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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                     March 31 , 2012                     

or

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

For the transition period from ______________________ to _____________________.

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 [  X  ] No [     ]

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

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

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

       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 -- 1,571,831 shares outstanding as of May 1, 2012.

page 1


PART I - FINANCIAL INFORMATION
____________________________________________


Item 1. Financial Statements.

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS

March 31,

December 31,

2012

2011

Cash and due from banks

$25,333,658

$32,182,394

Federal funds sold

6,365,000

1,640,000

    Cash and cash equivalents

31,698,658

33,822,394

Interest bearing balances with banks

445,598

543,832

Securities available for sale

242,724,005

217,469,728

Loans held for sale

2,028,867

2,168,816

Loans

    Loans net of unearned income

335,513,329

340,553,701

    Allowance for loan losses

(7,177,794)

(7,470,322)

    Total net loans

328,335,535

333,083,379

Bank premises and equipment

18,824,289

18,760,960

Accrued interest receivable

3,315,094

3,351,127

Other real estate

7,159,467

7,110,969

Federal Home Loan Bank stock

1,526,500

1,526,500

Company-owned life insurance

10,869,115

10,789,213

Prepaid FDIC insurance

1,616,397

1,731,418

Deferred tax assets, net

4,233,738

3,221,632

Prepayments and other assets

1,621,607

1,518,844

    TOTAL ASSETS

$654,398,870

$635,098,812

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

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Deposits

    Non-interest bearing balances

$91,518,604

$88,005,413

    Interest bearing balances

487,823,751

471,225,835

      Total deposits

579,342,355

559,231,248

Securities sold under repurchase agreements

1,923,406

1,850,824

Other borrowed funds

6,610,016

7,326,366

Accrued interest payable

873,317

863,878

Other liabilities

5,503,703

6,059,192

    TOTAL LIABILITIES

594,252,797

575,331,508

SHAREHOLDERS' EQUITY

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

    1,571,481 and 1,570,428 shares issued and outstanding, respectively

1,571,481

1,570,428

Capital surplus

1,659,202

1,601,845

Retained earnings

56,304,412

54,357,140

Accumulated other comprehensive income, net

610,978

2,237,891

    TOTAL SHAREHOLDERS' EQUITY

60,146,073

59,767,304

    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$654,398,870

$635,098,812

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

* 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

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

For Three Months Ended

March 31,

2012

2011

INTEREST INCOME:

  Loans, including fees

$5,817,036

$5,932,720

  Securities

      Taxable

886,535

748,963

      Non-taxable

266,800

329,495

  Federal funds sold and other

15,446

12,187

  Dividends

32,153

32,153

      Total interest income

7,017,970

7,055,518

INTEREST EXPENSE:

  Interest on deposits:

      NOW Accounts

55,905

54,398

      Savings & MMDAs

99,973

98,877

      Time

896,000

1,239,189

  Repurchase agreements

7,654

7,770 

  Borrowed funds

66,083

68,801

      Total interest expense

1,125,615

1,469,035

      NET INTEREST INCOME

5,892,355

5,586,483

      Provision for loan losses

-

750,000

      NET INTEREST INCOME AFTER

          PROVISION FOR LOAN LOSSES

5,892,355

4,836,483

NON-INTEREST INCOME:

      Service charges on deposit accounts

487,696

510,614

      Commissions and fees

89,776

74,529

      Other service charges and fees

282,229

232,598

      Income on company-owned life insurance

79,902

89,875

      Security gains, net

1,042,045

110,058

      Mortgage banking income

262,049

148,744

      Other income

20,178

293,236

          Total non-interest income

2,263,875

1,459,654


page 3


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

For Three Months Ended

March 31,

2012

2011

NON-INTEREST EXPENSES:

  Salaries and employee benefits

$2,613,823

$2,433,570

  Occupancy expense, net

466,370

475,886

  Furniture and equipment expense

178,916

160,903

  Advertising and public relations

131,854

122,858

  Foreclosed assets, net

243,753

140,712

  FDIC insurance expense

124,277

226,923

  Other operating expenses

851,050

800,734

      Total non-interest expenses

4,610,043

4,361,586

      Income before taxes

3,546,187

1,934,551

      Applicable income taxes

1,205,583

566,335

      NET INCOME

$2,340,604

$1,368,216

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

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

      Earnings per common share:

      Basic

$1.49

$0.87

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

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

      Diluted

$1.49

$0.87

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

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

Comprehensive income

Net income

$2,340,604

$1,368,216

Reclassification adjustment for gains included

    in net income, net of tax

(643,046)

(67,917)

Change in unrealized gains (losses) on

    available for sale securities, net of tax

(983,867)

512,089

Comprehensive income

$713,691

$1,812,388

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

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

* 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 Three Months Ended March 31, 2012

Accumulated

Other

Common

Capital

Retained

Comprehensive

Stock

Surplus

Earnings

Income (Loss)

Total

Balance, January 1, 2012

$1,570,428

$1,601,845

$54,357,140

$2,237,891

$59,767,304

Comprehensive income:

    Net Income

2,340,604

2,340,604

    Reclassification adjustment

      for gains included in net

      income, net of tax

(643,046)

(643,046)

    Change in unrealized

      gains (losses) on available

      for sale securities, net of tax

(983,867)

(983,867)

Comprehensive income

713,691

Cash Dividends

($0.25 per share)

(393,332)

(393,332)

Compensation expense for

    restricted stock

33,687

33,687

Issuance of new common stock

450

(450)

-

Issuance of common stock through

    dividend reinvestment plan

603

24,120

24,723

Balance, March 31, 2012

$1,571,481

$1,659,202

$56,304,412

$610,978

$60,146,073

==========

===========

==========

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

=========

page 5


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 Three Months Ended March 31, 2011

Accumulated

Other

Common

Capital

Retained

Comprehensive

Stock

Surplus

Earnings

Income (Loss)

Total

Balance, January 1, 2011

$1,564,350

$1,323,023

$50,070,308

$(293,218)

$52,664,463

Comprehensive income:

    Net Income

1,368,216

1,368,216

    Reclassification adjustment

      for gains included in net

      income, net of tax

(67,917)

(67,917)

    Change in unrealized

      gains (losses) on available

      for sale securities, net of tax

512,089

512,089

Comprehensive income

1,812,388

Cash Dividends

($0.25 per share)

(391,813)

(391,813)

Compensation expense for

    restricted stock

33,688

33,688

Issuance of new common stock

450

(450)

-

Issuance of common stock through

    dividend reinvestment plan

705

28,905

29,610

Balance, March 31, 2011

$1,565,505

$1,385,166

$51,046,711

$150,954

$54,148,336

==========

===========

==========

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

=========

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

page 6


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

FIRST PULASKI NATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For Three Months Ended March 31,

2012

2011

Cash flows from operating activities:

