UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2013~~March 31, 2014

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

LAKELAND FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Indiana	0-11487	35-1559596
(State or Other Jurisdiction	(Commission File Number)	(IRS Employer
of Incorporation or Organization)		Identification No.)

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

(Address of Principal Executive Offices)(Zip Code)

(574) 267-6144

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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

Number of shares of common stock outstanding at ~~October 31, 2013: 16,465,316~~April 30, 2014: 16,534,617

~~LAKELAND FINANCIAL CORPORATION~~

~~Form 10-Q Quarterly Report~~

~~Table of Contents~~

~~PART I.~~

TABLE OF CONTENTS

		Page ~~Number~~

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements
	Consolidated Balance Sheets — March 31, 2014 and December 31, 2013	1
	Consolidated Statements of Income — three months ended March 31, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income — three months ended March 31, 2014 and 2013	3
	Consolidated Statements of Shareholders’ Equity — three months ended March 31, 2014 and 2013	4
	Consolidated Statements of Cash Flows — three months ended March 31, 2014 and 2013	5
	Notes to the Consolidated Financial Statements	1 6
Item 2.	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	47 31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64 42
Item 4.	Controls and Procedures	65 42

~~PART II.~~

		~~Page Number~~
PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	66 43
Item 1A.	Risk Factors	66 43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66 43
Item 3.	Defaults Upon Senior Securities	66 43
Item 4.	Mine Safety Disclosures	67 43
Item 5.	Other Information	67 43
Item 6.	Exhibits	67 43

~~Form 10-Q~~ SIGNATURES		~~Signature Page~~45
68

~~PART I~~

~~LAKELAND~~ITEM 1. FINANCIAL ~~CORPORATION~~

~~ITEM 1 –~~ ~~FINANCIAL~~ STATEMENTS

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED BALANCE SHEETS~~

~~As of September 30, 2013 and December 31, 2012~~

~~(in thousands except for share data)~~

~~(Page 1 of 2~~)

September 30, December 31,
2013 2012
(Unaudited)
ASSETS
Cash and due from banks $             72,982 $           156,666
Short-term investments 8,358 75,571
  Total cash and cash equivalents 81,340 232,237

Securities available for sale (carried at fair value) 463,070 467,021
Real estate mortgage loans held for sale 1,047 9,452

Loans, net of allowance for loan losses of $49,804 and $51,445 2,342,911 2,206,075

Land, premises and equipment, net 38,514 34,840
Bank owned life insurance 62,397 61,112
Accrued income receivable 8,333 8,491
Goodwill 4,970 4,970
Other intangible assets 12 47
Other assets 38,643 39,899
  Total assets $        3,041,237 $        3,064,144

~~(continued)~~

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED BALANCE SHEETS~~

~~As of September 30, 2013 and December 31, 2012~~

~~(in thousands except for share data)~~

~~(Page 2 of 2~~)

September 30, December 31,
2013 2012
(Unaudited)
LIABILITIES AND EQUITY

LIABILITIES
Noninterest bearing deposits $           449,590 $           407,926
Interest bearing deposits 1,995,236 2,173,830
  Total deposits 2,444,826 2,581,756

Short-term borrowings
  Federal funds purchased 57,000 0
  Securities sold under agreements to repurchase 103,959 121,883
  Other short-term borrowings 75,000 0
    Total short-term borrowings 235,959 121,883

Accrued expenses payable 12,766 15,321
Other liabilities 2,177 1,390
Long-term borrowings 37 15,038
Subordinated debentures 30,928 30,928
    Total liabilities 2,726,693 2,766,316

EQUITY
Common stock:  90,000,000 shares authorized, no par value
16,459,156 shares issued and 16,361,411 outstanding as of September 30, 2013
16,377,247 shares issued and 16,290,136 outstanding as of December 31, 2012 92,229 90,039
Retained earnings 225,648 203,654
Accumulated other comprehensive income (loss) (1,452) 5,689
Treasury stock, at cost (2013 - 97,745 shares, 2012 - 87,111 shares) (1,970) (1,643)
  Total stockholders' equity 314,455 297,739

  Noncontrolling interest 89 89
  Total equity 314,544 297,828
    Total liabilities and equity $        3,041,237 $        3,064,144

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

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~For the Three Months and Nine Months Ended September 30, 2013 and 2012~~

~~(in thousands except for share and per share data)~~

~~(Unaudited)~~

~~(Page 1 of 2)~~

Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
NET INTEREST INCOME
Interest and fees on loans
  Taxable $        24,595 $        25,803 $        73,469 $        77,789
  Tax exempt                 100                 109                 304                 333
Interest and dividends on securities
  Taxable              1,463              2,034              3,560              7,425
  Tax exempt                 802                 698              2,307              2,094
Interest on short-term investments                   10                   16                   46                   43
    Total interest income            26,970            28,660            79,686            87,684

Interest on deposits              3,589              5,989            12,365            19,352
Interest on borrowings
  Short-term                 146                 112                 349                 329
  Long-term                 263                 399                 831              1,198
    Total interest expense              3,998              6,500            13,545            20,879

NET INTEREST INCOME            22,972            22,160            66,141            66,805

Provision for loan losses                     0                     0                     0              1,299

NET INTEREST INCOME AFTER PROVISION FOR
  LOAN LOSSES            22,972            22,160            66,141            65,506

NONINTEREST INCOME
Wealth advisory fees                 980                 959              2,895              2,770
Investment brokerage fees              1,503                 695              3,449              2,435
Service charges on deposit accounts              2,325              2,045              6,548              5,937
Loan, insurance and service fees              1,524              1,421              4,792              4,062
Merchant card fee income                 356                 297                 925                 902
Other income                 856                 669              2,937              1,614
Mortgage banking income                 159                 590              1,206              1,574
Net securities gains (losses)                 106                (380)                 107                (377)
Other than temporary impairment loss on available-for-sale securities:
  Total impairment losses recognized on securities                     0                  (67)                     0             (1,052)
  Loss recognized in other comprehensive income                     0                     0                     0                   26
  Net impairment loss recognized in earnings                     0                  (67)                     0             (1,026)
  Total noninterest income              7,809              6,229            22,859            17,891

~~(continued)~~

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~For the Three Months and Nine Months Ended September 30, 2013 and 2012~~

~~(in thousands except for share and per share data)~~

~~(Unaudited)~~

~~(Page 2 of 2)~~

Three Months Ended Nine Months Ended
September 30, September 30,
2013 2012 2013 2012
NONINTEREST EXPENSE
Salaries and employee benefits              9,437              8,569            27,493            26,007
Net occupancy expense                 813                 803              2,532              2,519
Equipment costs                 758                 641              2,021              1,854
Data processing fees and supplies              1,443              1,143              4,115              3,044
Other expense              3,815              3,146            10,089              9,807
  Total noninterest expense            16,266            14,302            46,250            43,231

INCOME BEFORE INCOME TAX EXPENSE            14,515            14,087            42,750            40,166

Income tax expense              4,746              4,740            14,499            13,374

NET INCOME $          9,769 $          9,347 $        28,251 $        26,792

BASIC WEIGHTED AVERAGE COMMON SHARES     16,451,199     16,340,425     16,427,060     16,312,896

BASIC EARNINGS PER COMMON SHARE $            0.59 $            0.57 $            1.72 $            1.64

DILUTED WEIGHTED AVERAGE COMMON SHARES     16,634,933     16,490,390     16,581,089     16,470,485

DILUTED EARNINGS PER COMMON SHARE $            0.59 $            0.57 $            1.70 $            1.63

CONSOLIDATED BALANCE SHEETS (in thousands except share data)
	March 31,	December 31,
	2014	2013
	(Unaudited)
ASSETS
Cash and due from banks	$ 67,960	$ 55,727
Short-term investments	9,179	7,378
Total cash and cash equivalents	77,139	63,105

Securities available for sale (carried at fair value)	471,449	468,967
Real estate mortgage loans held for sale	2,043	1,778

Loans, net of allowance for loan losses of $46,137 and $48,797	2,528,053	2,486,301

Land, premises and equipment, net	39,575	39,335
Bank owned life insurance	62,994	62,883
Federal Reserve and Federal Home Loan Bank stock	10,732	10,732
Accrued interest receivable	8,833	8,577
Goodwill	4,970	4,970
Other assets	27,936	29,116
Total assets	$ 3,233,724	$ 3,175,764

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Noninterest bearing deposits	$ 482,189	$ 479,606
Interest bearing deposits	2,256,585	2,066,462
Total deposits	2,738,774	2,546,068

Short-term borrowings
Federal funds purchased	8,000	11,000
Securities sold under agreements to repurchase	81,361	104,876
Other short-term borrowings	25,000	146,000
Total short-term borrowings	114,361	261,876

Long-term borrowings	35	37
Subordinated debentures	30,928	30,928
Accrued interest payable	2,938	2,918
Other liabilities	14,597	11,973
Total liabilities	2,901,633	2,853,800

STOCKHOLDERS' EQUITY
Common stock: 90,000,000 shares authorized, no par value
16,533,617 shares issued and 16,433,341 outstanding as of March 31, 2014
16,475,716 shares issued and 16,377,449 outstanding as of December 31, 2013	93,789	93,249
Retained earnings	239,889	233,108
Accumulated other comprehensive income (loss)	454	(2,494)
Treasury stock, at cost (2014 - 100,276 shares, 2013 - 98,267 shares)	(2,130)	(1,988)
Total stockholders' equity	332,002	321,875
Noncontrolling interest	89	89
Total equity	332,091	321,964
Total liabilities and equity	$ 3,233,724	$ 3,175,764

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

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~For the Three Months and Nine Months Ended September 30, 2013 and 2012~~

~~(in thousands)~~

~~(Unaudited)~~

Three months ended September 30, Nine months ended September 30,
2013 2012 2013 2012
Net income $            9,769 $            9,347 $          28,251 $          26,792
Other comprehensive income (loss)
Change in securities available for sale:
Unrealized holding gain (loss) on securities available for sale
  arising during the period               (1,242)                  (251)             (11,642)                   818
Reclassification adjustment for (gains) losses included in net income (106) 380 (107) 377
Reclassification adjustment for other than temporary impairment 0                     67 0                1,026
Net securities gain (loss) activity during the period               (1,348)                   196             (11,749)                2,221
Tax effect                   484                    (76)                4,589                  (880)
Net of tax amount                  (864)                   120               (7,160)                1,341
Defined benefit pension plans:
Net gain (loss) on defined benefit pension plans 0 0                  (151) 110
Amortization of net actuarial loss                     62                     55                   183                   164
Net gain activity during the period                     62 55                     32 274
Tax effect                    (25)                    (22)                    (13)                  (110)
Net of tax amount                     37                     33                     19                   164

Total other comprehensive income (loss), net of tax                  (827)                   153               (7,141)                1,505

Comprehensive income $            8,942 $            9,500 $          21,110 $          28,297

CONSOLIDATED STATEMENTS OF INCOME (unaudited - in thousands except share and per share data)
	Three Months Ended
	March 31,
	2014	2013
NET INTEREST INCOME
Interest and fees on loans
Taxable	$ 25,334	$ 24,486
Tax exempt	98	102
Interest and dividends on securities
Taxable	2,011	945
Tax exempt	819	735
Interest on short-term investments	8	24
Total interest income	28,270	26,292

Interest on deposits	3,187	4,637
Interest on borrowings
Short-term	151	91
Long-term	252	307
Total interest expense	3,590	5,035

NET INTEREST INCOME	24,680	21,257

Provision for loan losses	0	0

NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES	24,680	21,257

NONINTEREST INCOME
Wealth advisory fees	1,039	944
Investment brokerage fees	1,117	949
Service charges on deposit accounts	2,151	1,971
Loan, insurance and service fees	1,458	1,456
Merchant card fee income	350	276
Bank owned life insurance income	372	393
Other income	875	982
Mortgage banking income	65	509
Net securities gains	0	1
Total noninterest income	7,427	7,481

NONINTEREST EXPENSE
Salaries and employee benefits	9,987	9,165
Net occupancy expense	1,110	846
Equipment costs	773	609
Data processing fees and supplies	1,491	1,293
Corporate and business development	416	406
FDIC insurance and other regulatory fees	477	463
Professional fees	800	595
Other expense	1,736	1,516
Total noninterest expense	16,790	14,893

INCOME BEFORE INCOME TAX EXPENSE	15,317	13,845
Income tax expense	5,405	4,599
NET INCOME	$ 9,912	$ 9,246

BASIC WEIGHTED AVERAGE COMMON SHARES	16,513,645	16,408,710
BASIC EARNINGS PER COMMON SHARE	$ 0.60	$ 0.56
DILUTED WEIGHTED AVERAGE COMMON SHARES	16,713,853	16,527,171
DILUTED EARNINGS PER COMMON SHARE	$ 0.59	$ 0.56

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

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~For the Nine Months Ended September 30, 2013 and 2012~~

~~(in thousands except for share and per share data)~~

~~(Unaudited~~)

Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
Stock Earnings Income (Loss) Stock Equity

Balance at January 1, 2012 $           87,380 $         181,903 $                    5,139 $           (1,222) $          273,200
  Net income               26,792                26,792
Other comprehensive income (loss), net of tax                        1,505                  1,505
  Common stock cash dividends declared, $0.495 per share                (8,080)                (8,080)
  Treasury shares purchased under deferred directors' plan
    (14,741 shares)                    391                  (391)                         0
  Stock activity under stock compensation plans (129,228 shares)                    323                     323
  Stock compensation expense                 1,161                  1,161
Balance at September 30, 2012 $           89,255 $         200,615 $                    6,644 $           (1,613) $          294,901

Balance at January 1, 2013 $           90,039 $         203,654 $                    5,689 $           (1,643) $          297,739
  Net income               28,251                28,251
Other comprehensive income (loss), net of tax                       (7,141)                (7,141)
  Common stock cash dividends declared, $0.38 per share                (6,257)                (6,257)
  Treasury shares purchased under deferred directors' plan
    (13,652 shares)                    381                  (381)                         0
  Treasury stock sold and distributed under deferred directors' plan
    (3,018 shares)                    (54)                      54                         0
  Stock activity under stock compensation plans, net of taxes (81,909 shares)                    498                     498
  Stock compensation expense                 1,365                  1,365
Balance at September 30, 2013 $           92,229 $         225,648 $                   (1,452) $           (1,970) $          314,455

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

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~For the Nine Months Ended September 30, 2013 and 2012~~

~~(in thousands)~~

~~(Unaudited)~~

~~(Page 1 of 2)~~

2013 2012
Cash flows from operating activities:
Net income $            28,251 $            26,792
Adjustments to reconcile net income to net cash from operating
      activities:
  Depreciation                  2,174                  2,029
  Provision for loan losses                         0                  1,299
  Loss on sale and write down of other real estate owned                         8                     214
  Amortization of intangible assets                       35                       39
  Amortization of loan servicing rights                     453                     541
  Net change in loan servicing rights valuation allowance                     (39)                       84
  Loans originated for sale              (68,378)              (89,595)
  Net gain on sales of loans                (2,193)                (1,926)
  Proceeds from sale of loans                78,221                87,180
  Net loss on sales of premises and equipment                       12                         4
  Net (gain) loss  on sales and calls of securities available for sale                   (107)                     377
  Impairment on available for sale securities                         0                  1,026
  Net securities amortization                  7,097                  5,210
  Stock compensation expense                  1,365                  1,161
  Earnings on life insurance                (1,168)                   (708)
  Tax benefit of stock option exercises                     (77)                   (535)
  Net change:
    Accrued income receivable                     158                   (123)
    Accrued expenses payable                (2,536)                  2,027
    Other assets                  5,740                  2,322
    Other liabilities                  1,168                   (615)
      Total adjustments                21,933                10,011
        Net cash from operating activities                50,184                36,803

Cash flows from investing activities:
  Proceeds from sale of securities available for sale                29,996                27,492
  Proceeds from maturities, calls and principal paydowns of
    securities available for sale                97,229                82,499
  Purchases of securities available for sale            (142,011)            (128,249)
  Purchase of life insurance                   (117)                   (210)
  Net (increase) decrease in total loans            (136,944)                27,238
  Proceeds from sales of land, premises and equipment                         1                         2
  Purchases of land, premises and equipment                (5,861)                (2,268)
  Proceeds from sales of other real estate                     621                  1,698
        Net cash from investing activities            (157,086)                  8,202

~~(Continued)~~

~~LAKELAND FINANCIAL CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~For the Nine Months Ended September 30, 2013 and 2012~~

~~(in thousands)~~

~~(Unaudited)~~

~~(Page 2 of 2)~~

2013 2012
Cash flows from financing activities:
  Net increase (decrease) in total deposits            (136,930)                63,401
  Net increase (decrease) in short-term borrowings              114,076              (23,438)
  Payments on long-term borrowings              (15,001)                       (2)
  Common dividends paid                (6,244)                (8,067)
  Preferred dividends paid                     (13)                     (13)
  Proceeds from stock option exercise                     498                     323
  Purchase of treasury stock                   (381)                   (391)
        Net cash from financing activities              (43,995)                31,813
Net change in cash and cash equivalents            (150,897)                76,818
Cash and cash equivalents at beginning of the period              232,237              104,584
Cash and cash equivalents at end of the period $            81,340 $          181,402
Cash paid during the period for:
    Interest $            14,673 $            19,937
    Income taxes                13,180                11,028
Supplemental non-cash disclosures:
    Loans transferred to other real estate                     108                     296

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited - in thousands)
			Three months ended March 31,
			2014	2013
Net income			$ 9,912	$ 9,246
Other comprehensive income
	Change in securities available for sale:
		Unrealized holding gain (loss) on securities available for sale
		arising during the period	4,791	(1,040)
		Reclassification adjustment for (gains) losses included in net income	0	(1)
		Net securities gain (loss) activity during the period	4,791	(1,041)
		Tax effect	(1,904)	397
		Net of tax amount	2,887	(644)
	Defined benefit pension plans:
		Net gain (loss) on defined benefit pension plans	64	(151)
		Amortization of net actuarial loss	49	55
		Net gain (loss) activity during the period	113	(96)
		Tax effect	(52)	39
		Net of tax amount	61	(57)
		Total other comprehensive income (loss), net of tax	2,948	(701)
Comprehensive income			$ 12,860	$ 8,545

