation expense                    266                           266
Balance at March 31, 2011  $           86,401  $         164,754  $                    1,419  $           (1,521)  $          251,053
           
Balance at January 1, 2012  $           87,380  $         181,903  $                    5,139  $           (1,222)  $          273,200
Comprehensive income:          
  Net income                   8,626                      8,626
 Other comprehensive income, net of tax                            1,102  ��                 1,102
    Comprehensive income                          9,728
  Common stock cash dividends declared, $.155 per share                  (2,515)                    (2,515)
  Treasury shares purchased under deferred directors' plan          
    (6,683 shares)                    172                      (172)                         0
  Stock activity under stock compensation plans, net of taxes (98,581 shares)                      30                             30
  Stock compensation expense                    428                           428
Balance at March 31, 2012  $           88,010  $         188,014  $                    6,241  $           (1,394)  $          280,871

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

 
56
 


LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineThree Months Ended September 30,March 31, 2012 and 2011 and 2010
(in thousands)
(Unaudited)
(Page 1 of 2)

2011 20102012 2011
Cash flows from operating activities:      
Net income $            22,401  $            18,761 $              8,626  $              5,965
Adjustments to reconcile net income to net cash from operating      
activities:      
Depreciation                 1,660                  1,656                    666                     551
Provision for loan losses               10,900                17,426                    799                  5,600
Loss on sale and write down of other real estate owned                    358                     118                        3                     174
Amortization of intangible assets                      41                       41                      13                       14
Amortization of loan servicing rights                    427                     463                    170                     134
Net change in loan servicing rights valuation allowance                    162                     180                    (62)                       (3)
Loans originated for sale             (48,294)              (56,044)             (25,041)                (9,739)
Net gain on sales of loans               (1,004)                (1,255)                  (573)                   (322)
Proceeds from sale of loans               49,086                53,496               23,821                14,831
Net loss on sales of premises and equipment                      17                         4                        0                       10
Net loss (gain) on sales of securities available for sale                    167                       (4)
Net (gain) loss on sales and calls of securities available for sale                      (3)                     198
Impairment on available for sale securities                    154                     337                    510                     121
Net securities amortization                 2,255                  1,235                 1,504                     449
Stock compensation expense                 1,061                  1,212                    428                     266
Earnings on life insurance                  (726)                   (763)                  (310)                   (326)
Tax benefit of stock option exercises                    (96)                   (178)                  (267)                     (78)
Net change:      
Accrued income receivable                    179                   (579)                    135                     174
Accrued expenses payable                 1,259                (1,082)                 3,659                     968
Other assets               (1,565)                (3,028)                    381                  1,177
Other liabilities                  (192)                     408                  (486)                     (38)
Total adjustments               15,849                13,643                 5,347                14,161
Net cash from operating activities               38,250                32,404               13,973                20,126
      
Cash flows from investing activities:      
Proceeds from sale of securities available for sale               73,318                         0                        0                68,847
Proceeds from maturities, calls and principal paydowns of      
securities available for sale               58,668                69,718               22,538                22,399
Purchases of securities available for sale           (147,042)              (87,929)             (31,610)              (17,251)
Purchase of life insurance                  (162)                     (21)                      (6)                   (132)
Net increase in total loans             (95,690)              (53,098)
Net (increase) decrease in total loans                 6,727              (16,789)
Proceeds from sales of land, premises and equipment                      33                         0                        0                       14
Purchases of land, premises and equipment               (2,965)                (1,288)                  (950)                   (767)
Proceeds from sales of other real estate                 1,254                  1,403                      81                     576
Net cash from investing activities           (112,586)              (71,215)               (3,220)                56,897

                                                        
(Continued)

 
67
 

LAKELAND FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineThree Months Ended September 30,March 31, 2012 and 2011 and 2010
(in thousands)
(Unaudited)
(Page 2 of 2)

2011 20102012 2011
Cash flows from financing activities:      
Net increase (decrease) in total deposits             155,334              419,162
Net increase (decrease) in short-term borrowings             (32,476)            (244,737)
Net increase in total deposits               71,174                91,443
Net decrease in short-term borrowings             (16,825)              (29,128)
Payments on long-term borrowings                      (1)                       (1)                      (2)                       (1)
Common dividends paid               (7,533)                (7,502)               (2,515)                (2,510)
Preferred dividends paid                    (13)                (1,588)
Redemption of preferred stock                        0              (56,044)
Proceeds from stock option exercise                    395                     580                      30                     266
Purchase of treasury stock                  (233)                   (195)                  (172)                   (103)
Net cash from financing activities             115,473              109,675               51,690                59,967
Net change in cash and cash equivalents               41,137                70,864               62,443              136,990
Cash and cash equivalents at beginning of the period               60,141                55,983             104,584                60,141
Cash and cash equivalents at end of the period $          101,278  $          126,847 $          167,027  $          197,131
Cash paid during the period for:      
Interest $            22,095  $            23,877 $              6,211  $              6,323
Income taxes               14,629                13,583                        0                  1,015
Supplemental non-cash disclosures:      
Loans transferred to other real estate                    807                  4,094                      78                     270


  
 

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


8













7






LAKELAND FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011March 31, 2012

(Table amounts in thousands except for share and per share data)

(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 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 (“GAAP”) for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principlesGAAP for complete financial statements.statements and are unaudited. 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 nine-month periodsperiod ending September 30, 2011March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.2012. The 20102011 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 available to common shareholders 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 awards and warrants.

 Three Months Ended September 30, Nine Months Ended September 30,
 2011 2010 2011 2010
Net income  $             8,447  $             6,521  $           22,401  $           18,761
Dividends and accretion of discount on preferred stock                      0                      0                      0                3,187
Net income available to common shareholders  $             8,447  $             6,521  $           22,401  $           15,574
         Three Months Ended March 31,
         2012 2011
Weighted average shares outstanding for basic earnings per common share         16,208,889         16,138,809         16,201,900         16,112,108         16,280,416         16,195,352
Dilutive effect of stock options, awards and warrants             115,169               93,445             107,914               93,025             158,827               89,809
Weighted average shares outstanding for diluted earnings per common share         16,324,058         16,232,254         16,309,814         16,205,133         16,439,243         16,285,161
            
Basic earnings per common share  $              0.52  $              0.40  $              1.38  $              0.97  $              0.53  $              0.37
Diluted earnings per common share  $              0.52  $              0.40  $              1.37  $              0.96  $              0.52  $              0.37


8
Stock options for 70,0000 and 95,00070,000 shares for the three-month periods ended September 30,March 31, 2012 and 2011 and September 30, 2010, respectively, were not considered in computing diluted earnings per common share because they were antidilutive.  Stock options for 70,000 and 109,000 shares for the nine-month periods ended September 30, 2011 and September 30, 2010, respectively, were not considered in computing diluted earnings per common share because they were antidilutive.  In addition, warrants for 198,269 shares for the three-month and nine-month periods ended September 30, 2010, were not considered in computing diluted earnings per share because they were antidilutive.

NOTE 3. LOANS

 September 30,December 31,
 20112010
Commercial and industrial loans:      
  Working capital lines of credit loans $   382,202   17.5 % $   281,546   13.5 %
  Non-working capital loans      380,125   17.4       384,138   18.4 
    Total commercial and industrial loans      762,327   34.9       665,684   31.8 
       
Commercial real estate and multi-family residential loans:      
  Construction and land development loans      110,493     5.1       106,980     5.1 
  Owner occupied loans      335,514   15.4       329,760   15.8 
  Nonowner occupied loans      363,777   16.7       355,393   17.0 
  Multifamily loans       19,578     0.9        24,158     1.2 
    Total commercial real estate and multi-family residential loans      829,362   38.0       816,291   39.0 
       
Agri-business and agricultural loans:      
  Loans secured by farmland101,978     4.7 111,961     5.4 
  Loans for agricultural production92,414     4.2 117,518     5.6 
    Total agri-business and agricultural loans194,392     8.9 229,479   11.0 
       
Other commercial loans       58,208     2.7        38,778     1.9 
  Total commercial loans   1,844,289   84.6    1,750,232   83.7 
       
Consumer 1-4 family mortgage loans:      
  Closed end first mortgage loans      107,026     4.9       103,118     4.9 
  Open end and junior lien loans      177,940     8.2       182,325     8.7 
  Residential construction and land development loans         4,380     0.2          4,140     0.2 
  Total consumer 1-4 family mortgage loans      289,346   13.3       289,583   13.8 
       
Other consumer loans       47,623     2.2        51,123     2.4 
  Total consumer loans      336,969   15.4       340,706   16.3 
  Subtotal   2,181,258 100.0 %   2,090,938 100.0 %
Less:  Allowance for loan losses      (52,073)        (45,007)  
           Net deferred loan fees           (250)             (979)  
Loans, net $2,128,935   $2,044,952  




 
9
 
NOTE 3. LOANS

 March 31,December 31,
 20122011
Commercial and industrial loans:      
  Working capital lines of credit loans $   402,703   18.1 % $   373,768   16.7 %
  Non-working capital loans      378,000   17.0       377,388   16.9 
    Total commercial and industrial loans      780,703   35.1       751,156   33.6 
       
Commercial real estate and multi-family residential loans:      
  Construction and land development loans       89,356     4.0        82,284     3.7 
  Owner occupied loans      353,186   15.9       346,669   15.5 
  Nonowner occupied loans      357,781   16.1       385,090   17.2 
  Multifamily loans       35,178     1.6        38,477     1.7 
    Total commercial real estate and multi-family residential loans      835,501   37.6       852,520   38.2 
       
Agri-business and agricultural loans:      
  Loans secured by farmland104,090     4.7 118,224     5.3 
  Loans for agricultural production113,014     5.1 119,705     5.4 
    Total agri-business and agricultural loans217,104     9.8 237,929   10.7 
       
Other commercial loans       58,718     2.6        58,278     2.6 
  Total commercial loans   1,892,026   85.1    1,899,883   85.0 
       
Consumer 1-4 family mortgage loans:      
  Closed end first mortgage loans      107,910     4.8       106,999     4.8 
  Open end and junior lien loans      174,029     7.8       175,694     7.9 
  Residential construction and land development loans         6,929     0.3          5,462     0.2 
  Total consumer 1-4 family mortgage loans      288,868   12.9       288,155   12.9 
       
Other consumer loans       44,977     2.0        45,999     2.1 
  Total consumer loans      333,845   14.9       334,154   15.0 
  Subtotal   2,225,871 100.0 %   2,234,037 100.0 %
Less:  Allowance for loan losses      (52,757)        (53,400)  
           Net deferred loan fees           (409)             (328)  
Loans, net $2,172,705   $2,180,309  




10


NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2011:March 31, 2012:

  Commercial              Commercial            
  Real Estate     Consumer        Real Estate     Consumer      
Commercial and Multifamily Agri-business Other 1-4 Family Other    Commercial and Multifamily Agri-business Other 1-4 Family Other    
and Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Totaland Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Total
Three Months Ended September 30, 2011 
Balance July 1, $               22,999  $               20,032  $                    948  $                    560  $                 2,658  $                    605  $                 3,458  $               51,260
Provision for loan losses1,171 2,134 (194) (536) (272) 294 (197) 2,400
Loans charged-off(883) (557) (103) 0 (292) (264) 0 (2,099)
Recoveries465 10 0 0 5 32 0 512
Net loans charged-off(418) (547) (103) 0 (287) (232) 0 (1,587)
Balance September 30, $               23,752  $               21,619  $                    651  $                      24  $                 2,099  $                    667  $                 3,261  $               52,073
Nine Months Ended September 30, 2011               
(in thousands)
Balance January 1, $               21,479  $               15,893  $                 1,318  $                    270  $                 1,694  $                    682  $                 3,671  $               45,007 $               22,830  $               23,489  $                    695  $                      65  $                 2,322  $                    645  $                 3,354  $               53,400
Provision for loan losses3,048 7,362 (564) (246) 1,390 320 (410) 10,900(104) 565 (157) 119 171 (54) 259 799
Loans charged-off(1,470) (1,973) (103) 0 (1,009) (493) 0 (5,048)(778) (847) 0 0 (14) (94) 0 (1,733)
Recoveries695 337 0 0 24 158 0 1,214186 29 0 2 48 26 0 291
Net loans charged-off(775) (1,636) (103) 0 (985) (335) 0 (3,834)(592) (818) 0 2 34 (68) 0 (1,442)
Balance September 30, $               23,752  $               21,619  $                    651  $                      24  $                 2,099  $                    667  $                 3,261  $               52,073
Balance March 31, $               22,134  $               23,236  $                    538  $                    186  $                 2,527  $                    523  $                 3,613  $               52,757
                              
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment $                 9,809  $                 6,508  $                    236  $                        0  $                    158  $                        0  $                        0  $               16,711 $                 8,478  $                 8,274  $                    138  $                        -  $                    478  $                        5  $                        0  $               17,373
Collectively evaluated for impairment13,943 15,111 415 24 1,941 667 3,261 35,36213,656 14,962 400 186 2,049 518 3,613 35,384
                              
Total ending allowance balance $               23,752  $               21,619  $                    651  $                      24  $                 2,099  $                    667  $                 3,261  $               52,073 $               22,134  $               23,236  $                    538  $                    186  $                 2,527  $                    523  $                 3,613  $               52,757
                              
                              
Loans:                              
Loans individually evaluated for impairment $               25,060  $               29,693  $                    870  $                        0  $                 2,041  $                        0  $                        0  $               57,664 $               22,982  $               34,122  $                    826  $                        -  $                 3,058  $                        7  $                        0  $               60,995
Loans collectively evaluated for impairment737,180 799,574 193,500 58,201 287,282 47,607 0 2,123,344757,846 800,570 216,347 58,695 286,075 44,934 0 2,164,467
                              
Total ending loans balance $             762,240  $             829,267  $             194,370  $               58,201  $             289,323  $               47,607  $                        0  $          2,181,008 $             780,828  $             834,692  $             217,173  $               58,695  $             289,133  $               44,941  $                        0  $          2,225,462


The recorded investment in loans does not include accrued interest.



 
1011



The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011:

   Commercial            
   Real Estate     Consumer      
 Commercial and Multifamily Agri-business Other 1-4 Family Other    
 and Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Total
 (in thousands)
Balance January 1, $               21,479  $               15,893  $                 1,318  $                    270  $                 1,694  $                    682  $                 3,671  $               45,007
  Provision for loan losses1,371 3,373 (124) 0 1,161 (82) (101) 5,598
  Loans charged-off(398) (1,391) 0 0 (378) (131) 0 (2,298)
  Recoveries97 9 0 0 3 79 0 188
    Net loans charged-off(301) (1,382) 0 0 (375) (52) 0 (2,110)
Balance March 31, $               22,549  $               17,884  $                 1,194  $                    270  $                 2,480  $                    548  $                 3,570  $               48,495
                
Allowance for loan losses:               
  Ending allowance balance attributable to loans:               
    Individually evaluated for impairment $                 7,612  $                 4,957  $                    276  $                    190  $                      69  $                        0  $                        0  $               13,104
    Collectively evaluated for impairment14,937 12,927 918 80 2,411 548 3,570 35,391
                
Total ending allowance balance $               22,549  $               17,884  $                 1,194  $                    270  $                 2,480  $                    548  $                 3,570  $               48,495
                
                
Loans:               
  Loans individually evaluated for impairment $               20,739  $               24,893  $                 1,185  $                    195  $                 1,675  $                        0  $                        0  $               48,687
  Loans collectively evaluated for impairment668,324 790,581 216,822 44,226 284,980 50,746 0 2,055,679
                
Total ending loans balance $             689,063  $             815,474  $             218,007  $               44,421  $             286,655  $               50,746  $                        0  $          2,104,366

The recorded investment in loans does not include accrued interest.



12
 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:2011:

  Commercial              Commercial            
  Real Estate     Consumer        Real Estate     Consumer      
Commercial and Multifamily Agri-business Other 1-4 Family Other    Commercial and Multifamily Agri-business Other 1-4 Family Other    
and Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Totaland Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Total
(in thousands)
Balance January 1 $               21,479  $               15,893  $                 1,318  $                    270  $                 1,694  $                    682  $                 3,671  $               45,007
Provision for loan losses3,112 9,748 (520) (205) 1,632 350 (317) 13,800
Loans charged-off(2,587) (2,514) (103) 0 (1,050) (575) 0 (6,829)
Recoveries826 362 0 0 46 188 0 1,422
Net loans charged-off(1,761) (2,152) (103) 0 (1,004) (387) 0 (5,407)
Balance December 31 $               22,830  $               23,489  $                    695  $                      65  $                 2,322  $                    645  $                 3,354  $               53,400
                
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment $                 6,911  $                 4,663  $                    301  $                    190  $                      76  $                        0  $                        0  $               12,141 $                 9,443  $                 8,382  $                    213  $                        -  $                    288  $                        0  $                        0  $               18,326
Collectively evaluated for impairment14,568 11,230 1,017 80 1,618 682 3,671 32,86613,387 15,107 482 65 2,034 645 3,354 35,074
                              
Total ending allowance balance $               21,479  $               15,893  $                 1,318  $                    270  $                 1,694  $                    682  $                 3,671  $               45,007 $               22,830  $               23,489  $                    695  $                      65  $                 2,322  $                    645  $                 3,354  $               53,400
                              
                              
Loans:                              
Loans individually evaluated for impairment $               20,988  $               23,358  $                 1,259  $                    197  $                 2,204  $                        0  $                        0  $               48,006 $               24,204  $               35,794  $                    853  $                        0  $                 2,665  $                        0  $                        0  $               63,516
Loans collectively evaluated for impairment644,551 791,715 228,305 38,542 287,729 51,111 0 2,041,953727,160 815,883 237,150 58,249 285,791 45,960 0 2,170,193
                              
Total ending loans balance $             665,539  $             815,073  $             229,564  $               38,739  $             289,933  $               51,111  $                        0  $          2,089,959 $             751,364  $             851,677  $             238,003  $               58,249  $             288,456  $               45,960  $                        0  $          2,233,709

The recorded investment in loans does not include accrued interest.



