Attached files

file filename
EX-32 - FIRST PULASKI NATIONAL CORPrex322200909.htm
EX-31 - FIRST PULASKI NATIONAL CORPrex312200909.htm
EX-32 - FIRST PULASKI NATIONAL CORPrex321200909.htm
EX-31 - FIRST PULASKI NATIONAL CORPrex311200909.htm

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

FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended           September 30, 2009            

or

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

For the transition period from ______________________ to _____________________.

Commission File Number 0-10974

FIRST PULASKI NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

Tennessee                                                                                                    62-1110294        
(
State or other jurisdiction of incorporation or organization)                                    (I.R.S. Employer Identification No.)      

206 South First Street, Pulaski, Tennessee                                             38478                     
(Address of principal executive offices)                                                         (Zip Code)     


                     931-363-2585                    
(Registrant's telephone number, including area code)

                                       Not applicable                                       
(Former name, former address and former fiscal year, if changed since last report)

       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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [    ] 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 ]

       Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

       Common Stock, $1.00 par value -- 1,560,937 shares outstanding as of November 1, 2009.

page 1


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements.

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

September 30,

December 31,

2009

2008

(Unaudited)

Cash and due from banks

$24,290,506

$12,490,928

Federal funds sold

3,190,000

11,686,000

    Cash and cash equivalents

27,480,506

24,176,928

Interest bearing balances with banks

540,013

535,508

Securities available for sale

151,675,669

136,651,867

Loans

    Loans held for sale

1,967,560

1,638,320

    Loans net of unearned income

383,719,420

396,926,068

    Allowance for loan losses

(6,670,340)

(5,219,956)

    Total net loans

379,016,640

393,344,432

Bank premises and equipment

18,446,092

17,660,834

Accrued interest receivable

4,178,518

4,598,027

Other real estate

9,381,475

247,183

Federal Home Loan Bank stock

1,526,500

1,526,500

Company-owned life insurance

9,935,998

9,274,734

Prepayments and other assets

4,482,310

4,287,195

    TOTAL ASSETS

$606,663,721

$592,303,208

============

============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Deposits

    Non-interest bearing balances

$78,840,004

$69,672,714

    Interest bearing balances

461,185,124

460,824,543

        Total deposits

540,025,128

530,497,257

Securities sold under repurchase agreements

1,646,505

1,724,058

Other borrowed funds

8,211,608

3,391,522

Accrued interest payable

1,691,533

2,300,461

Other liabilities

3,157,361

3,357,042

        TOTAL LIABILITIES

554,732,135

541,270,340

SHAREHOLDERS' EQUITY

Common Stock, $1 par value; authorized - 10,000,000 shares;

    1,558,087 and 1,551,407 shares issued and outstanding, respectively

1,558,087

1,551,407

Capital surplus

989,514

649,985

Retained earnings

47,644,215

47,865,678

Accumulated other comprehensive income, net

1,739,770

965,798

        TOTAL SHAREHOLDERS' EQUITY

51,931,586

51,032,868

        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$606,663,721

$592,303,208

============

============

* See accompanying notes to consolidated financial statements (unaudited).

   

page 2


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

INTEREST INCOME:

    Loans, including fees

$6,662,205

$6,842,764

$19,801,461

$20,147,097

    Investment securities

1,190,038

1,495,145

3,671,785

4,811,543

    Federal funds sold and other

8,621

59,493

23,771

245,990

    Dividends

20,753

22,725

71,520

79,388

        Total interest income

7,881,617

8,420,127

23,568,537

25,284,018

INTEREST EXPENSE:

  Interest on deposits:

    NOW Accounts

114,166

223,106

336,824

523,482

    Savings & MMDAs

157,325

310,138

456,436

837,216

    Time

2,084,578

2,844,260

7,096,331

9,942,259

  Repurchase agreements

6,488

10,779

19,333

30,883

  Borrowed funds

78,767

45,604

182,283

142,532

        Total interest expense

2,441,324

3,433,887

8,091,207

11,476,372

  

        NET INTEREST INCOME

5,440,293

4,986,240

15,477,330

13,807,646

        Provision for loan losses

1,700,000

500,000

3,877,702

1,070,000

        NET INTEREST INCOME

        AFTER PROVISION FOR

        LOAN LOSSES

3,740,293

4,486,240

11,599,628

12,737,646

NON-INTEREST INCOME:

    Service charges on deposit accounts

597,972

637,723

1,691,761

1,890,056

    Commissions and fees

82,794

108,505

248,966

314,075

    Other service charges and fees

118,067

113,337

352,375

347,973

    Income on company-owned life insurance

102,517

73,246

302,264

220,108

    Mortgage banking income

123,451

115,621

358,992

372,313

    Gain on the sale of securities

0

23,982

84,554

23,982

    Gain on sale of other assets

11,804

4,099

2,707

13,879

    Other income

60,921

12,029

97,181

183,791

        Total non-interest income

1,097,526

1,088,542

3,138,800

3,366,177

page 3


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

NON-INTEREST EXPENSE

    Salaries and employee benefits

$2,200,326

$2,152,647

$6,913,425

$6,548,989

    Occupancy expense, net

443,247

374,280

1,309,918

1,126,500

    Furniture and equipment expense

191,819

210,935

563,143

578,106

    Advertising and public relations

116,690

174,311

387,568

558,388

    Impairment of available for sale securities

        and other equity investments

0

1,661,600

144,408

1,844,721

    Other operating expenses

1,166,470

762,760

3,450,552

2,367,343

        Total non-interest expense

4,118,552

5,336,533

12,769,014

13,024,047

        Income before taxes

719,267

238,249

1,969,414

3,079,776

        Applicable income tax expense (benefit)

67,262

(70,939)

89,864

465,287

        NET INCOME

$652,005

$309,188

$1,879,550

$2,614,489

    ==========   ==========   ==========   ==========

        Earnings per common share:

        Basic

$0.42

$0.20

$1.21

$1.69

        Diluted

$0.42

$0.19

$1.21

$1.68

        Dividends per common share

$0.45

$0.45

$1.35

$1.35

        Weighted basic average

            shares for period

1,558,499

1,551,317

1,555,829

1,548,270

        Weighted diluted average

            shares for period

1,562,002

1,555,723

1,559,370

1,553,816

* See accompanying notes to consolidated financial statements (unaudited).

page 4


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

   

For the Nine Months Ended September 30, 2009

Accumulated

Other

Common

Capital

Retained

Comprehensive

Stock

Surplus

Earnings

Income (loss)

Total

Balance, December 31, 2008

$1,551,407

$649,985

$47,865,678

$965,798

$51,032,868

           

Comprehensive income:

    Net Income

1,879,550

1,879,550

    Reclassification adjustment

       for gains included in net

       income, net of tax

(52,178)

(52,178)

    Change in unrealized

       gains (losses) on available

       for sale securities, net of tax

826,150

826,150

Comprehensive income

2,653,522

Cash Dividends

($1.35 per share)

(2,101,013)

(2,101,013)

Compensation expense for

    restricted stock

101,063

101,063

Tax benefit arising from exercise

    of director stock options

5,896

5,896

Exercise of stock options

725

23,750

24,475

Issuance of common stock

5,955

208,820

214,775

Balance, September 30, 2009

$1,558,087

$989,514

$47,644,215

$1,739,770

$51,931,586

===========

===========

============

============

============

     

* See accompanying notes to consolidated financial statements (unaudited).

page 5


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For Nine Months Ended September 30,

2009

2008

Cash flows from operating activities:

    Net income

$1,879,550

$2,614,489

    Adjustments to reconcile net income

      to net cash provided by operating activities

        Provision for loan losses

3,877,702

1,070,000

        Depreciation of premises and equipment

678,502

600,148

        Amortization and accretion of investment securities, net

460,759

218,046

        Deferred income tax benefit

(865,604)