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

~~LAKELAND FINANCIAL CORPORATION~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2013~~

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

~~(Unaudited)~~

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited - in thousands except share and per share data)
				Accumulated
				Other		Total
	Common Stock		Retained	Comprehensive	Treasury	Stockholders'
	Shares	Stock	Earnings	Income (Loss)	Stock	Equity


Balance at January 1, 2013	16,290,136	$ 90,039	$ 203,654	$ 5,689	$ (1,643)	$ 297,739
Comprehensive income:
Net income			9,246			9,246
Other comprehensive income (loss), net of tax				(701)		(701)
Treasury shares purchased under deferred
directors' plan	(6,466)	173			(173)	0
Treasury stock sold and distributed under deferred
directors' plan	3,018	(54)			54
Stock activity under equity incentive plans	47,234	(138)				(138)
Stock based compensation expense		439				439
Balance at March 31, 2013	16,333,922	$ 90,459	$ 212,900	$ 4,988	$ (1,762)	$ 306,585

Balance at January 1, 2014	16,377,449	$ 93,249	$ 233,108	$ (2,494)	$ (1,988)	$ 321,875
Comprehensive income:
Net income			9,912			9,912
Other comprehensive income (loss), net of tax				2,948		2,948
Cash dividends declared, $0.19 per share			(3,131)			�� (3,131)
Treasury shares purchased under deferred
directors' plan	(5,446)	209			(209)	0
Treasury stock sold and distributed under deferred
directors' plan	3,437	(67)			67	0
Stock activity under equity incentive plans	57,901	(199)				(199)
Stock based compensation expense		597				597
Balance at March 31, 2014	16,433,341	$ 93,789	$ 239,889	$ 454	$ (2,130)	$ 332,002

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited - in thousands)
Three Months Ended March 31,	2014	2013
Cash flows from operating activities:
Net income	$ 9,912	$ 9,246
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation	830	679
Loss on sale and write down of other real estate owned	1	0
Amortization of intangible assets	0	12
Amortization of loan servicing rights	130	168
Net change in loan servicing rights valuation allowance	0	(37)
Loans originated for sale	(7,035)	(29,409)
Net gain on sales of loans	(192)	(1,021)
Proceeds from sale of loans	6,892	32,949
Net gain on sales and calls of securities available for sale	0	(1)
Net securities amortization	1,490	2,720
Stock based compensation expense	597	439
Earnings on life insurance	(372)	(383)
Tax benefit of stock option exercises	(13)	(14)
Net change:
Interest receivable and other assets	(299)	(1,005)
Interest payable and other liabilities	2,953	8,765
Total adjustments	4,982	13,862
Net cash from operating activities	14,894	23,108
Cash flows from investing activities:
Proceeds from maturities, calls and principal paydowns of
securities available for sale	14,277	38,293
Purchases of securities available for sale	(13,457)	(57,736)
Purchase of life insurance	(86)	(79)
Loans sold or participated to others	4,836	0
Net increase in total loans	(47,325)	(5,567)
Purchases of land, premises and equipment	(1,070)	(341)
Proceeds from sales of other real estate owned	13	0
Distribution from life insurance	302	0
Net cash from investing activities	(42,510)	(25,430)
Cash flows from financing activities:
Net increase (decrease) in total deposits	192,706	(130,568)
Net decrease in short-term borrowings	(147,515)	(8,368)
Payments on long-term borrowings	(2)	(15,001)
Common dividends paid	(3,131)	0
Payments related to equity incentive plans	(199)	(138)
Purchase of treasury stock	(209)	(173)
Net cash from financing activities	41,650	(154,248)
Net change in cash and cash equivalents	14,034	(156,570)
Cash and cash equivalents at beginning of the period	63,105	232,237
Cash and cash equivalents at end of the period	$ 77,139	$ 75,667
Cash paid during the period for:
Interest	$ 3,570	$ 5,232
Income taxes	465	0
Supplemental non-cash disclosures:
Loans transferred to other real estate owned	737	0
Securities purchases payable	0	5,216

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

NOTE 1. BASIS OF PRESENTATION

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

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and are unaudited. In the opinion of management, all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included. Operating results for the three-month ~~and nine-month periods~~period ending ~~September 30, 2013~~March 31, 2014 are not necessarily indicative of the results that may be expected for any subsequent reporting periods, including the year ending December 31, ~~2013.~~2014. The ~~2012~~2013 Lakeland Financial Corporation Annual Report on Form 10-K should be read in conjunction with these statements.

NOTE 2. SECURITIES

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

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
(dollars in thousands)	Cost	Gain	Losses	Value
March 31, 2014
U.S. Treasury securities	$ 1,000	$ 11	$ 0	$ 1,011
Agency residential mortgage-backed securities	372,570	6,203	(5,349)	373,424
State and municipal securities	95,121	3,103	(1,210)	97,014
Total	$ 468,691	$ 9,317	$ (6,559)	$ 471,449

December 31, 2013
U.S. Treasury securities	$ 1,001	$ 16	$ 0	$ 1,017
Agency residential mortgage-backed securities	374,611	5,301	(7,935)	371,977
State and municipal securities	95,388	2,597	(2,012)	95,973
Total	$ 471,000	$ 7,914	$ (9,947)	$ 468,967

There was no other than temporary impairment recognized in accumulated other comprehensive income (loss) for securities available for sale at March 31, 2014 and December 31, 2013.

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of March 31, 2014 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.

	Amortized	Fair
(dollars in thousands)	Cost	Value
Due in one year or less	$ 4,168	$ 4,201
Due after one year through five years	17,443	18,468
Due after five years through ten years	43,033	44,208
Due after ten years	31,477	31,148
	96,121	98,025
Mortgage-backed securities	372,570	373,424
Total debt securities	$ 468,691	$ 471,449

There were no securities sales during the first three months of 2014 or 2013. All the gains in 2013 were from calls.

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

Securities with carrying values of $238.9 million and $192.4 million were pledged as of March 31, 2014 and 2013, as collateral for deposits of public funds, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of March 31, 2014 and December 31, 2013 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	Value	Losses	Value	Losses	Value	Losses
March 31, 2014
Agency residential mortgage-backed
securities	$ 147,322	$ (3,847)	$ 27,140	$ (1,502)	$ 174,462	$ (5,349)
State and municipal securities	13,167	(432)	10,695	(778)	23,862	(1,210)
Total temporarily impaired	$ 160,489	$ (4,279)	$ 37,835	$ (2,280)	$ 198,324	$ (6,559)

December 31, 2013
Agency residential mortgage-backed
securities	$ 177,779	$ (6,444)	$ 34,093	$ (1,491)	$ 211,872	$ (7,935)
State and municipal securities	24,610	(1,102)	8,037	(910)	32,647	(2,012)
Total temporarily impaired	$ 202,389	$ (7,546)	$ 42,130	$ (2,401)	$ 244,519	$ (9,947)

The total number of securities with unrealized losses as of March 31, 2014 and December 31, 2013 is presented below.

	Less than	12 months
	12 months	or more	Total
March 31, 2014
Agency residential mortgage-backed securities	43	8	51
State and municipal securities	34	18	52
Total temporarily impaired	77	26	103

	Less than	12 months
	12 months	or more	Total
December 31, 2013
Agency residential mortgage-backed securities	49	10	59
State and municipal securities	59	12	71
Total temporarily impaired	108	22	130

The following factors are considered in determining whether or not the impairment of these securities is other-than-temporary. In making this determination, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. Credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. Ninety-nine percent of the securities are backed by the U.S. government, government agencies, government sponsored agencies or are A-rated or better, except for certain non-local or local municipal securities, which are not rated. For the government, government-sponsored agency and municipal securities, management did not have concerns of credit losses and there was nothing to indicate that full principal would not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that it will not be required to sell these securities before the recovery of their amortized cost basis.

NOTE 3. LOANS

	March 31,			December 31,
(dollars in thousands)	2014			2013
Commercial and industrial loans:
Working capital lines of credit loans	$ 476,818	18.5	%	$ 457,690	18.0	%
Non-working capital loans	467,679	18.2		443,877	17.5
Total commercial and industrial loans	944,497	36.7		901,567	35.6

Commercial real estate and multi-family residential loans:
Construction and land development loans	144,978	5.6		157,630	6.2
Owner occupied loans	388,052	15.1		370,386	14.6
Nonowner occupied loans	424,143	16.5		394,748	15.6
Multifamily loans	57,882	2.2		63,443	2.5
Total commercial real estate and multi-family residential loans	1,015,055	39.4		986,207	38.9

Agri-business and agricultural loans:
Loans secured by farmland	109,260	4.2		133,458	5.3
Loans for agricultural production	104,384	4.1		120,571	4.8
Total agri-business and agricultural loans	213,644	8.3		254,029	10.0

Other commercial loans	77,324	3.0		70,770	2.8
Total commercial loans	2,250,520	87.4		2,212,573	87.3

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	135,111	5.3		125,444	4.9
Open end and junior lien loans	139,185	5.4		146,946	5.8
Residential construction and land development loans	5,658	0.2		4,640	0.2
Total consumer 1-4 family mortgage loans	279,954	10.9		277,030	10.9

Other consumer loans	44,319	1.7		46,125	1.8
Total consumer loans	324,273	12.6		323,155	12.7
Subtotal	2,574,793	100.0	%	2,535,728	100.0	%
Less: Allowance for loan losses	(46,137)			(48,797)
Net deferred loan fees	(603)			(630)
Loans, net	$ 2,528,053			$ 2,486,301

~~NOTE 2. EARNINGS PER SHARE~~

Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, stock awards and warrants.

Three Months Ended September 30, Nine Months Ended September 30,
2013 2012 2013 2012
Weighted average shares outstanding for basic earnings per common share         16,451,199         16,340,425         16,427,060         16,312,896
Dilutive effect of stock options, awards and warrants             183,734             149,965             154,029             157,589
Weighted average shares outstanding for diluted earnings per common share         16,634,933         16,490,390         16,581,089         16,470,485

Basic earnings per common share $              0.59 $              0.57 $              1.72 $              1.64
Diluted earnings per common share $              0.59 $              0.57 $              1.70 $              1.63

~~NOTE 3. LOANS~~

September 30, December 31,
2013 2012
Commercial and industrial loans:
  Working capital lines of credit loans $   462,098    19.3 % $   439,638    19.5 %
  Non-working capital loans       435,968    18.2       407,184    18.0
    Total commercial and industrial loans       898,066    37.5       846,822    37.5

Commercial real estate and multi-family residential loans:
  Construction and land development loans       117,733      4.9        82,494      3.7
  Owner occupied loans       371,500    15.5       358,617    15.9
  Nonowner occupied loans       392,538    16.4       314,889    13.9
  Multifamily loans        37,279      1.6        45,011      2.0
    Total commercial real estate and multi-family residential loans       919,050    38.4       801,011    35.5

Agri-business and agricultural loans:
  Loans secured by farmland 104,807      4.4 109,147      4.8
  Loans for agricultural production 95,330      4.0 115,572      5.1
    Total agri-business and agricultural loans 200,137      8.4 224,719    10.0

Other commercial loans        55,797      2.3        56,807      2.5
  Total commercial loans    2,073,050    86.6    1,929,359    85.5

Consumer 1-4 family mortgage loans:
  Closed end first mortgage loans       119,788      5.0       109,823      4.9
  Open end and junior lien loans       151,726      6.3       161,366      7.1
  Residential construction and land development loans          4,705      0.2        11,541      0.5
  Total consumer 1-4 family mortgage loans       276,219    11.5       282,730    12.5

Other consumer loans        44,091      1.8        45,755      2.0
  Total consumer loans       320,310    13.4       328,485    14.5
  Subtotal    2,393,360 100.0 %    2,257,844 100.0 %
Less:  Allowance for loan losses       (49,804)       (51,445)
           Net deferred loan fees            (645)            (324)
Loans, net $2,342,911 $2,206,075

NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following ~~table presents~~tables present the activity in the allowance for loan losses by portfolio segment for the three-month ~~and nine-month~~ periods ended ~~September 30, 2013,~~March 31, 2014 and 2013:

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
March 31, 2014
Beginning balance	$ 21,005	$ 18,556	$ 1,682	$ 391	$ 3,046	$ 608	$ 3,509	$ 48,797
Provision for loan losses	720	(388)	(279)	(142)	132	(23)	(20)	0
Loans charged-off	(30)	(2,531)	0	0	(115)	(75)	0	(2,751)
Recoveries	35	11	5	0	1	39	0	91
Net loans charged-off	5	(2,520)	5	0	(114)	(36)	0	(2,660)
Ending balance	$ 21,730	$ 15,648	$ 1,408	$ 249	$ 3,064	$ 549	$ 3,489	$ 46,137

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
March 31, 2013
Beginning balance	$ 22,342	$ 20,812	$ 1,403	$ 240	$ 2,682	$ 609	$ 3,357	$ 51,445
Provision for loan losses	(359)	253	(142)	(17)	270	(23)	18	0
Loans charged-off	(133)	(906)	0	0	(108)	(59)	0	(1,206)
Recoveries	263	261	2	0	22	31	0	579
Net loans charged-off	130	(645)	2	0	(86)	(28)	0	(627)
Ending balance	$ 22,113	$ 20,420	$ 1,263	$ 223	$ 2,866	$ 558	$ 3,375	$ 50,818

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of ~~September 30,~~March 31, 2014 and December 31, 2013:

Commercial
Real Estate Consumer
Commercial and Multifamily Agri-business Other 1-4 Family Other
and Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Total
Three Months Ended September 30, 2013
Balance July 1, $               21,879 $               20,098 $                 1,517 $                    264 $                 2,823 $                    587 $                 3,467 $               50,635
  Provision for loan losses 138 (544) (185) (23) 409 179 26 0
  Loans charged-off (595) (455) 0 0 (126) (120) 0 (1,296)
  Recoveries 75 73 201 0 71 45 0 465
    Net loans charged-off (520) (382) 201 0 (55) (75) 0 (831)
Balance September 30, $               21,497 $               19,172 $                 1,533 $                    241 $                 3,177 $                    691 $                 3,493 $               49,804
Nine Months Ended September 30, 2013
Balance January 1, $               22,342 $               20,812 $                 1,403 $                    240 $                 2,682 $                    609 $                 3,357 $               51,445
  Provision for loan losses (569) (627) 125 1 709 225 136 0
  Loans charged-off (738) (1,361) (200) 0 (315) (257) 0 (2,871)
  Recoveries 462 348 205 0 101 114 0 1,230
    Net loans charged-off (276) (1,013) 5 0 (214) (143) 0 (1,641)
Balance September 30, $               21,497 $               19,172 $ ��               1,533 $                    241 $                 3,177 $                    691 $                 3,493 $               49,804

Allowance for loan losses:
  Ending allowance balance attributable to loans:
    Individually evaluated for impairment $                 4,345 $                 5,731 $                      45 $                        0 $                    390 $                      32 $                        0 $               10,543
    Collectively evaluated for impairment 17,152 13,441 1,488 241 2,787 659 3,493 39,261

Total ending allowance balance $               21,497 $               19,172 $                 1,533 $                    241 $                 3,177 $                    691 $                 3,493 $               49,804

Loans:
  Loans individually evaluated for impairment $               16,493 $               26,127 $                 1,147 $                        0 $                 3,494 $                      97 $                        0 $               47,358
  Loans collectively evaluated for impairment 881,826 891,635 199,091 55,792 273,067 43,946 0 2,345,357

Total ending loans balance $             898,319 $             917,762 $             200,238 $               55,792 $             276,561 $               44,043 $                        0 $          2,392,715

~~The recorded investment in loans does not include accrued interest.~~

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
March 31, 2014
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$ 3,521	$ 2,002	$ 26	$ 0	$ 500	$ 33	$ 0	$ 6,082
Collectively evaluated for impairment	18,209	13,646	1,382	249	2,564	516	3,489	40,055
Total ending allowance balance	$ 21,730	$ 15,648	$ 1,408	$ 249	$ 3,064	$ 549	$ 3,489	$ 46,137

Loans:
Loans individually evaluated for impairment	$ 16,458	$ 12,753	$ 875	$ 0	$ 3,934	$ 91	$ 0	$ 34,111
Loans collectively evaluated for impairment	928,325	1,000,956	212,865	77,322	276,429	44,182	0	2,540,079
Total ending loans balance	$ 944,783	$ 1,013,709	$ 213,740	$ 77,322	$ 280,363	$ 44,273	$ 0	$ 2,574,190

~~The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month and nine-month periods ended September 30, 2012:~~


		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
December 31, 2013
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$ 4,144	$ 4,598	$ 38	$ 0	$ 479	$ 57	$ 0	$ 9,316
Collectively evaluated for impairment	16,861	13,959	1,644	391	2,566	551	3,509	39,481
Total ending allowance balance	$ 21,005	$ 18,557	$ 1,682	$ 391	$ 3,045	$ 608	$ 3,509	$ 48,797

Loans:
Loans individually evaluated for impairment	$ 16,196	$ 22,204	$ 1,114	$ 0	$ 3,594	$ 119	$ 0	$ 43,227
Loans collectively evaluated for impairment	885,651	962,673	253,011	70,766	273,812	45,958	0	2,491,871
Total ending loans balance	$ 901,847	$ 984,877	$ 254,125	$ 70,766	$ 277,406	$ 46,077	$ 0	$ 2,535,098

The recorded investment in loans does not include accrued interest.