The allowance for loan losses to total loans for the three months ended March 31, 2012 and 2011 was 2.37% and 2.30% respectively.  The allowance for loan losses to total loans for the year ended December 31, 2011 was 2.39%.



 
1113
 






The following is an analysis of the allowance for loan losses for the three months and nine months ended September 30, 2010:

 Three Months Nine Months 
 ended ended 
 September 30, September 30, 
 2010 2010 
     
Balance at beginning of period $           37,364  $         32,073 
Provision for loan losses                6,150             17,426 
Loans charged-off               (1,720)             (8,097) 
Recoveries                   217                  609 
  Net loans charged-off               (1,503)             (7,488) 
Balance at end of period $           42,011  $         42,011 
     
 Nine Months ended 
 September 30, 
 2011 2010 
     
Allowance for loan losses to total loans2.39%2.05%










12



The following table presents loans individually evaluated for impairment as of and for the three-month and nine-month periodsperiod ended September 30,March 31, 2012 and 2011:

      Three Months Ended September 30, 2011 Nine Months Ended September 30, 2011
          Cash Basis     Cash Basis          Cash Basis
Unpaid   Allowance for Average Interest Interest Average Interest InterestUnpaid   Allowance for Average Interest Interest
Principal Recorded Loan Losses Recorded Income Income Recorded Income IncomePrincipal Recorded Loan Losses Recorded Income Income
Balance Investment Allocated Investment Recognized Recognized Investment Recognized RecognizedBalance Investment Allocated Investment Recognized Recognized
                            
With no related allowance recorded:                            
Commercial and industrial loans:           
Non-working capital loans $                    196  $                    196  $                        0  $                    171  $                        0  $                        0
           
Commercial real estate and multi-family residential loans:                            
Nonowner occupied loans $          0  $              0  $                    0  $              0  $               0  $               0  $          567  $               0  $               0
Owner occupied loans292 292 0 290 0 0
           
Consumer 1-4 family loans:           
Closed end first mortgage loans301 301 0 297 0 0
Open end and junior lien loans40 40 0 40 0 0
                            
With an allowance recorded:                            
Commercial and industrial loans:                            
Working capital lines of credit loans6,098 6,097 3,366 5,466 4 3 5,464 10 95,503 5,502 3,023 5,805 16 15
Non-working capital loans18,958 18,963 6,443 18,842 152 165 16,857 442 45617,282 17,284 5,455 17,723 180 182
                            
Commercial real estate and multi-family residential loans:                            
Construction and land development loans986 987 225 1,935 0 0 1,554 0 02,060 2,059 550 969 0 0
Owner occupied loans2,904 2,903 1,074 2,634 7 6 2,942 19 184,175 4,174 1,169 4,588 12 10
Nonowner occupied loans25,801 25,803 5,209 26,001 100 88 22,270 135 12327,598 27,597 6,555 29,401 98 99
Multifamily loans0 0 0 0 0 0 0 0 00 0 0 0 0 0
                            
Agri-business and agricultural loans:                            
Loans secured by farmland642 641 218 716 0 0 603 0 0618 618 120 622 0 0
Loans for agricultural production229 229 18 231 0 0 471 0 0208 208 18 210 0 0
                            
Other commercial loans0 0 0 126 0 0 171 0 00 0 0 0 0 0
                            
Consumer 1-4 family mortgage loans:                            
Closed end first mortgage loans2,041 2,041 158 1,888 19 24 1,848 50 462,445 2,447 329 1,797 11 11
Open end and junior lien loans0 0 0 0 0 0 19 0 0270 270 149 354 0 0
Residential construction loans0 0 0 0 0 0 0 0 00 0 0 0 0 0
                            
Other consumer loans0 0 0 0 0 0 0 0 07 7 5 7 0 0
                            
Total $ 57,659  $     57,664  $           16,711  $     57,839  $           282  $           286  $     52,766  $           656  $           652 $               60,995  $               60,995  $               17,373  $               62,274  $                    317  $                    317


The recorded investment in loans does not include accrued interest.


14

           Cash Basis
 Unpaid   Allowance for Average Interest Interest
 Principal Recorded Loan Losses Recorded Income Income
 Balance Investment Allocated Investment Recognized Recognized
            
With no related allowance recorded:           
  Commercial real estate and multi-family residential loans:           
    Nonowner occupied loans $                    857  $                    856  $                        0  $                    856  $                        0  $                        0
            
With an allowance recorded:           
  Commercial and industrial loans:           
    Working capital lines of credit loans5,630 5,631 3,303 5,615 3 3
    Non-working capital loans15,107 15,108 4,309 15,163 127 111
            
  Commercial real estate and multi-family residential loans:           
    Construction and land development loans1,395 1,393 245 1,396 0 0
    Owner occupied loans2,942 2,943 912 3,205 6 6
    Nonowner occupied loans19,711 19,701 3,800 19,950 17 17
    Multifamily loans0 0 0 0 0 0
            
  Agri-business and agricultural loans:           
    Loans secured by farmland397 398 83 401 0 0
    Loans for agricultural production787 787 193 819 0 0
            
  Other commercial loans194 195 190 195 0 0
            
  Consumer 1-4 family mortgage loans:           
    Closed end first mortgage loans1,675 1,675 69 1,844 12 14
    Open end and junior lien loans0 0 0 47 0 0
    Residential construction loans0 0 0 0 0 0
            
  Other consumer loans0 0 0 0 0 0
            
Total $               48,695  $               48,687  $               13,104  $               49,491  $                    165  $                    151

The recorded investment in loans does not include accrued interest.

15
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011:

           Cash Basis
 Unpaid   Allowance for Average Interest Interest
 Principal Recorded Loan Losses Recorded Income Income
 Balance Investment Allocated Investment Recognized Recognized
            
With no related allowance recorded:           
  Commercial and industrial loans:           
    Non-working capital loans $                    116  $                    116  $                        0  $                      30  $                        0  $                        0
            
  Commercial real estate and multi-family residential loans:           
    Nonowner occupied loans0 0 0 425 0 0
            
With an allowance recorded:           
  Commercial and industrial loans:           
    Working capital lines of credit loans7,831 5,969 3,206 5,649 23 25
    Non-working capital loans20,867 18,119 6,237 17,202 616 625
            
  Commercial real estate and multi-family residential loans:           
    Construction and land development loans816 429 125 1,319 0 0
    Owner occupied loans5,874 5,082 1,566 3,082 41 45
    Nonowner occupied loans30,769 30,283 6,691 24,108 246 252
    Multifamily loans0 0 0 0 0 0
            
  Agri-business and agricultural loans:           
    Loans secured by farmland1,126 628 195 610 0 0
    Loans for agricultural production225 225 18 410 0 0
            
  Other commercial loans0 0 0 129 0 0
            
  Consumer 1-4 family mortgage loans:           
    Closed end first mortgage loans2,461 2,256 285 1,872 44 48
    Open end and junior lien loans409 409 3 118 0 0
    Residential construction loans0 0 0 0 0 0
            
  Other consumer loans0 0 0 0 0 0
            
Total $               70,494  $               63,516  $               18,326  $               54,924  $                    970  $                    995


The recorded investment in loans does not include accrued interest.



 
1316
 


The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

 Unpaid   Allowance for
 Principal Recorded Loan Losses
 Balance Investment Allocated
      
With no related allowance recorded:     
  Commercial real estate and multi-family residential loans:     
    Nonowner occupied loans $                    870  $                    869  $                        0
      
With an allowance recorded:     
  Commercial and industrial loans:     
    Working capital lines of credit loans5,651 5,652 2,944
    Non-working capital loans15,335 15,336 3,967
      
  Commercial real estate and multi-family residential loans:     
    Construction and land development loans1,402 1,401 195
    Owner occupied loans2,908 2,909 948
    Nonowner occupied loans18,186 18,179 3,520
    Multifamily loans0 0 0
      
  Agri-business and agricultural loans:     
    Loans secured by farmland405 406 83
    Loans for agricultural production853 853 218
      
  Other commercial loans197 197 190
      
  Consumer 1-4 family mortgage loans:     
    Closed end first mortgage loans2,067 2,063 75
    Open end and junior lien loans141 141 1
    Residential construction loans0 0 0
      
  Other consumer loans0 0 0
      
Total $               48,015  $               48,006  $               12,141

The recorded investment in loans does not include accrued interest.

The following table presents information on impaired loans for the three and nine months ended September 30, 2010.

 Three Months Nine Months
 ended ended
 September 30, September 30,
 2010 2010
    
Average of impaired loans during the period $         39,498  $         38,128
Interest income recognized during impairment                 113                  338
Cash-basis interest income recognized                 116                  349




14

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2011March 31, 2012 and December 31, 2010:2011:

March 31, 2012 December 31, 2011
September 30, 2011 December 31, 2010  Loans Past Due   Loans Past Due
  Loans Past Due   Loans Past Due  Over 90 Days   Over 90 Days
  Over 90 Days   Over 90 Days  Still   Still
  Still   StillNonaccrual Accruing Nonaccrual Accruing
Nonaccrual Accruing Nonaccrual Accruing       
Commercial and industrial loans:              
Non-impaired watch list loans $                    137  $                         0  $                    372  $                        0
Working capital lines of credit loans4,911 0 5,405 0 $                 4,441  $                         0  $                 4,743  $                        0
Non-working capital loans5,805 28 4,786 04,763 0 5,433 0
              
Commercial real estate and multi-family residential loans:              
Non-impaired watch list loans29 0 26 0
Construction and land development loans988 0 1,400 0420 0 429 0
Owner occupied loans2,482 0 2,935 04,099 0 4,371 0
Nonowner occupied loans16,984 0 19,049 020,147 0 21,971 0
Multifamily loans0 0 0 00 0 0 0
              
Agri-business and agricultural loans:              
Non-impaired watch list loans0 0 0 0
Loans secured by farmland641 0 406 0618 0 628 0
Loans for agricultural production230 0 878 0207 0 225 0
              
Other commercial loans0 0 197 0  0 0 0
              
Consumer 1-4 family mortgage loans:              
Closed end first mortgage loans811 31 842 3181,453 52 1,193 52
Open end and junior lien loans169 0 267 0311 2 452 0
Residential construction loans0 0 0 00 0 0 0
              
Other consumer loans8 3 20 127 0 7 0
              
Total $               33,195  $                       62  $               36,583  $                    330 $               36,466  $                       54  $               39,452  $                      52


The recorded investment in loans does not include accrued interest.


 
1517
 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2011March 31, 2012 by class of loans:

30-89 Greater than      
30-89        Days 90 Days Total Loans Not  
Days   Total Loans Not  Past Due Past Due Past Due Past Due Total
Past Due Nonaccrual Past Due Past Due Total    (in thousands)    
Commercial and industrial loans:                  
Non-impaired watch list loans $                       0  $                     137  $                   137  $             41,811  $            41,948
Working capital lines of credit loans161 4,911 5,072 362,976 368,048 $                       0  $                  4,441  $                4,441  $           398,378  $          402,819
Non-working capital loans121 5,833 5,954 346,290 352,244326 4,763 5,089 372,920 378,009
                  
Commercial real estate and multi-family residential loans:                  
Non-impaired watch list loans0 29 29 64,037 64,066
Construction and land development loans0 988 988 91,656 92,6440 420 420 88,704 89,124
Owner occupied loans186 2,482 2,668 310,254 312,9220 4,099 4,099 348,965 353,064
Nonowner occupied loans313 16,984 17,297 324,024 341,321578 20,146 20,724 336,685 357,409
Multifamily loans0 0 0 18,314 18,3140 0 0 35,095 35,095
                  
Agri-business and agricultural loans:                  
Non-impaired watch list loans0 0 0 1,073 1,073
Loans secured by farmland128 641 769 100,124 100,8930 618 618 103,491 104,109
Loans for agricultural production0 230 230 92,174 92,4040 207 207 112,857 113,064
                  
Other commercial loans0 0 0 58,201 58,2010 0 0 58,695 58,695
                  
Consumer 1-4 family mortgage loans:                  
Closed end first mortgage loans2,066 842 2,908 104,106 107,0142,494 1,505 3,999 103,703 107,702
Open end and junior lien loans246 169 415 177,504 177,919128 313 441 174,061 174,502
Residential construction loans0 0 0 4,390 4,39033 0 33 6,896 6,929
                  
Other consumer loans143 11 154 47,453 47,607110 7 117 44,824 44,941
                  
Total $                3,364  $                33,257  $              36,621  $        2,144,387  $       2,181,008 $                3,669  $                36,519  $              40,188  $        2,185,274  $       2,225,462


The recorded investment in loans does not include accrued interest.


 
1618
 

The following table presents the aging of the recorded investment in past due loans as of December 31, 20102011 by class of loans:

30-89 Greater than      30-89 Greater than      
Days 90 Days Total Loans Not  Days 90 Days Total Loans Not  
Past Due Past Due Past Due Past Due TotalPast Due Past Due Past Due Past Due Total
             (in thousands)    
Commercial and industrial loans:                  
Non-impaired watch list loans $                       0  $                     372  $                   372  $             54,977  $            55,349
Working capital lines of credit loans0 5,405 5,405 261,556 266,961 $                1,051  $                  4,743  $                5,794  $           368,098  $          373,892
Non-working capital loans462 4,786 5,248 337,981 343,22921 5,433 5,454 372,018 377,472
                  
Commercial real estate and multi-family residential loans:                  
Non-impaired watch list loans0 26 26 60,473 60,499
Construction and land development loans0 1,400 1,400 88,089 89,4890 429 429 81,650 82,079
Owner occupied loans27 2,935 2,962 304,702 307,664104 4,371 4,475 342,068 346,543
Nonowner occupied loans0 19,049 19,049 314,245 333,2940 21,971 21,971 362,710 384,681
Multifamily loans0 0 0 24,127 24,1270 0 0 38,374 38,374
                  
Agri-business and agricultural loans:                  
Non-impaired watch list loans0 0 0 4,131 4,131
Loans secured by farmland0 406 406 109,465 109,8710 628 628 117,619 118,247
Loans for agricultural production0 878 878 114,684 115,5620 225 225 119,531 119,756
                  
Other commercial loans0 197 197 38,542 38,7390 0 0 58,249 58,249
                  
Consumer 1-4 family mortgage loans:                  
Closed end first mortgage loans2,333 1,160 3,493 99,405 102,8982,569 1,245 3,814 102,970 106,784
Open end and junior lien loans237 267 504 182,395 182,899254 452 706 175,517 176,223
Residential construction loans0 0 0 4,136 4,13634 0 34 5,415 5,449
                  
Other consumer loans145 32 177 50,934 51,111192 7 199 45,761 45,960
                  
Total $                3,204  $                36,913  $              40,117  $        2,049,842  $       2,089,959 $                4,225  $                39,504  $              43,729  $        2,189,980  $       2,233,709


The recorded investment in loans does not include accrued interest.


 
1719
 


Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $9.5$15.2 million and $4.1$15.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011March 31, 2012 and December 31, 2010.2011. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.

March 31, December 31,
September 30, December 31,2012 2011
2011 2010   
Accruing troubled debt restructured loans $             22,428  $                8,547 $             22,735  $              22,177
Nonaccrual troubled debt restructured loans                  9,300                    6,091                31,940                  34,273
Total troubled debt restructured loans $             31,728  $              14,638 $             54,675  $              56,450

During the quarter ending March 31, 2012, there were no loan modifications offered to borrowers experiencing financial distress that would be considered troubled debt restructurings.  There were, however, renewal terms on several loans offered to a borrower under financial distress which did not require additional compensation or consideration and would not have been readily available in the marketplace for loans bearing similar risk profiles.  In this instance, it was determined that a concession had been granted.  It is difficult to quantify the concession granted due to an absence in market terms to be used for comparison.  The renewals were to one borrower engaged in construction and land development, where the aggregate recorded investment totaled $1.6 million.  These loans are included in the table of all modifications below.

Renegotiated interest rates include loans with a reduction in rate for a short-term (part of the remaining life of the loan) or long-term (life of loan).  There were modifications to borrowers at rates that were readily available in the market, but to borrowers who would not have qualified for the terms offered in the modification without a concession being granted. Also included are borrowers who received interest rate concessions that were below market rates.

Delays in principal repayment include loans which were intended to be amortizing during the period, but due to financial hardship the borrowers under these loans were unable to meet the original or intended repayment terms. These include loans with principal deferrals for a prolonged period or those with modified payments which are an exception to bank policy.



20

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2012:

  Modifications
  Three Months Ended March 31, 2012
       
  All Modifications
       
    Pre-Modification Post-Modification
    Outstanding Outstanding
  Number of Recorded Recorded
  Loans Investment Investment
       
Troubled Debt Restructurings     
       
 Commercial real estate and multi-family residential loans:     
   Construction and land development loans5 $                 1,638 $                    1,638
       
 Total5  $                 1,638  $                    1,638

For the three month period ending March 31, 2012 the commercial real estate and ninemulti-family residential loan troubled debt restructurings described above increased the allowance for loan losses by $500,000.