(1,154,617)

        Gain on sale of other assets

(2,707)

(13,879)

        Security gains, net

(84,554)

(23,982)

        Stock-based compensation expense

101,063

92,125

        Federal Home Loan Bank stock dividend

-

(59,400)

        Loans originated for sale

(16,641,678)

(16,736,468)

        Proceeds from sale of loans

16,671,430

16,767,701

        Gain on sale of loans

(358,992)

(372,313)

        Impairment of available for sale securities and other equity investments

144,408

1,844,721

        Increase in cash surrender value of life insurance

(302,264)

(220,108)

        Decrease in accrued interest receivable

419,509

292,138

        Decrease (increase) in prepayments/other assets

45,037

(307,949)

        Decrease in accrued interest payable

(608,928)

(1,119,750)

        Decrease in accrued taxes

(509,437)

(7,394)

        Increase in other liabilities

309,755

195,064

            Net cash from operating activities

5,213,551

3,678,572

Cash flows from investing activities:

        Proceeds from maturity of investment securities available for sale

48,747,206

54,832,812

        Proceeds from sale of investment securities

5,745,122

8,452,672

        Purchase of investment securities available for sale

(68,637,318)

(58,004,739)

        Increase in interest bearing balances with banks

(4,505)

(9,691)

        Net decrease (increase) in loans

1,042,036

(69,184,450)

        Purchase of company-owned life insurance

(359,000)

-

        Capital expenditures

(1,464,551)

(5,351,178)

        Proceeds from sale of other assets

606,500

683,940

        Net cash used by investing activities

(14,324,510)

(68,580,634)

Cash flows from financing activities:

        Proceeds from borrowings

5,000,000

2,068,000

        Net increase in deposits

9,527,871

50,945,079

        Cash dividends paid

(2,101,013)

(2,090,893)

        Proceeds from exercise of stock options, including tax benefit

30,371

115,101

        Proceeds from issuance of common stock

214,775

250,470

        Payments to repurchase common stock

-

(352,550)

        (Decrease) increase in securities sold under repurchase agreements

(77,553)

5,576

        Borrowings repaid

(179,914)

(184,750)

            Net cash from financing activities

12,414,537

50,756,033

Net increase (decrease) in cash and cash equivalents

3,303,578

(14,146,029)

Cash and cash equivalents at beginning of period

24,176,928

27,366,523

Cash and cash equivalents at end of period

$27,480,506

$13,220,494

============

============

Supplemental noncash disclosures

    Transfers from loans to real estate owned

9,737,294

224,555

* See accompanying notes to consolidated financial statements (unaudited).

page 6


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

     Notes to Consolidated Financial Statements

Note 1.

       The unaudited consolidated financial statements include the accounts of First Pulaski National Corporation (the "registrant") and its wholly-owned subsidiary, First National Bank of Pulaski (the "Bank") and the Bank's wholly-owned subsidiary First Pulaski Reinsurance Company. 
       The interim financial statements furnished under this item reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, as allowed under rules and regulations of the Securities and Exchange Commission for interim period presentation. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year. Certain prior period amounts have been reclassified to conform to the current period classifications.

Note 2.

       Accounting Standards Codification ("ASC") Sections 718 and 505 require the measurement, at the date of the grant, of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Compensation cost is recognized based upon the fair value of the awards over the vesting period for each award. The compensation cost associated with awards granted prior to January 1, 2006 is based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures, which were required prior to the adoption of these standards.
       Bank employees may be granted options, restricted shares or rights to purchase shares of the registrant's common stock under the registrant's equity incentive and employee stock purchase plans.
       The 1994 employee stock purchase plan ("1994 Plan") permits the granting of rights to eligible employees of the registrant to acquire stock. A total of 150,000 shares were reserved under this plan and 2,822 shares were sold under the 1994 Plan during the first nine months of 2009.
       As there are no unvested stock options as of January 1, 2009, and no stock options were granted in the first nine months of 2009, there was no share-based compensation expense or tax benefit recorded in the first nine months of 2009 related to stock options; however, as discussed below, the registrant incurred stock compensation expense in the quarter related to the previously issued restricted shares. In addition there were no unrecognized compensation costs related to stock options at September 30, 2009.
       The registrant has estimated the fair value of employee stock options at the date of grant using the Black-Scholes option pricing model. The assumptions required by this model are subjective. Changes to these assumptions can materially affect the fair value estimate. There may be other factors which could have a significant effect on the value of employee stock options granted that are not considered by the model. While management believes that the Black-Scholes model provides a reasonable estimate of fair value, other methods could provide alternative fair values for the registrant's equity-based awards to employees.

 

page 7


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       Below is a summary of the registrant's stock option activity for the 2008 fiscal year and the first nine months of 2009:

Weighted

Average

   

Number

 

Exercise

of Options

Price

Outstanding January 1, 2008

17,252

$39.67

 

 

     
 

Granted

-

 

-

 

Exercised

(7,527)

 

32.66

 

Expired

-

 

-

 

Outstanding December 31, 2008

9,725

 

$45.09

    =========   =============
 

Exercisable December 31, 2008

9,725

 

$45.09

=========   =============
 

 

     

Outstanding December 31, 2008

9,725

$45.09

 

Granted

-

 

-

 

Exercised

(725)

 

33.76

 

Expired

-

 

-

 

Outstanding September 30, 2009

9,000

 

$46.00

    =========   =============
 

Exercisable September 30, 2009

9,000

 

$46.00

=========   =============

       The aggregate intrinsic value of outstanding options shown in the table at September 30, 2009 was approximately $81,000 based on $55.00 per share, the price of which the registrant is aware, at which the registrant's common stock was traded on a date closest to September 30, 2009. The weighted average remaining term of the stock options in the table above was 3.4 years as of September 30, 2009.
       Cash received from the exercise of stock options during the nine months ended September 30, 2009 and 2008 was $24,475 and $240,189, respectively. The total intrinsic value of stock options exercised was $15,400 and $163,794, respectively, for the nine months ended September 30, 2009 and 2008. 
       At September 30, 2009, the registrant had 87,750 shares reserved for award under its 2007 Equity Incentive Plan (the "2007 Plan"). During the first nine months of 2009 the registrant did not award any shares of restricted stock to employees of the Bank. Compensation expense associated with restricted share awards is recognized over the time period that the restrictions associated with the awards lapse. During the nine months ended September 30, 2009, the registrant recognized $101,063 in compensation costs attributable to all restricted stock awards issued under the 2007 Plan. A summary of activity for restricted share awards for the nine months ended September 30, 2009 follows:

Weighted-Average

Grant-Date

Nonvested Shares

Shares

Fair Value

Nonvested at January 1, 2009

10,600

$55.00

Granted

-

55.00

Vested

(2,050)

55.00

Forfeited

-

-

Nonvested at September 30, 2009

8,550

$55.00

==========

       The registrant expects to satisfy the exercise of stock options and the future grants of other equity-based awards, by issuing shares of common stock from authorized but unissued shares. At September 30, 2009, the registrant had approximately 8.4 million authorized but unissued shares of common stock.

page 8


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

Note 3

Recent Accounting Pronouncements:
       In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary (OTTI) for debt securities in ASC 320-10-65-65. According to the amendment, an entity is required to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the standard expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The registrant adopted this standard in the second quarter of 2009 and its adoption did not have a material effect on the registrant's results of operations or financial position.
       In April 2009, the FASB issued additional guidance in ASC 820-10, related to Fair Value Measurements and Disclosures. This standard emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The standard provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The standard also requires increased disclosures. This standard is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption was permitted for periods ending after March 15, 2009. The adoption of this standard at June 30, 2009 did not have a material impact on the results of operations or financial position.
       In April 2009, the FASB amended existing guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard in the second quarter of 2009 did not have a material impact on the results of operations or financial position as it only required disclosures which are included in Note 6.
       In May 2009, the FASB issued ASC 855-10 which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires entities to disclose the date through which it has evaluated subsequent events and the basis for the date. This standard is effective for interim and annual periods ending after June 15, 2009. The standard was effective for the registrant as of June 30, 2009. The adoption of this standard did not have a material impact on our financial condition, results of operations or disclosures.