The following table presents ~~the balance in the allowance~~loans individually evaluated for ~~loan losses and the recorded investment in~~impairment by class of loans ~~by portfolio segment and based on impairment method~~ as of ~~December~~March 31, ~~2012:~~2014:

Commercial
Real Estate Consumer
Commercial and Multifamily Agri-business Other 1-4 Family Other
and Industrial Residential and Agricultural Commercial Mortgage Consumer Unallocated Total
Allowance for loan losses:
  Ending allowance balance attributable to loans:
    Individually evaluated for impairment $                 5,542 $                 8,559 $                      63 $                        0 $                    607 $                      34 $                        0 $               14,805
    Collectively evaluated for impairment 16,800 12,253 1,340 240 2,075 575 3,357 36,640

Total ending allowance balance $               22,342 $               20,812 $                 1,403 $                    240 $                 2,682 $                    609 $                 3,357 $               51,445

Loans:
  Loans individually evaluated for impairment $               18,281 $               36,919 $                    797 $                        0 $                 2,853 $                      92 $                        0 $               58,942
  Loans collectively evaluated for impairment 828,728 763,279 224,008 56,810 280,141 45,612 0 2,198,578

Total ending loans balance $             847,009 $             800,198 $             224,805 $               56,810 $             282,994 $               45,704 $                        0 $          2,257,520

	Unpaid		Allowance for
	Principal	Recorded	Loan Losses
(dollars in thousands)	Balance	Investment	Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$ 112	$ 111	$ 0
Commercial real estate and multi-family residential loans:
Owner occupied loans	505	285	0
Nonowner occupied loans	352	352	0
Agri-business and agricultural loans:
Loans secured by farmland	381	382	0
Consumer 1-4 family loans:
Closed end first mortgage loans	688	689	0
Open end and junior lien loans	74	74	0
Residential construction loans	144	145	0
Other consumer loans	1	1	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	2,015	2,014	640
Non-working capital loans	17,890	14,333	2,881
Commercial real estate and multi-family residential loans:
Construction and land development loans	2,665	2,664	726
Owner occupied loans	2,127	2,105	448
Nonowner occupied loans	7,979	7,347	828
Agri-business and agricultural loans:
Loans secured by farmland	992	493	26
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	3,057	2,926	497
Open end and junior lien loans	101	100	3
Other consumer loans	90	90	33
Total	$ 39,173	$ 34,111	$ 6,082

The recorded investment in loans does not include accrued interest.

The ~~allowance~~following table presents loans individually evaluated for ~~loan losses to total~~impairment by class of loans ~~at September 30, 2013 and 2012 was 2.08% and 2.36%, respectively. The allowance for loan losses to total loans at~~as of December 31, ~~2012 was 2.28%.~~2013:

	Unpaid		Allowance for
	Principal	Recorded	Loan Losses
(dollars in thousands)	Balance	Investment	Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$ 63	$ 63	$ 0
Commercial real estate and multi-family residential loans:
Owner occupied loans	377	196	0
Agri-business and agricultural loans:
Loans secured by farmland	604	604	0
Other commercial loans
Consumer 1-4 family loans:
Closed end first mortgage loans	688	689	0
Open end and junior lien loans	81	81	0
Residential construction loans	150	150	0
Other consumer loans	1	1	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	5,251	2,641	984
Non-working capital loans	15,345	13,492	3,160
Commercial real estate and multi-family residential loans:
Construction and land development loans	2,795	2,795	585
Owner occupied loans	5,553	4,681	723
Nonowner occupied loans	15,163	14,532	3,290
Agri-business and agricultural loans:
Loans secured by farmland	1,008	510	38
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	3,469	2,463	442
Open end and junior lien loans	211	211	37
Other consumer loans	118	118	57
Total	$ 50,877	$ 43,227	$ 9,316

The recorded investment in loans does not include accrued interest.

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014:

			Cash Basis
	Average	Interest	Interest
	Recorded	Income	Income
(dollars in thousands)	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$ 112	$ 1	$ 0
Commercial real estate and multi-family residential loans:
Owner occupied loans	318	0	0
Nonowner occupied loans	355	0	0
Agri-business and agricultural loans:
Loans secured by farmland	393	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	689	0	0
Open end and junior lien loans	68	0	0
Residential construction loans	147	0	0
Other consumer loans	1	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	2,450	12	13
Non-working capital loans	13,783	126	126
Commercial real estate and multi-family residential loans:
Construction and land development loans	2,631	15	15
Owner occupied loans	3,710	13	14
Nonowner occupied loans	11,834	34	34
Agri-business and agricultural loans:
Loans secured by farmland	501	0	0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	2,933	16	19
Open end and junior lien loans	117	0	0
Other consumer loans	92	0	0
Total	$ 40,134	$ 217	$ 221

The recorded investment in loans does not include accrued interest.

The following table presents loans individually evaluated for impairment by class of loans as of ~~and for the three-month and nine-month periods ended September 30,~~March 31, 2013:

Three Months Ended September 30, 2013 Nine Months Ended September 30, 2013
Cash Basis Cash Basis
Unpaid Allowance for Average Interest Interest Average Interest Interest
Principal Recorded Loan Losses Recorded Income Income Recorded Income Income
Balance Investment Allocated Investment Recognized Recognized Investment Recognized Recognized
With no related allowance recorded:
  Commercial and industrial loans:
    Working capital lines of credit loans $                      64 $                      64 $                        0 $                      64 $                        0 $                        0 $                      65 $                        0 $                        0
    Non-working capital loans 0 0 0 0 0 0 11 0 0

  Commercial real estate and multi-family residential loans:
    Owner occupied loans 1,072 476 0 616 0 0 575 0 0

  Agri-business and agricultural loans:
    Loans secured by farmland 612 613 0 479 0 0 480 0 0

  Consumer 1-4 family loans:
    Closed end first mortgage loans 1,158 1,054 0 719 0 0 275 0 0
    Open end and junior lien loans 41 41 0 27 0 0 23 0 0

  Other consumer loans 1 1 0 1 0 0 1 0 0

With an allowance recorded:
  Commercial and industrial loans:
    Working capital lines of credit loans 5,196 2,587 1,024 2,988 12 14 3,019 39 41
    Non-working capital loans 15,695 13,842 3,321 14,017 120 126 14,081 391 402

  Commercial real estate and multi-family residential loans:
    Construction and land development loans 2,569 2,569 595 2,848 11 20 3,860 63 67
    Owner occupied loans 3,946 3,906 505 3,707 20 20 3,592 88 96
    Nonowner occupied loans 19,166 19,176 4,631 19,183 87 86 20,960 255 258
    Multifamily loans 0 0 0 0 0 0 64 0 0

  Agri-business and agricultural loans:
    Loans secured by farmland 1,033 534 45 536 0 0 418 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 3,355 2,384 385 2,347 5 6 2,461 28 43
    Open end and junior lien loans 15 15 5 22 0 0 40 0 0

  Other consumer loans 96 96 32 99 0 0 86 1 1

Total $               54,019 $           ��   47,358 $               10,543 $               47,653 $                    255 $                    272 $               50,010 $                    865 $                    908

~~The recorded investment in loans does not include accrued interest.~~

~~The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month and nine-month periods ended September 30, 2012:~~

Three Months Ended September 30, 2012 Nine Months Ended September 30, 2012
Cash Basis Cash Basis
Unpaid Allowance for Average Interest Interest Average Interest Interest
Principal Recorded Loan Losses Recorded Income Income Recorded Income Income
Balance Investment Allocated Investment Recognized Recognized Investment Recognized Recognized
With no related allowance recorded:
  Commercial and industrial loans:
    Non-working capital loans $                      70 $                      70 $                        0 $                      70 $                        0 $                        0 $                    136 $                        0 $                        0

  Commercial real estate and multi-family residential loans:
    Owner occupied loans 781 601 0 611 0 0 513 0 0
    Nonowner occupied loans 385 385 0 385 10 13 217 10 13

  Agri-business and agricultural loans:
    Loans secured by farmland 666 487 0 489 0 0 252 0 0
    Loans for ag production 0 0 0 0 0 0 68 0 0

  Consumer 1-4 family loans:
    Closed end first mortgage loans 277 276 0 417 1 0 432 1 0
    Open end and junior lien loans 0 0 0 0 0 0 20 0 0

  Other consumer loans 1 1 0 0 0 0 0 0 0

With an allowance recorded:
  Commercial and industrial loans:
    Working capital lines of credit loans 5,915 3,074 1,417 3,059 13 10 4,420 42 38
    Non-working capital loans 19,357 17,175 5,154 17,072 171 168 17,353 528 528

  Commercial real estate and multi-family residential loans:
    Construction and land development loans 3,786 3,396 672 2,436 18 13 1,814 35 30
    Owner occupied loans 6,900 6,287 1,527 5,702 30 19 4,859 48 35
    Nonowner occupied loans 27,957 27,255 6,670 27,382 78 77 28,115 280 281

  Agri-business and agricultural loans:
    Loans secured by farmland 654 333 67 343 0 0 437 0 0
    Loans for agricultural production 0 0 0 63 0 0 91 0 0

  Other commercial loans 0 0 0 0 0 0 0 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 1,562 1,564 267 1,730 12 10 1,787 32 32
    Open end and junior lien loans 354 354 192 353 0 0 340 0 0

  Other consumer loans 45 45 18 30 1 1 14 1 1

Total $               68,710 $               61,303 $               15,984 $               60,142 $                    334 $                    311 $               60,866 $                    977 $                    958

~~The recorded investment in loans does not include accrued interest.~~

~~The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012:~~

Unpaid Allowance for
Principal Recorded Loan Losses
Balance Investment Allocated
With no related allowance recorded:
  Commercial and industrial loans:
    Working capital lines of credit loans $                      61 $                      61 $                        0
    Non-working capital loans 0 0 0
  Commercial real estate and multi-family residential loans:
    Construction and land development loans
    Owner occupied loans 754 574 0
    Nonowner occupied loans 385 385 0
    Multifamily loans 410 286 0
  Agri-business and agricultural loans:
    Loans secured by farmland 645 466 0
    Loans for ag production 0 0 0
  Other commercial loans 0 0 0

  Consumer 1-4 family loans:
    Closed end first mortgage loans 59 59 0
    Open end and junior lien loans 41 41 0
    Residential construction loans

  Other consumer loans 1 1 0

With an allowance recorded:
  Commercial and industrial loans:
    Working capital lines of credit loans 5,833 3,224 1,516
    Non-working capital loans 16,763 14,996 4,026
  Commercial real estate and multi-family residential loans:
    Construction and land development loans 3,352 2,960 934
    Owner occupied loans 5,869 5,869 1,476
    Nonowner occupied loans 26,835 26,845 6,149
    Multifamily loans 0 0 0
  Agri-business and agricultural loans:
    Loans secured by farmland 651 331 63
    Loans for agricultural production 0 0 0
  Other commercial loans 0 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 3,387 2,403 415
    Open end and junior lien loans 379 350 192
    Residential construction loans 0 0 0

  Other consumer loans 91 91 34
Total $               65,516 $               58,942 $               14,805

~~The recorded investment in loans does not include accrued interest.~~

~~The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2013 and December 31, 2012:~~

September 30, 2013 December 31, 2012
Loans Past Due Loans Past Due
Over 90 Days Over 90 Days
Still Still
Nonaccrual Accruing Nonaccrual Accruing

  Commercial and industrial loans:
    Working capital lines of credit loans $                 1,765 $                         0 $                 1,899 $                        0
    Non-working capital loans 3,895 0 4,812 50

  Commercial real estate and multi-family residential loans:
    Construction and land development loans 0 0 398 0
    Owner occupied loans 2,646 0 2,461 0
    Nonowner occupied loans 11,633 0 19,200 0
    Multifamily loans 0 0 286 0

  Agri-business and agricultural loans:
    Loans secured by farmland 1,147 0 797 0
    Loans for agricultural production 0 0 0 0

  Other commercial loans 0 0 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 1,607 239 504 0
    Open end and junior lien loans 56 126 391 0
    Residential construction loans 0 0 0 0

  Other consumer loans 83 0 77 0

Total $               22,832 $                     365 $               30,825 $                      50

~~The recorded investment in loans does not include accrued interest.~~

~~The following table presents the aging of the recorded investment in past due loans as of September 30, 2013 by class of loans:~~

	30-89	Greater than						Cash Basis
	Days	90 Days	Total	Loans Not		Average	Interest	Interest
	Past Due	Past Due	Past Due	Past Due	Total	Recorded	Income	Income

(dollars in thousands)						Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$ 596	$ 1,765	$ 2,361	$ 459,989	$ 462,350	$ 65	$ 0	$ 0
Non-working capital loans	872	3,895	4,767	431,202	435,969	34	0	0

Commercial real estate and multi-family residential loans:
Owner occupied loans						566	0	0
Agri-business and agricultural loans:
Loans secured by farmland						521	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans						58	0	0
Open end and junior lien loans						41	0	0
Other consumer loans						1	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans						3,170	13	13
Non-working capital loans						14,412	135	137
Commercial real estate and multi-family residential loans:
Construction and land development loans	0	0	0	117,323	117,323	4,528	45	52
Owner occupied loans	45	2,646	2,691	368,521	371,212	4,300	29	31
Nonowner occupied loans	0	11,633	11,633	380,360	391,993	24,299	84	87
Multifamily loans	0	0	0	37,234	37,234

Agri-business and agricultural loans:
Loans secured by farmland	0	1,147	1,147	103,665	104,812	327	0	0
Loans for agricultural production	90	0	90	95,336	95,426

Other commercial loans	0	0	0	55,792	55,792

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,167	1,846	3,013	116,516	119,529	2,499	0	19
Open end and junior lien loans	233	182	415	151,921	152,336	40	0	0
Residential construction loans	162	0	162	4,534	4,696

Other consumer loans	102	83	185	43,858	44,043	80	0	0

Total	$ 3,267	$ 23,197	$ 26,464	$ 2,366,251	$ 2,392,715	$ 55,132	$ 306	$ 339

The recorded investment in loans does not include accrued interest.

1814

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 by class of loans:

		30-89	Greater than
	Loans Not	Days	90 Days		Total
(dollars in thousands)	Past Due	Past Due	Past Due	Nonaccrual	Past Due	Total
Commercial and industrial loans:
Working capital lines of credit loans	$ 476,355	$ 375	$ 0	$ 343	$ 718	$ 477,073
Non-working capital loans	463,387	9	0	4,314	4,323	467,710
Commercial real estate and multi-family
residential loans:
Construction and land development loans	143,993	0	0	535	535	144,528
Owner occupied loans	385,623	0	0	2,128	2,128	387,751
Nonowner occupied loans	418,671	0	0	4,946	4,946	423,617
Multifamily loans	57,813	0	0	0	0	57,813
Agri-business and agricultural loans:
Loans secured by farmland	108,394	0	0	874	874	109,268
Loans for agricultural production	104,472	0	0	0	0	104,472
Other commercial loans	77,322	0	0	0	0	77,322
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	132,071	1,205	21	1,545	2,771	134,842
Open end and junior lien loans	139,570	127	0	175	302	139,872
Residential construction loans	5,504	0	0	145	145	5,649
Other consumer loans	44,103	92	0	78	170	44,273
Total	$ 2,557,278	$ 1,808	$ 21	$ 15,083	$ 16,912	$ 2,574,190

The recorded investment in loans does not include accrued interest.

The following table presents the aging of the recorded investment in past due loans as of December 31, ~~2012~~2013 by class of loans:

	30-89	Greater than					30-89	Greater than
	Days	90 Days	Total	Loans Not		Loans Not	Days	90 Days		Total
	Past Due	Past Due	Past Due	Past Due	Total

(dollars in thousands)						Past Due	Past Due	Past Due	Nonaccrual	Past Due	Total
Commercial and industrial loans:
Working capital lines of credit loans	$ 233	$ 1,899	$ 2,132	$ 437,705	$ 439,837	$ 456,136	$ 0	$ 0	$ 1,819	$ 1,819	$ 457,955
Non-working capital loans	48	4,862	4,910	402,262	407,172	440,050	46	0	3,796	3,842	443,892

Commercial real estate and multi-family residential loans:
Commercial real estate and multi-family
residential loans:
Construction and land development loans	998	398	1,396	80,954	82,350	156,594	0	0	544	544	157,138
Owner occupied loans	1,023	2,461	3,484	354,921	358,405	366,955	0	0	3,156	3,156	370,111
Nonowner occupied loans	38	19,200	19,238	295,243	314,481	382,478	0	0	11,758	11,758	394,236
Multifamily loans	0	286	286	44,676	44,962	63,392	0	0	0	0	63,392

Agri-business and agricultural loans:
Loans secured by farmland	0	797	797	108,359	109,156	132,347	0	0	1,113	1,113	133,460
Loans for agricultural production	0	0	0	115,649	115,649	120,665	0	0	0	0	120,665

Other commercial loans	0	0	0	56,810	56,810	70,766	0	0	0	0	70,766

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,475	504	1,979	107,583	109,562	122,370	1,645	0	1,165	2,810	125,180
Open end and junior lien loans	361	391	752	161,172	161,924	147,123	135	46	291	472	147,595
Residential construction loans	0	0	0	11,508	11,508	4,481	0	0	150	150	4,631

Other consumer loans	81	77	158	45,546	45,704	45,826	145	0	106	251	46,077

Total	$ 4,257	$ 30,875	$ 35,132	$ 2,222,388	$ 2,257,520	$ 2,509,183	$ 1,971	$ 46	$ 23,898	$ 25,915	$ 2,535,098

The recorded investment in loans does not include accrued interest.

1915

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated ~~$9.8~~$4.8 million and ~~$12.5~~$8.3 million of specific reserves to ~~loans~~customers whose loan terms have been modified in troubled debt restructurings as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012.~~2013. The Company is not committed to ~~lending~~lend additional funds to ~~customers~~debtors whose loans have been modified in a troubled debt restructuring.

	September 30	December 31,	March 31,	December 31,
	2013	2012

(dollars in thousands)			2014	2013
Accruing troubled debt restructured loans	$ 22,888	$ 22,332	$ 16,222	$ 17,714
Nonaccrual troubled debt restructured loans	18,691	28,506	10,721	18,531
Total troubled debt restructured loans	$ 41,579	$ 50,838	$ 26,943	$ 36,245

During the quarter ending ~~June 30, 2013,~~March 31, 2014, certain loans ~~totaling $328,000~~ were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.

During the quarter ending March 31, 2014, there were restructured ~~loans. Concessions granted during~~terms offered to one borrower under financial duress which did not require additional compensation or consideration, and the ~~modifications included reduction in the interest rates to rates that~~terms offered would not behave been readily available in the marketplace for ~~borrowers~~loans bearing similar risk profiles. In this instance, it was determined that a concession had been granted. It is difficult to quantify the concession granted due to an absence of readily available market terms to be used for comparison. The restructure was granted to a borrower engaged in retail sales where the collateral and cash flow did not support the loan with a ~~similar risk profile and/or capitalizing past due interest and other expenses into~~recorded investment of $159,000.