   Net income

$2,340,604

$1,368,216

   Adjustments to reconcile net income

      to net cash from operating activities

         Provision for loan losses

-

750,000

         Depreciation of premises and equipment

242,257

245,757

         Amortization and accretion of investment securities, net

449,012

318,356

         Deferred income tax (benefit) expense

(2,650)

651,890

         Loss (gain) on sale of other assets

188,154

(246,817)

         Security gains, net

(1,042,045)

(110,058)

         Stock-based compensation expense

33,687

33,688

         Loans originated for sale

(9,058,299)

(4,666,496)

         Proceeds from sale of loans

9,460,297

5,579,205

         Mortgage banking income

(262,049)

(148,744)

         Increase in cash surrender value of life insurance

(79,902)

(89,875)

         Decrease in accrued interest receivable

36,033

3,731

         (Increase) decrease in prepayments/other assets

12,259

(574,015)

         Increase (decrease) in accrued interest payable

9,439

(82,624)

         Increase (decrease) in accrued taxes

229,868

(486,468)

         (Decrease) increase in other liabilities

(785,356)

142,565

              Net cash from operating activities

1,771,309

2,688,311

Cash flows from investing activities:

         Proceeds from maturity of investment securities available for sale

17,857,179

13,000,212

         Proceeds from sale of investment securities

41,263,183

3,893,335

         Purchase of investment securities available for sale

(86,417,977)

(20,268,651)

         Decrease (increase) in interest bearing balances with banks

98,234

(4,274)

         Net decrease (increase) in loans

4,411,781

(3,701,895)

         Capital expenditures

(323,449)

(102,466)

         Proceeds from sale of other assets

117,274

4,010,644

              Net cash used by investing activities

(22,993,775)

(3,173,095)

Cash flows from financing activities:

         Net increase in deposits

20,111,107

17,054,277

         Cash dividends paid

(393,332)

(391,813)

         Proceeds from issuance of common stock

24,723

29,610

         Net increase in securities sold under repurchase agreements

72,582

67,760

         Borrowings repaid

(716,350)

(60,525)

              Net cash from financing activities

19,098,730

16,699,309

Net increase (decrease) in cash and cash equivalents

(2,123,736)

16,214,525

Cash and cash equivalents at beginning of period

33,822,394

17,043,132

Cash and cash equivalents at end of period

$31,698,658

$33,257,657

===========

==========

Supplemental cash flow information

    Interest paid

1,116,176

1,551,659

    Income taxes paid

938,000

988,000

Supplemental noncash disclosures

    Transfers from loans to other real estate owned

342,063

1,659,744

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

page 7


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 "Corporation" or 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.
       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 no shares were issued under the 1994 Plan during the first three months of 2012.
       As there are no unvested stock options as of January 1, 2012, and no stock options were granted in the first three months of 2012, there was no share-based compensation expense or tax benefit recorded in the first three months of 2012 related to stock options; however, as discussed below, the registrant incurred stock compensation expense in the first three months of 2012 related to the previously issued restricted shares. In addition, there were no unrecognized compensation costs related to stock options at March 31, 2012.

 

 

 

page 8


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       Below is a summary of the registrant's stock option activity for the 2011 fiscal year and the first three months of 2012:

Weighted

Average

Number

Exercise

of Options

Price

Outstanding January 1, 2011

8,000

$46.56

Granted

-

-

Exercised

-

-

Expired

(1,000)

38.50

Outstanding December 31, 2011

7,000

47.71

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

Exercisable December 31, 2011

7,000

$47.71

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

Outstanding January 1, 2012

7,000

$47.71

Granted

-

-

Exercised

-

-

Expired

-

-

Outstanding March 31, 2012

7,000

47.71

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

Exercisable March 31, 2012

7,000

$47.71

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

       The aggregate intrinsic value of outstanding options shown in the table at March 31, 2012 was $0 based on $41.00 per share, the price of which the registrant is aware, at which the registrant's common stock was traded on a date closest to and/or prior to March 31, 2012. The weighted average remaining term of the stock options in the table above was 1.4 years as of March 31, 2012.
       No stock options were exercised and no cash was received from the exercise of stock options during the three months ended March 31, 2012 and 2011. There was no intrinsic value of stock options exercised for the three months ended March 31, 2012 and 2011. 
       At March 31, 2012, the registrant had 87,750 shares reserved for award under its 2007 Equity Incentive Plan (the "2007 Plan"). During the first three months of 2012 the registrant did not grant any awards of restricted stock to employees of the Bank under the 2007 Plan. Compensation expense associated with restricted share awards, like those previously awarded under the 2007 Plan, is recognized over the time period that the restrictions associated with the awards lapse. During the three months ended March 31, 2012, the registrant recognized $33,687 in compensation costs attributable to all restricted stock awards issued under the 2007 Plan. A summary of activity for restricted share awards for the three months ended March 31, 2012 follows:

Weighted-Average

Grant-Date

Nonvested Shares

Shares

Fair Value

Nonvested at January 1, 2012

3,250

$55.00

Granted

-

55.00

Vested

(450)

55.00

Forfeited

-

-

Nonvested at March 31, 2012

2,800

$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 March 31, 2012, the registrant had approximately 8.4 million authorized but unissued shares of common stock.

page 9


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       As of March 31, 2012, there was $81,239 of total unrecognized compensation cost related to nonvested restricted shares granted under the 2007 Plan. The cost is expected to be recognized within the next year. The total fair value of shares vested during the three months ended March 31, 2012 and 2011was $18,450 and $18,900, respectively.

Note 3

Recent Accounting Pronouncements:
       In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this amendment did not have a material impact on the consolidated financial statements.
       In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment changed the presentation of the components of comprehensive income for the Corporation as part of the consolidated statement of shareholders' equity and is now reported in the statement of income and comprehensive income.

Note 4

       The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income at March 31, 2012 and December 31, 2011 were as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

March 31, 2012

Cost

Gains

Losses

Value

U.S. government sponsored entities

$117,360,264

$521,737

$721,903

$117,160,098

Obligations of states and

political subdivisions

36,614,662

1,021,148

303,076

37,332,734

Mortgage-backed securities-residential

87,759,000

805,192

333,019

88,231,173

       Total

$241,733,926

$2,348,077

$1,357,998

$242,724,005

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

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

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

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

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

December 31, 2011

Cost

Gains

Losses

Value

U.S. treasury securities

$100,107

$26

$-

$100,133

U.S. government sponsored entities

114,896,330

1,522,270

11,008

116,407,592

Obligations of states and

political subdivisions

36,668,186

1,437,841

27,737

38,078,290

Mortgage-backed securities-residential

62,178,656

767,916

62,859

62,883,713

       Total

$213,843,279

$3,728,053

$101,604

$217,469,728

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

page 10


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The amortized cost and fair value of debt securities at March 31, 2012 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