The commercial real estate and multi-family residential loan troubled debt restructurings described above did not result in any charge offs during the three months ending March 31, 2012.

21


The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification which occurred during the three month periodsperiod ending SeptemberMarch 31, 2012:

  Number of Recorded
  Loans Investment
     
     
     
Troubled Debt Restructurings that Subsequently Defaulted   
     
 Consumer 1-4 family loans:   
   Closed end first mortgage loans1  $                  65
     
 Total1  $                  65


A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructuring that subsequently defaulted as set forth above increased the allowance for loan losses by $1,000 and did not result in any charge offs during the three month period ending March 31, 2012.

During the year ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modified terms of these loans included one or a combination of the following: a reduction of the stated interest rate of the loan;loan below market rates; principle and interest forgiveness; a modification of repayment terms that delays principal repayment for some period; or inadequate compensation for the terms of the restructure. Clarifications in the accounting guidance for troubled debt restructurings that became effective in the third quarter of 2011 resulted in $15.6 million being added to total troubled debt restructured loans in 2011. Of the $15.6 million added, $15.3 million was included in nonperforming and impaired loans at December 31, 2010.

RenegotiatedLoans with renegotiated interest rates include loans with a reductionreductions in rate for a short-term (part of the remaining life of the loan) or long-term (life of loan). Included are modifications to borrowers at a rate that is readily available in the market, but tofor borrowers who would not have otherwise qualified for the terms offered in the modification without a concession being granted. Also included are borrowers who received interest rate concessions that are below market rates.

22
Delays in principal repayment include loans whichthat were intended to be amortizing during the period, but, due to financial hardship, these borrowers were unable to meet the original or intended repayment terms. These include loans with principal deferrals for a prolonged period or those with modified payments, which are an exception to bank policy.

Inadequate compensation for the terms of the restructure were identified in some loans where terms offered would not have been readily available in the marketplace for loans bearing similar risk profiles, including loans that were renewed under terms similar to original terms. In some instances it was determined that a concession had been granted; however, it is difficult to quantify these concessions due to an absence in market terms to be used for comparison. These loans included two non-working capital loans with a recorded investment of $636,000, one non-owner occupied loan with a recorded investment of $642,000 and one loan secured by farmland with a recorded investment of $413,000. These loans are included in the table of all modifications below.

The following tables present loans by class modified as troubled debt restructurings that occurred during the three and nine month periodsperiod ending September 30, 2011:December 31, 2011:

  All Modifications
       
    Pre-Modification Post-Modification
    Outstanding Outstanding
  Number of Recorded Recorded
  Loans Investment Investment
Troubled Debt Restructurings     
       
 Commercial and industrial loans:     
   Working capital lines of credit loans3  $                    639  $                       639
   Non-working capital loans6 6,187 6,261
       
 Commercial real estate and multi-family residential loans:     
   Construction and land development loans     
   Owner occupied loans8 6,648 6,651
   Nonowner occupied loans8 23,767 23,767
       
 Agri-business and agricultural loans:     
   Loans secured by farmland2 683 683
       
 Consumer 1-4 family loans:     
   Closed end first mortgage loans6 942 849
       
 Total33  $               38,866  $                  38,850


 
1823
 


  Modifications
  Nine Months Ended September 30, 2011
                 
  All Modifications Interest Rate Reductions Modified Repayment Terms
                 
    Pre-Modification Post-Modification          
    Outstanding Outstanding   Interest at Interest at   Extension
  Number of Recorded Recorded Number of Pre-Modification Post-Modification Number of Period or
  Loans Investment Investment Loans Rate Rate Loans Range
                (in months)
Troubled Debt Restructurings               
                 
 Commercial and industrial loans:               
   Working capital lines of credit loans3  $                    639  $                       639 0  $                         0  $                            0 3 11-60
   Non-working capital loans4 5,551 5,625 0 0 0 4 12-36
                 
 Commercial real estate and multi-family residential loans:               
   Owner occupied loans5 1,788 1,787 0 0 0 5 20-70
   Nonowner occupied loans3 8,550 8,550 0 0 0 3 9-26
                 
 Agri-business and agricultural loans:               
   Loans secured by farmland1 270 270 0 0 0 1 22
                 
 Consumer 1-4 family loans:               
   Closed end first mortgage loans5 394 399 5 402 324 0 0
                 
 Total21  $               17,192  $                  17,270 5  $                     402  $                        324 16 9-70








19



  Modifications
  Three Months Ended September 30, 2011
                 
  All Modifications Interest Rate Reductions Modified Repayment Terms
                 
    Pre-Modification Post-Modification          
    Outstanding Outstanding   Interest at Interest at   Extension
  Number of Recorded Recorded Number of Pre-Modification Post-Modification Number of Period
  Loans Investment Investment Loans Rate Rate Loans Pre-Modification
                 
Troubled Debt Restructurings               
                 
 Commercial and industrial loans:               
   Non-working capital loans2  $                 3,545  $                    3,546 0  $                         0  $                            0 2 12
                 
 Commercial real estate and multi-family residential loans:               
   Nonowner occupied loans2 7,493 7,493 0 0 0 2 24-26
                 
 Total4  $               11,038  $                  11,039 0  $                         0  $                            0 4 12-26
  Interest Rate Reductions Principal and Interest Forgiveness Modified Repayment Terms
                     
    Interest at Interest at   Principal at Principal at Interest at Interest at   Extension
  Number of Pre-Modification Post-Modification Number of Pre-Modification Post-Modification Pre-Modification Post-Modification Number of Period or
  Loans Rate Rate Loans Rate Rate Rate Rate Loans Range
          (in thousands)   (in months)
Troubled Debt Restructurings                   
                     
 Commercial and industrial loans:                   
   Working capital lines of credit loans0  $                        0  $                           0 0  $                          0  $                            0  $                         0  $                            0 3 11-60
   Non-working capital loans0 0 0 0 0 0 0 0 4 12-36
                     
 Commercial real estate and                   
  multi-family residential loans:                   
   Owner occupied loans0 0 0 1 2,125 2,125 641 429 7 20-70
   Nonowner occupied loans0 0 0 0 0 0 0 0 7 6-36
                     
 Agri-business and agricultural loans:                   
   Loans secured by farmland0 0 0 0 0 0 0 0 1 22
                     
 Consumer 1-4 family loans:                   
   Closed end first mortgage loans5 402 324 1 550 450 66 57 0 0
                     
 Total5  $                    402  $                       324 2  $                   2,675  $                     2,575  $                     707  $                        486 22 6-70

All of the commercial and industrial loan troubled debt restructurings described above also had inadequate compensation of additional collateral as part of the restructuring.

For the three month period ending September 30,December 31, 2011, the commercial and industrial loan troubled debt restructurings described above increaseddecreased the allowance for loan losses by $76,000,$112,000, the commercial real estate and multi-family residential loan troubled debt restructurings described above increased the allowance for loan losses by $378,000,$3.2 million, the agri-business and agricultural loan troubled debt restructurings described above increaseddecreased the allowance for loan losses by $2,000$11,000 and the consumer 1-4 family loan troubled debt restructurings described above increased the allowance for loan losses by $58,000.

For the nine month period ending September 30, 2011 the$76,000. The five commercial and industrial loan troubled debt restructurings described above increased the allowance for loan losses by $124,000, the commercial real estateloans and multi-family residential loan troubled debt restructurings described above increased the allowance for loan losses by $674,000, theone agri-business and agricultural loan troubled debt restructurings described above increasedthat decreased the allowance for loan losses by $9,000provision during 2011 had modifications during the first five months of the year and had improved their positions during the consumer 1-4 family loan troubled debt restructurings described above increasedremainder of the allowance for loan losses by $88,000.year warranting the decrease in allocation.

24
The commercial real estate and multi-family residential loan troubled debt restructurings described above also resulted in charge offs of $0 and $487,000$667,000 during the three and nine month periodsperiod ending September 30,December 31, 2011. No charge offs resulted from any other troubled debt restructurings described above during the three and nine month periodsperiod ending September 30, 2011
.

20

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine month periods ending September 30, 2011:

  Modifications
  Three and Nine Months ended September 30, 2011
         
  Three Months Ended Nine Months Ended
  September 30, 2011 September 30, 2011
         
  Number of Recorded Number of Recorded
  Loans Investment Loans Investment
         
         
         
Troubled Debt Restructurings that Subsequently Defaulted       
         
 Consumer 1-4 family loans:       
   Closed end first mortgage loans3  $                258 3  $                258
         
 Total3  $                258 3  $                258


A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $6,000 and did not result in any charge offs during the three and nine month periods ending September 30,December 31, 2011.








 
2125
 


Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.

The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institutionCompany will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.







 
2226
 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be passPass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans.  Loans listed as not ratedNot Rated are consumer loans included in groups of homogenous loans.loans which are analyzed for credit quality indicators utilizing delinquency status.  As of September 30,March 31, 2012 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

   Special     Not
 Pass Mention Substandard Doubtful Rated
     (in thousands)    
  Commercial and industrial loans:         
    Working capital lines of credit loans $            383,024  $              5,348  $              14,447  $                        0  $                       0
    Non-working capital loans334,206 4,977 37,484 0 1,342
          
  Commercial real estate and multi-family residential loans:         
    Construction and land development loans72,224 3,291 13,609 0 0
    Owner occupied loans322,863 8,342 21,811 0 48
    Nonowner occupied loans322,080 10,297 25,032 0 0
    Multifamily loans33,864 1,231 0 0 0
          
  Agri-business and agricultural loans:         
    Loans secured by farmland102,769 70 1,250 0 20
    Loans for agricultural production112,857 0 207 0 0
     ��    
  Other commercial loans58,531 46 118 0 0
          
  Consumer 1-4 family mortgage loans:         
    Closed end first mortgage loans19,704 51 1,069 0 86,878
    Open end and junior lien loans13,224 300 0 0 160,978
    Residential construction loans0 0 0 0 6,929
          
  Other consumer loans7,647 386 497 0 36,411
          
Total $         1,782,993  $            34,339  $            115,524  $                        0  $            292,606


The recorded investment in loans does not include accrued interest.


27
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans.  Loans listed as Not Rated are consumer loans included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status.  As of December 31, 2011 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

   Special     Not
 Pass Mention Substandard Doubtful Rated
  Commercial and industrial loans:         
    Non-impaired watch list loans $                       0  $            14,707  $              27,070  $                    171  $                       0
    Working capital lines of credit loans361,935 0 5,947 150 16
    Non-working capital loans331,759 8,758 10,111 94 1,522
          
  Commercial real estate and multi-family residential loans:         
    Non-impaired watch list loans2 21,557 42,507 0 0
    Construction and land development loans91,656 0 988 0 0
    Owner occupied loans309,927 0 2,903 0 92
    Nonowner occupied loans315,518 3,438 22,365 0 0
    Multifamily loans18,314 0 0 0 0
          
  Agri-business and agricultural loans:         
    Non-impaired watch list loans0 70 1,003 0 0
    Loans secured by farmland100,231 0 641 0 21
    Loans for agricultural production91,952 0 230 0 222
          
  Other commercial loans58,116 85 0 0 0
          
  Consumer 1-4 family mortgage loans:         
    Closed end first mortgage loans20,755 54 410 0 85,795
    Open end and junior lien loans11,525 300 0 0 166,094
    Residential construction loans0 0 0 0 4,390
          
  Other consumer loans8,852 319 497 0 37,939
          
Total $         1,720,542  $            49,288  $            114,672  $                    415  $            296,091


The recorded investment in loans does not include accrued interest.
23
As of December 31, 2010 the risk category of loans by class of loans is as follows:

  Special     Not  Special     Not
Pass Mention Substandard Doubtful RatedPass Mention Substandard Doubtful Rated
             (in thousands)    
Commercial and industrial loans:                  
Non-impaired watch list loans $                       0  $            22,282  $              33,067  $                        0  $                       0
Working capital lines of credit loans261,210 0 5,751 0 0 $            352,055  $              5,625  $              16,212  $                        0  $                       0
Non-working capital loans325,976 0 15,327 0 1,926331,881 7,437 36,751 0 1,403
                  
Commercial real estate and multi-family residential loans:                  
Non-impaired watch list loans0 23,722 36,777 0 0
Construction and land development loans88,088 0 1,401 0 064,808 3,296 13,976 0 0
Owner occupied loans304,661 0 2,911 0 92318,191 5,913 22,400 0 38
Nonowner occupied loans314,247 0 19,047 0 0337,090 8,875 38,716 0 0
Multifamily loans24,127 0 0 0 037,127 1,247 0 0 0
                  
Agri-business and agricultural loans:                  
Non-impaired watch list loans0 2,008 2,123 0 0
Loans secured by farmland109,444 0 405 0 22116,742 70 1,415 0 20
Loans for agricultural production114,495 0 853 0 214119,531 0 225 0 0
                  
Other commercial loans38,400 0 339 0 058,061 66 120 0 2
                  
Consumer 1-4 family mortgage loans:                  
Closed end first mortgage loans17,398 427 1,386 0 83,68717,307 53 974 0 88,450
Open end and junior lien loans13,380 0 178 0 169,34111,569 319 0 0 164,335
Residential construction loans0 0 0 0 4,1360 0 0 0 5,449
                  
Other consumer loans9,394 0 497 0 41,2207,416 375 497 0 37,672
                  
Total $         1,620,820  $            48,439  $            120,062  $                        0  $            300,638 $         1,771,778  $            33,276  $            131,286  $                        0  $            297,369

The recorded investment in loans does not include accrued interest.



 
2428
 


NOTE 5. SECURITIES

Information related to the fair value and amortized cost of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the tables below.

  Gross Gross    Gross Gross  
Fair Unrealized Unrealized AmortizedFair Unrealized Unrealized Amortized
Value Gain Losses CostValue Gain Losses Cost
September 30, 2011       
March 31, 2012       
U.S. Treasury securities $     1,057  $          54  $            0  $     1,003 $           1,048  $                45  $                  0  $           1,003
U.S. Government sponsored agencies5,241 206 0 5,035
U.S. government sponsored agencies5,265 234 0 5,031
Agency residential mortgage-backed securities345,941 11,526 (366) 334,781360,440 9,785 (610) 351,265
Non-agency residential mortgage-backed securities35,207 217 (2,356) 37,34630,627 371 (1,103) 31,359
State and municipal securities76,626 4,414 (10) 72,22278,829 4,697 (51) 74,183
Total $ 464,072  $   16,417  $   (2,732)  $ 450,387 $       476,209  $         15,132  $         (1,764)  $       462,841
              
December 31, 2010       
December 31, 2011       
U.S. Treasury securities $     1,036  $          32  $            0  $     1,004 $           1,055  $                52  $                  0  $           1,003
U.S. government sponsored agencies5,277 244 0 5,033
Agency residential mortgage-backed securities308,851 10,422 (837) 299,266350,102 8,989 (923) 342,036
Non-agency residential mortgage-backed securities62,773 331 (6,136) 68,57832,207 191 (2,225) 34,241
State and municipal securities69,960 1,538 (637) 69,05978,750 5,292 (9) 73,467
Total $ 442,620  $   12,323  $   (7,610)  $ 437,907 $       467,391  $         14,768  $         (3,157)  $       455,780

Total other-than-temporary impairment recognized in accumulated other comprehensive income was $516,000 at March 31, 2012 and $213,000 at December 31, 2011.

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of September 30, 2011March 31, 2012 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without prepayment penalty.

 Fair Amortized
 Value Cost
Due in one year or less $       1,576  $      1,567
Due after one year through five years20,805 19,681
Due after five years through ten years35,005 32,843
Due after ten years25,538 24,169
 82,924 78,260
Mortgage-backed securities381,148 372,127
  Total debt securities $   464,072  $  450,387



 Amortized Fair
 Cost Value
  
Due in one year or less $                 650  $              651
Due after one year through five years22,617 23,982
Due after five years through ten years33,659 35,850
Due after ten years23,291 24,659
 80,217 85,142
Mortgage-backed securities382,624 391,067
  Total debt securities $          462,841  $       476,209

 
2529
 

Information regarding securitySecurity proceeds, gross gains and gross losses are presented below.

Nine months ended September 30,
2011 2010
Sales of securities available for sale   
Proceeds $      73,318  $               0
Gross gains4,005 0
Gross losses(4,171) 0
    Three months ended March 31,
Three months ended September 30, 2012 2011
2011 2010    
Sales of securities available for sale       
Proceeds $               0  $               0  $                  0  $         68,847
Gross gains0 0 0 3,929
Gross losses0 0 0 4,127

There were no securities sales during the first three months of 2012.  All of the gains in 2012 were from calls.  The Company sold 3620 securities with a total book value of $73.5$69.1 million and a total fair value of $73.3$68.8 million during the first ninethree months of 2011.  The sales were related to a strategic realignment of the securities portfolio, and included six of the seven non-agency residential mortgage backed securities on which the Company had previously recognized other-than-temporary impairment.  There were no securities sales during the first nine months of 2010.

Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or over estimated lives for mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

Securities with carrying values of $249.8$230.4 million and $243.9$265.2 million were pledged as of September 30,March 31, 2012 and 2011, and 2010, as collateral for deposits of public funds, securities sold under agreements to repurchase, borrowings from the FHLBFederal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of September 30, 2011March 31, 2012 and December 31, 20102011 is presented below. The tables distribute the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

 Less than 12 months 12 months or more Total
 Fair Unrealized Fair Unrealized Fair Unrealized
 Value Losses Value Losses Value Losses
September 30, 2011           
            
U.S. Treasury securities $             0  $           0  $          0  $          0  $            0  $           0
Agency residential mortgage-backed securities60,725 347 4,874 19 65,599 366
Non-agency residential mortgage-backed securities3,101 4 26,047 2,352 29,148 2,356
State and municipal securities312 3 1,003 7 1,315 10
  Total temporarily impaired $    64,138  $       354  $ 31,924  $   2,378  $   96,062  $    2,732
 Less than 12 months 12 months or more Total
 Fair Unrealized Fair Unrealized Fair Unrealized
 Value Losses Value Losses Value Losses
March 31, 2012           
            
Agency residential mortgage-backed           
  securities $          56,970  $            (435)  $      12,339  $          (175)  $         69,309  $            (610)
Non-agency residential mortgage-backed           
  securities0 0 12,891 (1,103) 12,891 (1,103)
State and municipal securities1,949 (45) 1,003 (6) 2,952 (51)
  Total temporarily impaired $          58,919  $            (480)  $      26,233  $       (1,284)  $         85,152  $         (1,764)
            
December 31, 2011           
            
Agency residential mortgage-backed           
  securities $          74,463  $            (860)  $        4,813  $            (63)  $         79,276  $            (923)
Non-agency residential mortgage-backed           
  securities3,379 (4) 23,885 (2,221) 27,264 (2,225)
State and municipal securities341 (2) 1,003 (7) 1,344 (9)
  Total temporarily impaired $          78,183  $            (866)  $      29,701  $       (2,291)  $       107,884  $         (3,157)


 
2630
 
 Less than 12 months 12 months or more Total
 Fair Unrealized Fair Unrealized Fair Unrealized
 Value Losses Value Losses Value Losses
December 31, 2010           
            
U.S. Treasury securities $             0  $           0  $          0  $          0  $            0  $           0
Agency residential mortgage-backed securities55,193 821 4,170 16 59,363 837
Non-agency residential mortgage-backed securities1,607 2 50,786 6,134 52,393 6,136
State and municipal securities15,811 577 422 60 16,233 637
  Total temporarily impaired $    72,611  $    1,400  $ 55,378  $   6,210  $ 127,989  $    7,610

The number of securities with unrealized losses as of September 30, 2011March 31, 2012 and December 31, 20102011 is presented below.

Less than 12 months  Less than 12 months  
12 months or more Total12 months or more Total
September 30, 2011     
March 31, 2012     
          
U.S. Treasury securities0 0 0
Agency residential mortgage-backed securities18 1 1915 3 18
Non-agency residential mortgage-backed securities0 10 100 6 6
State and municipal securities2 2 414 2 16
Total temporarily impaired20 13 3329 11 40
          
December 31, 2010     
     Less than 12 months  
U.S. Treasury securities0 0 0
12 months or more Total
December 31, 2011     
     
Agency residential mortgage-backed securities13 1 1421 1 22
Non-agency residential mortgage-backed securities1 18 192 9 11
State and municipal securities35 1 363 2 5
Total temporarily impaired49 20 6926 12 38

All of the following are considered to determine whether or not the impairment of these securities is other-than-temporary. Ninety-four percent of the securities are backed by the U.S. Government,government, government agencies, government sponsored agencies or are A rated or better, except for certain non-local municipal securities which are not rated. Mortgage-backed securities which are not issued by the U.S. Governmentgovernment or government sponsored agencies (non-agency residential mortgage-backed securities) met specific criteria set by the Asset Liability Management Committee at their time of purchase, including having the highest rating available by either Moody’s or S&P. None of the securities have call provisions (with the exception of the municipal securities) and all payments as originally agreedon the securities have been received.received on their original terms. For the government, government-sponsored agency and municipal securities, management didwas not have concernsconcerned about the risk of credit losses, and there was nothing to indicate that full payment of the principal will not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold, whichsold.  However, at this time management does not have the intent to sell nor willand it is more likely than not that it nor will not be required to sell these securities before the recovery of their amortized cost basis.

27
As of September 30, 2011,March 31, 2012, the Company had $35.2$30.6 million of collateralized mortgage obligationsnon-agency residential mortgage-backed securities which were not issued by the federal government or government sponsored agencies, but were rated AAA by S&P and/or Aaa by Moody’s at the time of purchase.  At December 31, 2010,2011, the Company had $62.8$32.2 million of these collateralized mortgage obligations.  During the first quarter of 2011, the Company sold eight of the non-agency residential mortgage backed securities as part of a strategic realignment of the investment portfolio.  The securities sold had a book value of $21.9 million and a fair value of $17.7 million.  The sales included six of the seven non-agency residential mortgage backed securities on which the Company had previously recognized other-than-temporary impairment.  Twomortgage-backed securities.  Five of the 15 remaining non-agency residential mortgage backed securities were still rated AAA/Aaa as of September 30,March 31, 2012 and December 31, 2011 but 13 were downgraded by at least one of the rating agencies S&P, Moody’s and Fitch, and/or Moody’s, including 10 which were rankedbut the other ten had been downgraded to below investment grade by at least one or moreof those rating agencies.  Of the five securities rated AAA/Aaa at December 31, 2010, three have been downgraded, but were still rated as investment grade.  Of the 10 that were below AAA/Aaa at December 31, 2010, three incurred further downgrades.

31
For these non-agency residential mortgage-backed securities, additional analysis is performed to determine if the impairment is temporary or other-than-temporary in which case impairment would need to be recorded for these securities. The Company performs an independent analysis of the cash flows of the individual securities based upon assumptions as to collateral defaults, prepayment speeds, expected losses and the severity of potential losses.  Based upon the initial review, securities may be identified for further analysis by computing the net present value using an appropriate discount rate (the current accounting yield) and comparing it to the book value of the security to determine if there is any other-than-temporary impairment that must be recorded. Based on this analysis of the non-agency residential mortgage-backed securities, the Company recorded an other-than-temporary impairment of $33,000 and $154,000, respectively,$510,000 relating to one securitythree securities in the three-months and nine-months ended September 30, 2011,March 31, 2012, which is equal to the credit loss, establishing a new, lower amortized cost basis.  Because management did not have the intent to sell these securities norand did managementnot believe that it was more likely than not they would be required to sell these securities before the recovery of their new, lower amortized cost basis, management did not consider the remaining unrealized losses of the investment securities to be other-than-temporarily impaired at September 30, 2011.March 31, 2012.

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.  The table represents the three months ended March 31, 2012 and nine months ended September 30, 2011 and 2010.2011.












28







Accumulated
Three Months Ended September 30, 2011Credit Losses
Balance July 1, 2011 $           194
Sales of securities for which other-than-temporary impairment losses were previously recognized           0
Additional increases to the amount of credit loss for which other-than-temporary impairment was previously recognized              33
Balance September 30, 2011 $           227

Accumulated
Three Months Ended September 30, 2010Credit Losses
Balance July 1, 2010 $           477
Additions related to other-than-temporary impairment losses not previously recognized              61
Additional increases to the amount of credit loss for which other-than-temporary impairment was previously recognized              24
Balance September 30, 2010 $           562

Accumulated
Nine Months Ended September 30, 2011Credit Losses
Balance January 1, 2011 $           1,812
Sales of securities for which other-than-temporary impairment losses were previously recognized           (1,739)
Additional increases to the amount of credit loss for which other-than-temporary impairment was previously recognized              154
Balance September 30, 2011 $           227

Accumulated
Nine Months Ended September 30, 2010Credit Losses
Balance January 1, 2010 $           225
Additions related to other-than-temporary impairment losses not previously recognized              113
Additional increases to the amount of credit loss for which other-than-temporary impairment was previously recognized              224
Balance September 30, 2010 $           562
 Three Months Ended March 31,
 2012 2011
  
Balance January 1, $                  359  $                1,812
Additions related to other-than-temporary impairment losses   
  not previously recognized449 0
Additional increases to the amount of credit loss for which   
 other-than-temporary impairment was previously recognized61 121
Reductions for previous credit losses realized on   
  securities sold during the year0 (1,739)
Balance March 31, $                  869  $                   194



 
2932
 

Information on securities with at least one rating below investment grade as of September 30, 2011March 31, 2012 is presented below.

 Other Than           
    September 30, 20111-Month3-Month6-Month  Temporary        March 31, 20121-Month3-Month6-Month 
 Other ThanSeptember 30, 2011LowestConstant  Impairment March 31, 2012LowestConstantConstant 
 TemporaryParAmortizedFairUnrealizedCreditDefaultCredit Since Par Amortized Fair UnrealizedCreditDefaultDefaultCredit
DescriptionCUSIPImpairmentValueCostValueGain/(Loss)RatingRateSupportCUSIPPurchase Value Cost Value Gain/(Loss)RatingRateRateSupport
             
CWHL 2006-18 2A712543WAJ7 $               0 $   3,110 $   3,050 $   2,758 $        (292)CC0.000.733.4312543WAJ7 $           100  $             2,625  $             2,473  $          2,311             $                (162)C4.117.647.731.95
CWALT 2005-46CB A112667G6U2                  03,6643,4933,045(448)CC3.082.431.963.5712667G6U2103 3,393 3,131                   2,858 (273)CC6.794.803.312.18
CWALT 2005-J8 1A312667GJ20                  05,2074,9934,538(455)CC0.001.743.636.8612667GJ20348 4,838 4,290                   4,355 65CC5.067.938.145.11
CHASE 2005-S3 A416162WNE5                  06056010B17.734.763.393.9916162WNE50 83 82                        82 0B11.552.070.983.89
CHASE 2006-S3 1A516162XAE7                  01,5681,5651,480(85)CC5.844.264.722.5816162XAE70 1,026 1,024                   1,000 (24)C14.058.274.690.83
CMSI 2007-6 1A5173103AE2                  02,7332,7312,693(38)B14.562.481.786.76
CMSI 2007-61A5173103AE20 2,313 2,312                   2,337 25B6.575.764.256.36
GSR 2006-10F 1A136266WAC6                  04,2213,9263,643(283)CC6.572.241.102.9236266WAC60 3,444 3,204                   3,065 (139)C0.000.001.40
MALT 2004-6 7A1576434SK1                  03,1243,1053,101(4)BB0.0011.25
MALT 2004-6 7 A1576434SK10 2,953 2,934                   2,938 4B0.000.0011.57
MANA 2007-F1 1A159023YAA2                  02,4652,4171,991(426)D0.000.0059023YAA20 1,966 1,928                   1,629 (299)D0.000.00
RFMSI 2006-S5 A1474957EAP2              2272,8062,5242,237(287)CC4.056.034.830.0074957EAP2317 2,614 2,254                   2,047 (207)D0.003.674.270.00
  $           227 $ 29,503 $ 28,405 $ 26,087 $     (2,318)                
  $           868  $           25,255  $           23,632  $             22,622  $             (1,010)   


All of these securities are super senior or senior tranche non-agency residential mortgage-backed securities.  The credit support is the credit support percentage for a tranche from other subordinated tranches, which is the amount of principal in the subordinated tranches expressed as a percentage of the remaining principal in the super senior/senior or senior tranche.  The super senior/senior or senior tranches receive the prepayments and the subordinate tranches absorb the losses.  The super senior/senior or senior tranches do not absorb losses until the subordinate tranches are gone.


 
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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, it is management’s current intent and ability to hold them until a recovery in fair value or maturity.

NOTE 6. EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost

 Nine Months Ended September 30,
 Pension Benefits SERP Benefits
 2011 2010 2011 2010
Interest cost $        105  $        106  $          46  $          51
Expected return on plan assets(119) (125) (60) (61)
Recognized net actuarial (gain) loss80 63 52 44
  Net pension expense (benefit) $          66  $          44  $          38  $          34

Three Months Ended September 30,Three Months Ended March 31,
Pension Benefits SERP BenefitsPension Benefits SERP Benefits
2011 2010 2011 20102012 2011 2012 2011
Interest cost $          33  $          38  $          12  $          17 $          35  $          36  $          16  $          17
Expected return on plan assets(41) (47) (20) (19)(40) (39) (20) (20)
Recognized net actuarial (gain) loss40 13 22 16
Net pension expense (benefit) $          32  $            4  $          14  $          14
Recognized net actuarial loss27 20 17 15
Net pension expense $          22  $          17  $          13  $          12

The Company previously disclosed in its financial statements for the year ended December 31, 20102011 that it did not expectexpected to contribute $170,000 to its pension in 2011plan and did expect to contribute $90,000$114,000 to its SERP plan in 2011.  No contributions were made2012.  The Company has contributed $62,000 to theits pension plan and $90,000 was contributed$114,000 to theits SERP plan as of September 30, 2011.March 31, 2012.  The Company expects to contribute an additional $108,000 to its pension plan during the remainder of 2012.  The Company does not expect to make any additional contributions to its SERP plan during the remainder of 2012.

NOTE 7.  NEW ACCOUNTING PRONOUNCEMENTS

In January 2011, the FASB issued ASU No. 2011-01, “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.”  The provisions of ASU No. 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company’s reporting period ended March 31, 2011.  The amendments in ASU No. 2011-01 defer the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completes their project clarifying the guidance for determining what constitutes a troubled debt restructuring.  As the provisions of this ASU only deferred the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU did not have a material impact on the Company’s statements of income and condition.
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In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.”  The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties.  A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20.  The provisions of ASU No. 2011-02 were effective for the Company’s reporting period ending September 30, 2011.  The adoption of ASU No. 2011-02 did not have a material impact on the Company’s statements of income and condition.

In May 2011, the FASB issued ASU No. 2011-04, “Amendmentsan amendment to Achieve Common Fair Value Measurementachieve common fair value measurement and Disclosure Requirements indisclosure requirements between U.S. GAAP and IFRSs.”  ASU No. 2011-04international accounting principles. The amendment results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The changes to U.S. GAAP as a result of ASU No. 2011-04the amendment are as follows:  (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04The amendment extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) AlignsThe exception aligns the fair value measurement of instruments classified within an entity’s shareholders’stockholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04the amendment are effective for the Company’s interim and annual periods beginning on or after December 15, 2011. The adoption of ASU No. 2011-04this standard did not have a material impact on the Company’s statements of income and condition and the disclosure requirements are already included.

34
In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. In December 2011, the FASB deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. The adoption of the remaining amendments changed the presentation of the components of comprehensive income for the Company as part of Note 9 into two consecutive statements. In December 2011, the FASB deferred the effective date pertaining to reclassification adjustments out of accumulated other comprehensive income in this standard until the Board is able to reconsider those paragraphs. These amendments are effective for interim and annual periods beginning on or after December 15, 2011.  The adoption of this standard did not expected to have a material impact on the Company’s statements of income and condition.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.”amended existing guidance relating to goodwill impairment testing. The provisions of ASU No. 2011-08amendment permits an entity an option to first perform aassessment of qualitative assessmentfactors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, an entity believes, as a result of its qualitative assessment,after assessing these events or circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitativetwo-step impairment test is required.  Otherwise, no further impairment testing is required.  ASU No. 2011-08 includes examples of events and circumstances that may indicate that a reporting unit’s fair value is less than its carrying amount.unnecessary. The provisions of ASU No. 2011-08amendments in this guidance are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASU No. 2011-08 isthis standard did not expected to have a material impact on the Company’s statements of income and condition.



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NOTE 8.  FAIR VALUE DISCLOSURES

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:
   
Level 1  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
  
Level 2  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
  
Level 3 Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

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Securities:  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). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.  For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).  There were no transfers from or into Level 1, Level 2 or Level 3 during the first ninethree months of 2011.2012.

Mortgage banking derivatives:  The fair value of derivatives are based on observable market data as of the measurement date (Level 2).

Impaired loans:  Impaired loans with specific allocations of the allowance for loan losses are generally assessed against higher than normal discounted advance ratiosgeneral based on the fair value of the underlying collateral as approved atif repayment is expected solely from the timecollateral.  Fair value is determined using several methods.  Generally, the fair value of funding, with consideration given for any supplemental credit support from guarantors. Consideration is given for the type and nature of collateral, as well as the anticipated liquidation value to develop a discount for the advance ratios on each credit.  Commercial real estate is generally discounted from its appraised valuebased on appraisals by 20-50% after various considerations including age of the appraisal, current net operating income realized, general market conditions where the property is located, type of property and potential buyer base.  Thequalified third party appraisers.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant.significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans.  The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions.  Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral.  In addition to real estate, the Company’s management evaluates other types of collateral as follows: Raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods.  Finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good.  Work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base.  Equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons.  Marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions.  This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.

 
3336
 
Mortgage servicing rights:  As of September 30, 2011March 31, 2012 the fair value of the Company’s Level 3 servicing assets for residential mortgage loans was $1.9$2.2 million, some of which are not currently impaired and therefore carried at amortized cost.  These residential mortgage loans have a weighted average interest rate of 5.08%4.81%, a weighted average maturity of 20 years and are secured by homes generally within the Company’s market area, ofwhich is primarily Northern Indiana.  A valuation model is used to estimate fair value, which is based on an income approach.  The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income.  The most significant assumption used to value mortgage servicing rights is prepayment rate.  Prepayment rates are estimated based on published industry consensus prepayment rates.  The most significant unobservable assumptions is the discount rate.  At September 30,March 31, 2012 the constant prepayment speed (PSA) used was 345 and the discount rate used was 9.2%.  At March 31, 2011 the constant prepayment speed (PSA) used was 420 and the discount rate used was 9.2%.  At September 30, 2010 the constant prepayment speed (PSA) used was 433273 and the discount rate used was 9.5%.