Note 4

       The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at September 30, 2009 were as follows:

 

page 9


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

           

Gross

 

Gross

   
       

Amortized

 

Unrealized

 

Unrealized

 

Fair

September 30, 2009

Cost

 

Gains

 

Losses

 

Value

 

U.S. Treasury securities

$102,565

 

$2,904

 

$-

 

$105,469

 

U.S. Government sponsored agencies

$81,423,306

 

735,832

 

87,300

 

82,071,838

 

Obligations of states and

         

 

 

political subdivisions

$51,120,921

 

1,755,129

 

31,929

 

52,844,121

 

Mortgage-backed securities-residential

$15,645,860

 

406,240

 

18,009

 

16,034,091

 

Corporate debt securities

$500,000

 

-

 

8,650

 

491,350

 

        Total debt securities

148,792,652

 

2,900,105

 

145,888

 

151,546,869

 

Equity Securities

66,400

 

62,400

 

-

 

128,800

Total

$148,859,052

$2,962,505

$145,888

$151,675,669

===========

===========

===========

===========

       The amortized cost and fair value of debt securities at September 30, 2009 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

             

Available

for Sale

         

Amortized Cost

 

Fair Value

Due in one year or less

 

$11,512,452

 

$11,610,241

Due after one year through five years

93,478,543

 

95,141,294

Due after five years through ten years

27,265,797

 

27,857,389

Due after ten years

890,000

 

903,854

Mortgage-backed-residential

15,645,860

 

16,034,091

   

TOTAL

   

$148,792,652

 

$151,546,869

============

============

       Securities with unrealized losses at September 30, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

September 30, 2009

                       

Less Than 12 Months

12 Months or Longer

Total

     

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

Obligations of U.S. Government

   Sponsored Agencies

 

$13,320,700

 

$76,878

 

$509,050

 

$10,422

 

$13,829,750

 

$87,300

Obligations of States and

                       

   Political Subdivisions

 

832,253

 

4,317

 

232,388

 

27,612

 

1,064,641

 

31,929

Mortgage-backed securities

                       

   - residential

 

3,609,116

 

18,009

 

-

 

-

 

3,609,116

 

18,009

Corporate Bonds

 

-

 

-

 

491,350

 

8,650

 

491,350

 

8,650

Total Temporarily Impaired

                       

   Securities

$17,762,069

$99,204

$1,232,788

$46,684

$18,994,857

$145,888

==========

========

==========

========

==========

========

       Proceeds from sales of securities available for sale were $0 and $8,452,672 for the three months ended September 30, 2009 and 2008, respectively, and $5,745,122 and $8,452,672 for the nine months ended September 30, 2009 and 2008, respectively. Gross gains of $91,982 and $32,194 and gross losses of $7,428 and $8,212 were realized on these sales for the first nine months of 2009 and 2008, respectively.
       The registrant evaluated its investment in preferred stock issued by the Federal National Mortgage Association ("Fannie Mae") for other-than-temporary impairment as of September 30, 2008. The registrant

page 10


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

recognized a $1,661,600 non-cash impairment charge for the other-than temporary decline in fair value of the Fannie Mae preferred stock for the quarter ended September 30, 2008, bringing the total other-than temporary impairment charge related to Fannie Mae preferred stock to $1,844,721  for the nine months ended September 30, 2008.
       Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments - Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
       When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
       As of September 30, 2009, the registrant's security portfolio consisted of 338 securities, 25 of which were in an unrealized loss position. The majority of unrealized losses are related to the registrant's obligations of U.S. government sponsored agencies and obligations of state and political subdivisions. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the registrant does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the registrant does not consider these securities to be other-than-temporarily impaired at September 30, 2009.
       The Company held common stock in Silverton Financial Services, Inc. ("Silverton") in the amount of $144,408 that was classified as an other asset on the Company's balance sheet. On May, 1, 2009, the Office of the Comptroller of the Currency closed Silverton's subsidiary, Silverton Bank, N.A. The Company recorded a capital loss of $144, 408 in the second quarter of 2009 due to the closing of Silverton Bank, N.A. The Company has sufficient capital gains to offset the capital loss for federal income tax purposes.
       The Company had a 1.5% limited partnership interest in the Morgan Keegan Mezzanine Fund, LLP. This investment is accounted for under the equity method of accounting since it is a partnership.

 

 

 

page 11


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

Note 5

       Loans at September 30, 2009 and December 31, 2008 were as follows:

September 30,

December 31,

2009

2008

Construction and land development

$48,388,532

$55,484,202

Commercial and industrial

39,374,619

34,120,024

Agricultural

6,912,301

7,641,762

Real estate loans secured by:

Farmland

35,341,771

35,923,454

Residential property

92,361,806

91,757,578

Nonresidential, nonfarm

128,603,245

137,748,507

Consumer

26,311,926

26,668,337

Other loans

8,773,977

9,671,625

Subtotal

386,068,177

399,015,489

Less:

Net deferred loan fees

(381,197)

(451,101)

Allowance for loan losses

(6,670,340)

(5,219,956)

Loans, net

$379,016,640

$393,344,432

============

============

       Activity in the allowance for the nine months ended September 30, 2009 and 2008 was as follows:

Nine months ended September 30,

2009

2008

Beginning balance

$5,219,956

$3,467,019

Provision for loan losses

3,877,702

1,070,000

Loans charged-off

(2,536,780)

(272,939)

Recoveries

109,462

136,117

     Ending balance

$6,670,340

$4,400,197

============

============


Note 6

       ASC 820-10 defines fair value as 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. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes 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 reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

page 12


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or 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).
       The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. 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 typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets Measured on a Recurring Basis

       Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at

Fair Value Measurements at

September 30, 2009 using

December 31, 2008 using

Quoted Prices

Quoted Prices

in Active

Significant

in Active

Significant

Markets for

Other

Markets for

Other

Identical

Observable

Identical

Observable

Carrying

Assets

Inputs

Carrying

Assets

Inputs

Value

(Level 1)

(Level 2)

Value

(Level 1)

(Level 2)

Assets:

Available for sale securities:

    U.S. Treasuries

$105,469

$105,469

    Obligations of U.S. Government

        Sponsored Agencies

$82,071,838

$82,071,838

    Obligations of States and

        Political Subdivisions

$52,844,121

$52,844,121

    Mortgage-backed securities

        - residential

$16,034,091

$16,034,091

    Corporate Bonds

$491,350

$491,350

    Equity securities

$128,800

$128,800

        Total

$151,675,669

$128,800

$151,546,869

$136,651,867

     $66,400

$136,585,467

===========

===========

============

===========

===========

============

Assets Measured on a Non-Recurring Basis

Fair Value

Fair Value

Measurements at

Measurements at

September 30, 2009

December 31, 2008

Using

Using

Significant

Significant

Unobservable

Unobservable

Inputs

Inputs

(Level 3)

(Level 3)

Assets:

Impaired loans

$4,705,617

$2,775,164

page 13


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

     Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $5,500,849, with a valuation allowance of $795,231, resulting in an additional provision for loan losses of $437,898 for the period.
     Carrying amount and estimated fair values of financial instruments at September 30, 2009 were as follows:

September 30, 2009

(In thousands)

Carrying Amount

Fair Value

Financial assets:

Cash and short-term investments

$27,481

$27,481

Securities

151,676

151,676

Loans, net

379,017

374,965

Federal Home Loan Bank stock

1,527

N/A

Accrued interest receivable

4,179

4,179

Financial liabilities:

Deposits

540,025

541,838

Securities sold under repurchase agreements

1,647

1,647

Other borrowed funds

8,212

8,525

Accrued interest payable

1,692

1,692

       The methods and assumptions used to estimate fair value are described as follows:
       Carrying amount is the estimated fair value for cash short term investments, accrued interest receivable and payable, demand deposits, and variable rate loans or deposits that reprice frequently and fully. The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges or 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. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values of impaired loans are generally based on recent real estate appraisals. 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. Fair values of debt are based on current rates for similar financing. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items and loans held for sale are not considered material.