$7,342,017

$7,417,285

Due after one year through five years

81,508,856

82,156,555

Due after five years through ten years

60,408,406

60,413,741

Due after ten years

4,715,647

4,505,251

Mortgage-backed-residential

87,759,000

88,231,173

TOTAL

$241,733,926

$242,724,005

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

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

       Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

March 31, 2012

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 entities

$67,467,188

$721,903

$-

$-

$67,467,188

$721,903

Obligations of states and

    political subdivisions

7,234,692

294,644

254,550

8,432

7,489,242

303,076

Mortgage-backed securities

    - residential

43,674,732

333,019

-

-

43,674,732

333,019

Total temporarily impaired

    securities

$118,376,612

$1,349,566

$254,550

$8,432

$118,631,162

$1,357,998

==========

========

=========

========

==========

=========

December 31, 2011

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 entities

$8,505,750

$11,008

$-

$-

$8,505,750

$11,008

Obligations of states and

    political subdivisions

1,125,358

17,763

254,050

9,974

1,379,408

27,737

Mortgage-backed securities

    - residential

15,573,390

62,859

-

-

15,573,390

62,859

Total temporarily impaired

    securities

$25,204,498

$91,630

$254,050

$9,974

$25,458,548

$101,604

==========

========

=========

========

==========

=========

       Proceeds from sales of securities available for sale were $41,263,183 and $3,893,335 for the three months ended March 31, 2012 and 2011, respectively. Gross gains of $1,042,045 and $110,058 and no gross losses were realized on these sales for the first three months of 2012 and 2011, respectively.


page 11


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       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 March 31, 2012, the registrant's security portfolio consisted of 304 securities, 86 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 entities as well as mortgage-backed securities that are also obligations of U.S. government-sponsored entities or U.S. government agencies. 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 March 31, 2012.

 

page 12


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

Note 5

       Loans at March 31, 2012 and December 31, 2011 were as follows:

March 31,

December 31,

2012

2011

Commercial

$25,010,596

$29,518,794

Commercial and agricultural real estate:

Commercial real estate

132,758,089

127,470,394

Agricultural real estate

35,214,757

36,825,448

Residential real estate:

Home equity line of credit

16,390,113

17,573,194

1-4 family closed-end first lien

60,125,424

60,979,977

1-4 family closed-end junior lien

2,348,718

2,593,391

Multi-family

1,457,968

997,839

Construction and land development

27,112,905

27,255,729

Consumer

25,050,853

26,194,891

Other

10,231,031

11,337,367

Subtotal

335,700,454

340,747,024

Less:

Net deferred loan fees

(187,125)

(193,323)

Allowance for loan losses

(7,177,794)

(7,470,322)

Loans, net

$328,335,535

$333,083,379

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

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

      The loan balances in the following tables related to credit quality do not include approximately $2,067,000 in accrued interest receivable and approximately $187,000 in deferred loan fees at March 31, 2012 and approximately $2,292,000 in accrued interest receivable and approximately $193,000 in deferred loan fees at December 31, 2011.
      The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2012 and loans by portfolio segment and based on impairment method as of March 31, 2012.

Commercial

Construction

and Agricultural

and Land

Residential

Commercial

Real Estate

Development

Real Estate

Consumer

Other

Total

Allowance for loan losses:

Beginning balance

$677,655

$3,825,067

$1,198,728

$1,327,170

$389,576

$52,126

$7,470,322

Provision for loan losses

96,583

(14,895)

(52,496)

(51,506)

33,774

(11,460)

-

Loans charged-off

(99,002)

(74,691)

-

(54,874)

(112,063)

-

(340,630)

Recoveries

6,634

17,500

-

827

23,141

-

48,102

Ending balance

681,870

3,752,981

1,146,232

1,221,617

334,428

40,666

7,177,794

==========

==========

=========

==========

==========

=========

=========

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$-

$146,680

$83,371

$-

$-

$-

$230,051

Collectively evaluated for impairment

681,870

3,606,301

1,062,861

1,221,617

334,428

40,666

6,947,743

Total ending allowance balance

$681,870

$3,752,981

$1,146,232

$1,221,617

$334,428

$40,666

$7,177,794

==========

==========

=========

==========

==========

=========

=========

Loans:

Loans individually evaluated for impairment

$48,018

$3,664,075

$1,420,397

$2,705,201

$-

$-

$7,837,691

Loans collectively evaluated for impairment

24,962,578

164,308,771

25,692,508

77,617,022

$25,050,853

10,231,031

327,862,763

Total ending loans balance

$25,010,596

$167,972,846

$27,112,905

$80,322,223

$25,050,853

$10,231,031

$335,700,454

==========

==========

=========

==========

==========

=========

=========

page 13


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2011:

Commercial

Construction

and Agricultural

and Land

Residential

Commercial

Real Estate

Development

Real Estate

Consumer

Other

Total

Allowance for loan losses:

Beginning balance

$1,035,511

$3,747,046

$1,474,970

$1,274,380

$383,644

$81,410

$7,996,961

Provision for loan losses

(128,440)

357,728

(30,538)

420,272

130,513

465

750,000

Loans charged-off

(147,928)

(40,159)

(115,046)

(226,062)

(88,055)

-

(617,250)

Recoveries

450

5,923

-

21,759

9,375

1,500

39,007

Ending balance

759,593

4,070,538

1,329,386

1,490,349

435,477

83,375

8,168,718

==========

==========

==========

==========

==========

==========

=========

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

Commercial

Construction

and Agricultural

and Land

Residential

Commercial

Real Estate

Development

Real Estate

Consumer

Other

Total

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$-

$146,311

$106,227

$-

$-

$-

$252,538

Collectively evaluated for impairment

677,655

3,678,756

1,092,501

1,327,170

389,576

52,126

7,217,784

Total ending allowance balance

$677,655

$3,825,067

$1,198,728

$1,327,170

$389,576

$52,126

$7,470,322

==========

==========

=========

==========

==========

==========

=========

Loans:

Loans individually evaluated for impairment

$48,405

$3,195,817

$1,643,830

$2,736,506

$-

$-

$7,624,558

Loans collectively evaluated for impairment

29,470,389

161,100,025

25,611,899

79,407,895

26,194,891

11,337,367

333,122,466

Total ending loans balance

$29,518,794

$164,295,842

$27,255,729

$82,144,401

$26,194,891

$11,337,367

$340,747,024

==========

==========

=========

==========

==========

==========

=========

 

 

page 14


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The following table presents information related to impaired loans by class of loans as of and for the three months ended March 31, 2012. The unpaid principal balance has been reduced for net charge-offs in the following table.