An additional concession was granted to a borrower with a previously restructured loan. The new concession includes further forgiveness of principal if the ~~principal balance~~terms of the restructured loan are met during the life of the loan. ~~The~~This borrower had a recorded investment of $2.7 million as of March 31, 2014, which is not included in the table below since it was not considered a new troubled debt ~~restructured~~restructuring.

The following table presents loans by class modified as troubled debt restructurings that occurred during the ~~quarter were all granted to consumer mortgage borrowers.~~period ending March 31, 2014:


	All Modifications			Modified Repayment Terms
		Pre-Modification	Post-Modification		Extension
		Outstanding	Outstanding		Period or
	Number of	Recorded	Recorded	Number of	Range
(dollars in thousands)	Loans	Investment	Investment	Loans	(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Non-working capital loans	2	$ 433	$ 433	2	12-15
Commercial real estate and multi-
family residential loans:
Owner occupied loans	1	158	159
Total	3	$ 591	$ 592	2	12-15

For the period ending March 31, 2014, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $101,000 and the commercial real estate and multi-family residential loan troubled debt restructuring in the chart above decreased the allowance for loan losses by $6,000.

No charge-offs resulted from any of the troubled debt restructurings described above during the period ending March 31, 2014.

During the quarter ending March 31, 2013, loans totaling ~~$2.2~~$1.8 million were modified as troubled debt restructurings. The modified terms of the loans included reductions in the interest rates to ~~one~~rates that would not be readily available in the marketplace for borrowers with a similar risk profile and modifications of the repayment terms. These restructured loans were provided to related borrowers who are engaged in land development.

~~No loans were modified as troubled debt restructurings during the three month period ended September 30, 2013.~~ The following table presents loans by class modified as troubled debt restructurings that occurred during the ~~nine-month periods~~period ending ~~September 30, 2013~~:March 31, 2013:

Modifications
Nine Months Ended September 30, 2013

All Modifications

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment

Troubled Debt Restructurings

Commercial real estate and multi-family residential loans:
  Construction and land development loans 6 $                 2,198 $                    2,198

Consumer 1-4 family loans:
  Closed end first mortgage loans 4 317 328

Total 10 $                 2,515 $                    2,526

Interest Rate Reductions Principal and Interest Forgiveness Modified Repayment Terms

Interest at Interest at Interest at Interest at Extension
Number of Pre-Modification Post-Modification Number of Principal at Principal at Pre-Modification Post-Modification Number of Period or
Loans Rate Rate Loans Pre-Modification Post-Modification Rate Rate Loans Range
(in months)
Troubled Debt Restructurings

Commercial real estate and:
multi-family residential loans
  Construction and land development loans 6 $                       85 $                          63 0 $                            0 $                            0 $                            0 $                            0 0 0

Consumer 1-4 family loans:
  Closed end first mortgage loans 2 142 158 2 156 161 164 149 0 0

Total 8 $                     227 $                        221 2 $                        156 $                        161 $                        164 $                        149 0 0

	All Modifications			Interest Rate Reductions
		Pre-Modification	Post-Modification
		Outstanding	Outstanding		Interest at	Interest at
	Number of	Recorded	Recorded	Number of	Pre-Modification	Post-Modification
(dollars in thousands)	Loans	Investment	Investment	Loans	Rate	Rate
Troubled Debt Restructurings
Commercial real estate and multi-
family residential loans:
Construction and land
development loans	6	$ 2,198	$ 2,198	6	$ 85	$ 63
Total	6	$ 2,198	$ 2,198	6	$ 85	$ 63

For the three month period ending ~~September 30,~~March 31, 2013 the commercial real estate and multi-family residential loan troubled debt restructuring described above decreased the allowance for loan losses by ~~$11,000 and the consumer 1-4 family loan~~$287,000.

There were no troubled debt restructurings ~~described above decreased~~which had payment defaults within the ~~allowance for loan losses by $4,000~~

For the nine month period ending September 30, 2013 the commercial real estate and multi-family residential loan troubled debt restructurings described above decreased the allowance for loan losses by $384,000 and the consumer 1-4 family loan troubled debt restructurings described above increased the allowance for loan losses by $61,000.

~~The troubled debt restructurings described above had charge-offs of $0 and $365,000, respectively, during the three-month and nine-month periods ending September 30, 2013.~~

~~The~~twelve months following ~~table presents loans by class modified as troubled debt restructurings that occurred during the nine-month and three-month periods ending September 30, 2012~~:

Modifications
Nine Months Ended September 30, 2012

All Modifications

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment

Troubled Debt Restructurings

Commercial and industrial loans:
  Non-working capital loans 1 $                    942 $                    1,060

Commercial real estate and multi-family residential loans:
  Construction and land development loans 5 1,638 1,638
  Owner occupied loans 2 2,260 2,260
  Nonowner occupied loans 1 385 385

Consumer 1-4 family loans:
  Closed end first mortgage loans 1 39 39

Other consumer loans 1 17 17

Total 11 $                 5,281 $                    5,399

�� Interest Rate Reductions Modified Repayment Terms

Interest at Interest at Extension
Number of Pre-Modification Post-Modification Number of Period or
Loans Rate Rate Loans Range
(in months)
Troubled Debt Restructurings

Commercial and industrial loans:
  Non-working capital loans 0 $                         0 $                            0 0 0

Commercial real estate and multi-family residential loans:
  Construction and land development loans
  Owner occupied loans 1 440 117 1 18
  Nonowner occupied loans 0 0 0 1 14

Consumer 1-4 family loans:
  Closed end first mortgage loans 1 76 15 0 0

Other consumer loans 0 0 0 0 0

Total 2 $                     516 $                        132 2 14-18

Modifications
Three Months Ended September 30, 2012

All Modifications

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
Loans Investment Investment

Troubled Debt Restructurings

Commercial real estate and multi-family residential loans:
Owner occupied loans 1 $ 1,411 $ 1,411

Other consumer loans 1 17 17

Total 2 $ 1,428 $ 1,428

Modified Repayment Terms

Extension
Number of Period or
Loans Range
(in months)
Troubled Debt Restructurings

Commercial real estate and multi-family residential loans:
Owner occupied loans 1 18

Other consumer loans 0 0

Total 1 18

For the three month period ending September 30, 2012, the commercial and industrial loan troubled debt restructurings described above decreased the allowance for loan losses by $15,000, the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $11,000, the consumer 1-4 family loan troubled debt restructurings described above decreased the allowance for loan losses by $1,000 and the other consumer loan troubled debt restructuring described above increased the allowance for loan losses by $4,000.

For the nine month period ending September 30, 2012, the commercial and industrial loan troubled debt restructurings described above decreased the allowance for loan losses by $534,000, the commercial real estate and multi-family residential loan troubled debt restructurings described above decreased the allowance for loan losses by $18,000, the consumer 1-4 family loan troubled debt restructurings described above increased the allowance for loan losses by $5,000 and other consumer loan trouble debt restructuring described above increased the allowance for loan losses by $4,000.

~~No charge offs resulted from any troubled debt restructurings described above~~modification during the three ~~and nine month periods ending September 30, 2012.~~months ended March 31, 2014.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification which occurred during the three month ~~and nine month periods~~period ending ~~September 30,~~March 31, 2013:

Modifications
Three Months Ended September 30, 2013 Nine Months Ended September 30, 2013

Number of Recorded Number of Recorded
Loans Investment Loans Investment
Troubled Debt Restructurings that Subsequently Defaulted

Consumer 1-4 family loans:
Closed end first mortgage loans 0 $ 0 1 $ 912

Total 0 $ 0 1 $ 912

	2013
	Number of	Recorded
(dollars in thousands)	Loans	Investment
Troubled Debt Restructurings that Subsequently Defaulted
Commercial real estate and multi-family residential loans:
Construction and land development loans	1	$ 1,249

Total	1	$ 1,249

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

The troubled debt restructurings described above that subsequently defaulted ~~made a large principal payment during the second quarter of 2013, which decreased~~increased the allowance for loan losses by ~~$85,000~~$15,000 and did not result in any charge offs during the three ~~and nine~~ month ~~periods~~period ending ~~September 30,~~March 31, 2013.

During the first quarter of 2014 the Company sold, to an independent party, three loans totaling $6.7 million, representing a single commercial relationship. The ~~following table presents~~three loans ~~by class modified~~were accounted for as troubled debt ~~restructurings for which there was a payment default within twelve months following the modification which occurred during the three month~~restructurings. The Company received proceeds of $4.3 million and ~~nine month periods ending September 30, 2012:~~

Modifications
Three months ended September 30, 2012 Nine months ended September 30, 2012
Number of Recorded Number of Recorded
Loans Investment Loans Investment
Troubled Debt Restructurings that Subsequently Defaulted

Consumer 1-4 family loans:
Closed end first mortgage loans 0 $ 0 1 $ 65

Total 0 $ 0 1 $ 65

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

~~The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $17,000 and did not result in any~~recognized charge offs ~~during~~of $2.4 million as a result of the ~~three and nine month periods ending September 30, 2012.~~sale. The amount charged-off had previously been reserved for by the Company.

2517

Credit Quality Indicators:

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

The Company uses the following definitions for risk ratings:

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

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

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

2618

Loans not meeting the criteria above that are analyzed individually as part of the ~~above described~~above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as ~~Not Rated~~not rated are consumer loans included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. As of ~~September 30,~~March 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

		Special			Not
(dollars in thousands)	Pass	Mention	Substandard	Doubtful	Rated	Total
Commercial and industrial loans:
Working capital lines of credit loans	$ 444,957	$ 20,467	$ 11,649	$ 0	$ 0	$ 477,073
Non-working capital loans	407,143	38,211	20,057	0	2,299	467,710
Commercial real estate and multi-
family residential loans:
Construction and land development loans	135,860	690	7,978	0	0	144,528
Owner occupied loans	349,274	27,068	11,409	0	0	387,751
Nonowner occupied loans	403,435	9,104	11,078	0	0	423,617
Multifamily loans	57,813	0	0	0	0	57,813
Agri-business and agricultural loans:
Loans secured by farmland	108,166	0	1,086	0	16	109,268
Loans for agricultural production	104,472	0	0	0	0	104,472
Other commercial loans	77,318	0	0	0	4	77,322
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	33,291	0	2,298	0	99,253	134,842
Open end and junior lien loans	9,173	1,862	0	0	128,837	139,872
Residential construction loans	0	0	0	0	5,649	5,649
Other consumer loans	10,041	405	291	0	33,536	44,273
Total	$ 2,140,943	$ 97,807	$ 65,846	$ 0	$ 269,594	$ 2,574,190

The recorded investment in loans does not include accrued interest.

As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

		Special			Not		Special			Not
	Pass	Mention	Substandard	Doubtful	Rated

(dollars in thousands)						Pass	Mention	Substandard	Doubtful	Rated	Total
Commercial and industrial loans:
Working capital lines of credit loans	$ 427,576	$ 21,129	$ 13,645	$ 0	$ 0	$ 431,069	$ 15,212	$ 11,674	$ 0	$ 0	$ 457,955
Non-working capital loans	387,047	29,779	19,143	0	0	384,415	37,727	19,659	0	2,091	443,892

Commercial real estate and multi-family residential loans:
Construction and land development loans	107,363	549	9,411	0	0
Commercial real estate and multi-
family residential loans:
Construction and land
development loans						148,338	763	8,037	0	0	157,138
Owner occupied loans	333,148	25,536	12,528	0	0	333,795	23,687	12,629	0	0	370,111
Nonowner occupied loans	363,712	9,476	18,805	0	0	367,108	9,180	17,948	0	0	394,236
Multifamily loans	36,904	330	0	0	0	63,392	0	0	0	0	63,392

Agri-business and agricultural loans:
Loans secured by farmland	103,083	0	1,729	0	0	132,331	0	1,113	0	16	133,460
Loans for agricultural production	95,426	0	0	0	0	120,665	0	0	0	0	120,665

Other commercial loans	55,674	0	118	0	0	70,766	0	0	0	0	70,766

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	29,422	549	1,824	0	87,734	29,092	0	2,316	0	93,772	125,180
Open end and junior lien loans	7,099	1,949	0	0	143,288	8,291	1,863	0	0	137,441	147,595
Residential construction loans	0	0	0	0	4,696	0	0	0	0	4,631	4,631

Other consumer loans	8,699	467	292	0	34,585	10,722	416	291	0	34,648	46,077

Total	$ 1,955,153	$ 89,764	$ 77,495	$ 0	$ 270,303	$ 2,099,984	$ 88,848	$ 73,667	$ 0	$ 272,599	$ 2,535,098

The recorded investment in loans does not include accrued interest.

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

Special Not
Pass Mention Substandard Doubtful Rated

  Commercial and industrial loans:
    Working capital lines of credit loans $            403,778 $            22,591 $              13,468 $                        0 $                       0
    Non-working capital loans 355,772 23,192 26,857 66 1,285

  Commercial real estate and multi-family residential loans:
    Construction and land development loans 67,002 4,595 10,753 0 0
    Owner occupied loans 315,672 24,589 18,144 0 0
    Nonowner occupied loans 282,108 6,345 26,028 0 0
    Multifamily loans 43,425 345 1,192 0 0

  Agri-business and agricultural loans:
    Loans secured by farmland 107,734 0 1,404 0 18
    Loans for agricultural production 115,649 0 0 0 0

  Other commercial loans 56,692 0 118 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 18,685 343 729 0 89,805
    Open end and junior lien loans 7,932 300 0 0 153,692
    Residential construction loans 0 0 0 0 11,508

  Other consumer loans 10,168 378 497 0 34,661

Total $         1,784,617 $            82,678 $              99,190 $                      66 $            290,969

~~The recorded investment in loans does not include accrued interest.~~

2819

~~NOTE 5. SECURITIES~~

Gross Gross
Fair Unrealized Unrealized Amortized
Value Gain Losses Cost
September 30, 2013
  U.S. Treasury securities $           1,022 $                20 $                  0 $           1,002
  Agency residential mortgage-backed securities 369,311 5,613 (6,183) 369,881
  State and municipal securities 92,737 2,810 (1,816) 91,743
    Total $       463,070 $           8,443 $         (7,999) $       462,626

December 31, 2012
  U.S. Treasury securities $           1,037 $                35 $                  0 $           1,002
  U.S. government sponsored agencies 5,304 278 0 5,026
  Agency residential mortgage-backed securities 365,644 7,813 (1,495) 359,326
  Non-agency residential mortgage-backed securities 6,453 242 0 6,211
  State and municipal securities 88,583 5,509 (189) 83,263
    Total $       467,021 $         13,877 $         (1,684) $       454,828

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of September 30, 2013 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.

Amortized Fair
Cost Value
Due in one year or less $ 4,168 $ 4,238
Due after one year through five years 15,691 16,618
Due after five years through ten years 40,061 40,987
Due after ten years 32,825 31,916
92,745 93,759
Mortgage-backed securities 369,881 369,311
Total debt securities $ 462,626 $ 463,070

~~Security proceeds, gross gains and gross losses are presented below.~~

Nine months ended September 30,
2013 2012
Sales of securities available for sale
  Proceeds $             29,996 $             27,493
  Gross gains 1,078 823
  Gross losses (972) (1,203)

Three months ended September 30,
2013 2012
Sales of securities available for sale
  Proceeds $             29,996 $             27,493
  Gross gains 1,078 823
  Gross losses (972) (1,203)

The Company sold twelve securities with a total book value of $29.9 million and a total fair value of $30.0 million during the first nine months of 2013. The sales included the four remaining non-agency residential mortgage backed securities. The remaining gains during the first nine months of 2013 were from calls. The Company sold eleven securities with a total book value of $27.9 million and a total fair value of $27.5 million during the first nine months of 2012. The sales in 2012 included nine non-agency residential mortgage backed securities. The securities sales in both 2013 and 2012 were related to a strategic realignment of the securities portfolio.

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

Securities with carrying values of $154.1 million and $199.3 million were pledged as of September 30, 2013 and 2012, as collateral for deposits of public funds, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of September 30, 2013 and December 31, 2012 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
September 30, 2013

Agency residential mortgage-backed
  securities $        163,795 $         (5,825) $      17,358 $          (358) $       181,153 $         (6,183)
State and municipal securities 25,130 (1,816) 0 0 25,130 (1,816)
  Total temporarily impaired $        188,925 $         (7,641) $      17,358 $          (358) $       206,283 $         (7,999)

December 31, 2012

Agency residential mortgage-backed
  securities $          92,974 $         (1,066) $      20,422 $          (429) $       113,396 $         (1,495)
State and municipal securities 10,791 (188) 50 (1) 10,841 (189)
  Total temporarily impaired $        103,765 $         (1,254) $      20,472 $          (430) $       124,237 $         (1,684)

~~The number of securities with unrealized losses as of September 30, 2013 and December 31, 2012 is presented below.~~

Less than 12 months
12 months or more Total
September 30, 2013

Agency residential mortgage-backed securities 45 7 52
State and municipal securities 56 0 56
Total temporarily impaired 101 7 108

Less than 12 months
12 months or more Total
December 31, 2012

Agency residential mortgage-backed securities 29 9 38
State and municipal securities 29 1 30
Total temporarily impaired 58 10 68

The following factors are considered to determine whether or not the impairment of these securities is other-than-temporary. Ninety-nine percent of the securities are backed by the U.S. government, government agencies, government sponsored agencies or are A- rated or better by Moody’s, S&P or Fitch, except for certain non-local or local municipal securities, which are not rated. All mortgage-backed securities are backed by government agencies. The Company does not currently have any non-agency mortgage backed securities in its securities portfolio. None of the securities have call provisions (with the exception of the municipal securities) and all payments as originally agreed are being received on their original terms. For the government, government-sponsored agency and municipal securities, management did not have concerns of credit losses, and there was nothing to indicate that full principal will not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

The following table provides information about debt securities for which only a credit loss was recognized in income and for which other losses are recorded in other comprehensive income. There were no securities with other than temporary impairment during the three and nine months ended September 30, 2013. All securities with other than temporary impairment were sold during 2012. The table represents the three months and nine months ended September 30, 2013 and 2012.