Other real estate owned:  Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resultingproperty.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales.  Such adjustments are usually significant and result in a Level 3 classification.   In addition the Company’s management may apply discount factors to the appraisals to take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Real estate mortgage loans held for sale:  Real estate mortgage loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors.

The table below presents the balances of assets measured at fair value on a recurring basis:

September 30, 2011March 31, 2012
Fair Value Measurements Using AssetsFair Value Measurements Using Assets
AssetsLevel 1 Level 2 Level 3 at Fair ValueLevel 1 Level 2 Level 3 at Fair Value
     
U.S. Treasury securities $             1,057  $                      0  $                     0  $              1,057 $             1,048  $                      0  $                     0  $              1,048
U.S. Government sponsored agencies0 5,241 0 5,2410 5,265 0 5,265
Agency residential mortgage-backed securities0 345,941 0 345,941
Residential mortgage-backed securities0 360,440 0 360,440
Non-agency residential mortgage-backed securities0 35,207 0 35,2070 30,627 0 30,627
State and municipal securities0 76,626 0 76,6260 78,191 638 78,829
Total Securities1,057 463,015 0 464,0721,048 474,523 638 476,209
              
Mortgage banking derivative0 535 0 5350 488 0 488
              
Total assets $             1,057  $           463,550  $                     0  $          464,607 $             1,048  $           475,011  $                 638  $          476,697
       
Liabilities       
       
Mortgage banking derivative $                    0  $                   (37)  $                     0  $                  (37)
       
       
       




 
3437
 
 December 31, 2010
 Fair Value Measurements Using Assets
AssetsLevel 1 Level 2 Level 3 at Fair Value
U.S. Treasury securities $             1,036  $                      0  $                     0  $              1,036
Agency residential mortgage-backed securities0 308,851 0 308,851
Non-agency residential mortgage-backed securities0 62,773 0 62,773
State and municipal securities0 69,960 0 69,960
Total Securities1,036 441,584 0 442,620
        
Mortgage banking derivative0 357 0 357
        
Total assets $             1,036  $           441,941  $                     0  $          442,977








 December 31, 2011
 Fair Value Measurements Using Assets
AssetsLevel 1 Level 2 Level 3 at Fair Value
      
U.S. Treasury securities $             1,055  $                      0  $                     0  $              1,055
U.S. Government sponsored agencies0 5,277 0 5,277
Residential mortgage-backed securities0 350,102 0 350,102
Non-agency residential mortgage-backed securities0 32,207 0 32,207
State and municipal securities0 78,064 686 78,750
Total Securities1,055 465,650 686 467,391
        
Mortgage banking derivative0 406 0 406
        
Total assets $             1,055  $           466,056  $                 686  $          467,797
        
Liabilities       
        
Mortgage banking derivative $                    0  $                   (81)  $                     0  $                  (81)

There were no transfers from or into Level 1, Level 2 or Level 3 during 2012 and there were no transfers from or into Level 1 or Level 2 during the quarter ended March 31, 2011.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012:

State and
Municipal
Securities
March 31, 2012
(in thousands)
Balance or recurring Level 3 assets at January 1 $                 686
   Decrease in fair value of securities, included in other comprehensive income(3)
   Principal payments(45)
Balance or recurring Level 3 assets at March 31 $                 638

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011.

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The fair value of 3 state and municipal securities with a fair value of $686,000 as of December 31, 2011 were transferred out of Level 2 and into Level 3 because of a lack of observable market data for these investments.  The Company’s policy is to recognize transfers as of the end of the reporting period.  As a result, the fair value for these state and municipal securities was transferred on December 31, 2011.

The securities measured at fair value included below are nonrated Indiana municipal revenue bonds and are not actively traded.

Quantitative Information about Level 3 Fair Value Measurements
     
 Fair Value at  Range
 3/31/2012Valuation TechniqueUnobservable Input(Weighted Average)
 (in thousands)   
     
State and municipal securities $             638Price to type, par, callDiscount to benchmark index1%



The Company’s Controlling Department, which is responsible for all accounting and SEC compliance and the Company’s Treasury Department, which is responsible for investment portfolio management and asset/liability modeling, are the two areas that decide the Company’s valuation policies and procedures.  Both of these areas report directly to the President and Chief Financial Officer of the Company.  For assets or liabilities that may be considered for Level 3 fair value measurement on a recurring basis, these two areas and the President and Chief Financial Officer determine the appropriate level of the assets or liabilities under consideration.  If there are assets or liabilities that are determined as Level 3 by this group, the Risk Management Committee of the Company and the Audit Committee of the Board of Directors are made aware of such assets at their next scheduled meeting.

Securities pricing is obtained from a third party pricing service and is tested at least annually against prices from another third party provider and reviewed with a market value tolerance variance of 3%.  If any securities fall above this tolerance threshold, they are reviewed in more detail to determine why the variance exists.  Changes in market value are reviewed monthly in aggregate yield by security type and any material differences are reviewed to determine why they exist.  At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair value using unobservable inputs by the pricing service.

The primary methodology used in the fair value measurement of the Company’s state and municipal securities classified as Level 3 is a discount to the AAA municipal benchmark index.  Significant increases or (decreases) in this index as well as the degree to which the security differs in ratings, coupon, call and duration will result in a higher or (lower) fair value measurement for those securities that are not callable.  For those securities that are continuously callable, a slight premium to par is used.




39






The table below presents the balances of assets measured at fair value on a nonrecurring basis:

September 30, 2011March 31, 2012
Fair Value Measurements Using AssetsFair Value Measurements Using Assets
AssetsLevel 1 Level 2 Level 3 at Fair ValueLevel 1 Level 2 Level 3 at Fair Value
  (in thousands)  
Impaired loans:              
Commercial and industrial loans:              
Working capital lines of credit loans $                   0  $                     0  $            2,731  $             2,731 $                   0  $                     0  $            2,480  $             2,480
Non-working capital loans0 0 11,595 11,5950 0 5,554 5,554
              
Commercial real estate and multi-family residential loans:              
Construction and land development loans0 0 762 7620 0 1,510 1,510
Owner occupied loans0 0 1,829 1,8290 0 3,006 3,006
Nonowner occupied loans0 0 20,594 20,5940 0 21,043 21,043
Multifamily loans0 0 0 00 0 0 0
              
Agri-business and agricultural loans:              
Loans secured by farmland0 0 423 4230 0 498 498
Loans for agricultural production0 0 211 2110 0 190 190
              
Other commercial loans0 0 0 00 0 0 0
              
Consumer 1-4 family mortgage loans:              
Closed end first mortgage loans0 0 1,672 1,6720 0 566 566
Open end and junior lien loans0 0 0 00 0 0 0
Residential construction loans0 0 0 00 0 0 0
              
Other consumer loans0 0 0 00 0 0 0
              
Total impaired loans $                   0  $                     0  $          39,817  $          39,817 $                   0  $                     0  $          34,847  $          34,847
              
Mortgage servicing rights0 0 1,578 1,5780 0 1,047 1,047
Other real estate owned                       0                          0                      58                       58                       0                          0                    730                    730
              
Total assets $                   0  $                     0  $          41,453  $          41,453 $                   0  $                     0  $          36,624  $          36,624


40

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2012:

Range of Inputs
Fair ValueValuation MethodologyUnobservable Inputs(Average)
Impaired Loans:
  Commercial and industrial: $        8,034Collateral basedDiscount to reflect0% - 83%
measurementscurrent market conditions(25%)
and ultimate collectability
Impaired loans:
  Commercial real estate:         25,559Collateral basedDiscount to reflect0% - 88%
measurementscurrent market conditions(40%)
and ultimate collectability
Impaired loans:
  Agri-business and agricultural:               688Collateral basedDiscount to reflect9% - 24%
measurementscurrent market conditions(16%)
and ultimate collectability
Impaired loans:
  Consumer 1-4 family mortgage               566Collateral basedDiscount to reflect0% - 20%
measurementscurrent market conditions(8%)
and ultimate collectability
Mortgage servicing rights           1,047Discounted cash flowsDiscount rate9.1% - 9.5%
(9.3%)
Other real estate owned               730AppraisalsDiscount to reflect31% - 61%
current market conditions(46%)









 
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 December 31, 2010
 Fair Value Measurements Using Assets
AssetsLevel 1 Level 2 Level 3 at Fair Value
      
Impaired loans:       
  Commercial and industrial loans:       
    Working capital lines of credit loans $                   0  $                     0  $            2,708  $             2,708
    Non-working capital loans0 0 4,990 4,990
        
  Commercial real estate and multi-family residential loans:       
    Construction and land development loans0 0 1,207 1,207
    Owner occupied loans0 0 1,960 1,960
    Nonowner occupied loans0 0 14,666 14,666
    Multifamily loans0 0 0 0
        
  Agri-business and agricultural loans:       
    Loans secured by farmland0 0 322 322
    Loans for agricultural production0 0 635 635
        
  Other commercial loans0 0 7 7
        
  Consumer 1-4 family mortgage loans:       
    Closed end first mortgage loans0 0 815 815
    Open end and junior lien loans0 0 140 140
    Residential construction loans0 0 0 0
        
  Other consumer loans0 0 0 0
        
Total impaired loans $                   0  $                     0  $          27,450  $          27,450
        
Mortgage servicing rights                       0                          0                      11                       11
        
Total assets $                   0  $                     0  $          27,461  $          27,461
        










 December 31, 2011
 Fair Value Measurements Using Assets
AssetsLevel 1 Level 2 Level 3 at Fair Value
   (in thousands)  
Impaired loans:       
  Commercial and industrial loans:       
    Working capital lines of credit loans $                   0  $                     0  $            2,762  $             2,762
    Non-working capital loans0 0 11,885 11,885
        
  Commercial real estate and multi-family residential loans:       
    Construction and land development loans0 0 303 303
    Owner occupied loans0 0 3,515 3,515
    Nonowner occupied loans0 0 23,591 23,591
    Multifamily loans0 0 0 0
        
  Agri-business and agricultural loans:       
    Loans secured by farmland0 0 433 433
    Loans for agricultural production0 0 207 207
        
  Other commercial loans0 0 0 0
        
  Consumer 1-4 family mortgage loans:       
    Closed end first mortgage loans0 0 878 878
    Open end and junior lien loans0 0 406 406
    Residential construction loans0 0 0 0
        
  Other consumer loans0 0 0 0
        
Total impaired loans $                   0  $                     0  $          43,980  $          43,980
        
Mortgage servicing rights0 0 1,734 1,734
Other real estate owned                       0                          0                    730                    730
        
Total assets $                   0  $                     0  $          46,444  $          46,444


Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $56.4$51.3 million, with a valuation allowance of $16.6$16.5 million at March 31, 2012, resulting in additionala net recovery in the provision for loan losses of $5.3$1.7 million and $1.8 million, respectively, for the nine months and three months ended September 30,March 31, 2012.  At March 31, 2011, impaired loans had a carrying amount of $39.7 million, with a valuation allowance of $12.3 million, resulting in an additional provision for loans losses of $979,000 for the three months ending March 31, 2011.  In addition, $162,000 and $169,000, respectively,

Mortgage servicing rights, which are carried at the lower of cost or fair value, included a portion carried at their fair value of $1.0 million, which is made up of the outstanding balance of $1.1 million, net of a valuation allowance of $46,000 at March 31, 2012, resulting in a net recovery of $62,000 for the three months ended March 31, 2012.  The Company realized a net recovery of $3,000 in the impairment of mortgage servicing rights measured using Level 3 inputs withinfor the fair value hierarchy, was recognized during the nine months and three months ended September 30,March 31, 2011.

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The Company also recognized $76,000 and $56,000, respectively, ina $21,000 reduction in the value of other real estate owned during the nine months and three months ended September 30,March 31, 2011.


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The following table contains the estimated fair values and the related carrying values of the Company’s financial instruments. Items which are not financial instruments are not included.

March 31, 2012
September 30, 2011 December 31, 2010Carrying Estimated Fair Value
Carrying Estimated Carrying EstimatedValue Level 1 Level 2 Level 3 Total
Value Fair Value Value Fair Value         
Financial Assets:                
Cash and cash equivalents $    101,278  $    101,278  $         60,141  $         60,141 $       167,027  $       167,027  $                  0  $                  0  $  167,027
Securities available for sale464,072 464,072 442,620 442,620476,209 1,048 474,523 638 476,209
Real estate mortgages held for sale5,444 5,512 5,606 5,6614,540 0 4,596 0 4,596
Loans, net2,128,935 2,140,317 2,044,952 2,041,8122,172,705 0 822,579 1,330,996 2,153,575
Federal Home Loan Bank stock7,313 N/A 8,511��N/A7,313 N/A N/A N/A N/A
Federal Reserve Bank stock3,420 N/A 3,420 N/A3,420 N/A N/A N/A N/A
Accrued interest receivable8,887 8,887 9,064 9,0649,471 0 9,471 0 9,471
Financial Liabilities:                
Certificates of deposit(971,656) (983,571) (949,559) (962,456)(982,650) 0 (998,714) 0 (998,714)
All other deposits(1,384,703) (1,384,703) (1,251,466) (1,251,466)(1,501,220) 0 (1,501,220) 0 (1,501,220)
Securities sold under agreements to repurchase(139,016) (139,016) (142,015) (142,015)(125,165) 0 (125,165) 0 (125,165)
Other short-term borrowings(2,560) (2,560) (32,037) (32,037)
Long-term borrowings(15,040) (16,186) (15,041) (15,991)(15,038) 0 (15,923) 0 (15,923)
Subordinated debentures(30,928) (31,207) (30,928) (31,242)(30,928) 0 0 (31,240) (31,240)
Standby letters of credit(291) (291) (321) (321)(343) 0 0 (343) (343)
Accrued interest payable(5,315) (5,315) (4,978) (4,978)(6,641) 0 (6,641) 0 (6,641)







43











 December 31, 2011
 Carrying Estimated
 Value Fair Value
    
Financial Assets:   
 Cash and cash equivalents $       104,584  $       104,584
 Securities available for sale467,391 467,391
 Real estate mortgages held for sale2,953 2,998
 Loans, net2,180,309 2,141,459
 Federal Home Loan Bank stock7,313 N/A
 Federal Reserve Bank stock3,420 N/A
 Accrued interest receivable9,604 9,604
Financial Liabilities:   
 Certificates of deposit(910,381) (925,619)
 All other deposits(1,502,315) (1,502,315)
 Securities sold under agreements to repurchase(131,990) (131,990)
 Other short-term borrowings(10,000) (10,000)
 Long-term borrowings(15,040) (16,079)
 Subordinated debentures(30,928) (31,240)
 Standby letters of credit(247) (247)
 Accrued interest payable(5,574) (5,574)

For purposesThe methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and cash equivalents - The carrying amount of the above disclosures of estimated fair value, the following assumptions were used as of September 30, 2011 and December 31, 2010. The estimated fair value for cash and cash equivalents demandapproximate fair value and savings deposits,are classified as Level 1.

Loans, net – Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans, variable rate short term borrowings and accrued interest is considered to approximate cost. The fair value of Federal Home Loan Bank and Federal Reserve Bank stock is not determinable as therevalues abased on carrying values resulting in a Level 3 classification.  Fair values for other loans are restrictions on its transferability. The estimated fair value for fixed rate loans, certificates of deposit and fixed rate borrowings is based onusing discounted cash flowsflow analyses, using current market rates applied to the estimated life. Real estate mortgages held for salelife resulting in a Level 2 classification.  Impaired loans are based uponvalued at the actual contracted price for thoselower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans sold butdo not yet delivered, or the current necessarily represent an exit price.

Federal Home Loan Mortgage Corporation priceBank stock and Federal Reserve Bank stock– It is not practical to determine the fair value of Federal Home Loan Bank stock and Federal Reserve Bank stock due to restrictions placed on its transferability.

Certificates of deposit - Fair values of certificates of deposit are estimated using discounted cash flow analyses using current market rates applied to the estimated life resulting in a Level 2 classification.

All other deposits- The fair values for normal deliveryall other deposits other than certificates of mortgages with similar coupons and maturities at year-end.deposit are equal to the amount payable on demand (the carrying value) resulting in a Level 2 classification.

44
Securities sold under agreements to repurchase – The carrying amount of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.

Long-term borrowings – The fair value of long-term borrowings is estimated using discounted cash flow analyses based on current borrowing rates resulting in a Level 2 classification.

Subordinated debentures- The fair value of subordinated debentures is based on the rates currently available to the Company with similar term and remaining maturity and credit spread.spread resulting in a Level 3 classification.

Standby letters of credit – The fair value of off-balance sheet items is based on the current fees orand costs that would be charged to enter into or terminate such arrangements. The estimated fair value of other financial instruments approximate cost and are not considered significant to this presentation.arrangements resulting in a Level 3 classification.