Note 7

       ASC 260-10 is effective for years beginning after December 15, 2008 and interim periods within those years and changes how earnings per share ("EPS") is computed for certain share-based awards. All prior EPS calculations presented are to be retrospectively changed to conform with this presentation.
       This standard addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method described in Section 45 of ASC 260-10.

page 14


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method.

For Three Months Ended

For Nine Months Ended

September 30,

September 30,

2009

2008

2009

2008

Net income

$652,005

$309,188

$1,879,550

$2,614,489

Less dividends paid:

Common stock

700,651

697,871

2,097,705

2,087,743

Unvested restricted shares

1,103

1,103

3,308

3,150

701,754

698,974

2,101,013

2,090,893

Undistributed earnings

(49,749)

(389,786)

(221,463)

523,596

========== ========== ========== ==========

Weighted average shares outstanding

1,556,049

1,548,867

1,553,379

1,545,937

Unvested restricted shares

2,450

2,450

2,450

2,333

1,558,499

1,551,317

1,555,829

1,548,270

Basic EPS amounts

Common Stock and Unvested

Common Stock and Unvested

Share-Based Payment Awards

Share-Based Payment Awards

2009

2008

2009

2008

Distributed earnings

$0.45

$0.45

$1.35

$1.35

Undistributed earnings

(0.03)

(0.25)

(0.14)

0.34

$0.42

$0.20

$1.21

$1.69

========== ========== ========== ==========

Weighted average diluted shares

1,562,002

1,555,723

1,559,370

1,553,816

Diluted earnings per common share

$0.42

$0.19

$1.21

$1.68

========== ========== ========== ==========

Note 8

       Management has evaluated subsequent events through the time of filing the 10Q report on November 9, 2009, which is the date that the registrant's financial statements were issued. No material subsequent events have occurred since September 30, 2009 that required recognition or disclosures in these financial statements.


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

       The following analysis should be read in conjunction with the financial statements set forth in Part I, Item 1, immediately preceding this section. 
       Reference is made to the annual report of the registrant on Form 10-K for the year ended December 31, 2008, which report was filed with the Securities and Exchange Commission on March 16, 2009. This Form 10-Q contains certain forward-looking statements regarding, among other things, the anticipated financial and operating results of the registrant. The words "anticipate," "expect," "should," "could," "may", "plan," "intend", "believe", "likely" and "seek" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The registrant undertakes no obligation to publicly release any modifications, updates or revisions of these statements to reflect events or circumstances occurring after the day hereof, or to reflect the occurrence of unanticipated events.

page 15


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

       In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the registrant cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the registrant. Such forward-looking statements involve known and unknown risks and uncertainties, including, but not limited to those described in the registrant's 2008 Annual Report on Form 10-K and, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) continuation of the historically low short-term interest rate environment, (iii) increased competition with other financial institutions, (iv) deterioration or lack of sustained growth in the economy in the registrant's market areas, (vi) rapid fluctuations in interest rates, (vi) significant downturns in the businesses of one or more large customers, (vii) risks inherent in originating loans, including prepayment risks, (viii) the fluctuations in collateral values, the rate of loan charge-offs and the level of the provision for losses on loans, (ix) results of regulatory examinations, (x) any activity in the capital markets that would cause the registrant to conclude that there was impairment of any asset including intangible assets, (xi) changes in state and Federal legislation, regulations or policies applicable to banks and other financial services providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy and (xii) loss of key personnel. These risks and uncertainties may cause the actual results or performance of the registrant to be materially different from any future results or performance expressed or implied by such forward-looking statements.

Critical Accounting Policies

       The accounting principles the registrant follows and its methods of applying these principles conform to accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles to the determination of the allowance for loan losses, the registrant has made judgments and estimates that have significantly impacted the financial position and results of operations.
       The provision for loan losses is the charge to earnings which management feels is necessary to maintain the allowance for loan losses at a level considered adequate to reflect estimated credit losses for specifically identified impaired loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. The allowance is increased by the provision for loan losses, which is charged against current period operating results, and decreased by the amount of charge-offs, net of recoveries. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The registrant's methodology of assessing the appropriateness of the allowance consists of several elements, which include the historical allowance and specific allowances as described below.
       The historical allowance is calculated by applying loss factors to outstanding loans. For purposes of the quarterly review, the loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. Each loan is assigned a risk rating by loan officers using established credit policy guidelines. These risk ratings are periodically reviewed and all risk ratings are subject to review by an independent Credit Review Department. Each risk rating is assigned an allocation percentage which, when multiplied times the dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. Allocation percentages are based on the registrant's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
       Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred. In addition, every substandard or worse loan in excess of $250,000 and all loans classified as "Other Assets Especially Mentioned" over $400,000 are reviewed quarterly by the Executive and Loan Committee of the Bank's Board of Directors.

page 16


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

OVERVIEW

       Total assets of the registrant grew approximately $14.4 million, or 2.4 percent, in the first nine months of 2009. Growth in the first nine months of 2009 slowed as compared to the last three quarters of 2008 reflecting deteriorating economic conditions and the registrant's decision to slow loan growth. This growth in assets was funded by an increase in deposits as total deposits increased $9.5 million, or 1.8 percent, as well as an increase in borrowings from the Federal Home Loan Bank of Cincinnati of $4.8 million from December 31, 2008 to September 30, 2009.
       Net income increased $342,817 to $652,005, or $0.42 per diluted share, in the third quarter of 2009 as compared to $309,188, or $0.19 per diluted share, during the same period of 2008. The increase in net income in the third quarter of 2009 as compared to the same period of 2008 was primarily due to write-down of the registrant's investment in Fannie Mae preferred stock securities of $1,661,600 in the third quarter of 2008. Net interest income increased approximately $454,000 in the third quarter of 2009 as compared to the same period of 2008 as net interest margin improvements were made during the first nine months of 2009. The registrant's provision for loan losses increased $1,200,000 in the third quarter of 2009 as compared to the same period of 2008 as deteriorating economic conditions continued to put stress on more of registrant's borrowers in the third quarter of 2009. Expenses related to other real estate owned increased approximately $182,000 and FDIC insurance assessments increased approximately $154,000 in the third quarter of 2009 as compared to the same period of 2008. 
       Net income decreased $734,939 to $1,879,550, or $1.21 per diluted share, in the first nine months of 2009 as compared to $2,614,489, or $1.68 per diluted share, for the same period of 2008. Net interest income increased approximately $1,670,000 in the first nine months of 2009 as compared to the same period of 2008 as the net interest margin increased to 3.89 percent in the first nine months of 2009 from 3.81 percent for same period of 2008. The registrant's provision for loan losses increased approximately $2,808,000 in the first nine months of 2009 to $3,877,702 as compared to $1,070,000 for the same period of 2008 as deteriorating economic conditions continued to put stress on the registrant's borrowers in the first nine months of 2009. Net charged-off loans totaled approximately $2,427,000 in the first nine months of 2009, resulting in an annualized charge-off ratio of 0.85 percent as compared to net charge-offs of approximately $137,000 in the first nine months of 2008, an annualized charge-off ratio of 0.05 percent. Nonaccrual loans increased to approximately $9,381,000 at September 30, 2009 as compared to approximately $519,000 at September 30, 2008 and approximately $3,029,000 at December 31, 2008. Nonaccrual loans decreased approximately $808,000 from June 30, 2009 to September 30, 2009, primarily as a result of foreclosures on properties securing certain nonaccrual loans. These foreclosures led to an increase of approximately $5,265,000 in other real estate owned from June 30, 2009 to September 30, 2009, leading to total other real estate owned of $9,381,475 at September 30, 2009, as compared to $247,183 at December 31, 2008. The registrant expects total non-performing assets will continue at elevated levels for the remainder of 2009 and into 2010. Net income in the first nine months of 2009 was also negatively impacted by an approximately $790,000 increase in FDIC deposit insurance premiums, which included approximately $275,000 for a special assessment and an approximately $249,000 increase in expenses related to other real estate owned in the first nine months of 2009, as compared to the same period of 2008. Both FDIC insurance premiums and expenses related to other real estate owned are anticipated to remain at elevated levels for the remainder of 2009 and into 2010.