Three Months Ended September 30,
2013 2012
Balance July 1, $                      0 $                1,318
Additions related to other-than-temporary impairment losses
  not previously recognized 0 0
Additional increases to the amount of credit loss for which
other-than-temporary impairment was previously recognized 0 67
Reductions for previous credit losses realized on
securities sold during the year 0 (1,385)
Balance September 30, $                      0 $                       0

Nine Months Ended September 30,
2013 2012
Balance January 1, $                      0 $                   359
Additions related to other-than-temporary impairment losses
  not previously recognized 0 747
Additional increases to the amount of credit loss for which
other-than-temporary impairment was previously recognized 0 279
Reductions for previous credit losses realized on
securities sold during the year 0 (1,385)
Balance September 30, $                      0 $                       0

The Company does not have a history of actively trading securities but continues to hold securities available for sale should liquidity or other needs develop that would warrant the sale of securities. While these securities are held in the available for sale portfolio, it is management’s current intent to hold them until a recovery in fair value or maturity.

NOTE 5. FAIR VALUE DISCLOSURES

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


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

Level 2		Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3		Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Securities: Securities available for sale are valued primarily by a third party pricing service. The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or pricing models which utilize significant observable inputs such as matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). These models utilize the market approach with standard inputs that include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain non-agency residential mortgage-backed securities where observable inputs about the specific issuer are not available, fair values are estimated using observable data from other non-agency residential mortgage-backed securities presumed to be similar or other market data on other non-agency residential mortgage-backed securities (Level 3 inputs). For certain municipal securities that are not rated and observable inputs about the specific issuer are not available, fair values are estimated using observable data from other municipal securities presumed to be similar or other market data on other non-rated municipal securities (Level 3 inputs).

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

Securities pricing is obtained from a third party pricing service and is tested at least annually against prices from another third party provider and reviewed with a market value price tolerance variance of +/-3%, an individual security market value tolerance of +/-$50,000 and an aggregate market value tolerance of +/-$500,000 for all securities. If any securities fall outside any of these tolerance thresholds, they are reviewed in more detail to determine why the variance exists. Changes in market value are reviewed monthly in aggregate yield by security type and any material differences are reviewed to determine why they exist. At least annually, the pricing methodology of the pricing service is received and reviewed to support the fair value levels used by the Company. A detailed pricing evaluation is requested and reviewed on any security determined to be fair valued using unobservable inputs by the pricing service.

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

Interest rate swap derivatives: The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings. The fair value of interest rate swap derivatives is determined by pricing or valuation models using observable market data as of the measurement date (Level 2).

Impaired loans: Impaired loans with specific allocations of the allowance for loan losses are generally based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: (a) raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods; (b) finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good; (c) work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base; (d) equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons; and (e) Marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.

Mortgage servicing rights: As of March 31, 2014 the fair value of the Company’s Level 3 servicing assets for residential mortgage loans was $3.2 million, none of which are currently impaired and therefore carried at amortized cost. These residential mortgage loans have a weighted average interest rate of 4.10%, a weighted average maturity of 19 years and are secured by homes generally within the Company’s market area, which is primarily Northern Indiana. A valuation model is used to estimate fair value, which is based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The most significant assumption used to value mortgage servicing rights is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At March 31, 2014, the constant prepayment speed (PSA) used was 189 and the discount rate used was 9.4%. At December 31, 2013, the PSA used was 185 and the discount rate used was 9.4%.

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

Real estate mortgage loans held for sale: Real estate mortgage loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors, and result in a Level 2 classification.

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

	March 31, 2014
	Fair Value Measurements Using			Assets
(dollars in thousands)	Level 1	Level 2	Level 3	at Fair Value
Assets
U.S. Treasury securities	$ 1,011	$ 0	$ 0	$ 1,011
Mortgage-backed securities	0	373,424	0	373,424
State and municipal securities	0	96,123	891	97,014
Total securities	1,011	469,547	891	471,449
Mortgage banking derivative	0	144	0	144
Interest rate swap derivative	0	640	0	640
Total assets	$ 1,011	$ 470,331	$ 891	$ 472,233

Liabilities
Mortgage banking derivative	0	1	0	1
Interest rate swap derivative	0	629	0	629
Total liabilities	$ 0	$ 630	$ 0	$ 630

	December 31, 2013
	Fair Value Measurements Using			Assets
(dollars in thousands)	Level 1	Level 2	Level 3	at Fair Value
Assets
U.S. Treasury securities	$ 1,017	$ 0	$ 0	$ 1,017
Mortgage-backed securities	0	371,977	0	371,977
State and municipal securities	0	94,998	975	95,973
Total securities	1,017	466,975	975	468,967
Mortgage banking derivative	0	142	0	142
Interest rate swap derivative	0	627	0	627
Total assets	$ 1,017	$ 467,744	$ 975	$ 469,736

Liabilities
Mortgage banking derivative	0	2	0	2
Interest rate swap derivative	0	592	0	592
Total liabilities	$ 0	$ 594	$ 0	$ 594

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2014 and there were no transfers between Level 1 and Level 2 during 2013.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013:

	Non-Agency Residential
	Mortgage-Backed Securities		State and Municipal Securities
(dollars in thousands)	2014	2013	2014	2013
Balance of recurring Level 3 assets at January 1	$ 0	$ 2,859	$ 975	$ 988
Transfers into Level 3	0	3,334	0	0
Changes in fair value of securities	0	(17)	1	(2)
Principal payments	0	(291)	(85)	0
Balance of recurring Level 3 assets at March 31	$ 0	$ 5,885	$ 891	$ 986

The fair value of two non-agency residential mortgage-backed securities with a fair value of $3.3 million as of March 31, 2013 were transferred out of Level 2 and into Level 3 because of a lack of observable market data for these investments. The Company’s policy is to recognize transfers as of the end of the reporting period. As a result, the fair value for these non-agency residential mortgage-backed securities and state and municipal securities was transferred into Level 3 on March 31, 2013. The securities were subsequently sold in the third quarter of 2013. The Company no longer owns any non-agency residential mortgage backed securities.

The state and municipal securities measured at fair value included below are non-rated Indiana municipal revenue bonds and are not actively traded.

Quantitative Information about Level 3 Fair Value Measurements
				Range of
	Fair Value at			Inputs
(dollars in thousands)	3/31/2014	Valuation Technique	Unobservable Input	(Average)

State and municipal securities	$ 891	Price to type, par, call	Discount to benchmark index	0-6%
				(2.43%)

Quantitative Information about Level 3 Fair Value Measurements
				Range of
	Fair Value at			Inputs
(dollars in thousands)	12/31/2013	Valuation Technique	Unobservable Input	(Average)

State and municipal securities	$ 975	Price to type, par, call	Discount to benchmark index	0-6%
				(2.21%)

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

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

	March 31, 2014
	Fair Value Measurements Using			Assets
(dollars in thousands)	Level 1	Level 2	Level 3	at Fair Value
Assets
Impaired loans:
Commercial and industrial loans:
Working capital lines of credit loans	$ 0	$ 0	$ 1,374	$ 1,374
Non-working capital loans	0	0	3,281	3,281
Commercial real estate and multi-family
residential loans:
Construction and land development loans	0	0	1,938	1,938
Owner occupied loans	0	0	1,657	1,657
Nonowner occupied loans	0	0	4,217	4,217
Agri-business and agricultural loans:
Loans secured by farmland	0	0	467	467
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	0	0	824	824
Open end and junior lien loans	0	0	98	98
Other consumer loans	0	0	46	46
Total impaired loans	$ 0	$ 0	$ 13,902	$ 13,902
Other real estate owned	0	0	75	75
Total assets	$ 0	$ 0	$ 13,977	$ 13,977

	December 31, 2013
	Fair Value Measurements Using			Assets
(dollars in thousands)	Level 1	Level 2	Level 3	at Fair Value
Assets
Impaired loans:
Commercial and industrial loans:
Working capital lines of credit loans	$ 0	$ 0	$ 920	$ 920
Non-working capital loans	0	0	3,097	3,097
Commercial real estate and multi-family
residential loans:
Construction and land development loans	0	0	2,210	2,210
Owner occupied loans	0	0	3,958	3,958
Nonowner occupied loans	0	0	8,938	8,938
Agri-business and agricultural loans:
Loans secured by farmland	0	0	472	472
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	0	0	409	409
Open end and junior lien loans	0	0	174	174
Other consumer loans	0	0	50	50
Total impaired loans	$ 0	$ 0	$ 20,228	$ 20,228
Other real estate owned	0	0	75	75
Total assets	$ 0	$ 0	$ 20,303	$ 20,303

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2014:

(dollars in thousands)	Fair Value	Valuation Methodology	Unobservable Inputs	Average	Range of Inputs
Impaired loans:
Commercial and industrial	$ 4,655	Collateral based	Discount to reflect	34%	(2% - 43%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Commercial real estate	7,812	Collateral based	Discount to reflect	17%	(2% - 39%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Agri-business and agricultural	467	Collateral based	Discount to reflect	5%	(2% - 9%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Consumer 1-4 family mortgage	922	Collateral based	Discount to reflect	21%	(3% - 77%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Other consumer	46	Collateral based	Discount to reflect	40%	(30% - 47%)
		measurements	current market conditions
			and ultimate collectability

Other real estate owned	75	Appraisals	Discount to reflect	49%
			current market conditions

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2013:

(dollars in thousands)	Fair Value	Valuation Methodology	Unobservable Inputs	Average	Range of Inputs
Impaired loans:
Commercial and industrial	$ 4,017	Collateral based	Discount to reflect	29%	(3% - 93%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Commercial real estate	15,106	Collateral based	Discount to reflect	22%	(3% - 45%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Agri-business and agricultural	472	Collateral based	Discount to reflect	8%	(4% - 12%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Consumer 1-4 family mortgage	583	Collateral based	Discount to reflect	33%	(6% - 77%)
		measurements	current market conditions
			and ultimate collectability
Impaired loans:
Other consumer	50	Collateral based	Discount to reflect	53%	(28% - 98%)
		measurements	current market conditions
			and ultimate collectability

Other real estate owned	75	Appraisals	Discount to reflect	49%
			current market conditions
			and ultimate collectability

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $18.1 million, with a valuation allowance of $4.2 million at March 31, 2014, resulting in a net recovery in the provision for loan losses of $2.1 million in the three months ended March 31, 2014. At March 31, 2013, impaired loans had a gross carrying amount of $29.9 million, with a valuation allowance of $7.7 million, resulting in a net recovery in the provision for loan losses of $2.3 million for the three months ended March 31, 2013.

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

	March 31, 2014
	Carrying	Estimated Fair Value
(dollars in thousands)	Value	Level 1	Level 2	Level 3	Total
Financial Assets:
Cash and cash equivalents	$ 77,139	$ 77,139	$ 0	$ 0	$ 77,139
Securities available for sale	471,449	1,011	469,547	891	471,449
Real estate mortgages held for sale	2,043	0	2,067	0	2,067
Loans, net	2,528,053	0	0	2,526,033	2,526,033
Federal Home Loan Bank stock	7,312	N/A	N/A	N/A	N/A
Federal Reserve Bank stock	3,420	N/A	N/A	N/A	N/A
Accrued interest receivable	8,833	0	2,006	6,827	8,833
Financial Liabilities:
Certificates of deposit	(899,727)	0	(907,835)	0	(907,835)
All other deposits	(1,839,047)	(1,839,047)	0	0	(1,839,047)
Securities sold under agreements
to repurchase	(81,361)	0	(81,361)	0	(81,361)
Federal funds purchased	(8,000)	0	(8,000)	0	(8,000)
Other short-term borrowings	(25,000)	0	(24,998)	0	(24,998)
Long-term borrowings	(35)	0	(41)	0	(41)
Subordinated debentures	(30,928)	0	0	(31,226)	(31,226)
Standby letters of credit	(348)	0	0	(348)	(348)
Accrued interest payable	(2,938)	(115)	(2,820)	(3)	(2,938)

	December 31, 2013
	Carrying	Estimated Fair Value
(dollars in thousands)	Value	Level 1	Level 2	Level 3	Total
Financial Assets:
Cash and cash equivalents	$ 63,105	$ 63,105	$ 0	$ 0	$ 63,105
Securities available for sale	468,967	1,017	466,975	975	468,967
Real estate mortgages held for sale	1,778	0	1,800	0	1,800
Loans, net	2,486,301	0	0	2,490,593	2,490,593
Federal Home Loan Bank stock	7,312	N/A	N/A	N/A	N/A
Federal Reserve Bank stock	3,420	N/A	N/A	N/A	N/A
Accrued interest receivable	8,577	0	2,297	6,280	8,577
Financial Liabilities:
Certificates of deposit	(727,809)	0	(736,088)	0	(736,088)
All other deposits	(1,818,259)	(1,818,259)	0	0	(1,818,259)
Securities sold under agreements
to repurchase	(104,876)	0	(104,876)	0	(104,876)
Federal funds purchased	(11,000)	0	(11,000)	0	(11,000)
Other short-term borrowings	(146,000)	0	(146,002)	0	(146,002)
Long-term borrowings	(37)	0	(43)	0	(43)
Subordinated debentures	(30,928)	0	0	(31,217)	(31,217)
Standby letters of credit	(312)	0	0	(312)	(312)
Accrued interest payable	(2,918)	(125)	(2,790)	(3)	(2,918)

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

Cash and cash equivalents - The carrying amount of cash and cash equivalents approximate fair value and are classified as Level 1.

Loans, net – Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using current market rates applied to the estimated life resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

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

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

All other deposits- The fair values for all other deposits other than certificates of deposit are equal to the amount payable on demand (the carrying value) resulting in a Level 1 classification.

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

Federal funds purchased – The carrying amount of federal funds purchased approximates their fair values resulting in a Level 2 classification.

Other short-term borrowings – The fair value of other short-term borrowings approximates their fair values resulting in a Level 2 classification.

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

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

Standby letters of credit – The fair value of off-balance sheet items is based on the current fees and costs that would be charged to enter into or terminate such arrangements resulting in a Level 3 classification.

Accrued interest receivable/payable – The carrying amounts of accrued interest approximates fair value resulting in a Level 1, Level 2 or Level 3 classification which is consistent with its associated asset/liability.

NOTE 6. EMPLOYEE BENEFIT PLANS

Components of net periodic benefit cost:

Nine Months Ended September 30,
Pension Benefits SERP Benefits
2013 2012 2013 2012
Interest cost $ 87 $ 95 $ 34 $ 38
Expected return on plan assets (90) (102) (56) (56)
Recognized net actuarial (gain) loss 113 102 70 62
Net pension expense (benefit) $ 110 $ 95 $ 48 $ 44

	Three Months Ended September 30,				Three Months Ended March 31,
	Pension Benefits		SERP Benefits		Pension Benefits		SERP Benefits
	2013	2012	2013	2012
(dollars in thousands)					2014	2013	2014	2013
Interest cost	$ 29	$ 31	$ 11	$ 12	$ 30	$ 32	$ 12	$ 13
Expected return on plan assets	(30)	(34)	(19)	(18)	(31)	(35)	(18)	(19)
Recognized net actuarial (gain) loss	38	35	24	20	29	34	20	21
Net pension expense (benefit)	$ 37	$ 32	$ 16	$ 14	$ 28	$ 31	$ 14	$ 15

The Company previously disclosed in its financial statements for the year ended December 31, ~~2012~~2013 that it expected to contribute ~~$211,000~~$207,000 to its pension plan and ~~$80,000~~$4,000 to its Supplemental Executive Retirement Plan (“SERP”) in ~~2013.~~2014. The Company has contributed ~~$160,000~~$0 to its pension plan and ~~$80,000~~$4,000 to its SERP as of ~~September 30, 2013.~~March 31, 2014. The Company expects to contribute $207,000 to its pension plan during the remainder of 2014. The Company does not expect to make any additional contributions to its ~~pension or~~ SERP during the remainder of ~~2013.~~2014.

3227

NOTE 7. ~~NEW ACCOUNTING PRONOUNCEMENTS~~OFFSETTING ASSETS AND LIABILITIES

~~In February 2013,~~The following tables summarize gross and net information about financial instruments and derivative instruments that are offset in the ~~Financial Accounting Standards Board (“FASB”) issued updated guidance related~~statement of financial position or that are subject to ~~disclosure~~an enforceable master netting arrangement at March 31, 2014 and December 31, 2013.

	March 31, 2014
		Gross	Net Amounts
	Gross	Amounts	of Assets	Gross Amounts Not
	Amounts of	Offset in the	presented in	Offset in the Statement
	Recognized	Statement of	the Statement	of Financial Position
	Assets/	Financial	of Financial	Financial	Cash Collateral
(dollars in thousands)	Liabilities	Position	Position	Instruments	Received	Net Amount
Assets
Interest rate swap derivatives	$ 640	$ 0	$ 640	$ 0	$ 0	$ 640
Total assets	$ 640	$ 0	$ 640	$ 0	$ 0	$ 640
Liabilities
Interest rate swap derivatives	$ 629	$ 0	$ 629	$ 0	$ 0	$ 629
Repurchase agreements	81,361	0	81,361	(81,361)	0	0
Total liabilities	$ 81,990	$ 0	$ 81,990	$ (81,361)	$ 0	$ 629

	December 31, 2013
		Gross	Net Amounts
	Gross	Amounts	of Assets	Gross Amounts Not
	Amounts of	Offset in the	presented in	Offset in the Statement
	Recognized	Statement of	the Statement	of Financial Position
	Assets/	Financial	of Financial	Financial	Cash Collateral
(dollars in thousands)	Liabilities	Position	Position	Instruments	Received	Net Amount
Assets
Interest rate swap derivatives	$ 627	$ 0	$ 627	$ 0	$ (260)	$ 367
Total assets	$ 627	$ 0	$ 627	$ 0	$ (260)	$ 367
Liabilities
Interest rate swap derivatives	$ 592	$ 0	$ 592	$ 0	$ 0	$ 592
Repurchase agreements	104,876	0	104,876	(104,876)	0	0
Total liabilities	$ 105,468	$ 0	$ 105,468	$ (104,876)	$ 0	$ 592

If an event of ~~reclassification amounts out~~default occurs causing an early termination of other comprehensive income. The standard requires that companies present, either in a single note or parenthetically on the face of their financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affectedan interest rate swap derivative, any early termination amount payable to one party by the ~~reclassification. The new requirements~~other party may be reduced by set-off against any other amount payable by the one party to the other party. If a default in performance of any obligation of a repurchase agreement occurs, each party will ~~take effect for public companies~~set-off property held in fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. Adopting this standard did not have a significant impact on the Company’s financial condition or resultsrespect of ~~operations.~~transactions against obligations owing in respect of any other transactions.