Accrued interest receivable/payable – The carrying amounts approximate fair value resulting in a Level 2 classification.
37

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income includes unrealized gains and losses on securities available-for-sale and changes in the funded status of pension plans which are also recognized as separate components of equity.  Following is a summary of other comprehensive income for the three months and nine months ended September 30, 2011 and 2010:

   Three months ended September 30, Nine months ended September 30,
   2011 2010 2011 2010
Net income $            8,447  $            6,521  $          22,401  $          18,761
Other comprehensive income       
 Change in securities available for sale:       
  Unrealized holding gain on securities available for sale       
    arising during the period               4,857                5,092                8,651              15,731
  Reclassification adjustment for (gains)/losses included in net income1 (4) 167 (4)
  Reclassification adjustment for other than temporary impairment33                     85                   154                   337
  Net securities gain activity during the period               4,891                5,173                8,972              16,064
  Tax effect              (1,889)               (2,027)               (3,462)               (6,431)
  Net of tax amount               3,002                3,146                5,510                9,633
 Defined benefit pension plans:       
  Net gain(loss) on defined benefit pension plans0 0                  (233) (35)
  Amortization of net actuarial loss                    62                     29                   132                   107
  Net gain /(loss) activity during the period                    62 29                  (102) 72
  Tax effect                   (26)                    (13)                     41                    (30)
  Net of tax amount                    36                     16                    (60)                     42
          
  Total other comprehensive income, net of tax               3,038                3,162                5,450                9,675
          
Comprehensive income $          11,485  $            9,683  $          27,851  $          28,436


The following table summarizes the changes within each classification of accumulated other comprehensive income for the ninethree months ended September 30, 2011March 31, 2012 and 2010:2011:

  Current    Current  
Balance Period BalanceBalance Period Balance
at December 31, 2010 Change at September 30, 2011at December 31, 2011 Change at March 31, 2012
Unrealized gain on securities available for sale     
     
Unrealized loss on securities available for sale     
without other than temporary impairment $                           4,285  $             4,372  $                           8,657 $                           7,688  $             1,065  $                           8,753
Unrealized loss on securities available for sale          
with other than temporary impairment                            (1,425)                 1,138                                (287)                               (523)                    (54)                                (577)
          
Total unrealized loss on securities available for sale                              2,860                 5,510                               8,370                              7,165                 1,011                               8,176
          
Unrealized loss on defined benefit pension plans                            (1,510)                    (60)                             (1,570)
Unrealized (loss) gain on defined benefit pension plans                            (2,026)                      91                             (1,935)
          
Total $                           1,350  $             5,450  $                           6,800 $                           5,139  $             1,102  $                           6,241

   Current  
 Balance Period Balance
 at December 31, 2010 Change at March 31, 2011
      
Unrealized loss on securities available for sale     
  without other than temporary impairment $                           4,285  $              (966)  $                           3,319
Unrealized loss on securities available for sale     
  with other than temporary impairment                            (1,425) 1,152 (273)
      
Total unrealized loss on securities available for sale                              2,860                    186                               3,046
      
Unrealized loss on defined benefit pension plans                            (1,510)                  (117)                             (1,627)
      
Total $                           1,350  $                  69  $                           1,419


 
3845
 
   Current  
 Balance Period Balance
 at December 31, 2009 Change at September 30, 2010
Unrealized gain (loss) on securities available for sale     
  without other than temporary impairment $                         (2,814)  $             9,586  $                           6,772
Unrealized loss on securities available for sale     
  with other than temporary impairment(1,606) 47 (1,559)
      
Total unrealized loss on securities available for sale                            (4,420)                 9,633                               5,213
      
Unrealized loss on defined benefit pension plans                            (1,573)                      42                             (1,531)
      
Total $                         (5,993)  $             9,675  $                           3,682


NOTE 10. SUBSEQUENT EVENTS

There were no subsequent events that would have a material impact to the financial statements presented in this Form 10-Q.

NOTE 11. 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.








46








39


















Part 1
LAKELAND FINANCIAL CORPORATION
ITEM 2 - MANAGEMENTMANAGEMENT’S’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS

September 30, 2011March 31, 2012

OVERVIEW

Lakeland Financial Corporation is the holding company for Lake City Bank. The Company is headquartered in Warsaw, Indiana and operates 4345 offices in 1213 counties in Northern Indiana and a loan production office in Indianapolis,Central Indiana. The Company earned $22.4$8.6 million for the first ninethree months of 2011,2012, versus $18.8$6.0 million in the same period of 2010,2011, an increase of 19.4%44.6%.  Net income was positively impacted by a $6.5$4.8 million decrease in the provision for loan losses and an increase in noninterest income of $249,000.$1.0 million.  Offsetting these positive impacts were an increase of $1.5 million in noninterest expense and a decrease in net interest income of $30,000.$1.0 million and an increase of $512,000 in noninterest expense.  Basic earnings per common share for the first ninethree months of 20112012 were $1.38$0.53 per share, versus $0.97$0.37 per share for the first ninethree months of 2010.2011.  Diluted earnings per common share reflect the potential dilutive impact of stock options, stock awards and warrants.  Diluted earnings per common share for the first ninethree months of 2011 were $1.37 per share, versus $0.96 for the first nine months of 2010.  Basic and diluted earnings per common share for the first nine months of 2010 were impacted by $3.2 million in dividends and accretion of discount on preferred stock.  The Company redeemed the preferred stock, which had been issued to the U.S. Treasury under the Capital Purchase Program, in the second quarter of 2010.

Net income for the third quarter of 2011 was $8.4 million, an increase of 29.5% versus $6.5 million for the comparable period of 2010.  The increase was driven by a $3.8 million decrease in the provision for loan losses as well as a $150,000 decrease in noninterest expense.  Offsetting these positive impacts was a decrease of $396,000 in net interest income, as well as a decrease of $289,000 in noninterest income.  Basic earnings per common share for the third quarter of 20112012 were $0.52 per share, versus $0.40 per share$0.37 for the third quarterfirst three months of 2010.  Diluted earnings per common share for the third quarter of 2011 were $0.52 per share, versus $0.40 per share for the third quarter of 2010.2011.

RESULTS OF OPERATIONS

Net Interest Income

For the nine-monththree-month period ended September 30, 2011,March 31, 2012, net interest income totaled $69.3 million, substantially unchanged from the first nine months of 2010.  During the nine-month period ended September 30, 2011, average earning assets increased by $119.7 million, or 4.8%, to $2.616 billion.  The Company’s net interest margin was 3.60% for the nine-month period ended September 30, 2011, versus 3.77% for the comparable period in 2010.  For the three-month period ended September 30, 2011, net interest income totaled $22.8$22.5 million, a decrease of 1.7%4.3%, or $396,000,$1.0 million, versus the third quarterfirst three months of 2010.2011.  This decrease was primarily due to a 2237 basis point decrease in the Company’s net interest margin to 3.48%3.41% for the three month period ended March 31, 2012, versus 3.78% comparable period of 2011.  During the three-month period ended September 30, 2011, versus 3.70% for the comparable period of 2010.  AverageMarch 31, 2012, average earning assets increased $111.0by $141.4 million, or 4.4%5.5%, to $2.640 billion in the third quarter of 2011, versus the third quarter of 2010.$2.703 billion.

40
Given the Company’s mix of interest earning assets and interest bearing liabilities at September 30, 2011,March 31, 2012, 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 rate movements and other factors such as deposit mix, market deposit rate pricing and non-bank deposit products could have an impact on net interest margin.  Over time, the Company’s mix of deposits has shifted to more reliance on transaction accounts such as Rewards Checking, as well as the Rewards Savings product 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 ninethree months of 2011,2012, total interest and dividend income decreased by $463,000,$975,000, or 0.5%3.2%, to $91.7$29.8 million, versus $92.2$30.8 million during the first ninethree months of 2010.2011.  This decrease was primarily the result of a 2444 basis point decrease in the tax equivalent yield on average earning assets to 4.8%4.5%, versus 5.0% for the same period of 2010.  Average earning assets increased by $119.7 million, or 4.8%, during the first nine months of 2011 versus the same period of 2010.  During the third quarter of 2011, total interest and dividend income decreased by $693,000, or 2.2%, to $30.4 million, versus $31.1 million during the third quarter of 2010.  This decrease was primarily the result of a 31 basis point decrease in the tax equivalent yield on average earning assets to 4.6% in the third quarter of 2011, versus 4.9% for the same period of 2010.2011.  Average earning assets increased by $111.0$141.4 million, or 4.4%5.5%, induring the third quarterfirst three months of 20112012 versus the same period of 2010.2011.

47
During the first ninethree months of 2011,2012, loan interest income increased by $1.2 million,$317,000, or 1.5%1.2%, to $78.9$26.3 million, versus $77.7$26.0 million during the first ninethree months of 2010.2011. The increase was driven by a $93.5$118.3 million, or 4.6%, increase in average daily loan balances.  During the third quarter of 2011, loan interest income increased by $101,000, or 0.4%, to $26.5 million, versus $26.4 million during the third quarter of 2010. The increase was driven by a $99.8 million, or 4.8%5.6%, increase in average daily loan balances.

The average daily securities balances for the first ninethree months of 20112012 increased $15.8$31.5 million, or 3.7%7.2%, to $441.8$470.0 million, versus $426.0$438.5 million for the same period of 2010.2011. During the same periods, income from securities decreased by $1.7$1.3 million, or 11.8%27.1%, to $12.7$3.5 million versus $14.4$4.7 million during the first ninethree months of 2010.2011.  The decrease was primarily the result of a 67145 basis point decrease in the tax equivalent yield on securities, to 4.2%3.3%, versus 4.8%4.7% in the first ninethree months of 2010.  The average daily securities balances for the third quarter of 20112011.

Total interest expense increased $21.1 million,$62,000, or 4.9%0.9%, to $457.4 million, versus $436.2$7.3 million for the same period of 2010. During the same periods, income from securities decreased by $793,000, or 16.9%, to $3.9 million versus $4.7 million during the third quarter of 2010.  The decrease was primarily the result of an 89 basis point decrease in the tax equivalent yield on securities, to 3.7%, versus 4.6% in the third quarter of 2010.

Despite the Company’s change in deposit mix to include higher costing deposit types, total interest expense decreased $433,000, or 1.9%, to $22.4 million for the nine-monththree-month period ended September 30, 2011,March 31, 2012, from $22.9$7.2 million for the comparable period in 2010.2011. The decreaseincrease was primarily the result of a ten basis point decrease$171.9 million, or 7.1%, increase in total deposits and purchased funds during the Company’s daily costfirst three months of funds to 1.4%,2012 versus 1.5% for the samecomparable period of 2010.  This decrease was generally caused by lower competitive interest rates in the Company’s market areas than were present in early 2010.  Total interest expense decreased $297,000, or 3.8%, to $7.6 million for the third quarter of 2011, versus $7.9 million for the third quarter of 2010.  The decrease was primarily the result of a 10 basis point decrease in the Company’s cost of funds to 1.4%, from 1.5% for the same period of 2010.2011.

41
On an average daily basis, total deposits (including demand deposits) increased $205.4$202.9 million, or 9.8%9.1%, to $2.292$2.428 billion for the nine-monththree-month period ended September 30, 2011,March 31, 2012, versus $2.087$2.225 billion during the same period in 2010.  The average daily balances for the third quarter of 2011 increased $112.2 million, or 5.1%, to $2.316 billion from $2.204 billion during the third quarter of 2010.2011.  On an average daily basis, noninterest bearing demand deposits were $302.2$334.4 million for the nine-monththree-month period ended September 30, 2011,March 31, 2012, versus $257.1$294.2 million for the same period in 2010.  The average daily noninterest bearing demand deposit balances for the third quarter of 2011 were $317.9 million, versus $277.3 million for the third quarter of 2010.2011.  On an average daily basis, interest bearing transaction accounts increased $167.9$159.5 million, or 24.8%20.1%, to $844.5$952.0 million for the nine-monththree-month period ended September 30, 2011,March 31, 2012, versus the same period in 2010.  Average daily interest bearing transaction accounts increased $144.3 million, or 20.4%, to $850.3 million for the third quarter of 2011, versus $706.0 million for the third quarter of 2010.2011.  When comparing the ninethree months ended September 30, 2011March 31, 2012 with the same period of 2010,2011, the average daily balance of time deposits, which pay a higher rate of interest compared to demand deposit and non-Rewards Checking transaction accounts, decreased $62.8$20.9 million.  The average rate paid on time deposit accounts decreased 15increased four basis points to 1.7% for the nine-monththree-month period ended September 30, 2011,March 31, 2012, versus the same period in 2010.  During the third quarter of 2011, the average daily balance of time deposits decreased $114.8 million, and the rate paid decreased five basis points to 1.7%, versus the third quarter of 2010.2011.  Despite the low interest rate environment, the Company has been able to attract and retain retail deposit customers through offering innovative deposit products such as Rewards Checking and Savings.  These products pay somewhat higher interest rates, but also encourage certain customer behaviors such as using debit cards and electronic statements, which have the effect of generating additional third-partyrelated fee income and reducing the Company’s processing costs.

The Company’s funding strategy is generally focused on leveraging its retail branch network to grow traditional retail deposits and on its presence with commercial customers and public fund entities in its Indiana markets to generate deposits.  In addition, the Company has utilized the Certificate of Deposit Account Registry Service (CDARS) program and out-of-market deposit programs such as brokered certificates of deposit.  Due to the Company’s historical and ongoing loan growth, the Company sought these deposits and has expanded its funding strategy over time to include these types of non-core deposit programs.  The Company believes that these deposit programs represent an appropriate tool in the overall liquidity and funding strategy.strategy, but will continue to focus on funding loan and investment growth with in-market deposits whenever possible.  On an average daily basis, total brokered certificates of deposit decreased $17.2$121.3 million to $149.7$54.5 million for the nine-monththree-month period ended September 30, 2011,March 31, 2012, versus $166.9$175.8 million for the same period in 2010.  During the third quarter of 2011, average daily brokered certificates of deposit were $125.1 million, versus $223.0 million during the third quarter of 2010.2011.  On an average daily basis, total public fund certificates of deposit decreased $79.2$11.3 million to $102.7$83.3 million for the nine-monththree-month period ended September 30, 2011,March 31, 2012, versus $181.9$94.6 million for the same period in 2010.  During the third quarter of 2011, average daily public fund certificates of deposit were $104.6 million, versus $191.9 million during the third quarter of 2010.2011.  In addition, the Company had average public fund interest bearing transaction accounts of $105.6$192.7 million and $108.9 million, respectively, in the nine months and three months ended September 30, 2011,March 31, 2012, versus $80.8 million and $85.3$101.8 million for the comparable period of 2010.2011.  Availability of public fund deposits can be cyclical, primarily due to the timing differences between when real estate property taxes are collected versus when those tax revenues are spent, as well as the intense competition for these funds.

 
4248
 
Average daily balances of borrowings were $193.2$172.6 million during the ninethree months ended September 30, 2011,March 31, 2012, versus $256.0$203.7 million during the same period of 2010,2011, and the rate paid on borrowings decreased eightincreased 11 basis points to 1.1%1.2%.  During the third quarter of 2011 the average daily balances of borrowings decreased $4.0 million to $193.7 million, versus $197.7 million for the same period of 2010, and the rate paid on borrowings decreased 36 basis points to 1.1%.  The decrease in average borrowings during 2011 was driven by the discontinuance of the Federal Reserve Bank’s Term Auction Facility (TAF) during the first quarter of 2010.  Average daily borrowings under the facility were $41.5 million during the nine months ended September 30, 2010, and the Company’s last borrowing matured on April 8, 2010.  On an average daily basis, total deposits (including demand deposits) and purchased funds increased 6.1% and 4.5%, respectively,7.1% during the nine-month and the three-month periodsperiod ended September 30, 2011March 31, 2012 versus the same periods in 2010.2011.
 
 
The Board of Directors and management recognize the importance of liquidity during times of normal operations and in times of stress.  Therefore, during 2010, the Company formalized and expanded upon its extensive Contingency Funding Plan (CFP)(“CFP”).  The formal CFP was developed to ensure that the multiple liquidity sources available to the Company are detailed. The CFP identifies the potential funding sources, which include the Federal Home Loan Bank of Indianapolis, The Federal Reserve Bank, brokered certificates of deposit, certificates of deposit available from the CDARS program, repurchase agreements, and Fed Funds. The CFP also addressaddresses the role of the securities portfolio in liquidity.

Further, the plan identifies CFP team members and expressly details their respective roles. Potential risk scenarios are identified and the plan includes multiple scenarios, including short-term and long-term funding crisis situations. Under the long-term funding crisis, two additional scenarios are identified: a moderate risk scenario and a highly stressed scenario. The CFP indicates the responsibilities and the actions to be taken by the CFP Teamteam under each scenario. Monthly reports to management and the Board of Directors under the CFP include an early warning indicator matrix and pro forma cash flows for the various scenarios.  The Company will continue to carefully monitor its liquidity planning and will consider adjusting its plans as circumstances warrant.