Results of Operations

       Net income of the registrant was $1,879,550 for the first nine months of 2009. This amounted to a decrease of $734,939, or 28.1 percent, compared to the first nine months of 2008.  For the three-month period ended September 30, 2009, net income was $652,005, an increase of $342,817, or 110.9 percent, as compared to the three months ended September 30, 2008.  

page 17


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

       Net interest income increased $454,053, or 9.1 percent, to $5,440,293 during the third quarter of 2009 as compared to $4,986,240 for the third quarter of 2008.  Total interest income decreased $538,510, or 6.4 percent, to $7,881,617 for the third quarter of 2009 as compared to $8,420,127 for the same period in 2008. The decrease in total interest income was due primarily to a decrease in the yields earned on the registrant's loans and investment securities as the general level of interest rates decreased in the third quarter of 2009 as compared to the second quarter of 2008. The registrant saw a decrease in interest and fees on loans of $180,559 and a decrease in interest earned on investment securities of $305,107 in the third quarter of 2009 as compared to the third quarter of 2008. The decrease in interest and fees on loans was the result of an increase in average loans outstanding of approximately $14.2 million that was offset by a decrease in yields earned on loans in the third quarter of 2009 as compared to the same period of 2008. The decrease in interest on investment securities was primarily a result of a decrease in average yields earned on investment securities as well as a decrease in average investment securities held of approximately $0.8 million in the third quarter of 2009 as compared to the third quarter of 2008.
       The increase in net interest income in the third quarter of 2009 as compared to the third quarter of 2008 was primarily due to a decrease in total interest expense of $992,563, or 28.9 percent, to $2,441,324 for the third quarter of 2009 as compared to $3,433,887 for the same period in 2008. The decrease in total interest expense was primarily due to lower average interest rates paid on interest-bearing deposits in the third quarter of 2009 as compared to the third quarter of 2008. The interest expense on time deposits decreased $759,682 in the third quarter of 2009 as compared to the third quarter of 2008 in spite of increased average balances of $3.3 million in time deposits in the third quarter of 2009 as compared to the third quarter of 2008. The decrease in interest expense on time deposits was primarily due to a decrease in average interest rates paid to 2.63 percent in the third quarter of 2009 as compared to 3.62 percent in the same period of 2008. The interest expense on savings and money market accounts decreased $152,813 in the third quarter of 2009 as the average balances held increased $0.3 million and the average interest rate paid fell to 0.83 percent in the third quarter of 2009 from 1.64 percent in the third quarter of 2008. The interest expense on NOW accounts decreased $108,940 in the third quarter of 2009 as compared to the same period of 2008 as the average balances held increased $13.8 million and the average interest rate paid fell to 0.61 percent in the third quarter of 2009 as compared to the same period of 2008.
       Net interest income of the registrant for the nine-month period ended September 30, 2009 increased by $1,669,684, or 12.1 percent, to $15,477,330 as compared to $13,807,646 for the nine months ended September 30, 2008. Total interest income decreased $1,715,481, or 6.8 percent, for the first nine months of 2009 as compared to the same period in 2008. This decrease was primarily the result of a $1,139,758 decrease in interest on investment securities. The decrease in interest on investment securities was primarily a result of a decrease in average yields earned on investment securities as well as a decrease in average investment securities held of approximately $10.6 million in the first nine months of 2009 as compared to same period of 2008. Also, interest and fees on loans decreased $345,636 for the first nine months of 2009 as compared to the same period of 2008. The decrease in interest and fees on loans was primarily the result of a decrease in the average yield earned on loans that was partially offset by an increase in average loans outstanding of approximately $51.1 million for the first nine months of 2009 as compared to the same period of 2008. Interest earned on federal funds sold and other balances decreased $222,219 primarily due to lower yields earned in the first nine months of 2009 as compared to the same period in 2008.
       The increase in net interest income in the first nine months of 2009 as compared to the same period in 2008 was primarily due to a decrease in total interest expense of $3,385,165, or 29.5 percent, to $8,091,207 for the first nine months of 2009 as compared to $11,476,372 for the same period in 2008. The decrease in total interest expense was primarily caused by a $2,845,928 decrease in interest expense on time deposits for the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease in interest expense on time deposits was primarily due to lower interest rates paid in the first nine months of 2009 as compared to the same period of 2008. The average balance of time deposits increased $6.9 million while the average interest rate paid decreased to 2.98 percent in the first nine months of 2009 as compared to 4.27 percent in the first nine months of 2008. The interest expense on savings and money market accounts