NOTE 8. ~~FAIR VALUE DISCLOSURES~~EARNINGS PER SHARE

~~Fair value~~Basic earnings per common share is net income available to common shareholders divided by the ~~exchange price that would be received for an asset or paid to transfer a liability (exit price) in~~weighted average number of common shares outstanding during the ~~principal or most advantageous market for~~period. Diluted earnings per common share includes the ~~asset or liability in an orderly transaction between market participants on the measurement date. There are three levels~~dilutive effect of ~~inputs that may be used to measure fair values:~~


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

~~Level 2~~		Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

~~Level 3~~		~~Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.~~

additional potential common shares issuable under stock options, stock awards and warrants, none of which were antidilutive.

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

	Three Months Ended March 31,
	2014	2013
Weighted average shares outstanding for basic earnings per common share	16,513,645	16,408,710
Dilutive effect of stock options, awards and warrants	200,208	118,461
Weighted average shares outstanding for diluted earnings per common share	16,713,853	16,527,171

Basic earnings per common share	$ 0.60	$ 0.56
Diluted earnings per common share	$ 0.59	$ 0.56

3328

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

Impaired loans: Impaired loans with specific allocations of the allowance for loan losses are generally based on the fair value of the underlying collateral if repayment is expected solely from the collateral. Fair value is determined using several methods. Generally, the fair value of real estate is based on appraisals by qualified third party appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and result in a Level 3 classification of the inputs for determining fair value. In addition, the Company’s management routinely applies internal discount factors to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisals take into account changing business factors and market conditions, as well as value impairment in cases where the appraisal date predates a likely change in market conditions. Commercial real estate is generally discounted from its appraised value by 0-50% with the higher discounts applied to real estate that is determined to have a thin trading market or to be specialized collateral. In addition to real estate, the Company’s management evaluates other types of collateral as follows: Raw and finished inventory is discounted from its cost or book value by 35-65%, depending on the marketability of the goods. Finished goods are generally discounted by 30-60%, depending on the ease of marketability, cost of transportation or scope of use of the finished good. Work in process inventory is typically discounted by 50-100%, depending on the length of manufacturing time, types of components used in the completion process, and the breadth of the user base. Equipment is valued at a percentage of depreciated book value or recent appraised value, if available, and is typically discounted at 30-70% after various considerations including age and condition of the equipment, marketability, breadth of use, and whether the equipment includes unique components or add-ons. Accounts receivable are discounted by 60-90%, depending on age and estimated collectability. Marketable securities are discounted by 10-30%, depending on the type of investment, age of valuation report and general market conditions. This methodology is based on a market approach and typically results in a Level 3 classification of the inputs for determining fair value.

Mortgage servicing rights: As of September 30, 2013 the fair value of the Company’s Level 3 servicing assets for residential mortgage loans was $3.3 million, some of which are not currently impaired and therefore carried at amortized cost. These residential mortgage loans have a weighted average interest rate of 4.12%, a weighted average maturity of 19 years and are secured by homes generally within the Company’s market area, which is primarily Northern Indiana. A valuation model is used to estimate fair value, which is based on an income approach. The inputs used include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The most significant assumption used to value mortgage servicing rights is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At September 30, 2013, the constant prepayment speed (PSA) used was 189 and the discount rate used was 9.3%. At December 31, 2012, the PSA used was 392 and the discount rate used was 9.2%.

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

September 30, 2013
Fair Value Measurements Using Assets
Level 1 Level 2 Level 3 at Fair Value
Assets
U.S. Treasury securities $             1,022 $                      0 $                     0 $              1,022
U.S. Government sponsored agencies 0 0 0 0
Mortgage-backed securities 0 369,311 0 369,311
Non-agency residential mortgage-backed securities 0 0 0 0
State and municipal securities 0 91,760 977 92,737
Total securities 1,022 461,071 977 463,070

Mortgage banking derivative 0 263 0 263
Interest rate swap derivative 0 297 0 297

Total assets $             1,022 $           461,631 $                 977 $          463,630

Liabilities

Mortgage banking derivative 0                      109 0                     109
Interest rate swap derivative 0                      267 0                     267

Total liabilities $                    0 $                  376 $                     0 $                 376

December 31, 2012
Fair Value Measurements Using Assets
Level 1 Level 2 Level 3 at Fair Value
Assets
U.S. Treasury securities $             1,037 $                      0 $                     0 $              1,037
U.S. Government sponsored agencies 0 5,304 0 5,304
Mortgage-backed securities 0 365,644 0 365,644
Non-agency residential mortgage-backed securities 0 3,594 2,859 6,453
State and municipal securities 0 87,595 988 88,583
Total securities 1,037 462,137 3,847 467,021

Mortgage banking derivative 0 739 0 739

Total assets $             1,037 $           462,876 $              3,847 $          467,760

Liabilities
Mortgage banking derivative $                    0 $                    12 $                     0 $                   12

~~There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2013 and there were no transfers between Level 1 and Level 2 during 2012.~~

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2013 and 2012:

Non-Agency Residential
Mortgage-Backed Securities State and Municipal Securities
2013 2012 2013 2012
Balance of recurring Level 3 assets at January 1 $            2,859 $                   0 $               988 $               686
  Transfers into Level 3 3,334 0 0 0
  Changes in fair value of securities (181) 0 (11) (4)
  Principal payments (2,160) 0 0 (45)
  Sales (3,852) 0 0 0
Balance of recurring Level 3 assets at September 30 $                   0 $                   0 $               977 $               637

~~The state and municipal securities measured at fair value included below are non-rated Indiana municipal revenue bonds and are not actively traded.~~

~~Quantitative Information about Level 3 Fair Value Measurements~~
	~~Fair Value at~~			~~Range of Inputs~~
	~~9/30/2013~~	~~Valuation Technique~~	~~Unobservable Input~~	~~(Average)~~

~~State and municipal securities~~	~~$ 977~~	~~Price to type, par, call~~	~~Discount to benchmark index~~	~~1-7%~~
				~~(2.57%)~~

~~Quantitative Information about Level 3 Fair Value Measurements~~
	~~Fair Value at~~			~~Range of Inputs~~
	~~December 31, 2012~~	~~Valuation Technique~~	~~Unobservable Input~~	~~(Average)~~

~~Non-agency residential mortgage-backed securities~~	~~$ 2,859~~	~~Discounted cash flow~~	~~Constant prepayment rate~~	~~5.00-9.00~~
				~~(6.00)~~

			~~Average life (years)~~	~~0.20-2.86~~
				~~(2.70)~~

			~~Swap/EDSF spread~~	~~297-339~~
				~~(328)~~


~~State and municipal securities~~	~~$ 988~~	~~Price to type, par, call~~	~~Discount to benchmark index~~	~~1-11%~~
				~~(4%)~~

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

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

The significant unobservable inputs used in the fair value measurement of the Company’s non-agency residential mortgage-backed securities classified as Level 3 are constant prepayment rates, average life, and a Swap/EDSF spread. Significant increases/(decreases) in any of those inputs in isolation would result in a significantly lower/(higher) fair value measurement.

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

September 30, 2013
Fair Value Measurements Using Assets
Assets Level 1 Level 2 Level 3 at Fair Value

Impaired loans:
  Commercial and industrial loans:
    Working capital lines of credit loans $                    0 $                      0 $                 801 $                 801
    Non-working capital loans 0 0 3,234 3,234

  Commercial real estate and multi-family residential loans:
    Construction and land development loans 0 0 1,974 1,974
    Owner occupied loans 0 0 3,401 3,401
    Nonowner occupied loans 0 0 12,306 12,306
    Multifamily loans 0 0 0 0

  Agri-business and agricultural loans:
    Loans secured by farmland 0 0 489 489
    Loans for agricultural production 0 0 0 0

  Other commercial loans 0 0 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 0 0 366 366
    Open end and junior lien loans 0 0 10 10
    Residential construction loans 0 0 0 0

  Other consumer loans 0 0 53 53

Total impaired loans $                    0 $                      0 $            22,634 $            22,634

Mortgage servicing rights 0 0 8 8
Other real estate owned                        0                          0                       75                       75

Total assets $                    0 $                      0 $            22,717 $            22,717

~~The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2013:~~

Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs

Impaired Loans:
  Commercial and industrial $       4,035 Collateral based Discount to reflect 32% (4% - 91%)
measurements current market conditions
and ultimate collectability

Impaired loans:
  Commercial real estate         17,681 Collateral based Discount to reflect 23% (5% - 46%)
measurements current market conditions
and ultimate collectability

Impaired loans:
  Agri-business and agricultural              489 Collateral based Discount to reflect 8% (7% - 9%)
measurements current market conditions
and ultimate collectability

Impaired loans:
  Consumer 1-4 family mortgage              376 Collateral based Discount to reflect 27% (8% - 51%)
measurements current market conditions
and ultimate collectability
Impaired loans:
  Other consumer                53 Collateral based Discount to reflect 35% (28% - 61%)
measurements current market conditions
and ultimate collectability

Mortgage servicing rights                  8 Discounted cash flows Discount rate 9.50%

Other real estate owned                75 Appraisal Discount to reflect 49%
current market conditions

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

Fair Value Valuation Methodology Unobservable Inputs Average Range of Inputs

Impaired Loans:
  Commercial and industrial $     3,980 Collateral based Discount to reflect 35% (10% - 99%)
measurements current market conditions
and ultimate collectability

Impaired loans:
  Commercial real estate       24,560 Collateral based Discount to reflect 23% (4% - 57%)
measurements current market conditions
and ultimate collectability

Impaired loans:
  Agri-business and agricultural             268 Collateral based Discount to reflect 19%
measurements current market conditions
and ultimate collectability

Impaired loans:
  Consumer 1-4 family mortgage             510 Collateral based Discount to reflect 39% (8% - 100%)
measurements current market conditions
and ultimate collectability
Impaired loans:
  Other consumer               46 Collateral based Discount to reflect 40% (29% - 100%)
measurements current market conditions
and ultimate collectability

Mortgage servicing rights         1,906 Discounted cash flows Discount rate 9.20% (9.10% - 9.50%)

Other real estate owned               75 Appraisals Discount to reflect 49%
current market conditions

December 31, 2012
Fair Value Measurements Using Assets
Assets Level 1 Level 2 Level 3 at Fair Value
(in thousands)
Impaired loans:
  Commercial and industrial loans:
    Working capital lines of credit loans $                    0 $                      0 $                 990 $                 990
    Non-working capital loans 0 0 2,990 2,990

  Commercial real estate and multi-family residential loans:
    Construction and land development loans 0 0 2,026 2,026
    Owner occupied loans 0 0 3,892 3,892
    Nonowner occupied loans 0 0 18,642 18,642
    Multifamily loans 0 0 0 0

  Agri-business and agricultural loans:
    Loans secured by farmland 0 0 268 268
    Loans for agricultural production 0 0 0 0

  Other commercial loans 0 0 0 0

  Consumer 1-4 family mortgage loans:
    Closed end first mortgage loans 0 0 352 352
    Open end and junior lien loans 0 0 158 158
    Residential construction loans 0 0 0 0

  Other consumer loans 0 0 46 46

Total impaired loans $                    0 $                      0 $            29,364 $            29,364

Mortgage servicing rights 0 0 1,906 1,906
Other real estate owned                        0                          0                       75                       75

Total assets $                    0 $                      0 $            31,345 $            31,345

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $30.0 million, with a valuation allowance of $7.3 million at September 30, 2013, resulting in a net recovery in the provision for loan losses of $2.7 million and $200,000, respectively, for the nine months and three months ended September 30, 2013. At September 30, 2012, impaired loans had a carrying amount of had a gross carrying amount of $50.2 million, with a valuation allowance of $14.5 million, resulting in a net recovery in the provision for loan losses of $200,000 and $3.8 million, respectively, for the three months and nine months ended September 30, 2012.

Mortgage servicing rights, which are carried at the lower of cost or fair value, included a portion carried at their fair value of $8,000, which is made up of the outstanding balance of $11,000, net of a valuation allowance of $3,000 at September 30, 2013, resulting in a net recovery of $39,000 in impairment for the nine months ended September 30, 2013. The Company realized impairment of $84,000 for the nine months ended September 30, 2012.

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

September 30, 2013
Carrying Estimated Fair Value
Value Level 1 Level 2 Level 3 Total
Financial Assets:
Cash and cash equivalents $ 81,340 $ 81,340 $ 0 $ 0 $ 81,340
Securities available for sale 463,070 1,022 461,071 977 463,070
Real estate mortgages held for sale 1,047 0 1,066 0 1,066
Loans, net 2,342,911 0 0 2,347,776 2,347,776
Federal Home Loan Bank stock 7,313 N/A N/A N/A N/A
Federal Reserve Bank stock 3,420 N/A N/A N/A N/A
Accrued interest receivable 8,328 0 1,968 6,360 8,328
Financial Liabilities:
Certificates of deposit (782,684) 0 (792,444) 0 (792,444)
All other deposits (1,662,142) (1,662,142) 0 0 (1,662,142)
Securities sold under agreements to repurchase (103,959) 0 (103,959) 0 (103,959)
Federal funds purchased (57,000) 0 (57,000) 0 (57,000)
Other short-term borrowings (75,000) 0 (75,000) 0 (75,000)
Long-term borrowings (37) 0 (44) 0 (44)
Subordinated debentures (30,928) 0 0 (31,149) (31,149)
Standby letters of credit (288) 0 0 (288) (288)
Accrued interest payable (3,629) (121) (3,505) (3) (3,629)

December 31, 2012
Carrying Estimated Fair Value
Value Level 1 Level 2 Level 3 Total
Financial Assets:
Cash and cash equivalents $ 232,237 $ 232,237 $ 0 $ 0 $ 232,237
Securities available for sale 467,021 1,037 462,137 3,847 467,021
Real estate mortgages held for sale 9,452 0 9,663 0 9,663
Loans, net 2,206,075 0 0 2,230,993 2,230,993
Federal Home Loan Bank stock 7,313 N/A N/A N/A N/A
Federal Reserve Bank stock 3,420 N/A N/A N/A N/A
Accrued interest receivable 8,485 6 2,215 6,264 8,485
Financial Liabilities:
Certificates of deposit (907,505) 0 (922,397) 0 (922,397)
All other deposits (1,674,251) (1,674,251) 0 0 (1,674,251)
Securities sold under agreements to repurchase (121,883) 0 (121,883) 0 (121,883)
Long-term borrowings (15,038) 0 (15,607) 0 (15,607)
Subordinated debentures (30,928) 0 0 (31,223) (31,223)
Standby letters of credit (262) 0 0 (262) (262)
Accrued interest payable (4,757) (298) (4,456) (3) (4,757)

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

~~Cash and cash equivalents~~ ~~- The carrying amount of cash and cash equivalents approximate fair value and are classified as Level 1.~~

~~Loans, net~~ – Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using current market rates applied to the estimated life resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

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

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

~~All other deposits- The fair values for all other deposits other than certificates of deposit are equal to the amount payable on demand (the carrying value) resulting in a Level 1 classification.~~

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

~~Federal funds purchased~~ ~~– The carrying amount of federal funds purchased approximates their fair values resulting in a Level 2 classification.~~

~~Other short-term borrowings~~ ~~– The fair value of other short-term borrowings approximates their fair values resulting in a Level 2 classification.~~

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

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

~~Standby letters of credit~~ ~~– The fair value of off-balance sheet items is based on the current fees and costs that would be charged to enter into or terminate such arrangements resulting in a Level 3 classification.~~

~~Accrued interest receivable/payable~~ ~~– The carrying amounts of accrued interest approximates fair value resulting in a Level 1, Level 2 or Level 3 classification which is consistent with its associated asset/liability.~~

NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and ~~2012:~~2013:

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT(a)

Unrealized
Gains and
Losses on Defined
Available- Benefit
for-Sales Pension
Securities Items Total

Balance at December 31, 2012 $                 7,517 $  (1,828) $             5,689

Other comprehensive income (loss)
  before reclassification (7,096) (90) (7,186)

Amounts reclassified from
  accumulated other
  comprehensive income (loss) (64) 109 45

    Net current period other
      comprehensive income (loss) (7,160) 19 (7,141)

Balance at September 30, 2013 $                    357 $  (1,809) $           (1,452)

(a) All amounts are net of tax.  Amounts in parenthesis indicate a decrease in other comprehensive income.