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

 
4349
 


DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;INTEREST RATES AND INTEREST DIFFERENTIAL(in thousands of dollars)
                              
  Nine Months Ended September 30,   Three Months Ended March 31, 
    2011      2010       2012      2011   
  Average Interest    Average Interest     Average Interest    Average Interest   
  Balance Income Yield (1)  Balance Income Yield (1)   Balance Income Yield (1)  Balance Income Yield (1) 
ASSETSASSETS              ASSETS              
Earning assets:Earning assets:              Earning assets:              
Loans: Loans:               Loans:              
Taxable (2)(3) Taxable (2)(3)  $    2,121,294  $         78,555 4.95%  $    2,036,216  $         77,676 5.10% Taxable (2)(3)  $    2,205,774  $         26,191 4.78%  $    2,086,488  $         25,865 5.03%
Tax exempt (1) Tax exempt (1)             10,471                  529 6.76                2,099                    85 5.41  Tax exempt (1)               9,830                  167 6.88              10,768                  179 6.76 
Investments: (1) Investments: (1)               Investments: (1)              
Available for sale Available for sale           441,771             13,745 4.16            426,005             15,390 4.83  Available for sale           469,979               3,778 3.26            438,470               5,092 4.71 
Short-term investments Short-term investments             17,219                    18 0.14              30,365                    37 0.16  Short-term investments             16,065                      4 0.10              23,230                    10 0.17 
Interest bearing deposits Interest bearing deposits             25,606                    96 0.50                1,975                    23 1.56  Interest bearing deposits               1,577                      7 1.79                2,908                      8 1.12 
                              
Total earning assetsTotal earning assets        2,616,361             92,943 4.75%        2,496,660             93,211 4.99%Total earning assets        2,703,225             30,147 4.49%        2,561,864             31,155 4.93%
                              
Nonearning assets:Nonearning assets:              Nonearning assets:              
Cash and due from banks Cash and due from banks             65,115 0                47,458 0    Cash and due from banks           113,376 0                51,923 0   
Premises and equipment Premises and equipment             30,752 0                29,342 0    Premises and equipment             34,860 0                30,422 0   
Other nonearning assets Other nonearning assets             95,007 0                90,459 0    Other nonearning assets             95,978 0                95,708 0   
Less allowance for loan losses Less allowance for loan losses           (49,469) 0               (36,684) 0    Less allowance for loan losses           (54,119) 0               (46,638) 0   
                              
Total assetsTotal assets  $    2,757,766  $         92,943     $    2,627,235  $         93,211   Total assets  $    2,893,320  $         30,147     $    2,693,279  $         31,155   


(1)Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 20112012 and 2010. The tax equivalent rate for tax exempt loans and tax exempt securities included the TEFRA adjustment applicable to nondeductible interest expenses.
(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the nine months ended September 30, 2011 and 2010, are included as taxable loan interest income.
(3)Nonaccrual loans are included in the average balance of taxable loans.



44

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)
                 
    Nine Months Ended September 30, 
      2011      2010   
    Average Interest    Average Interest   
    Balance Expense Yield  Balance Expense Yield 
LIABILITIES AND STOCKHOLDERS'             
EQUITY               
                 
Interest bearing liabilities:              
  Savings deposits  $       166,740  $              686 0.55%  $       111,605  $              510 0.61%
  Interest bearing checking accounts          844,488               7,994 1.27            676,549               6,019 1.19 
  Time deposits:               
    In denominations under $100,000          348,557               5,125 1.97            321,180               5,596 2.33 
    In denominations over $100,000          630,820               7,063 1.50            720,964               8,517 1.58 
  Miscellaneous short-term borrowings          147,263                  477 0.43            185,001                  587 0.42 
  Long-term borrowings              
  and subordinated debentures            45,968               1,084 3.15              70,969               1,633 3.08 
                 
Total interest bearing liabilities       2,183,836             22,429 1.37%        2,086,268             22,862 1.47%
                 
Noninterest bearing liabilities              
 and stockholders' equity:              
  Demand deposits           302,170 0              257,126 0   
  Other liabilities              14,931 0                16,037 0   
Stockholders' equity           256,829 0              267,804 0   
Total liabilities and stockholders'             
 equity   $    2,757,766  $         22,429     $    2,627,235  $         22,862   
                 
Net interest differential - yield on             
 average daily earning assets    $         70,514 3.60%    $         70,349 3.77%


45

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)
                 
    Three Months Ended September 30, 
      2011      2010   
    Average Interest    Average Interest   
    Balance Income Yield (1)  Balance Income Yield (1) 
ASSETS               
Earning assets:               
  Loans:               
    Taxable (2)(3)   $    2,150,201  $         26,390 4.87%  $    2,057,899  $         26,381 5.09%
    Tax exempt (1)                9,806                  170 6.88                2,353                    31 5.29 
  Investments: (1)               
    Available for sale           457,360               4,254 3.69            436,211               5,036 4.58 
  Short-term investments             12,082                      3 0.10              30,849                    12 0.15 
  Interest bearing deposits             10,849                    15 0.55                1,938                      7 1.43 
                 
Total earning assets        2,640,298             30,832 4.63%        2,529,250             31,467 4.94%
                 
Nonearning assets:              
  Cash and due from banks             77,111 0                49,953 0   
  Premises and equipment             31,203 0                29,333 0   
  Other nonearning assets             93,763 0                90,420 0   
  Less allowance for loan losses           (52,184) 0               (38,961) 0   
                 
Total assets   $    2,790,191  $         30,832     $    2,659,995  $         31,467   


(1)Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2011 and 2010.2011. The tax equivalent rate for tax exempt loans and tax exempt securities included the TEFRA adjustment applicable to nondeductible interest expenses.
(2)Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended September 30,March 31, 2012 and 2011, and 2010, are included as taxable loan interest income.
(3)Nonaccrual loans are included in the average balance of taxable loans.



 
4650
 

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)(in thousands of dollars)
                            
 Three Months Ended September 30,  Three Months Ended March 31, 
   2011      2010      2012      2011   
 Average Interest    Average Interest    Average Interest    Average Interest   
 Balance Expense Yield  Balance Expense Yield  Balance Expense Yield  Balance Expense Yield 
LIABILITIES AND STOCKHOLDERS'LIABILITIES AND STOCKHOLDERS'             LIABILITIES AND STOCKHOLDERS'             
EQUITYEQUITY              EQUITY              
                            
Interest bearing liabilities:Interest bearing liabilities:              Interest bearing liabilities:              
Savings deposits Savings deposits  $       169,281  $              239 0.56%  $       127,265  $              224 0.70% Savings deposits  $       187,890  $              211 0.55%  $       163,802  $              224 0.55%
Interest bearing checking accounts Interest bearing checking accounts          850,343               2,769 1.29            706,014               2,265 1.27  Interest bearing checking accounts          951,992               2,482 1.25            792,443               2,435 1.25 
Time deposits: Time deposits:               Time deposits:              
In denominations under $100,000 In denominations under $100,000          360,060               1,773 1.95            321,494               1,720 2.12  In denominations under $100,000          397,410               1,871 1.89            339,387               1,656 1.98 
In denominations over $100,000 In denominations over $100,000          618,718               2,309 1.48            772,085               2,986 1.53  In denominations over $100,000          556,056               2,197 1.59            634,973               2,370 1.51 
Miscellaneous short-term borrowings Miscellaneous short-term borrowings          147,771                  159 0.43            126,742                  149 0.47  Miscellaneous short-term borrowings          126,628                  113 0.36            157,709                  171 0.44 
Long-term borrowings Long-term borrowings               Long-term borrowings              
and subordinated debentures and subordinated debentures            45,967                  361 3.12              70,969                  563 3.15  and subordinated debentures            45,967                  404 3.53              45,968                  360 3.18 
                            
Total interest bearing liabilitiesTotal interest bearing liabilities       2,192,140               7,610 1.38%        2,124,569               7,907 1.48%Total interest bearing liabilities       2,265,943               7,278 1.29%        2,134,282               7,216 1.37%
                            
Noninterest bearing liabilitiesNoninterest bearing liabilities              Noninterest bearing liabilities              
and stockholders' equity: and stockholders' equity:               and stockholders' equity:              
Demand deposits Demand deposits           317,921 0              277,261 0    Demand deposits           334,362 0              294,158 0   
Other liabilities Other liabilities             15,670 0                15,468 0    Other liabilities             15,834 0                14,815 0   
Stockholders' equityStockholders' equity           264,460 0              242,697 0   Stockholders' equity           277,181 0              250,024 0   
Total liabilities and stockholders'Total liabilities and stockholders'             Total liabilities and stockholders'             
equity equity  $    2,790,191  $           7,610     $    2,659,995  $           7,907    equity  $    2,893,320  $           7,278     $    2,693,279  $           7,216   
                            
Net interest differential - yield onNet interest differential - yield on             Net interest differential - yield on             
average daily earning assets average daily earning assets    $         23,222 3.48%    $         23,560 3.70% average daily earning assets    $         22,869 3.41%    $         23,939 3.78%



 
4751
 


Provision for Loan Losses

Based on management’s review of the adequacy of the allowance for loan losses, provisions for loan losses of $10.9 million and $2.4 million$799,000 were recorded during the nine-month and three-month periodsperiod ended September 30, 2011,March 31, 2012, versus provisions of $17.4 million and $6.2$5.6 million recorded during the same periodsperiod of 2010.2011.  Factors impacting the provision included the amount and status of classified and watch list credits, the level of charge-offs, management’s overall view on current credit quality and the regional and national economic conditions impacting credit quality, the amount and status of impaired loans, the amount and status of past due accruing loans (90 days or more), and overall loan growth as discussed in more detail below in the analysis relating to the Company’s financial condition.

Noninterest Income

Noninterest income categories for the nine-monththree-month period ended March 31, 2012 and three-month periods ended September 30, 2011 and 2010 are shown in the following table:

Nine Months EndedThree Months Ended
September 30,March 31,
    Percent    Percent
2011 2010 Change2012 2011 Change
            
Wealth advisory fees $   2,613  $   2,409           8.5% $      914  $      818         11.7%
Investment brokerage fees      2,093       1,692         23.7          800          731           9.4 
Service charges on deposit accounts      5,938       6,265         (5.2)       1,881       1,963         (4.2) 
Loan, insurance and service fees      3,595       3,094         16.2       1,189       1,076         10.5 
Merchant card fee income         775          846         (8.4)          316          234         35.0 
Other income      1,380       1,506         (8.4)          665          372         78.8 
Mortgage banking income         594          939       (36.7)          592           (49)    1,308.2 
Net securities gains (losses)       (167)              4  (4,275.0)              3         (198)       101.5 
Impairment on available-for-sale securities (includes total losses of $154 and $357,      
Impairment on available-for-sale securities (includes total losses of $510 and $121,      
both net of $0 recognized in other comprehensive income, pre-tax)       (154)         (337)       (54.3)        (510)         (121)       321.5 
Total noninterest income $ 16,667  $ 16,418           1.5% $   5,850  $   4,826         21.2%

 Three Months Ended
 September 30,
     Percent
 2011 2010 Change
       
Wealth advisory fees $      866  $      784         10.5%
Investment brokerage fees         741          676           9.6 
Service charges on deposit accounts      2,036       2,205         (7.7) 
Loan, insurance and service fees      1,259       1,100         14.5 
Merchant card fee income         253          263         (3.8) 
Other income         362          491       (26.3) 
Mortgage banking income         440          774       (43.2) 
Net securities gains (losses)           (1)              4     (125.0) 
Impairment on available-for-sale securities (includes total losses of $33 and $85,      
   both net of $0 recognized in other comprehensive income, pre-tax)         (33)           (85)       (61.2) 
  Total noninterest income $   5,923  $   6,212         (4.7)%
Noninterest income increased $1.0 million for the three-month period ended March 31, 2012 versus the same period in 2011.  Noninterest income was positively impacted by a $641,000 increase in mortgage banking income.  The increase was driven by a larger pipeline of refinance mortgage loans due to the continued low interest rate environment.  In addition, noninterest income was positively impacted by a $96,000 increase in wealth advisory fees and a $69,000 increase in investment brokerage fees.  Noninterest income was negatively impacted by a $389,000 increase in other than temporary impairment on several non-agency mortgage backed securities in the Company’s investment portfolio.



 
4852
 
Noninterest income increased $249,000 and decreased $289,000 respectively, for the nine-month and three-month periods ended September 30, 2011 versus the same periods in 2010.  Loan, insurance and service fees increased by $501,000 and $159,000, respectively, driven by greater debit card usage and increases in other ancillary revenue sources.  In addition, investment brokerage fees increased by $401,000 and $65,000, respectively, driven by greater trading activity.  Wealth advisory fees increased due to the increased value of certain trust assets upon which many of the fees are based and expansion of business.  Noninterest income was negatively impacted by decreases of $327,000 and $169,000 in service charges on deposit accounts due to fewer nonsufficient fund charges of $474,000 and $219,000, respectively.  In addition, mortgage banking income decreased by $345,000 and $334,000, respectively, due primarily to lower mortgage loan volumes.





Noninterest Expense

Noninterest expense categories for the nine-monththree-month period ended March 31, 2012 and three-month periods ended September 30, 2011 and 2010 are shown in the following table:

 Nine Months Ended
 September 30,
     Percent
 2011 2010 Change
       
Salaries and employee benefits $ 24,802  $ 22,729       9.1%
Occupancy expense      2,373       2,199       7.9 
Equipment costs      1,600       1,568       2.0 
Data processing fees and supplies      2,820       2,930     (3.8) 
Credit card interchange             2          144   (98.6) 
Other expense    10,023     10,532     (4.8) 
  Total noninterest expense $ 41,620  $ 40,102       3.8%

Three Months EndedThree Months Ended
September 30,March 31,
    Percent    Percent
2011 2010 Change2012 2011 Change
            
Salaries and employee benefits $   8,611  $   7,659     12.4% $   9,075  $   8,173     11.0%
Occupancy expense         746          711       4.9          885          875       1.1 
Equipment costs         536          517       3.7          617          554     11.4 
Data processing fees and supplies         729       1,004   (27.4)          841       1,112   (24.4) 
Credit card interchange             0            31  N/A 
Other expense      2,857       3,707   (22.9)       3,262       3,454     (5.6) 
Total noninterest expense $ 13,479  $ 13,629     (1.1)% $ 14,680  $ 14,168       3.6%

The Company's noninterest expense increased $1.5 million and decreased $150,000, respectively,$512,000 in the nine-month and three-month periodsperiod ended September 30, 2011March 31, 2012 versus the same periods of 2010.2011.  Salaries and employee benefits increased by $2.1 million and $952,000, respectively,$902,000 in the nine-month and three-month periodsperiod ended September 30, 2011March 31, 2012 versus the same period of 2010.2011.  These increases were driven by staff additions and normal merit increases and higher employee health insurance expense of $230,000 in the nine-month period and $288,000 in the three-month period.increases.  In addition, the Company’s performance based compensation expense increased by $838,000 and $265,000, respectively, for the nine and three month periods due to performance versus corporate objectives and increased recognition levels.  Data processing fees decreased by $110,000 and $275,000, respectively,$271,000 due to the Company’s completion of the conversion to a new core processor during the second quarter of 2011.  In addition, other expense decreased by $509,000 and $850,000, respectively,$192,000 driven by lower FDIC deposit insurance premiums as well as lower professional fees and other costs associated with borrowers who are experiencing difficulties.premiums.

49
Income Tax Expense

Income tax expense increased $1.6 million, or 16.8%61.5%, for the first ninethree months of 2011,2012, compared to the same period in 2010.2011.  The combined state franchise tax expense and the federal income tax expense, as a percentage of income before income tax expense, decreasedincreased to 33.0% during the first ninethree months of 20112012 compared to 33.5%30.6% during the same period of 2010.2011.  The combined tax expense increased to 34.3% in the third quarter of 2011, versus 32.4% during the same period of 2010.  The changes werechange was driven by fluctuations in the percentage of revenue being derived from tax-advantaged sources in the nine-month and three-month periodsperiod of 2011,2012, compared to the same periods in 20102011.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of mortgage servicing rights and the valuation and other-than-temporary impairment of investment securities. The Company’s critical accounting policies are discussed in detail in the Annual Report for the year ended December 31, 2010 (incorporated by reference as part of the Company’s 10-K filing).2011.


53
FINANCIAL CONDITION

Total assets of the Company were $2.827$2.955 billion as of September 30, 2011,March 31, 2012, an increase of $145.5$64.9 million, or 5.4%2.2%, when compared to $2.682$2.890 billion as of December 31, 2010.2011.

Total cash and cash equivalents increased by $41.1$62.4 million, or 68.4%59.7%, to $101.3$167.0 million at September 30, 2011March 31, 2012 from $60.1$104.6 million at December 31, 2010.2011.  The increase resulted from an increase in total deposits, primarily transaction accounts.

Total securities available-for-sale increased by $21.5$8.8 million, or 4.8%1.9%, to $464.1$476.2 million at September 30, 2011March 31, 2012 from $442.6$467.4 million at December 31, 2010.2011. The increase was a result of a number of transactions in the securities portfolio.  Securities purchases totaled $147.0$31.6 million.  Offsetting this increase were securities sales totaling $73.8 million, paydowns totaling $52.8$21.4 million, maturities and calls of securities totaling $5.8$1.2 million, and securities amortization net of accretion was $2.2 million.$1.5 million and other-than-temporary impairment of $510,000 was recognized on three non-agency residential mortgage-backed securities.  In addition, the net unrealized gain/lossgain of the securities portfolio increased by $9.0$1.8 million.  The increase in fair market value was primarily driven by higher market values for agency residential mortgage-backed securities as well as state and municipal securities.non-agency residential mortgage-backed securities, due to the lower interest rate environment.  The investment portfolio is generally managed to limit the Company’s exposure to risk by containing mostly mortgage-backed securities, other securities which are either directly or indirectly backed by the federal government or a local municipal government and collateralized mortgage obligations rated AAA by S&P and/or Aaa by Moody’s at the time of purchase.  As of September 30, 2011,March 31, 2012, the Company had $35.2$30.6 million of collateralized mortgage obligationsnon-agency residential mortgage-backed securities which were not backed by the federal government, but were rated AAA by S&P and/or Aaa by Moody’s at the time of purchase.