Unpaid

Allowance for

Average

Interest

Cash Basis

Principal

Loan

Loan Losses

Loan

Income

Interest

Balance

Balance

Allocated

Balance

Recognized

Recognized

With no related allowance recorded:

Commercial

$48,018

$48,018

$-

$147,163

$-

$-

Commercial and agricultural real estate:

Commercial real estate

3,063,985

3,064,708

-

3,119,693

24,540

24,540

Agricultural real estate

-

-

-

-

-

-

Residential real estate:

Home equity line of credit

-

-

-

-

-

-

1-4 family closed-end

2,705,201

2,705,201

-

2,725,978

4,876

4,876

Multi-family

-

-

-

-

-

-

Construction and land development

723,352

723,352

-

723,352

-

-

With an allowance recorded:

Commercial

-

-

-

-

-

-

Commercial and agricultural real estate:

Commercial real estate

600,090

600,090

146,680

597,058

-

-

Agricultural real estate

-

-

-

-

-

-

Residential real estate:

Home equity line of credit

-

-

-

-

-

-

1-4 family closed-end

-

-

-

-

-

-

Multi-family

-

-

-

-

-

-

Construction and land development

697,045

697,045

83,371

801,644

-

-

$7,837,691

$7,838,414

$230,051

$8,114,888

$29,416

$29,416

=========

=========

=========

=========

=========

=========

       The following table presents information related to impaired loans by class of loans as of and for the three months ended March 31, 2011. The unpaid principal balance has been reduced for net charge-offs in the following table.

Unpaid

Allowance for

Average

Interest

Cash Basis

Principal

Loan

Loan Losses

Loan

Income

Interest

Balance

Balance

Allocated

Balance

Recognized

Recognized

With no related allowance recorded:

Commercial

$61,572

$61,572

$-

$65,730

$-

$-

Commercial and agricultural real estate:

Commercial real estate

4,493,651

4,493,651

-

4,496,560

50,293

-

Agricultural real estate

-

-

-

-

-

-

Residential real estate:

Home equity line of credit

-

-

-

-

-

-

1-4 family closed-end

2,956,102

2,956,102

2,985,068

52,128

52,128

Multi-family

-

-

-

-

-

-

Construction and land development

1,861,553

1,861,553

1,861,552

-

-

With an allowance recorded:

Commercial

-

-

-

-

-

-

Commercial and agricultural real estate:

Commercial real estate

1,428,072

1,428,072

208,525

1,431,063

-

-

Agricultural real estate

-

-

-

-

-

-

Residential real estate:

Home equity line of credit

-

-

-

-

-

-

1-4 family closed-end

319,585

319,585

67,514

319,585

-

-

Multi-family

-

-

-

-

-

-

Construction and land development

1,377,001

1,377,047

126,688

1,387,077

-

-

$12,497,536

$12,497,582

$402,727

$12,546,635

$102,421

$52,128

=========

=========

=========

=========

=========

=========

page 15


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The following table presents information related to impaired loans by class of loans as of December 31, 2011. The unpaid principal balance has been reduced for net charge-offs in the following table.

Unpaid

Allowance for

Principal

Loan

Loan Losses

Balance

Balance

Allocated

With no related allowance recorded:

Commercial

$48,405

$48,405

$-

Commercial and agricultural real estate:

Commercial real estate

2,597,072

2,597,072

-

Agricultural real estate

-

-

-

Residential real estate:

Home equity line of credit

-

-

-

1-4 family closed-end

2,736,506

2,736,506

-

Multi-family

-

-

-

Construction and land development

723,352

723,352

-

With an allowance recorded:

Commercial

-

-

-

Commercial and agricultural real estate:

Commercial real estate

598,745

598,745

146,311

Agricultural real estate

-

-

-

Residential real estate:

Home equity line of credit

-

-

-

1-4 family closed-end

-

-

-

Multi-family

-

-

-

Construction and land development

920,478

920,478

106,227

$7,624,558

$7,624,558

$252,538

=========

=========

=========

       Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans that are not performing.
       The following table presents nonaccrual and loans past due 90 days still on accrual by class of loans as of March 31, 2012 and December 31, 2011.

Loans Past Due Over

Nonaccrual

90 Days and Still Accruing

March 31,

December 31,

March 31,

December 31,

2012

2011

2012

2011

Commercial

$103,935

$59,028

$-

$-

Commercial and agricultural real estate:

Commercial real estate

3,899,187

3,504,851

-

-

Agricultural real estate

378,929

378,527

-

-

Residential real estate:

Home equity line of credit

-

-

-

-

1-4 family closed-end first lien

3,654,286

3,983,744

-

-

1-4 family closed-end junior lien

-

6,250

-

-

Multi-family

-

-

-

-

Construction and land development

1,350,240

1,539,053

180,795

-

Consumer

67,507

92,786

-

23,684

Other

26,507

26,507

-

-

$9,480,591

$9,590,746

$180,795

$23,684

===========

===========

===========

===========

page 16


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The following table presents the aging of past due loans as of March 31, 2012 and December 31, 2011 by class of loans:

March 31, 2012

90 days

30-89 Days

or more

Total

Loans Not

Past Due

Past Due

Past Due

Past Due

Total

Commercial

$372,168

$10,623

$382,791

$24,627,805

$25,010,596

Commercial and agricultural real estate:

Commercial real estate

3,342,399

2,873,984

6,216,383

126,541,706

132,758,089

Agricultural real estate

164,089

250,294

414,383

34,800,374

35,214,757

Residential real estate:

Home equity line of credit

186,717

-

186,717

16,203,396

16,390,113

1-4 family closed-end first lien

1,132,870

383,707

1,516,577

58,608,847

60,125,424

1-4 family closed-end junior lien

62,895

-

62,895

2,285,823

2,348,718

Multi-family

117,789

-

117,789

1,340,179

1,457,968

Construction and land development

608,932

1,531,035

2,139,967

24,972,938

27,112,905

Consumer

465,948

19,074

485,022

24,565,831

25,050,853

Other

84,440

26,507

110,947

10,120,084

10,231,031

$6,538,247

$5,095,224

$11,633,471

$324,066,983

$335,700,454

=========

=========

=========

==========

===========

December 31, 2011

90 days

30-89 Days

or more

Total

Loans Not

Past Due

Past Due

Past Due

Past Due

Total

Commercial

$333,697

$10,623

$344,320

$29,174,474

$29,518,794

Commercial and agricultural real estate:

Commercial real estate

1,810,872

2,003,558

3,814,430

123,655,964

127,470,394

Agricultural real estate

137,201

249,228

386,429

36,439,019

36,825,448

Residential real estate:

Home equity line of credit

82,698

-

82,698

17,490,496

17,573,194

1-4 family closed-end first lien

2,000,183

894,097

2,894,280

58,085,697

60,979,977

1-4 family closed-end junior lien

113,240

-

113,240

2,480,151

2,593,391

Multi-family

-

-

-

997,839

997,839

Construction and land development

1,375,760

457,065

1,832,825

25,422,904

27,255,729

Consumer

527,327

60,439

587,766

25,607,125

26,194,891

Other

69,375

27,066

96,441

11,240,926

11,337,367

$6,450,353

$3,702,076

$10,152,429

$330,594,595

$340,747,024

=========

=========

=========

==========

===========

       The above table includes nonaccrual loans of $3,400,115 and $3,016,993 in the loans not past due category, $2,114,302 and $2,895,361 in the 30-89 days past due category and $3,966,174 and $3,678,392 in the 90 days or more past due category as of March 31, 2012 and December 31, 2011, respectively.