	Unrealized
	Gains and
	Losses on	Defined
	Available-	Benefit
	for-Sales	Pension
(dollars in thousands)	Securities	Items	Total
Balance at December 31, 2013	$ (1,138)	$ (1,356)	$ (2,494)
Other comprehensive income before reclassification	2,887	31	2,918
Amounts reclassified from accumulated other comprehensive income (loss)	0	30	30
Net current period other comprehensive income	2,887	61	2,948
Balance at March 31, 2014	$ 1,749	$ (1,295)	$ 454

Current
Balance Period Balance
at December 31, 2011 Change at September 30, 2012

Unrealized loss on securities available for sale
  without other than temporary impairment $                           7,688 $            818 $                     8,506
Unrealized loss on securities available for sale
  with other than temporary impairment                                (523) 523 0

Total unrealized loss on securities available for sale                               7,165             1,341                         8,506

Unrealized loss on defined benefit pension plans                             (2,026)                164                        (1,862)

Total $                           5,139 $         1,505 $                     6,644

	Unrealized
	Gains and
	Losses on	Defined
	Available-	Benefit
	for-Sales	Pension
(dollars in thousands)	Securities	Items	Total
Balance at December 31, 2012	$ 7,517	$ (1,828)	$ 5,689
Other comprehensive income before reclassification	(643)	(90)	(733)
Amounts reclassified from accumulated other comprehensive income (loss)	(1)	33	32
Net current period other comprehensive income	(644)	(57)	(701)
Balance at March 31, 2013	$ 6,873	$ (1,885)	$ 4,988

Reclassifications out of accumulated comprehensive income for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 are as follows:

~~RELCASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME(a)~~


Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
	(dollars in thousands)

~~Unrealized gains and losses on~~Amortization of defined benefit pension items	$ (49)		Salaries and employee benefits
~~available-for-sale securities~~Tax effect
	~~$ 107~~		~~Net securities gains (losses)~~

	~~(43)~~19		Income tax expense

Total reclassifications for the period	$ 64(30)		Net of tax

~~Amortization of defined benefit~~
~~pension items~~
	~~$ (183)~~	~~(b)~~	~~Salaries and employee benefits~~

	74		~~Income tax expense~~

	~~$ (109)~~		~~Net of tax~~

~~Total reclassifications for the period~~	~~$ (45)~~		~~Net of tax~~


~~(a)~~ Amounts in parenthesis indicate a decrease in net income.
~~(b) Included in the computation of net periodic benefit cost (see employee benefit plans footnote for additional details).~~

~~NOTE 10. OFFSETTING ASSETS AND LIABILITIES~~Reclassifications out of accumulated comprehensive income for the three months ended March 31, 2013 are as follows:

On January 1, 2013, the Company adopted changes issued by the FASB to the disclosure of offsetting assets and liabilities. These changes require an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The enhanced disclosures will enable users of an entity’s financial statements to understand and evaluate the effect or potential effect of master netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Other than the additional disclosure requirements, the adoption of these changes had no impact on the Consolidated Financial Statements.

Details about	Amount	Affected Line Item
Accumulated Other	Reclassified From	in the Statement
Comprehensive	Accumulated Other	Where Net
Income Components	Comprehensive Income	Income is Presented
(dollars in thousands)
Unrealized gains and losses on available-for-sale securities	$ 1	Net securities gains (losses)
Tax effect	0	Income tax expense
	1	Net of tax
Amortization of defined benefit pension items(1)	(55)	Salaries and employee benefits
Tax effect	22	Income tax expense
	(33)	Net of tax
Total reclassifications for the period	$ (32)	Net of tax

Offsetting of Financial Assets and Derivative Assets
September 30, 2013
Gross Amounts Not Offset in the Statement of Financial Position

Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Cash Collateral Received Net Amount
Description
Interest Rate Swap Derivatives $ 297 $ 0 $ 297 $ 0 $ (270) $ 27
Total $ 297 $ 0 $ 297 $ 0 $ (270) $ 27

4529

Offsetting of Financial Liabilities and Derivative Liabilities

September 30, 2013
Gross Amounts Not Offset in the Statement of Financial Position

Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Financial Instruments Cash Collateral Pledged Net Amount
Description
Interest Rate Swap Derivatives $              267 $                              0 $                          267 $                      0 $                           0 $        267
Repurchase Agreements          103,959                                   0                      103,959           (103,959)                               0                 0
Total $      104,226 $                              0 $                 104,226 $       (103,959) $                           0 $        267
NOTE 10.  NEW ACCOUNTING PRONOUNCEMENTS

Offsetting of Financial Liabilities and Derivative Liabilities

December 31, 2012
Gross Amounts Not Offset in the Statement of Financial Position

Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Financial Instruments Cash Collateral Pledged Net Amount
Description
Repurchase Agreements $ 121,883 $ 0 $ 121,883 $ (121,883) $ 0 $ 0
Total $ 121,883 $ 0 $ 121,883 $ (121,883) $ 0 $ 0

There were no interest rate swap derivatives as of December 31, 2012.
In January 2014, the FASB issued updated guidance related to the accounting for investments in qualified affordable housing projects. The amendment permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). To qualify for the proportional amortization method, all of the following conditions must be met: 1. It is probable that the tax credits allocable to the investor will be available. 2. The investor does not have the ability to exercise significant influence over the operating and financial policies of the limited liability entity. 3. Substantially all of the projected benefits are from tax credits and other tax benefits (for example, tax benefits generated from the operating losses of the investment). 4. The investor’s projected yield based solely on the cash flows from the tax credits and other tax benefits is positive. 5. The investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the investor’s liability is limited to its capital investment. The decision to apply the proportional amortization method of accounting is an accounting policy decision that should be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The new requirements are effective for public companies in fiscal years, and interim periods within those years, beginning after December 15,

2014. Adopting this standard is not expected to have a significant impact on the Company’s financial condition or results of operations.

IfIn January 2014, the FASB issued updated guidance related to the reclassification of residential real estate collateralized consumer mortgage loans upon foreclosure. The amendments in this Update clarify that an ~~event~~in substance repossession or

foreclosure occurs, and a creditor is considered to have received physical possession of ~~default occurs causing an early termination~~residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of ana foreclosure or (2) the borrower conveying all interest ~~rate swap derivative, any early termination~~in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount ~~payable to one party~~of foreclosed residential real estate property held by the ~~other party may be reduced~~creditor and (2) the recorded investment in consumer mortgage loans collateralized by ~~set-off against any other amount payable by~~residential real estate property that are in the ~~one party~~process of foreclosure according to local requirements of the ~~other party. If~~applicable jurisdiction. The new requirements are effective for public companies in fiscal years, and interim periods within those years, beginning after December 15, 2014. Adopting this standard is not expected to have a ~~default in performance~~significant impact on the Company’s financial condition or results of ~~any obligation of a repurchase agreement occurs, each party will set-off property held in respect of transactions against obligations owing in respect of any other transactions.~~operations.

NOTE 11. SUBSEQUENT EVENTS

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

NOTE 12. RECLASSIFICATIONS

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

4630

~~Part 1~~

~~LAKELAND FINANCIAL CORPORATION~~

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

~~and~~

~~RESULTS OF~~ OPERATIONS

~~September 30, 2013~~

OVERVIEW

~~Lakeland Financial Corporation is the holding company for Lake City Bank. The Company is headquartered~~Net income in ~~Warsaw, Indiana and operates 45 offices in 13 counties in Northern and Central Indiana. The Company earned $28.3 million for~~ the first ~~nine~~three months of ~~2013, versus $26.8~~2014 was $9.9 million, in the same period of 2012, an increase of 5.5%. Net income was positively impacted by an increase in noninterest income of $5.0 million and a $1.3 million decrease in the provision for loan losses. Offsetting these positive impacts were an increase of $3.0 million in noninterest expense and a decrease in net interest income of $664,000. Basic earnings per common share for the first nine months of 2013 were $1.72 per share versus $1.64 per share for the first nine months of 2012, an increase of 4.9%. Diluted earnings per common share reflect the potential dilutive impact of stock options, stock awards and warrants. Diluted earnings per common share for the first nine months of 2013 were $1.70 per share versus $1.63 for the first nine months of 2012, an increase of 4.3%.

~~Net income for the third quarter of 2013 was $9.8 million, an increase of 4.5%, versus $9.3~~up 7.2% from $9.2 million for the comparable period of ~~2012. The increase was driven by a $1.6 million increase in noninterest~~2013. Diluted income ~~and a $812,000 increase in net interest income. Offsetting this positive impact was an increase in noninterest expense of $2.0 million. Basic and diluted earnings~~ per common share ~~for~~was $0.59 in the ~~third quarter~~first three months of ~~2013 were $0.59 per share, versus $0.57 per share for the third quarter of 2012, an increase of 3.5%.~~

Earnings for the nine month period ended September 30, 2013 were negatively impacted by a $465,000 provision for state income tax expense due to a revaluation of the Company’s deferred tax items relating to state income tax. During the second quarter of 2013, the Indiana legislature approved new, lower tax rates for financial institutions, which will take effect beginning2014, up 5.4% from $0.56 in 2014. One effect of the lower, future rates is to reduce the benefit that will be provided by the Company’s existing deferred tax items requiring the non-cash adjustment. Excluding the effect of the adjustment, net income for the nine months ended September 30, 2013 would have been $28.7 million, representing an increase of 7.1% over the comparable period of ~~2012.~~

~~RESULTS OF OPERATIONS~~

~~Net Interest Income~~

~~For the nine-month period ended September 30, 2013, net interest income totaled $66.1 million, a decrease of 1.0%, or $664,000, versus~~2013. Return on average total assets was 1.26% in the first ~~nine~~three months of ~~2012. This decrease was primarily due to a twelve basis point decrease~~2014 versus 1.27% in ~~the Company’s net interest margin to 3.22% for the nine month period ended September 30, 2013, versus 3.34% for~~ the comparable period of ~~2012. During~~2013. The equity to average assets ratio was 10.29% in the ~~nine-month~~first three months of 2014 versus 10.30% in the comparable period ~~ended September 30,~~of 2013.

Total assets were $3.234 billion as of March 31, 2014 versus $3.176 billion as of December 31, 2013, ~~average earning assets increased by $79.3 million, or 2.9%, to $2.797 billion. For the third quarter of 2013, net interest income totaled $23.0 million,~~ an increase of ~~3.7%,~~$58.0 million, or ~~$812,000, versus the third quarter of 2012.~~1.8%. This increase was primarily due to a ~~$107.2~~$39.1 million ~~or 3.9%,~~ increase in average earning assets in the third quarter of 2013, versus the third quarter of 2012. The Company’s net interest margin was virtually unchanged at 3.29% for the third quarter of 2013 versus 3.30% for the third quarter of 2012.

Given the Company’s mix of interest earning assets and interest bearing liabilities at September 30, 2013, the Company would generally be considered to have a relatively neutral balance sheet structure. The Company’s balance sheet structure would normally be expected to produce a stable or declining net interest margin in a declining rate environment. As the Company’s balance sheet has become more neutral in structure, management believes rate movements and other factors such as deposit mix, market deposit rate pricing and non-bank deposit products could have an impact on net interest margin. As a result of the prolonged and unprecedented low interest rate environment, and given ongoing indications by the Federal Reserve Bank regarding its intentions to maintain current target rate levels, the Company expects to experience continued pressure on its net interest margin. Also contributing to this net interest margin compression is a recent trend of aggressive loan pricing by the Company’s competitors in its markets on both variable and fixed rate commercialtotal loans. As a result of this competitive pricing influence, the Company believes that its yields on the commercial loan portfolio will continue to experience downward pressure. Over time, the Company’s mix of deposits has shifted to more reliance on transaction accounts such as Rewards Checking, as well as Rewards Savings and corporate and public fund money market and repurchase agreements, which generally carry a higher interest rate cost than other types of interest bearing deposits. The Company believes that this deposit strategy provides for an appropriate funding strategy.

During the first nine months of 2013, total interest and dividend income decreased by $8.0 million, or 9.1%, to $79.7 million versus $87.7 million during the first nine months of 2012. This decrease was primarily the result of a 50 basis point decrease in the tax equivalent yield on average earning assets to 3.9%, versus 4.4% for the same period of 2012. Average earning assets increased by $79.3 million, or 2.9%, during the first nine months of 2013 versus the same period of 2012. During the third quarter of 2013, total interest and dividend income decreased by $1.7 million, or 5.9%, to $27.0 million, versus $28.7 million during the third quarter of 2012. This decrease was primarily the result of a 40 basis point decrease in the tax equivalent yield on average earning assets to 3.9% in the third quarter of 2013, versus 4.3% for the same period of 2012. Average earning assets increased by $107.2 million, or 3.9%, in the third quarter of 2013 versus the same period of 2012.

During the first nine months of 2013, loan interest income decreased by $4.3 million, or 5.6%, to $73.8 million versus $78.1 million during the first nine months of 2012. The decrease was driven by a 43 basis point decrease in the tax equivalent yield on loans, to 4.3%, versus 4.7% in the first nine months of 2012. During the third quarter of 2013, loan interest income decreased by $1.2 million, or 4.7%, to $24.7 million, versus $25.9 million during the third quarter of 2012. The decrease was driven by a 48 basis point decrease in the tax equivalent yield on loans, to 4.2%, versus 4.7% in the third quarter of 2012.

The average daily securities balances for the first nine months of 2013 increased $49,000 to $475.1 million, versus $475.0 million for the same period of 2012. During the same periods, income from securities decreased by $3.7 million, or 38.4%, to $5.9 million versus $9.5 million during the first nine months of 2012. The decrease was primarily the result of a 99 basis point decrease in the tax equivalent yield on securities, to 2.0%, versus 3.0% in the first nine months of 2012. The average daily securities balances for the third quarter of 2013 decreased $11.2 million, or 2.4%, to $464.7 million, versus $475.9 million for the same period of 2012. During the same periods, income from securities decreased by $467,000, or 17.1%, to $2.3 million versus $2.7 million during the third quarter of 2012. The decrease was primarily the result of a 29 basis point decrease in the tax equivalent yield on securities, to 2.3%, versus 2.6% in the third quarter of 2012. The prolonged low interest rate environment has reduced the income from securities since securities payments, including prepayments on mortgage-backed securities, must then be reinvested in securities at current, lower market yields. Due to the unprecedented low interest rate environment, the Company is actively considering and implementing changes in its investment strategy. The plan includes considering the purchase of good quality, higher yielding alternative investments. Given the strength of the Company’s balance sheet and the likelihood of the low interest rate environment persisting into the future, the Company believes that this would be an appropriate and prudent strategy although the Company does not expect this will result in a significant change in strategy.

Total interest expense decreased $7.3 million, or 35.1%, to $13.5 million for the nine-month period ended September 30, 2013, from $20.9 million for the comparable period in 2012. The decrease was primarily the result of a 36 basis point decrease in the Company’s daily cost of funds to 0.7% versus 1.1% for the same period of 2012. Total interest expense decreased $2.5 million, or 38.5%, to $4.0 million for the third quarter of 2013, versus $6.5 million for the third quarter of 2012. The decrease was primarily the result of a 39 basis point decrease in the Company’s cost of funds to 0.6% from 1.0% for the same period of 2012.

On an average daily basis, total deposits (including demand deposits) decreased $10.3 million, or 0.4%, to $2.481 billion for the nine-month period ended September 30, 2013, versus $2.491 billion during the same period in 2012. The average daily balances for the third quarter of 2013 decreased $6.0 million, or 0.3%, to $2.479 billion from $2.486 billion during the third quarter of 2012. On an average daily basis, noninterest bearing demand deposits were $401.0 million for the nine-month period ended September 30, 2013, versus $348.3 million for the same period in 2012. The average daily noninterest bearing demand deposit balances for the third quarter of 2013 were $434.5 million versus $364.6 million for the third quarter of 2012. On an average daily basis, interest bearing transaction accounts increased $26.9 million, or 2.7%, to $1.019 billion for the nine-month period ended September 30, 2013, versus the same period in 2012. Average daily interest bearing transaction accounts increased $33.5 million, or 3.4%, to $1.015 billion for the third quarter of 2013 versus $981.8 million for the third quarter of 2012. When comparing the nine months ended September 30, 2013 with the same period of 2012, the average daily balance of time deposits, which pay a higher rate of interest compared to demand deposits and non-Rewards Checking transaction accounts, decreased $124.5 million. The average rate paid on time deposit accounts decreased 40 basis points to 1.2% for the nine-month period ended September 30, 2013, versus the same period in 2012. During the third quarter of 2013, the average daily balance of time deposits decreased $153.9 million and the rate paid decreased 37 basis points to 1.2%, versus the third quarter of 2012. Despite the low interest rate environment, the Company has been able to attract and retain retail deposit customers through offering innovative deposit products such as Rewards Checking and Savings. These products pay somewhat higher interest rates but also encourage certain customer behaviors such as using debit cards and electronic statements, which have the effect of generating additional related fee income and reducing the Company’s processing costs.

The Company’s funding strategy is generally focused on leveraging its retail branch network to grow traditional retail deposits and on its presence with commercial customers and public fund entities in its Indiana markets to generate deposits. In addition, the Company has utilized the Certificate of Deposit Account Registry Service (“CDARS”) program and out-of-market brokered certificates of deposit. Due to the Company’s historical loan growth, the Company sought these deposits and has expanded its funding strategy over time to include these types of non-core deposit programs although its reliance on these types of deposits has reduced significantly over the past several years. The Company believes that these deposit programs represent an appropriate tool in the overall liquidity and funding strategy but will continue to focus on funding loan and investment growth with in-market deposits whenever possible. On an average daily basis, total brokered certificates of deposit decreased $30.3 million to $12.2 million for the nine-month period ended September 30, 2013, versus $42.5 million for the same period in 2012. During the third quarter of 2013, there were no brokered certificates of deposit, versus an average daily balance of $30.4 million in brokered certificates of deposit during the third quarter of 2012. On an average daily basis, total public fund certificates of deposit increased $30.7 million to $128.5 million for the nine-month period ended September 30, 2013, versus $97.9 million for the same period in 2012. During the third quarter of 2013, average daily public fund certificates of deposit were $139.7 million versus $108.2 million during the third quarter of 2012. In addition, the Company had average public fund interest bearing transaction accounts of $208.2 million and $238.9 million, respectively, in the nine months and three months ended September 30, 2013, versus $190.5 million and $189.5 million for the comparable periods of 2012. Availability of public fund deposits can be cyclical, primarily due to the timing differences between when real estate property taxes are collected versus when those tax revenues are spent, and the intense competition for these funds.

Average daily balances of borrowings were $171.3 million during the nine months ended September 30, 2013, versus $163.0 million during the same period of 2012, and the rate paid on borrowings decreased 33 basis points to 0.9%. During the third quarter of 2013, the average daily balances of borrowings increased $38.4 million to $197.1 million versus $158.7 million for the same period of 2012, and the rate paid on borrowings decreased 46 basis points to 0.8%. On an average daily basis, total deposits (including demand deposits) and purchased funds increased 0.1% and 1.2%, respectively, during the nine-month and three-month periods ended September 30, 2013 versus the same periods in 2012.