50
TwoFive of the 15 remaining non-agency collateralizedresidential mortgage obligations arebacked securities were still rated AAA/Aaa as of September 30,March 31, 2012 and December 31, 2011 by at least one of the following rating agencies, S&P, Moody’s and Fitch, but 13the other ten had been downgraded since the time of purchase by S&P, Fitch and/or Moody’s, including 10 which were rankedto below investment grade by at least one or moreof those rating agencies.  On a quarterly basis, the Company performs an analysis of the cash flows of these securities based on assumptions as to collateral defaults, prepayment speeds, expected losses and the severity of potential losses.  Based upon the initial analysis, securities may be identified for further analysis computing the net present value and comparing it to the book value to determine if there is any other-than-temporary impairment to be recorded.  Based on the analyses as of September 30, 2011,March 31, 2012, the Company realized an additional $33,000$510,000 in other-than-temporary impairment on onethree of the 15 non-agency residential mortgage backed securities.

Real estate mortgage loans held-for-sale decreasedincreased by $162,000,$1.6 million, or 2.9%53.7%, to $5.4$4.5 million at September 30, 2011March 31, 2012 from $5.6$3.0 million at December 31, 2010.2011. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. During the ninethree months ended September 30, 2011, $48.3March 31, 2012, $25.0 million in real estate mortgages were originated for sale and $48.1$23.2 million in mortgages were sold.

Total loans, excluding real estate mortgage loans held for sale, increaseddecreased by $91.0$8.2 million to $2.181$2.225 billion at September 30, 2011March 31, 2012 from $2.090$2.234 billion at December 31, 2010.2011.  During the first quarter, the Company experienced a high level of reductions in agri-business loans as favorable commodity prices resulted in strong results for these borrowers.  Management expects loan growth to be moderate as the economic recovery moves along.  The portfolio breakdowns at both September 30,March 31, 2012 and December 31, 2011 reflected 85% commercial and industrial, including commercial real estate and agri-business, 13% residential real estate and home equity and 2% consumer loans compared to 84% commercial and industrial, including commercial real estate and agri-business, 14% residential real estate and home equity and 2% consumer loans at December 31, 2010.loans.

54
The Company has a high percentage of commercial and commercial real estate loans, most of which are extended to small or medium-sized businesses. Commercial loans represent higher dollar loans to fewer customers and therefore higher credit risk than other types of loans. Pricing is adjusted to manage the higher credit risk associated with these types of loans. The Company also generally requires new and renewed variable rate commercial loans to have floor rates.  The majority of fixed rate residential mortgage loans, which represent increased interest rate risk, are sold in the secondary market, as well as some variable rate mortgage loans. The remainder of the variable rate mortgage loans and a small number of fixed rate mortgage loans are retained.

Loans are charged against the allowance for loan losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses relating to specifically identified loans based on an evaluation, as well as other probable incurred losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of general allowance is determined after considering the following factors:  application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans – substandard, doubtful and loss. The regulations also contain a special mention category. Special mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving management’s close attention.  The Company’s policy is to establish a specific allowance for loan losses for any assets classified as substandard or doubtful.  If an asset or portion thereof is classified as loss, the Company’s policy is to either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off such amount. At September 30, 2011,March 31, 2012, on the basis of management’s review of the loan portfolio, the Company had loans totaling $166.5$149.9 million on the classified loan list versus $169.3$164.6 million on December 31, 2010.2011. As of September 30, 2011,March 31, 2012, the Company had $49.3$34.3 million of assets classified special mention, $114.7$115.5 million classified as substandard, $415,000$0 classified as doubtful and $0 classified as loss as compared to $48.4$35.4 million, $120.1$131.3 million, $0 and $0 at December 31, 2010.2011.  In addition, the Company has allocated $9.5$15.2 million and $4.1$15.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011March 31, 2012 and December 31, 2010.2011. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.
51

 September 30, December 31,
 2011 2010
Accruing troubled debt restructured loans $             22,428  $                8,547
Nonaccrual troubled debt restructured loans                  9,300                    6,091
Total troubled debt restructured loans $             31,728  $              14,638

Allowance estimates are developed by management taking into account actual loss experience, adjusted for current economic conditions. The Company generally has regular discussions regarding this methodology with regulatory authorities.  Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio and are applied to individual loans based on loan type. In accordance with current accounting guidance, the allowance is provided for losses that have been incurred as of the balance sheet date and is based on past events and current economic conditions, and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions.

55
Net charge-offs totaled $1.6$1.4 million in the thirdfirst quarter of 2012, versus $2.1 million during the first quarter of 2011 versus $1.5and $1.6 million during the third quarter of 2010 and $136,000 during the secondfourth quarter of 2011.

The allowance for loan losses increased 15.7%decreased 1.2%, or $7.1 million,$643,000, from $45.0$53.4 million at December 31, 20102011 to $52.1$52.8 million at September 30, 2011.March 31, 2012.  Pooled loan allocations increased $3.3 millionslightly from $12.9$15.6 million at December 31, 20102011 to $16.2$15.7 million at September 30, 2011,March 31, 2012, which was primarily a result of management’s overall view on current credit quality.  Impaired loan allocations increased $4.6 milliondecreased $953,000 from $12.1$18.3 million at December 31, 20102011 to $16.7$17.4 million at September 30, 2011March 31, 2012 and other specifically reviewed loan allocations decreased to $15.9$16.1 million at September 30, 2011March 31, 2012 from $16.3$16.2 million at December 31, 2010.2011.  This increasedecrease in impaired allocations was primarily due to increasesdecreases in the allocations of existing impaired loans as well as additionsreductions to the impaired loans category.  The unallocated component of the allowance for loan losses decreased $410,000increased slightly from $3.7$3.4 million at December 31, 20102011 to $3.3$3.6 million at September 30, 2011,March 31, 2012, based on management’s assessment of economic and other qualitative factors impacting the loan portfolio, including the ongoing general economic challenges in the Company’s market areas.  While management has begun to see some positive trends, including general stabilization and a decline in watchlist credits and a decline in non-performing loans, management anticipates a slow recovery and therefore recognized only a slight decreaseincrease in the unallocated component of the allowance for loan losses.  Management believed the allowance for loan losses at September 30, 2011March 31, 2012 was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions do not continue to improve, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses.

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Total impaired loans increaseddecreased by $9.7$2.5 million to $57.7$61.0 million at September 30, 2011March 31, 2012 from $48.0$63.5 million at December 31, 2010.2011.  A loan is impaired when full payment under the original loan terms is not expected. Impairment is evaluated in the aggregate for smaller-balance loans of similar nature such as residential mortgage, and consumer loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  The increasedecrease in the impaired loans category was primarily due to the $989,000 payoff of one commercial credit.  In addition, of four commercial creditscharge-offs totaling $12.2 million.  One borrower is engaged in the health care field, two are engaged in commercial real estate development and one is a manufacturer.  The increase in impaired loans was partially offset by pay-offs and charge-offs.  Of the $57.7 million in impaired loans, $32.7$1.3 million were taken on nonaccrual status at September 30, 2011.three other commercial credits.  The following table summarizes nonperforming assets at September 30, 2011March 31, 2012 and December 31, 2010.2011.

 September 30,December 31,
 20112010
 (in thousands)
NONPERFORMING ASSETS:  
Nonaccrual loans including nonaccrual troubled debt restructured loans $         33,190  $         36,591 
Loans past due over 90 days and still accruing                 61                  330 
Total nonperforming loans $         33,251  $         36,921 
Other real estate owned              2,889                3,695 
Repossessions                  25                     42 
Total nonperforming assets $         36,165  $         40,659 
   
Impaired loans including troubled debt restructurings $         57,659  $         48,015 
   
Nonperforming loans to total loans1.52%1.77%
Nonperforming assets to total assets1.28%1.52%
   
Nonperforming troubled debt restructured loans (included in nonaccrual loans) $           9,300 $           6,091 
Performing troubled debt restructured loans            22,4288,547 
Total troubled debt restructured loans $         31,728  $          14,638 




 
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 March 31,December 31,
 20122011
 (in thousands)
NONPERFORMING ASSETS:  
Nonaccrual loans including nonaccrual troubled debt restructured loans $         36,466  $         39,425 
Loans past due over 90 days and still accruing                 54                  52 
Total nonperforming loans $         36,520  $         39,477 
Other real estate owned              2,067                2,075 
Repossessions                  40                     33 
Total nonperforming assets $         38,627  $         41,585 
   
Impaired loans including troubled debt restructurings $         60,995  $         63,518 
   
Nonperforming loans to total loans1.64%1.77%
Nonperforming assets to total assets1.31%1.44%
   
Nonperforming troubled debt restructured loans (included in nonaccrual loans) $          31,940 $          34,272 
Performing troubled debt restructured loans            22,73522,177
Total troubled debt restructured loans $         54,675  $          56,449 

Total nonperforming assets decreased by $4.5$3.0 million, or 11.1%7.1%, to $36.2$38.6 million during the nine-monththree-month period ended September 30, 2011.March 31, 2012.  The decrease was primarily due to the aforementioned charge-offs and pay-offs as well as the sale of other real estate.  Sixpay-off.  Four commercial relationships represented 81.5%79.8% of total nonperforming loans.  Three of the six relationships are each less than $2.0 million.  A $14.6$13.7 million commercial relationship consisting of four loans represents the largest exposure in the nonperforming category.  The borrower is engaged in real estate development.   Borrower collateral, including real estate and the personal guarantees of its principals, support the credit.  The Company took a $1.7 million charge-off related to this credit in the fourth quarter of 2009, and no charge-offs were taken in 2010 or have been taken2011.  The Company took a $601,000 charge-off related to this credit in 2011.the first quarter of 2012.

A $5.9commercial relationship consisting of three loans totaling $7.2 million represented the second largest exposure in the nonperforming category.  The borrower is engaged in commercial real estate development.  Borrower collateral, including real estate and the personal guarantees of its principals, support the credit.  The Company has not taken any charge-offs related to this credit.

A $5.8 million credit to a manufacturer tied to the housing industry represented the secondthird largest exposure in the nonperforming category.  The credit is accounted for as a troubled debt restructuring.  Borrower collateral including real estate, receivables, inventory and equipment support the credit, however, there are no guarantors.  The Company took a $906,000 charge-off related to this credit in 2008, and no charge-offs were taken in 2009 or 2010, or have been taken in 2011.since.

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A commercial relationship consisting of two loans totaling $2.7$2.5 million represented the thirdfourth largest exposure in the nonperforming category.  The borrower is engaged in sales tied to the recreational vehicle industry as well as residential real estate development.  Borrower collateral, including real estate and the personal guarantees of its principals, support the credit.  The Company took $1.3 million in charge-offs related to this relationship during 2008, and no charge-offs were taken in 2009 or 2010, or have been taken in 2011.since.

There can be no assurances that full repayment of the loans discussed above will result.  Although economic conditions in the Company’s markets have stabilized and in some areas improved, management does not foresee a rapid recovery as certain industries, including residential and commercial real estate development, recreational vehicle and mobile home manufacturing and other regional industries continue to experience slow growth.  The Company’s growth strategy has promoted diversification among industries as well as a continued focus on enforcement of a strong credit environment and an aggressive position on loan work-out situations.  While the Company believes that the impact on the Company of these industry-specific issues affecting real estate development and recreational vehicle and mobile home manufacturers will be somewhat mitigated by the Company’s overall growth strategy, the economic factors impacting its entire geographic footprint will continue to present challenges.  Additionally, the Company’s overall asset quality position can be influenced by a small number of credits due to the focus on commercial lending activity and the granularity inherent in this strategy.

Total deposits increased by $155.3$71.2 million, or 7.1%3.0%, to $2.356$2.484 billion at September 30, 2011March 31, 2012 from $2.201$2.413 billion at December 31, 2010.2011. The increase resulted from increases of $63.3 million in money market accounts, $45.1 million in certificates of deposit of $100,000 and over, $41.8 million in interest bearing transaction accounts, $36.2 million in other certificates of deposit, $18.6 million in demand deposits, $9.6 million in savings accounts and $5.5$50.0 million in public fund certificates of deposit of $100,000 or more.more, $21.0 million in certificates of deposit of $100,000 and over, $15.8 million in savings accounts, $14.9 million in other certificates of deposit and $11.5 million in interest bearing transaction accounts.  Offsetting these increases were decreases of $50.4$18.4 million in money market accounts, $10.0 million in demand deposits, $6.9 million in brokered deposits and $14.3$6.7 million in CDARS certificates of deposit.

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Total short-term borrowings decreased by $32.5$16.8 million, or 18.7%11.8%, to $141.6$125.2 million at September 30, 2011March 31, 2012 from $174.1$142.0 million at December 31, 2010.2011.  The decrease resulted primarily from decreases of $30.0$10.0 million in other borrowings, primarily from short-term advances from the Federal Home Loan Bank of Indianapolis.federal funds purchased.  In addition, securities sold under agreements to repurchase decreased by $3.0$6.8 million.

Total equity increased by $21.8$7.7 million, or 8.8%2.8%, to $268.8$281.0 million at September 30, 2011March 31, 2012 from $247.1$273.3 million at December 31, 2010.2011.  The increase in total equity resulted from net income of $22.4$8.6 million, plus the increase in the accumulated other comprehensive income of $5.5$1.1 million, less dividends of $7.5$2.5 million, plus $1.1 million$428,000 in stock compensation expense, plus $395,000$30,000 for stock issued through options exercised (including tax benefit).

The FDIC’s risk-based capital regulations require that all insured banking organizations maintain an 8.0% total risk-based capital ratio. The FDIC has also established definitions of “well capitalized” as a 5.0% Tier I leverage capital ratio, a 6.0% Tier I risk-based capital ratio and a 10.0% total risk-based capital ratio. All of the Bank’s ratios continue to be above these “well capitalized” levels. The Federal Reserve also has established minimum regulatory capital requirements for bank holding companies.  As of September 30, 2011,March 31, 2012, the Company had regulatory capital in excess of these minimum requirements with a Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 10.3%10.4%, 12.3%12.6% and 13.6%13.8%, respectively.


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FORWARD-LOOKING STATEMENTS

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1a. of Part I of our Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries.  These additional factors include, but are not limited to, the following:

55
·  Legislative or regulatory changes or actions, including the “Dodd-Frank Wall Street Reform and Consumer Protection Act” and the regulations required to be promulgated there under, which may adversely affect the business of the Company and its subsidiaries.
·  The costs, effects and outcomes of existing or future litigation.
·  Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board.
·  The ability of the Company to manage risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

ITEM 3 – QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The board of directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in May 2011. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income, but does not necessarily indicate the effect on future net interest income. The Company, through its Asset/Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the type of loans, investments, and deposits that currently fit the Company’s needs, as determined by the Asset/Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next 12twelve months. If the change in net interest income is less than 3% of primary capital, the balance sheet structure is considered to be within acceptable risk levels. As of September 30, 2011,March 31, 2012, the Company’s potential pretax exposure was within the Company’s policy limit, and not significantly different from December 31, 2010.2011.

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ITEM 4 – CONTROLS AND PROCEDURES

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of September 30, 2011.March 31, 2012.  Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
 
During the quarter ended September 30, 2011,March 31, 2012, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
 











 
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LAKELAND FINANCIAL CORPORATION

FORM 10-Q

September 30, 2011March 31, 2012

Part II - Other Information

Item 1.Legalproceedings

There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routinelitigation incidental to their respective businesses.

Item 1A. RiskFactors

There have been no material changes to the risk factors disclosed in Item 1A of Part I of the Company’s 20102011 Form 10-K.  Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

Item 2. UnregisteredSales of Equity Securities and Use of Proceeds

The following table provides information as of September 30, 2011March 31, 2012 with respect to shares of common stock repurchased by the Company during the quarter then ended:

Issuer Purchases of Equity Securities(a)

       Maximum Number (or
     Total Number of Appropriate Dollar
     Shares Purchased as Value) of Shares that
     Part of Publicly May Yet Be Purchased
 Total Number of Average Price Announced Plans or Under the Plans or
PeriodShares Purchased Paid per Share Programs Programs
        
July 1-31                          4,656  $                23.46                                         0  $                                          0
August 1-31                             473                    23.03                                         0                                              0
September 1-30                                 0                           0                                         0                                              0
        
Total                          5,129  $                23.42                                         0  $                                          0
       Maximum Number (or
     Total Number of Appropriate Dollar
     Shares Purchased as Value) of Shares that
     Part of Publicly May Yet Be Purchased
 Total Number of Average Price Announced Plans or Under the Plans or
PeriodShares Purchased Paid per Share Programs Programs
        
January 1-31                          6,223  $                25.80 ��                                       0  $                                          0
February 1-29                             460                    26.09                                         0                                              0
March 1-31                                 0                           0                                         0                                              0
        
Total                          6,683  $                25.82                                         0  $                                          0


(a)The shares purchased during the periods were credited to the deferred share accounts of 
 
non-employee directors under the Company’s directors’ deferred compensation plan.  These
shares were purchased in the ordinary course of business and consistent with past practice.

Item 3.DefaultsUpon Senior Securities

            None

 
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            None

Item 4. RemovedMine and ReservedSafety Disclosures

 None

Item 5. OtherInformation

            None

Item 6. Exhibits

31.1Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
  
31.2Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
  
32.1Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.











62









58





LAKELAND FINANCIAL CORPORATION

FORM 10-Q

September 30, 2011March 31, 2012

Part II - Other Information

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.



LAKELAND FINANCIAL CORPORATION
(Registrant)



Date: NovemberMay 9, 20112012/s/ Michael L. Kubacki
 Michael L. Kubacki – Chief Executive Officer
  


Date: NovemberMay 9, 20112012/s/ David M. Findlay
 David M. Findlay –President
 and Chief Financial Officer


Date: NovemberMay 9, 20112012/s/ Teresa A. Bartman
 Teresa A. Bartman – Senior Vice President-
 Finance and Controller




 
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