page 18


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

decreased $380,780 in the first nine months of 2009 as the average balances held increased $3.8 million and the average interest rate paid fell to 0.86% from 1.66% in the first nine months of 2009 as compared to the same period of 2008.
       The registrant's non-interest income is composed of several components, some of which vary significantly between quarterly periods. Service charges on deposit accounts and other non-interest income generally reflect the registrant's growth, while fees for origination of mortgage loans will often reflect stock and home mortgage market conditions and fluctuate more widely from period to period.
       Total non-interest income increased $8,984, or 0.8 percent, to $1,097,526 for the three-month period ended September 30, 2009 as compared to $1,088,542 for the three-month period ended September 30, 2008. Much of the increase in non-interest income was due to a $48,892 increase in other income and a $29,271 increase in income on company-owned life insurance in the third quarter of 2009 as compared to the third quarter of 2008. The increase in other income was primarily a result of rental income received on certain properties taken into other real estate owned in 2009. These increases were partially offset by decreases of $39,751 in income from service charges on deposit accounts, $25,711 in commission and fees and $23,982 in gains on the sale of securities in the third quarter of 2009 as compared to the same period of 2008.
       Total non-interest income decreased $227,377, or 6.8 percent, for the nine-month period ended September 30, 2009 as compared to the nine-month period ended September 30, 2008. The decrease was primarily due to a $198,295 decrease in service charges on deposit accounts as well as an $86,610 decrease in other income and a $65,109 decrease in commissions and fees for the first nine months of 2009 as compared to the first nine months of 2008. The decrease in service charges on deposit accounts was primarily due to a decrease in overdraft fees charged on deposit accounts in the first nine months of 2009 as compared to the same period of 2008. The decrease in other income in the first nine months of 2009 as compared to the same period of 2008 was primarily due to a large distribution received from the Morgan Keegan Mezzanine Fund, LLP ("MKMF") in which the registrant had a 1.9 percent limited partnership interest in the second quarter of 2008. The distribution included approximately $164,000 in income resulting from MKMF's sale of an investment in the second quarter of 2008. These decreases were partially offset by increases of $82,156 on income on company-owned life insurance and $60,572 on the gain on the sale of securities in the first nine months of 2009 as compared to the same period of 2008.
       For the three-month period ended September 30, 2009, total non-interest expenses decreased $1,217,981, or 22.8 percent, to $4,118,552 as compared to $5,336,533 for the three-month period ended September 30, 2008. Much of this decrease was due to the write-down of the registrant's investment in Fannie Mae preferred stock securities of $1,661,600 in the third quarter of 2008. This decrease in non-interest expenses was partially offset by a $403,710 increase in other operating expenses primarily resulting from an approximately $182,000 increase in expenses related to other real estate owned and an approximately $154,000 increase in FDIC insurance premium expenses in the third quarter of 2009 as compared to the same period of 2008. Other increases were $68,967 in occupancy expenses and $47,679 in salaries and employee benefits in the third quarter of 2009 as compared to the same period of 2008. Advertising and public relations expenses decreased $57,621 in the third quarter of 2009 as compared to the same period of 2008.
       Total non-interest expenses decreased $255,033, or 2.0 percent, to $12,769,014 for the nine months ended September 30, 2009 as compared to $13,024,047 for the same period of 2008. Much of this decrease was again due to the write-down of the registrant's investment in Fannie Mae preferred stock securities of $1,844,721 in the first nine months of 2008. This decrease was partially offset by a $1,083,209 increase in other operating expenses. Much of this increase in other operating expense was due to an increase of approximately $790,000 in FDIC insurance premium expenses in the first nine months of 2009 as compared to the same period of 2008 as well as an approximately $249,000 increase in expenses related to other real estate owned. Salaries and employee benefits also increased $364,436 in the first nine months of 2009 as compared to the same period of 2008. Much of the increase in salaries and employee benefits was due to the increased expenses related to staffing new offices in Huntsville and Athens, Alabama that were opened

page 19


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

in the first four months of 2008. These offices were fully staffed for the entire nine-month period ended September 30, 2009, as compared to only a portion of the nine-month period ended September 30, 2008. Also, occupancy expense increased $183,418 in the first nine months of 2009 as compared to the same period of 2008 primarily due to the expenses associated with the Huntsville office that opened in January 2008 and the Athens office that opened in April 2008, as well as expenses associated with the renovation of the main office in Pulaski completed in the first quarter of 2009.  These increased expenses were partially offset by a $170,820 decrease in advertising and public relations expenses in the first nine months of 2009 as compared to the same period of 2008.
       Non-interest expenses were also negatively impacted in the first nine months of 2009 by a capital loss of $144,408 incurred in the second quarter of 2009 relating to the registrant's investment in common stock of Silverton Financial Services, Inc. ("Silverton") that was classified as an other asset on the registrant's balance sheet. On May, 1, 2009, the Office of the Comptroller of the Currency closed Silverton's subsidiary, Silverton Bank, N.A. The Company recorded a capital loss of $144,408 to write-down the registrant's investment in Silverton to $0 in the second quarter of 2009 due to the closing of Silverton Bank, N.A. The Company has sufficient capital gains to offset the capital loss for federal income tax purposes.
       As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC. Because the FDIC's deposit insurance fund fell below prescribed levels in 2008, the FDIC has announced increased premiums for all insured depository institutions, including the Bank, in order to begin recapitalizing the fund. Insurance assessments ranged from 0.12 percent to 0.50 percent of total deposits for the first calendar quarter 2009 assessment. Effective April 1, 2009, insurance assessments range from 0.07% to 0.78%, depending on an institution's risk classification and other factors. The registrant's regular FDIC insurance premiums are expected to increase between $600,000 and $700,000 in 2009 as compared to 2008.
       In addition, the FDIC imposed a 5 basis point emergency assessment on insured depository institutions to be paid on September 30, 2009, based on total assets less Tier I capital at June 30, 2009. The FDIC may impose additional 5 basis point emergency assessments on insured depository institutions based on total assets less Tier I capital at September 30, 2009 and December 31, 2009. The registrant incurred approximately $276,000 in special assessments from the FDIC in the second quarter of 2009 which are reflected in other expenses in the registrant's income statement for the nine months ended September 30, 2009.
       The provision for loan losses for the three months ended September 30, 2009, increased $1,200,000 to $1,700,000 from $500,000 over the same period of 2008. For the nine-month period ended September 30, 2009, the provision for loan losses increased $2,807,702 to $3,877,702, from $1,070,000 over the same period of 2008.  The size of the provision for loan losses in 2009 primarily reflected the effects of weaker local and national economic conditions upon the loan portfolio, particularly within the real estate segment of the portfolio and primarily real estate construction and development loans. The provision for loan losses is likely to continue at elevated levels for the remainder of 2009 due to continuing deteriorating economic conditions that are forecasted through the end of the year. If economic conditions or the real estate market deteriorates beyond management's current expectations, additional provisions for loan losses would likely be necessary, negatively impacting the registrant's net income. The provision for possible loan losses is based on past loan experience and other factors that, in management's judgment, deserve current recognition in estimating possible credit losses. Such factors include past loan loss experience, growth and composition of the loan portfolio, review of specific problem loans, results of regulatory examinations, results of updated appraisals, the relationship of the allowance for credit losses to outstanding loans and current economic conditions that may affect the borrower's ability to repay. A more detailed description of the allowance for loan losses can be found under the section titled "Critical Accounting Policies."
       For the three-month period ended September 30, 2009, income before taxes increased $481,018, or 201.9 percent, to $719,267 as compared to $238,249 for the three months ended September 30, 2008.  Applicable income taxes increased $138,201 for the three-month period ended September 30, 2009 as

page 20


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

compared to the same period in 2008. The income tax benefit for the third quarter of 2008 was primarily due to reduced taxable income due to the markdown of the Fannie Mae preferred stock that occurred in the third quarter of 2008.
       For the nine-month period ended September 30, 2009, income before taxes decreased $1,110,362, or 36.1 percent, to $1,969,414 as compared to $3,079,776 for the nine-month period ended September 30, 2008. Applicable income taxes decreased $375,423, or 80.7 percent, for the nine months ended September 30, 2009 as compared to the same period of 2008. The decrease in applicable income taxes in the nine months ended September 30, 2009 as compared to the same period of 2008 was primarily a result of reduced income before taxes in the nine months ended September 30, 2009 while tax fee income proportionally increased as compared to the same period of 2008.
       The following table shows the return on assets (net income divided by average total assets) and return on equity (net income divided by average stockholders' equity, excluding unrealized gain or loss on securities) for the nine months ended September 30, 2009 (annualized) and for the year ended December 31, 2008.