 

page 17


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

Troubled Debt Restructurings:

       During the three-month period ending March 31, 2012, no loans were modified as troubled debt restructurings. The modification of the terms of loans usually include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.
       The Company has not allocated any specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011. The Company has not committed to lend any additional amounts as of March 31, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.
       There were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification for the period ended March 31, 2012.
       A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
       In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's internal underwriting policy.

Credit Quality Indicators

       The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company uses the following definitions for risk ratings, which are updated annually:

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

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

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

 

page 18


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are typically overdrafts and loans in process. An analysis of loans by risk category is performed quarterly. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed as of each date, the risk category of loans by class of loans is as follows:

March 31, 2012

Special

Pass

Mention

Substandard

Doubtful

Not Rated

Commercial

$24,346,806

$187,617

$476,173

$-

$-

Commercial and agricultural real estate:

Commercial real estate

120,420,816

3,646,193

8,691,080

-

-

Agricultural real estate

33,838,464

983,444

392,849

-

-

Residential real estate:

Home equity line of credit

16,121,752

-

268,361

-

-

1-4 family closed-end first lien

54,666,894

836,277

4,622,253

-

-

1-4 family closed-end junior lien

1,893,936

164,881

289,901

-

-

Multi-family

1,457,968

-

-

-

-

Construction and land development

24,960,624

191,322

1,960,959

-

Consumer

24,507,659

171,418

371,776

-

-

Other

9,611,308

117,281

26,506

-

475,936

Total

$311,826,227

$6,298,433

$17,099,858

$-

$475,936

==========

=========

=========

=========

=========

December 31, 2011

Special

Pass

Mention

Substandard

Doubtful

Not Rated

Commercial

$29,009,547

$125,766

$383,481

$-

$-

Commercial and agricultural real estate:

Commercial real estate

115,705,423

3,656,544

8,108,427

-

-

Agricultural real estate

35,611,655

819,682

394,111

-

-

Residential real estate:

Home equity line of credit

17,244,456

33,020

295,718

-

-

1-4 family closed-end first lien

55,194,491

1,177,666

4,607,820

-

-

1-4 family closed-end junior lien

2,194,417

101,553

297,421

-

-

Multi-family

997,839

-

-

-

-

Construction and land development

25,051,579

14,472

2,189,678

-

Consumer

25,625,547

170,075

399,269

-

-

Other

10,672,388

19,337

26,506

-

619,136

Total

$317,307,342

$6,118,115

$16,702,431

$-

$619,136

==========

=========

=========

=========

=========

Note 6

       Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:


Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

page 19


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)


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.

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

       Investment securities: 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).

       Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. For collateral dependent loans, fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted

       Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
       Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by independent appraisers whose qualifications have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value
.

page 20


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

Assets Measured on a Recurring Basis

       Assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 are summarized below:

Fair Value Measurements at

Fair Value Measurements at

March 31, 2012 using

December 31, 2011 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

$-

$-

$-

$100,133

$-

$100,133

    Obligations of U.S. Government

        Sponsored Agencies

117,160,098

-

117,160,098

116,407,592

-

116,407,592

    Obligations of States and

        Political Subdivisions

37,332,734

-

37,332,734

38,078,290

-

38,078,290

    Mortgage-backed securities

        - residential

88,231,173

-

88,231,173

62,883,713

-

62,883,713

Total

$242,724,005

$-

$242,724,005

$217,469,728

$-

$217,469,728

==========

==========

==========

==========

==========

==========

       There were no transfers between Level 1 and Level 2 during 2012 or 2011.

Assets Measured on a Non-Recurring Basis

       Assets measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at

March 31, 2012 Using

Significant

Other

Significant

Observable

Unobservable

Carrying

Inputs

Inputs

Value

(Level 2)

(Level 3)

Assets:

Impaired loans

Comml and ag real estate:

    Commercial real estate

$2,272,787

$2,272,787

    Agricultural real estate

-

-

Residential real estate:

    Home equity line of credit

-

-

    1-4 family closed-end

1,876,777

1,876,777

    Multi-family

-

-

Construction & land development

455,430

455,430

Total impaired loans

$4,604,994

$4,604,994

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

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

Other real estate owned

Residential real estate:

    Home equity line of credit

$-

$-

    1-4 family closed-end

-

-

    Multi-family

576,690

576,690

Construction & land development

3,583,750

3,583,750

Total other real estate owned

$4,160,440

$4,160,440

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

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

page 21


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

Fair Value Measurements at

December 31, 2011 Using

Significant

Other

Significant

Observable

Unobservable

Carrying

Inputs

Inputs

Value

(Level 2)

(Level 3)

Assets:

Impaired loans

Comml and ag real estate:

    Commercial real estate

$1,805,814

$1,805,814

    Agricultural real estate

-

-

Residential real estate:

    Home equity line of credit

-

-

    1-4 family closed-end

1,908,083

1,908,083

    Multi-family

-

-

Construction & land development

455,430

455,430

Total impaired loans

$4,169,327

$4,169,327

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

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

Other real estate owned

Residential real estate:

    Home equity line of credit

$-

$-

    1-4 family closed-end

-

-

    Multi-family

576,690

576,690

Construction & land development

3,511,370

3,511,370

Total other real estate owned

$4,088,060

$4,088,060

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

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

       There were $4,604,994 in impaired loans measured for impairment using the fair value of the collateral at March 31, 2012, resulting in an additional provision for loan losses of $154,859 for the three months ended March 31, 2012. There were $3,788,787 in impaired loans measured for impairment using the fair value of the collateral at March 31, 2011, resulting in an additional provision for loan losses of $28,200 for the three months ended March 31, 2011.
       Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $7,159,467 as of March 31, 2012. Included in this amount were properties that were written down to fair value totaling $4,160,440, resulting in additional foreclosed asset expense of $119,933 for the three months ended March 31, 2012. Other real estate owned had a net carrying amount of $10,590,698 as of March 31, 2011. Included in this amount were properties that were written down to fair value totaling $4,632,790, resulting in additional foreclosed asset expense of $705 in the three months ended March 31, 2011.
       Fair value measurements for impaired loans and other real estate owned are derived from appraisals received from independent appraisers and are discounted by 29.5%, resulting in Level 3 classification.