For the nine months ended

For year ended

September 30, 2009 (annualized)

December 31, 2008

Return on assets

0.42%

0.62%

Return on equity

4.98%

6.92%


Financial Condition

       The registrant's total assets increased 2.4 percent to $606,663,721 during the nine months ended September 30, 2009, from $592,303,208 at December 31, 2008. Total loans were $383,719,420 at September 30, 2009, a 3.3 percent decrease compared to $396,926,068 at December 31, 2008. Securities available-for-sale increased to $151,675,669 at September 30, 2009 from $136,651,867 at December 31, 2008.   At September 30, 2009, there was an unrealized gain on available-for-sale securities, net of tax, of $1,739,770, as compared to an unrealized gain on available-for-sale securities, net of tax, of $965,798 at December 31, 2008.
       Total liabilities increased by 2.5 percent to $554,732,135 at September 30, 2009, compared to $541,270,340 at December 31, 2008. This increase was primarily due to a $9,167,290, or 13.2 percent, increase in non-interest bearing deposits and a $4,820,086 increase in other borrowed funds at September 30, 2009 as compared to December 31, 2008.
       Non-performing assets increased to approximately $18,571,000 at September 30, 2009 as compared to approximately $3,278,000 at December 31, 2008.  The increase in non-performing assets at September 30, 2009 as compared to December 31, 2008, was primarily due to increases in other real estate owned and non-accrual loans. Non-performing assets at September 30, 2009 included $9,381,475 in other real estate owned, $9,189,075 in non-accrual loans, and no loans past due 90 days or more as to interest or principal payment and accruing interest. Other real estate owned increased substantially in the first nine months of 2009 as loan customers defaulted and the Bank foreclosed on properties securing these loans, primarily consisting of construction and development, agricultural real estate and 1-4 family real estate properties. The balance of non-accrual loans at September 30, 2009 consisted primarily of construction and land development loans, one-to-four family real estate loans and commercial real estate loans. There were no restructured loans at September 30, 2009.  At December 31, 2008, the corresponding amounts were $247,183 in other real estate owned, $3,028,882 in non-accrual loans, $2,001 in loans past due 90 days or more and accruing interest, with no loans restructured. The allowance for loan losses was 72.6% of the balance of nonaccrual loans at September 30, 2009 as compared to 172.3% at December 31, 2008.

page 21


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

       Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest unless such loans are well secured and in the process of collection. The additional amount of interest that would have been recorded during the first nine months of 2009 if the above nonaccrual loans had been current in accordance with their original terms was approximately $459,000.
       Loans that are classified as "substandard" by the registrant represent loans to which management has doubts about the borrowers' ability to comply with the present loan repayment terms. As of September 30, 2009, there were approximately $16,233,000 in loans that were classified as "substandard" and accruing interest. This compares to approximately $11,508,000 in loans that were classified as "substandard" and accruing interest as of September 30, 2008 and $11,457,000 of such loans at December 31, 2008.
       Credit risk represents the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk or types of collateral arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The registrant does not have a significant concentration to any individual customer or counterparty. The major concentrations of credit risk for the registrant arise by collateral type in relation to loans and credit commitments. The significant concentration that exists is in loans secured by real estate, primarily commercial real estate loans (35 percent of total loans) and 1-4 family residential loans (23 percent of total loans).
Commercial loans, both those secured by real estate and those not secured by real estate, are further classified by their appropriate North American Industry Classification System ("NAICS") code. Of those loans classified by NAICS code, the registrant has concentrations of credit, defined as 25 percent or more of total risk-based capital, of loans to lessors of residential buildings and dwellings (49 percent of total risk-based capital), loans to religious organizations (32 percent of risk-based capital), loans secured by hotel and motel properties (30 percent of total risk-based capital), loans to gasoline stations with convenience stores (30 percent of total risk-based capital), loans secured by subdivision land (30 percent of total risk-based capital), loans secured by new single family housing construction (29 percent of total risk-based capital) and loans to lessors of nonresidential buildings (28 percent of total risk-based capital). Although the registrant has a loan portfolio diversified by type of risk, the ability of its customers to honor their contracts is to some extent dependent upon economic conditions, particularly within the real estate segment of the economy, in the regions where our customers operate. A geographic concentration arises because the registrant grants commercial, real estate and consumer loans primarily to customers in Giles, Marshall and Lincoln Counties, Tennessee and Madison and Limestone Counties, Alabama. In order to mitigate the impact of credit risk, management strives to identify loans experiencing difficulty early enough to correct the problems and to maintain an allowance for loan losses at a level management believes is sufficient to cover probable incurred losses in the loan portfolio.
       For the nine months ended September 30, 2009, the registrant had net loan charge-offs of approximately $2,427,000 for a net charge-off ratio (net charge-offs divided by total loans net of unearned income) of 0.85 percent (annualized).
This compares to net charge-offs of approximately $136,800 for the nine months ended September 30, 2008 for a net charge-off ratio of 0.05 percent (annualized). Management expects that net loan charge-offs and provision expense for loan losses for the fourth quarter of 2009 are likely to be similar to or greater than the comparable period in 2008 due to continuing weakening economic conditions.
       The total allowance for loan losses increased to $6,670,340 as of September 30, 2009 from $5,219,956 as of December 31, 2008. The ratio of the allowance for loan losses to total loans outstanding was 1.74 percent at September 30, 2009 as compared to 1.32 percent at December 31, 2008. Management believes that the allowance for loan losses is adequate to cover probable incurred losses in the loan portfolio.

page 22


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

Liquidity

       Liquidity is the ability to fund increases in loan demand or to compensate for decreases in deposits and other sources of funds, or both. Maintenance of adequate liquidity is an essential component of the financial planning process. The objective of asset/liability management is to provide an optimum balance of liquidity and earnings. Cash and cash equivalents increased $3,303,578 between December 31, 2008 and September 30, 2009.
       Marketable investment securities, particularly those of short maturities, are another source of asset liquidity. Securities maturing in one year or less amounted to approximately $11,610,000 at September 30, 2009, representing 7.7 percent of the registrant's investment portfolio as compared to $19,137,000, or 13.1 percent, one year earlier and $11,690,000, or 8.6 percent, at December 31, 2008. These securities may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital, or asset/liability strategy. Management classifies all the registrant's investment portfolio in the available-for-sale category and reports these securities at fair value. Management does not anticipate the sale of a substantial amount of investment securities in the foreseeable future.
       Other sources of liquidity include maturing loans and federal funds sold. At September 30, 2009, the registrant had approximately $144,744,000 in loans maturing within one year. The registrant had $3,190,000 in federal funds sold at September 30, 2009, compared to $11,686,000 as of December 31, 2008. The registrant also increased its cash and due from banks approximately $11,800,000 from December 31, 2008 to September 30, 2009.
       The registrant does not anticipate that there will be any unusual demands, commitments, or events that could adversely impact the liquidity of the registrant.

Off Balance Sheet Arrangements

       The registrant has not historically incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial instruments of structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts. However, the registrant is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The following table summarizes the registrant's involvement in financial instruments with off-balance sheet risk:

Amount at

September 30, 2009

December 31, 2008

Commitments to extend credit

$58,763,560

$60,767,469

Standby letters of credit

2,658,707

3,558,784

Mortgage loans sold with repurchase

    requirements outstanding

5,852,745

3,234,873

      Since these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these commitments, the registrant has the ability to liquidate federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase federal funds from other financial institutions as well as borrow from the Federal Home Loan Bank of Cincinnati. At September 30, 2009, the registrant had total borrowings of $8,211,608 and had approximately $23,696,000 of available additional borrowings from the Federal Home Loan Bank of Cincinnati. At September 30, 2009, the registrant had no federal funds purchased and had $25,000,000 in additional federal funds lines available from correspondent banks.

page 23


PART I - FINANCIAL INFORMATION
____________________________________________

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

       The registrant originates residential mortgage loans for sale in the secondary market which it may be required to repurchase if a default occurs with respect to the payment of any of the first four installments of principal and interest after a loan is sold and the default continues for a period of 90 days.