 

page 22


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       Carrying amount and estimated fair values of financial instruments at March 31, 2012 were as follows:

Fair Value Measurements at

March 31, 2012

Carrying Value

Level 1

Level 2

Level 3

Total

(Dollars in thousands)

Financial assets:

Cash and short-term investments

$32,144

$31,813

$331

$-

$32,144

Securities

242,724

-

242,724

-

242,724

Loans held for sale

2,029

-

2,029

-

2,029

Loans, net

328,336

-

-

328,612

328,612

Federal Home Loan Bank stock

1,527

N/A

N/A

N/A

N/A

Accrued interest receivable

3,315

-

1,248

2,067

3,315

Financial liabilities:

Deposits

579,342

313,163

267,596

-

580,759

Securities sold under repurchase agreements

1,923

1,923

-

-

1,923

Other borrowed funds

6,610

-

6,971

-

6,971

Accrued interest payable

873

9

864

-

873

       Carrying amount and estimated fair values of financial instruments at December 31, 2011 were as follows:

December 31, 2011

(In thousands)

Carrying Value

Fair Value

Financial assets:

Cash and short-term investments

$34,366

$34,366

Securities

217,470

217,470

Loans held for sale

2,169

2,169

Loans, net

333,083

332,387

Federal Home Loan Bank stock

1,527

N/A

Accrued interest receivable

3,351

3,351

Financial liabilities:

Deposits

559,231

560,864

Securities sold under repurchase agreements

1,851

1,851

Other borrowed funds

7,326

7,733

Accrued interest payable

864

864

                       

 

page 23


PART I - FINANCIAL INFORMATION
____________________________________________

Item 1. Financial Statements. (Continued)

       The methods and assumptions not previously described used to estimate fair value are described as follows:
       Carrying amount is the estimated fair value for cash and short term investments, accrued interest receivable and payable, demand deposits, and variable rate loans or deposits that reprice frequently and fully and are classified as Level 1. For deposits with stated maturities fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk, resulting in Level 2 classification. For fixed rate loans and for variable rate loans 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, resulting in Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. Fair values of debt are based on current rates for similar financing. The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability, therefore it has been excluded from the table above. The fair value of off-balance-sheet items and loans held for sale are not considered material.

Note 7

       The factors used in the earnings per share computation follow:

March 31,

2012

2011

Net Income

$2,340,604

$1,368,216

Less: Distributed earnings allocated to participating securities

(613)

(613)

Less: Undistributed income allocated to participating securities

(3,033)

(1,527)

Net earnings allocated to common stock

$2,336,958

$1,366,076

=========

=========

Weighted common shares outstanding

    including participating securities

1,572,960

1,566,878

Less: Participating securities

(2,450)

(2,450)

Weighted average shares

1,570,510

1,564,428

=========

=========

Basic earnings per share

$1.49

$0.87

=========

=========

Net earnings allocated to common stock

$2,336,958

$1,366,076

=========

=========

Weighted average shares

1,570,510

1,564,428

Add: dilutive effects of assumed exercises of stock options

80

188

Average shares and dilutive potential common shares

1,570,590

1,564,616

=========

=========

Dilutive earnings per share

$1.49

$0.87

=========

=========

       Stock options for 6,500 and 7,000 shares of common stock were not considered in computing diluted earnings per share for the three-months ended March 31, 2012 and 2011, respectively, because they were anti-dilutive.

page 24


PART I - FINANCIAL INFORMATION
____________________________________________

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, 2011, which report was filed with the Securities and Exchange Commission on March 15, 2012. 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", "seek", "estimate" 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.
      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 Annual Report on Form 10-K for the year ended December 31, 2011 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, (v) rapid fluctuations or unanticipated changes 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, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act 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 incurred 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

page 25


PART I - FINANCIAL INFORMATION
____________________________________________

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

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 "special mention" loans over $400,000 are reviewed quarterly by the Executive and Loan Committee of the Bank's Board of Directors.
       Other Real Estate Owned acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.


OVERVIEW

       Total assets of the registrant grew $19.3 million, or 3.0 percent, in the first three months of 2012. This growth in assets was primarily funded by an approximately $20.1 million, or 3.6 percent increase in deposits. Loans net of unearned income decreased $5.0 million in the first three months of 2012 as loan demand remained weak. The growth in deposits along with the decline in loans contributed to an increase in investment securities of approximately $25.3 million in the first three months of 2012.
       Net income increased $972,388 to $2,340,604, or $1.49 per diluted share, in the first quarter of 2012 as compared to $1,368,216, or $0.87 per diluted share, during the same period of 2011. The increase in net income in the first quarter of 2012 as compared to the same period of 2011 was primarily due to increased security gains, decreased provision for loan losses and increased net interest income in the first quarter of 2012. Security gains increased $931,987 to $1,042,045 in the first quarter of 2012 as compared to $110,058 in the first quarter of 2011. There was no provision for loan losses in the first quarter of 2012, a decrease of $750,000 over the provision for loan losses in the first quarter of 2011. Net interest income increased $305,872, or 5.5 percent to $5,892,355 in the first quarter of 2012 as compared to the same period of 2011.
       Net charged-off loans totaled approximately $293,000 in the first three months of 2012, resulting in an annualized charge-off ratio of 0.35 percent as compared to net charge-offs of approximately $578,000 in the first three months of 2011, resulting in an annualized charge-off ratio of 0.68 percent. Nonaccrual loans decreased slightly to approximately $9,481,000 at March 31, 2012 as compared to approximately $9,591,000 at December 31, 2011. Other real estate owned totaled approximately $7,159,000 at March 31, 2012 as compared to approximately $7,111,000 at December 31, 2011. Concerted efforts are being made to dispose of the other real estate owned while striving to ensure that fair market value is received and that excessive discounts are not taken. Expenses related to these foreclosed assets increased approximately $103,000 in the first three months of 2012 as compared to the same period of 2011. The registrant expects total non-performing assets and expenses related to foreclosed assets will continue at elevated levels through the remainder of 2012.

page 26


PART I - FINANCIAL INFORMATION
____________________________________________

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

Results of Operations

       Net income of the registrant was $2,340,604 for the first three months of 2012. This amounted to an increase of $972,388, or 71.1 percent, compared to the first three months of 2011.  The increase in net income was primarily due to increased security gains and decreased loan loss provisions for the first three months of 2012 as compared to the same period of 2011.
       Net interest income increased $305,872, or 5.5 percent, to $5,892,355 during the first quarter of 2012 as compared to $5,586,483 for the first quarter of 2011.  Total interest income decreased $37,548, or 0.5 percent, to $7,017,970 for the first quarter of 2012 as compared to $7,055,518 for the same period in 2011. The decrease in total interest income was primarily due to a decrease in average loans outstanding and a decrease in the yields earned on those loans in the first quarter of 2012 as compared to the same period of 2011. Interest and fees on loans decreased $115,684 in the first quarter of 2012 as compared to the same period of 2011 primarily as a result of a decrease in average loans outstanding of approximately $4.3 million and a decrease in the yield earned on those loans to 6.90 percent in the first quarter of 2012 from 7.01 as compared to the same period of 2011. Interest income on securities increased $74,877 in the first quarter of 2012 as compared to the first quarter of 2011 primarily as a result of an increase in average investment securities held of approximately $35.3 million in the first quarter of 2012 as compared to the same period of 2011. The overall increase in interest income on securities was limited in the first quarter of 2012 as compared to the same period of 2011 as yields earned on securities declined in the first quarter of 2012.
       The increase in net interest income in the first quarter of 2012 as compared to the first quarter of 2011 was primarily due to a decrease in total interest expense of $343,420, or 23.4 percent, to $1,125,615 for the first quarter of 2012 as compared to $1,469,035 for the same period in 2011. The decrease in total interest expense was primarily due to lower average interest rates paid on interest-bearing deposits in the first quarter of 2012 as compared to the first quarter of 2011. The interest expense on time deposits decreased $343,189 in the first quarter of 2012 as compared to the same period of 2011 as the average interest rate paid on time deposits fell to 1.34 percent in the first quarter of 2012 as compared to 1.78 percent in the first quarter of 2011. The average balances held in time deposits also decreased $12.6 million in the first quarter of 2012 as compared to the same period of 2011. The interest expense on NOW accounts increased $1,507 in the first quarter of 2012 as compared to the same period of 2011 as the average balances held increased $11.1 million and the average interest rate paid fell to 0.20 percent in the first quarter of 2012 as compared to 0.22 percent for the same period of 2011. The interest expense on savings and money market accounts increased $1,096 in the first quarter of 2012 as compared to the same period of 2011 as the average balances held increased $14.8 million and the average interest rate paid fell to 0.39 percent in the first quarter of 2012 from 0.46 percent in the first quarter of 2011.
       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 home mortgage market conditions and fluctuate more widely from period to period.
       Total non-interest income increased $804,221, or 55.1 percent, to $2,263,875 for the three-month period ended March 31, 2012 as compared to $1,459,654 for the three-month period ended March 31, 2011. Most of the increase in non-interest income was due to a $931,987 increase in gain on the sale of securities in the first quarter of 2012 as compared to the same period of 2011 as the registrant restructured its investment portfolio in the first quarter of 2012. The investment portfolio restructuring primarily consisted of increasing the amount of mortgage-backed securities held in relation to other securities and is projected to increase interest income in flat and rising interest rate environments over the next few years as compared to the projected interest income that would have been generated before the restructuring. Mortgage banking

page 27


PART I - FINANCIAL INFORMATION
____________________________________________


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

income increased $113,305 in the first quarter of 2012 as compared to the first quarter of 2011 as mortgage refinancing activity increased. Also, other service charges and fees increased $49,631 primarily due to increased debit card interchange fees in the first quarter of 2012 as compared to the same period of 2011. These increases were partially offset by a decrease of $273,058 in other income in the first quarter of 2012 as compared to the same period of 2011. This decrease in other income was primarily due to a $274,976 gain on the sale of certain real estate held by the Corporation in the first quarter of 2011. Service charges on deposit accounts also decreased $22,918 as overdraft fees decreased in the first quarter of 2012 as compared to the same period of 2011. Other categories of non-interest income showed only minor differences between the first quarter of 2012 and the first quarter of 2011.
       Total non-interest expenses increased $248,457 or 5.7 percent, to $4,610,043 in the first quarter of 2012 as compared to $4,361,586 for the same period of 2011. This increase in non-interest expenses was primarily due to an $180,253 increase in salaries and employee benefits primarily due to increased accrued potential incentive and benefit expenses as well as increased personnel expenses per employee in the first quarter of 2012 as compared to the same period of 2011. Foreclosed asset expense increased $103,041 in the first quarter of 2012 as compared to the same period of 2011 primarily due to increased write-downs in the first quarter of 2012. These increases were partially offset by a $102,646 decrease in FDIC insurance expense in the first quarter of 2012 as compared to the same period of 2011 primarily due to a change in the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital that began in the second quarter of 2011.
       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 announced increased premiums for all insured depository institutions, including the Bank, in order to begin recapitalizing the fund.
       In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. In December 2009, the Bank paid $3.39 million in prepaid risk-based assessments. Prepaid FDIC insurance had a balance of $1.62 million at March 31, 2012, as a $124,000 reduction was made for applicable FDIC insurance premiums in the first quarter of 2012.
       There was no provision for loan losses in the three months ended March 31, 2012, leading to a decrease as compared to a provision for loan losses of $750,000 in the same period of 2011. Although the provision for loan losses in the first quarter of 2012 declined significantly from the amount in the same period of 2011, the size of the allowance for loan losses continued to reflect the effects of continued weakness in local and national economic conditions upon the loan portfolio, particularly within the real estate segment of the portfolio. 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."

 

page 28


PART I - FINANCIAL INFORMATION
____________________________________________

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

       For the three-month period ended March 31, 2012, income before taxes increased $1,611,636, or 83.3 percent, to $3,546,187 as compared to $1,934,551 for the three months ended March 31, 2011.  Applicable income taxes increased $639,248 for the three-month period ended March 31, 2012 as compared to the same period in 2011. The effective tax rate for the three months ended March 30, 2012 was 34.0 percent as compared to 29.3 percent for the same period of 2011.
       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 three months ended March 31, 2012 (annualized) and for the year ended December 31, 2011.

For the three months ended

For year ended

March 31, 2012 (annualized)

December 31, 2011

Return on assets

1.47%

1.01%

Return on equity

16.01%

11.26%


Financial Condition

       The registrant's total assets increased 3.0 percent to $654,398,870 during the three months ended March 31, 2012, from $635,098,812 at December 31, 2011. Loans, net of unearned income were $335,513,329 at March 31, 2012, a 1.5 percent decrease compared to $340,553,701 at December 31, 2011. Securities available-for-sale increased to $242,724,005 at March 31, 2012 from $217,469,728 at December 31, 2011.  At March 31, 2012, there was an unrealized gain on available-for-sale securities, net of tax, of $610,978, as compared to an unrealized gain on available-for-sale securities, net of tax, of $2,237,891 at December 31, 2011.
       Total liabilities increased by 3.3 percent to $594,252,797 at March 31, 2012, compared to $575,331,508 at December 31, 2011. This increase was primarily due to an increase of $16,597,916 in interest bearing deposits at March 31, 2012 as compared to December 31, 2011.
       Non-performing assets increased to $16,820,853 at March 31, 2012 as compared to $16,725,399 at December 31, 2011.  Non-performing assets at March 31, 2012 included $7,159,467 in other real estate owned, $9,480,591 in non-accrual loans, and $180,795 in loans past due 90 days or more as to interest or principal payment and accruing interest.
There were $267,922 in trouble debt restructurings still accruing interest at March 31, 2012. Other real estate owned remained at an elevated level at March 31, 2012. The properties comprising other real estate owned at March 31, 2012 were primarily construction and land development, one-to-four family real estate properties and commercial real estate properties. The balance of non-accrual loans at March 31, 2012 consisted primarily of commercial real estate loans, one-to-four family real estate loans and construction and land development loans. At December 31, 2011, the corresponding amounts of non-performing assets were $7,110,969 in other real estate owned and $9,590,746 in non-accrual loans and $23,684 in loans past due 90 days or more and accruing interest. There were $267,922 in troubled debt restructurings still accruing interest at December 31, 2011. The Company did not allocate any specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 or December 31, 2011. The allowance for loan losses was 75.7% of the balance of nonaccrual loans at March 31, 2012 as compared to 77.9% at December 31, 2011.
       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 three months of 2012 if the above nonaccrual loans had been current in accordance with their original terms was approximately $223,000.