Capital Adequacy

       The Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC have established risk-based capital guidelines for U.S. banking organizations. These guidelines provide a uniform capital framework that is sensitive to differences in risk profiles among banks. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Pulaski National Corporation ("FPNC") and First National Bank of Pulaski ("FNB") must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. FPNC's and FNB's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
       Under these guidelines, total capital consists of Tier I capital (core capital, primarily stockholders' equity) and Tier II capital (supplementary capital, including certain qualifying debt instruments and credit loss reserve).
       Assets are assigned risk weights ranging from 0 to 100 percent depending on the level of credit risk normally associated with such assets. Off-balance sheet items (such as commitments to make loans) are also included in assets through the use of conversion factors established by regulators and are assigned risk weights in the same manner as on-balance sheet items. Banking institutions are expected to maintain a Tier I capital to risk-weighted assets ratio of at least 4.00 percent, a total capital (Tier I plus Tier II) to total risk-weighted assets ratio of at least 8.00 percent, and a Tier I capital to total average assets ratio (leverage ratio) of at least 4.00 percent.
       Management believes, as of September 30, 2009 and December 31, 2008, that FPNC and FNB met all capital adequacy requirements to which they are subject.  To be categorized as well-capitalized, FNB must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. The following table presents actual, minimum and "well capitalized" capital amounts and ratios for FPNC and FNB as of September 30, 2009 and December 31, 2008.

 

 

 

page 24


PART I - FINANCIAL INFORMATION
____________________________________________


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued)

To Be Well Capitalized

Under Prompt

For Capital

Corrective Action

Actual

Adequacy Purposes

Provisions

Amount

Ratio

Amount

 

Ratio

Amount

 

Ratio

(Dollars In thousands)

As of September 30, 2009

Total Capital to risk weighted assets

FPNC

$55,781

12.57% 

$35,504

>

8.00%  

N/A

FNB

54,685

12.32

35,499

>

8.00

44,373

>

10.00

Tier I (Core) Capital to risk weighted assets

FPNC

50,192

11.31

17,752

>

4.00

N/A

FNB

49,096

11.06

17,749

>

4.00

26,624

>

6.00

Tier I (Core) Capital to average quarterly assets

FPNC

50,192

8.37

23,999

>

4.00

N/A

FNB

49,096

8.18

23,996

>

4.00

29,995

>

5.00

As of December 31, 2008

Total Capital to risk weighted assets

FPNC

$55,364

12.36% 

$35,824

>

8.00%  

N/A

FNB

54,490

12.17

35,817

>

8.00

44,771

>

10.00

Tier I (Core) Capital to risk weighted assets

FPNC

50,067

11.18

17,912

>

4.00

N/A

FNB

49,193

10.99

17,909

>

4.00

26,863

>

6.00

Tier I (Core) Capital to average quarterly assets

FPNC

50,067

8.51

23,532

>

4.00

N/A

FNB

49,193

8.36

23,528

>

4.00

29,410

>

5.00


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest rate risk

       The registrant's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the registrant's assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the registrant's operations, the registrant is not subject to foreign currency exchange or commodity price risk.
       Interest rate risk management focuses on the earnings risk associated with changing interest rates, as well as the risk to the present value of the registrant's equity. Management seeks to maintain profitability in both immediate and long-term earnings through funds management and interest rate risk management.  The registrant's rate sensitive position has an important impact on earnings and the present value of the registrant's equity. Management of the registrant meets regularly to analyze the rate sensitivity position, focusing on the spread between the cost of funds and interest yields generated primarily through loans and investments. Management also seeks to maintain stability in the net interest margin under varying interest rate environments. These goals are accomplished through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
       Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments, changes in market conditions, and pricing and deposit volume and mix. Since these assumptions are inherently uncertain, net interest income can not

page 25


PART I - FINANCIAL INFORMATION
____________________________________________

Item 3. Quantitative and Qualitative Disclosures About Market Risk. (Continued)

be precisely estimated nor can the impact of changes in interest rates be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management's strategies, among other factors.
       Simulation modeling is used to evaluate both the level of interest rate sensitivity as well as potential balance sheet strategies. Important elements in this modeling process include the mix of floating rate versus fixed rate assets and liabilities; the repricing/maturing volumes and rates of the existing balance sheet; and assumptions regarding future volumes, maturity patterns and pricing under varying interest rate scenarios. The Bank's Asset/Liability policy strives to limit the decrease in net interest income over a +/-200 basis point rate shock to no more than 9.0 percent over the next twelve months as compared to the base scenario of no changes in interest rates and to limit the decrease in the current present value of the Bank's equity to no more than 25 percent over the same +/-200 basis point rate shock. As of September 30, 2009, a -200 basis point rate shock was estimated to decrease net interest income approximately $1,454,000, or 6.8 percent, over the next twelve months, as compared to the base scenario. A +200 basis point rate shock was projected to decrease net interest income approximately $851,000, or 4.0 percent, over the next twelve months as compared to the base scenario. The -200 basis point rate shock was estimated to decrease the current present value of the Bank's equity by 5.0 percent and a +200 basis point rate shock was estimated to decrease the current present value of the Bank's equity by 1.3 percent, both well within the policy guidelines. Although interest rates are currently very low, the Bank believes a -200 basis point rate shock is an effective and realistic test since interest rates on many of the Bank's loans still have the ability to decline 200 basis points. For those loans that have floors above the -200 basis point rate shock, the interest rate would be the floor rate. All deposit account rates would likely fall to their floors under the -200 basis point rate shock as well. This simulation analysis assumes that NOW and savings accounts have a lower correlation to changes in market interest rates than do loans, investment securities and time deposits. The simulation analysis takes into account the call features of certain investment securities based upon the rate shock, as well as estimated prepayments on loans. The simulation analysis assumes no change in the Bank's asset/liability composition due to the inherent uncertainties of specific conditions and corresponding actions of management. Actual results would vary due to changing market conditions and management's response to those conditions.
       There have been no material changes in reported market risks during the quarter ended September 30, 2009.  


Item 4. Controls and Procedures.

       The registrant maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The registrant carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer concluded that the registrant's disclosure controls and procedures were effective.

 

page 26


PART I - FINANCIAL INFORMATION
____________________________________________


Item 4. Controls and Procedures. (Continued)

Changes in Internal Controls

       There were no changes in the registrant's internal control over financial reporting during the registrant's fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.

 

PART II - OTHER INFORMATION
____________________________________________

Item 1.  Legal Proceedings.

       The registrant and its subsidiaries are involved, from time to time, in ordinary routine litigation incidental to the banking business. Neither the registrant nor its subsidiary is involved in any material pending legal proceedings.


Item 1A. Risk Factors.

       There were no material changes to the risk factors previously disclosed in Part I, Item 1A, of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

       (a) None

       (b) None

       (c) None


Item 3.  Defaults upon Senior Securities.

       None


Item 4.  Submission of Matters to a Vote of Security Holders.

       None


Item 5.  Other Information.

       None

 

page 27


PART II - OTHER INFORMATION
____________________________________________

Item 6.  Exhibits.

      Exhibit 31.1  Certification of Mark A. Hayes, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
      Exhibit 31.2  Certification of Tracy Porterfield, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
      Exhibit 32.1  Certification of Mark A. Hayes, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                          Sarbanes-Oxley Act of 2002.
      Exhibit 32.2  Certification of Tracy Porterfield, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                          Sarbanes-Oxley Act of 2002.

 

 

 

 

 

page 28


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.

 

 

                                                                                FIRST PULASKI NATIONAL CORPORATION


Date:  November 9, 2009                                         /s/Mark A. Hayes                                                     
                                                                                Mark A. Hayes, Chief Executive Officer

 

Date:  November 9, 2009                                         /s/Tracy Porterfield                                                  
                                                                                Tracy Porterfield, Chief Financial Officer
                                                                               

 

 

page 29


Exhibit Index

Exhibit 31.1   Certification of Mark A. Hayes, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2   Certification of Tracy Porterfield, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1   Certification of Mark A. Hayes, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
                     of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2   Certification of Tracy Porterfield, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
                     of the Sarbanes-Oxley Act of 2002.

 

 

page 30