page 29


PART I - FINANCIAL INFORMATION
____________________________________________

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

       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 March 31, 2012, there were approximately $8,138,000 in loans that were classified as "substandard" and accruing interest. This compares to approximately $9,361,000 in loans that were classified as "substandard" and accruing interest as of March 31, 2011 and $7,622,000 of such loans at December 31, 2011.
       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 most significant concentration that exists is in loans secured by real estate, primarily commercial real estate loans (40 percent of total loans) and 1-4 family residential loans (24 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 (34 percent of total risk-based capital), loans secured by hotel and motel properties (34 percent of total risk-based capital), loans secured by subdivision land (29 percent of total risk-based capital) and loans to lessors of non-residential buildings (27 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 incurred losses in the loan portfolio
.
       For the three months ended March 31, 2012, the registrant had net loan charge-offs of approximately $293,000 for a net charge-off ratio (net charge-offs divided by total loans net of unearned income) of 0.35 percent (annualized). This compares to net charge-offs of approximately $578,000 for the three months ended March 31, 2011 for a net charge-off ratio of 0.68 percent (annualized).
       The total allowance for loan losses decreased to $7,177,794 as of March 31, 2012 from $7,470,322 as of December 31, 2011. The ratio of the allowance for loan losses to loans net of unearned income was 2.14 percent at March 31, 2012 as compared to 2.19 percent at December 31, 2011. Management believes that the allowance for loan losses is adequate to cover probable incurred losses in the loan portfolio.

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 decreased $2,123,736 from December 31, 2011 to March 31, 2012.
       Marketable investment securities, particularly those of short maturities, are another source of asset liquidity. Securities maturing in one year or less amounted to approximately $7,417,000 at March 31, 2012, representing 3.1 percent of the registrant's investment portfolio as compared to $10,963,000, or 5.6 percent, one year earlier and $8,133,000, or 3.7 percent, at December 31, 2011. These securities may be

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PART I - FINANCIAL INFORMATION
____________________________________________

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

sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital, or asset/liability strategy. Monthly principal paydowns received on mortgage-backed securities also provide additional liquidity. 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 March 31, 2012, the registrant had approximately $108,511,000 in loans maturing within one year. The registrant had $6,365,000 in federal funds sold at March 31, 2012, compared to $1,640,000 as of December 31, 2011. The registrant also had approximately $25,334,000 in cash and due from banks at March 31, 2012 as compared to approximately $32,182,000 at December 31, 2011.
       The registrant does not anticipate that there will be any unusual demands, commitments, or events that could adversely impact the liquidity of the registrant for the remainder of 2012.

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

March 31, 2012

December 31, 2011

Commitments to extend credit

$55,526,056

$49,502,377

Standby letters of credit

2,610,395

2,265,295

Mortgage loans sold with repurchase

     requirements outstanding

9,174,744

10,304,698

       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 March 31, 2012, the registrant had total borrowings of $6,610,016 and had approximately $24,634,000 of available additional borrowings from the Federal Home Loan Bank of Cincinnati. At March 31, 2012, the registrant had no federal funds purchased and had $25,000,000 in additional federal funds lines available from correspondent banks.
       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

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PART I - FINANCIAL INFORMATION
____________________________________________


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

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 March 31, 2012 and December 31, 2011, 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 and not be subject to a written agreement order or directive to maintain capital above specified levels. The following table presents actual, minimum and "well capitalized" capital amounts and ratios for FPNC and FNB as of March 31, 2012 and December 31, 2011.

To Be Well Capitalized

For Capital

Under Applicable

Actual

Adequacy Purposes

Regulations

Amount

Ratio

Amount

 

Ratio

Amount

 

Ratio

(Dollars In thousands)

As of March 31, 2012

Total Capital to risk weighted assets

FPNC

$64,792

15.48%   

$33,487

>

8.00%    

$41,859

>

10.00%

FNB

64,183

15.34

33,482

>

8.00

41,853

>

10.00    

Tier I (Core) Capital to risk weighted assets

FPNC

59,535

14.22

16,743

>

4.00

25,115

>

6.00    

FNB

58,926

14.08

16,741

>

4.00

25,112

>

6.00    

Tier I (Core) Capital to average quarterly assets

FPNC

59,535

9.28

25,661

>

4.00

FNB

58,926

9.19

25,658

>

4.00

32,073

>

5.00    

As of December 31, 2011

Total Capital to risk weighted assets

FPNC

$62,769

15.06%   

$33,354

>

8.00%    

$41,692

>

10.00%

FNB

62,188

14.92

33,349

>

8.00

41,686

>

10.00    

Tier I (Core) Capital to risk weighted assets

FPNC

57,529

13.80

16,677

>

4.00

25,015

>

6.00    

FNB

56,948

13.66

16,674

>

4.00

25,012

>

6.00    

Tier I (Core) Capital to average quarterly assets

FPNC

57,529

9.15

25,137

>

4.00

FNB

56,948

9.06

25,133

>

4.00

31,417

>

5.00    

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PART I - FINANCIAL INFORMATION
____________________________________________

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 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 18 percent over the same +/-200 basis point rate shock.
As of March 31, 2012, the -200 basis point rate shock was estimated to increase the current present value of the Bank's equity by 7.1 percent and a +200 basis point rate shock was estimated to decrease the current present value of the Bank's equity by 12.3 percent, both well within the policy guidelines. A -200 basis point rate shock was estimated to decrease net interest income approximately $2,932,000, or 13.8 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 $664,000, or 3.1 percent, over the next twelve months as compared to the base scenario. The decrease in net interest income in the next twelve months in the -200 basis point rate shock is outside the Bank's limit of -9.0%; however, the longer-term interest rate risk seems to be mitigated as shown by the smaller change in the current present value of the Bank's equity in the -200 basis point rate shock scenario as compared to rates remaining stable. 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

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PART I - FINANCIAL INFORMATION
____________________________________________

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

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 March 31, 2012.  


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.

Changes in Internal Controls

       There were no changes in the registrant's internal control over financial reporting during the registrant's fiscal quarter ended March 31, 2012 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, 2011.


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

     (a) None

     (b) None

     (c) None

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PART II - OTHER INFORMATION
____________________________________________

Item 3.  Defaults Upon Senior Securities.

      None


Item 4. Mine Safety Disclosures.

       Not applicable


Item 5.  Other Information.

      None


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.
      Exhibit 101     Interactive Data File

 

 

 

page 35


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:  May 10, 2012                                                /s/Mark A. Hayes                                             
                                                                                Mark A. Hayes, Chief Executive Officer

 


Date:  May 10, 2012                                                /s/Tracy Porterfield                                            
                                                                                Tracy Porterfield, Chief Financial Officer
                                                                               

 

page 36


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.
Exhibit 101      Interactive Data File