The Company’s Board of Directors and management recognize the importance of liquidity during times of normal operations and in times of stress. In 2010, the Company formalized and expanded upon its extensive Contingency Funding Plan (“CFP”). The formal CFP was developed to help ensure that the multiple liquidity sources available to the Company are detailed. The CFP identifies the potential funding sources, which include the Federal Home Loan Bank of Indianapolis, the Federal Reserve Bank, brokered certificates of deposit, money market deposits, certificates of deposit available from the CDARS program, repurchase agreements, and Fed Funds. The CFP also addresses the role of the securities portfolio in liquidity.

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

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

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)

Nine Months Ended September 30,
2013 2012
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
ASSETS
Earning assets:
  Loans:
    Taxable (2)(3) $    2,295,352 $         73,469 4.28 % $    2,207,594 $         77,789 4.71 %
    Tax exempt (1)               8,651                  459 7.10               9,634                  498 6.91
  Investments: (1)
    Available for sale           475,077               7,036 1.98           475,028             10,562 2.97
  Short-term investments               6,972                      4 0.08             22,891                    16 0.09
  Interest bearing deposits             10,611                    42 0.53               2,178                    27 1.66

Total earning assets        2,796,663             81,010 3.87 %        2,717,325             88,892 4.37 %

Nonearning assets:
  Cash and due from banks             83,945 0           162,385 0
  Premises and equipment             35,692 0             34,995 0
  Other nonearning assets           110,922 0             94,853 0
  Less allowance for loan losses            (50,944) 0            (53,076) 0

Total assets $    2,976,278 $         81,010 $    2,956,482 $         88,892

~~(1)~~

Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2013 and 2012. The tax equivalent rate for tax exempt loans and tax exempt securities included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.

~~(2)~~

~~Loan fees, which are immaterial in relation to total taxable loan interest income for the nine months ended September 30, 2013 and 2012, are included as taxable loan interest income.~~

~~(3)~~

~~Nonaccrual loans are included in the average balance of taxable loans.~~

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)

Nine Months Ended September 30,
2013 2012
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
LIABILITIES AND STOCKHOLDERS'
EQUITY

Interest bearing liabilities:
  Savings deposits $       227,522 $              493 0.29 % $       192,969 $              530 0.37 %
  Interest bearing checking accounts        1,018,904               4,179 0.55           992,045               7,139 0.96
  Time deposits:
    In denominations under $100,000           336,495               3,607 1.43           395,807               5,384 1.82
    In denominations over $100,000           497,003               4,086 1.10           562,157               6,299 1.50
  Miscellaneous short-term borrowings           138,383                  349 0.34           117,002                  329 0.38
  Long-term borrowings
  and subordinated debentures             32,888                  831 3.38             45,966               1,198 3.48

Total interest bearing liabilities        2,251,195             13,545 0.80 %        2,305,946             20,879 1.21 %

Noninterest bearing liabilities
and stockholders' equity:
  Demand deposits           401,006 0           348,280 0
  Other liabilities             16,481 0             17,760 0
Stockholders' equity           307,596 0           284,496 0
Total liabilities and stockholders'
equity $    2,976,278 $         13,545 $    2,956,482 $         20,879

Net interest differential - yield on
average daily earning assets $         67,465 3.22 % $         68,013 3.34 %

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)

Three Months Ended September 30,
2013 2012
Average Interest Average Interest
Balance Income Yield (1) Balance Income Yield (1)
ASSETS
Earning assets:
  Loans:
    Taxable (2)(3) $    2,342,527 $         24,595 4.17 % $    2,206,051 $         25,803 4.65 %
    Tax exempt (1)               8,456                  152 7.11               9,406                  164 6.93
  Investments: (1)
    Available for sale           464,652               2,670 2.28           475,899               3,074 2.57
  Short-term investments               6,344                      1 0.06             24,595                      6 0.10
  Interest bearing deposits               3,524                      9 1.01               2,367                    10 1.68

Total earning assets        2,825,503             27,427 3.85 %        2,718,318             29,057 4.25 %

Nonearning assets:
  Cash and due from banks             77,947 0           165,790 0
  Premises and equipment             37,754 0             35,043 0
  Other nonearning assets           111,535 0             93,258 0
  Less allowance for loan losses            (50,466) 0            (52,046) 0

Total assets $    3,002,273 $         27,427 $    2,960,363 $         29,057

~~(1)~~

~~(2)~~

~~Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended September 30, 2013 and 2012, are included as taxable loan interest income.~~

~~(3)~~

~~Nonaccrual loans are included in the average balance of taxable loans.~~

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (Cont.)
(in thousands of dollars)

Three Months Ended September 30,
2013 2012
Average Interest Average Interest
Balance Expense Yield Balance Expense Yield
LIABILITIES AND STOCKHOLDERS'
EQUITY

Interest bearing liabilities:
  Savings deposits $       235,190 $              143 0.24 % $       197,322 $              160 0.32 %
  Interest bearing checking accounts        1,015,298               1,121 0.44           981,770               2,174 0.88
  Time deposits:
    In denominations under $100,000           320,314               1,108 1.37           388,516               1,684 1.72
    In denominations over $100,000           474,173               1,217 1.02           559,855               1,971 1.40
  Miscellaneous short-term borrowings           166,132                  146 0.35           112,722                  112 0.40
  Long-term borrowings
  and subordinated debentures             30,965                  263 3.37             45,966                  399 3.45

Total interest bearing liabilities        2,242,072               3,998 0.71 %        2,286,151               6,500 1.13 %

Noninterest bearing liabilities
and stockholders' equity:
  Demand deposits           434,476 0           364,579 0
  Other liabilities             15,654 0             18,120 0
Stockholders' equity           310,071 0           291,513 0
Total liabilities and stockholders'
equity $    3,002,273 $           3,998 $    2,960,363 $           6,500

Net interest differential - yield on
average daily earning assets $         23,429 3.29 % $         22,557 3.30 %

~~Provision for Loan Losses~~

Based on management’s review of the adequacy of the allowance for loan losses, no provisions for loan losses were recorded during the nine-month and three-month periods ended September 30, 2013, versus provisions of $1.3 million and $0 recorded during the same periods of 2012. Factors impacting the provision included the amount and status of classified and watch list credits, the level of charge-offs, management’s overall view on current credit quality and the regional and national economic conditions impacting credit quality, the amount and status of impaired loans, the amount and status of past due accruing loans (90 days or more), and overall loan growth as discussed in more detail below in the analysis relating to the Company’s financial condition.

~~Noninterest Income~~

~~Noninterest income categories for the nine-month and three-month periods ended September 30, 2013 and 2012 are shown in the following table:~~

Nine Months Ended
September 30,
Percent
2013 2012 Change

Wealth advisory fees $   2,895 $   2,770           4.5 %
Investment brokerage fees       3,449       2,435         41.6
Service charges on deposit accounts       6,548       5,937         10.3
Loan, insurance and service fees       4,792       4,062         18.0
Merchant card fee income          925          902           2.5
Other income       2,937       1,614         82.0
Mortgage banking income       1,206       1,574       (23.4)
Net securities gains (losses)          107         (377)       128.4
Impairment on available-for-sale securities (includes total losses of $0 and $1,026,
   net of $0 and $0 recognized in other comprehensive income, pre-tax)              0      (1,026) N/A
  Total noninterest income $ 22,859 $ 17,891         27.8 %

Three Months Ended
September 30,
Percent
2013 2012 Change

Wealth advisory fees $      980 $      959           2.2 %
Investment brokerage fees       1,503          695       116.3
Service charges on deposit accounts       2,325       2,045         13.7
Loan, insurance and service fees       1,524       1,421           7.2
Merchant card fee income          356          297         19.9
Other income          856          669         28.0
Mortgage banking income          159          590       (73.1)
Net securities gains (losses)          106         (380)       127.9
Impairment on available-for-sale securities (includes total losses of $0 and $67,
   net of $0 and $0 recognized in other comprehensive income, pre-tax)              0           (67) N/A
  Total noninterest income $   7,809 $   6,229         25.4 %

Noninterest income increased $5.0 million and $1.6 million, respectively, for the nine-month and three-month periods ended September 30, 2013 versus the same periods in 2012. Investment brokerage fees increased $1.0 million and $808,000, respectively, driven by higher trading volumes and improvements in the product mix. Other income increased by $1.3 million and $187,000, respectively, driven by income on bank owned life insurance as well as fees related to the Company’s interest rate swap program for clients. During the first quarter, the Company introduced a new swap derivative product, which is offered to certain commercial banking customers. Loan, insurance and service fees increased by $730,000 and $103,000, respectively, and were driven by higher fee income on increased debit card activity. In addition, noninterest income in the nine-months and three-months ended June 30, 2012 was negatively impacted by $1.1 million and $67,000, respectively, in other-than-temporary impairment on several non-agency mortgage backed securities.

~~Noninterest Expense~~

~~Noninterest expense categories for the nine-month and three-month periods ended September 30, 2013 and 2012 are shown in the following table:~~

Nine Months Ended
September 30,
Percent
2013 2012 Change

Salaries and employee benefits $ 27,493 $ 26,007       5.7 %
Occupancy expense       2,532       2,519       0.5
Equipment costs       2,021       1,854       9.0
Data processing fees and supplies       4,115       3,044     35.2
Other expense     10,089       9,807       2.9
  Total noninterest expense $ 46,250 $ 43,231       7.0 %

Three Months Ended
September 30,
Percent
2013 2011 Change

Salaries and employee benefits $   9,437 $   8,569     10.1 %
Occupancy expense          813          803       1.2
Equipment costs          758          641     18.3
Data processing fees and supplies       1,443       1,143     26.2
Other expense       3,815       3,146     21.3
  Total noninterest expense $ 16,266 $ 14,302     13.7 %

The Company's noninterest expense increased $3.0 million and $1.6 million, respectively, in the nine-month and three-month periods ended June 30, 2013 versus the same periods of 2012. Salaries and employee benefits increased by $1.5 million and $868,000, respectively. For the nine month period, the $1.5 million increase was driven by $1.1 million in salaries, which resulted from staff additions and normal merit increases and a $366,000 increase in health insurance expense. The $868,000 increase in the three months was driven by a $556,000 in salaries and a $139,000 increase in health insurance expense. Data processing fees increased by $1.1 million and $300,000, respectively, driven by a larger customer base as well as greater utilization of services from the Company’s core processor, which the Company believes will improve marketing and cross-selling initiatives. Other expenses increased by $282,000 and $669,000, respectively, driven by higher advertising expenses as well as higher professional fees. The third quarter increase was driven by advertising and consulting expenses specific to programs that the Company made investments in during the third quarter, and is not expected to be recurring levels of spending.

~~Income Tax Expense~~

Income tax expense increased $1.1 million, or 8.4%, for the first nine months of 2013, compared to the same period in 2012. The combined state franchise tax expense and the federal income tax expense, as a percentage of income before income tax expense, increased to 33.9% during the first nine months of 2013 compared to 33.3% during the same period of 2012. The increase was driven by a $465,000 provision for state income tax expense due to a revaluation of the Company’s deferred tax items relating to state income tax. During the second quarter of 2013, the Indiana legislature enacted new, lower tax rates for financial institutions, which will take effect beginning in 2014. One effect of the lower, future rates is to reduce the benefit which will be provided by the Company’s existing deferred tax items requiring the non-cash adjustment. Excluding the effect of the adjustment, income taxes for the nine months ended September 30, 2013 would have been $14.0 million, representing 32.9% of pretax net income. The combined tax expense decreased to 32.7% in the third quarter of 2013, versus 33.6% during the same period of 2012. The decrease in the third quarter of 2013 was driven by an increase in the percentage of revenue derived from tax advantaged sources versus the third quarter of 2012.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses ~~the valuation of mortgage servicing rights~~ and the valuation and other-than-temporary impairment of investment securities.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to provide for probable incurred credit losses. Loan losses are charged against the allowance when management believes that the principal is uncollectable. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance are made for specific loans and for pools of similar types of loans, although the entire allowance is available for any loan that, in management’s judgment, should be charged against the allowance. A provision for loan losses is taken based on management’s ongoing evaluation of the appropriate allowance balance. A formal evaluation of the adequacy of the loan loss allowance is conducted monthly. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s ~~critical~~control.

The level of loan loss provision is influenced by growth in the overall loan portfolio, emerging market risk, emerging concentration risk, commercial loan focus and large credit concentration, new industry lending activity, general economic conditions and historical loss analysis. In addition, management gives consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Furthermore, management’s overall view on credit quality is a factor in the determination of the provision.

The determination of the appropriate allowance is inherently subjective, as it requires significant estimates by management. The Company has an established process to determine the adequacy of the allowance for loan losses that generally includes consideration of the following factors: changes in the nature and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to repay. Consideration is not limited to these factors although they represent the most commonly cited factors. With respect to specific allocation levels for individual credits, management considers the amounts and timing of expected future cash flows and the current valuation of collateral as the primary measures. Management also considers trends in adversely classified loans based upon an ongoing review of those credits. With respect to pools of similar loans, allocations are assigned based upon historical experience unless the rate of loss is expected to be greater than historical losses as noted below. A detailed analysis is performed on loans that are classified but determined not to be impaired which incorporates probability of default with a loss given default scenario to develop non-specific allocations for the loan pool. These allocations may be adjusted based on the other factors cited above. An appropriate level of general allowance for pooled loans is determined after considering the following: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentration, new industry lending activity and general economic conditions. It is also possible that the following could affect the overall process: social, political, economic and terrorist events or activities. All of these factors are susceptible to change, which may be significant. As a result of this detailed process, the allowance results in two forms of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover probable losses inherent in the loan portfolio.

Commercial loans are subject to a dual standardized grading process administered by the credit administration function. These grade assignments are performed independent of each other and a loan may or may not be graded the same. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that indicate the loan is impaired. Considerations with respect to specific allocations for these individual credits include, but are not limited to, the following: (a) does the customer’s cash flow or net worth appear insufficient to repay the loan; (b) is there adequate collateral to repay the loan; (c) has the loan been criticized in a regulatory examination; (d) is the loan impaired; (e) are there other reasons where the ultimate collectability of the loan is in question; or (f) are there unique loan characteristics that require special monitoring.

Allocations are also applied to categories of loans considered not to be individually impaired, but for which the rate of loss is expected to be consistent with or greater than historical averages. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values. In addition, general allocations are made for other pools of loans, including non-classified loans. These general pooled loan allocations are performed for portfolio segments of commercial and industrial, commercial real estate and multi-family, agri-business and agricultural, other commercial, consumer 1-4 family mortgage and other consumer loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, subjectively adjusted for economic factors and portfolio trends.

Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes an unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s determination, based on its judgment, of inherent losses that may not be fully reflected in other allocations, including factors such as the level of classified credits, economic uncertainties, industry trends impacting specific portfolio segments, broad portfolio quality trends and trends in the composition of the Company’s large commercial loan portfolio and related large dollar exposures to individual borrowers.

Valuation and Other-Than-Temporary Impairment of Investment Securities

The fair values of securities available for sale are determined on a recurring basis by obtaining quoted prices on nationally recognized securities exchanges or pricing models, which utilize significant observable inputs such as matrix pricing. This 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. Different judgments and assumptions used in pricing could result in different estimates of value. The fair value of certain securities is determined using unobservable inputs, primarily observable inputs of similar securities.

At the end of each reporting period, securities held in the investment portfolio are evaluated on an individual security level for other-than-temporary impairment in accordance with current accounting ~~policies~~guidance. Impairment is other-than-temporary if the decline in the fair value of the security is below its amortized cost and it is probable that all amounts due according to the contractual terms of a debt security will not be received.

Significant judgments are ~~discussed~~required in ~~detail~~determining impairment, which includes making assumptions regarding the estimated prepayments, loss assumptions and the change in interest rates.

We consider the following factors when determining other-than-temporary impairment for a security or investment:

the length of time and the extent to which the market value has been less than amortized cost;

the financial condition and near-term prospects of the issuer;

the underlying fundamentals of the relevant market and the outlook for such market for the near future; and

our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in market value.

An additional independent analysis was performed for the non-agency residential mortgage-backed securities to determine if other-than-temporary impairment needed to be recorded for these securities. The independent analysis utilized third party data sources which were then included in projections of the cash flows of the individual securities under several different scenarios based upon assumptions of collateral defaults, prepayment speeds, expected losses and the severity of potential losses. Based upon the initial review using the analysis created with third party sources, securities were identified for further analysis. For any that were identified, management made assumptions as to prepayment speeds, default rates, severity of losses and lag time until losses are actually recorded for each security based upon historical data for each security and other factors. Cash flows for each security using these assumptions were generated and the net present value was computed using an appropriate discount rate (the original accounting yield) for the individual security. The net present value was then compared to the book value of the security to determine if there was any other-than-temporary impairment that must be recorded. During 2013, all non-agency mortgage-backed securities owned as of December 31, 2012 were sold and no additional non-agency mortgage-backed securities were purchased.

If, in management’s judgment, other-than-temporary impairment exists, the cost basis of the security will be written down to the computed net present value, and the unrealized loss will be transferred from accumulated other comprehensive loss as an immediate reduction of current earnings (as if the loss had been realized in the period of other-than-temporary impairment). In addition, discount accretion will be discontinued on any bond that meets one or both of the following: (1) the rating by S&P, Moody’s or Fitch decreases to below “A” and/or (2) the cash flow analysis on a security indicates under any scenario modeled by the third party there is a potential to not receive the full amount invested in the security.

RESULTS OF OPERATIONS

Overview

Selected income statement information for the three months ended March 31, 2014 and 2013 is presented in the following table:

(dollars in thousands)	2014	2013
Income Statement Summary:
Net interest income	$ 24,680	$ 21,257
Provision for loan losses	0	0
Noninterest income	7,427	7,481
Noninterest expense	16,790	14,893
Other Data:
Efficiency ratio	52.29%	51.82%
Dilutive EPS	$ 0.59	$ 0.56
Tangible capital ratio	10.18%	10.38%
Net charge-offs to average loans	0.42%	0.11%

Net Income

Net income was $9.9 million in the first three months of 2014, an increase of $666,000, or 7.2%, versus net income of $9.2 million in the first three months of 2013. Net interest income increased $3.4 million, or 16.1%, to $24.7 million versus $21.3 million in the first three months of 2013. Net interest income increased primarily due to a 9.2% increase in average earning assets. Significantly affecting average earning assets during 2014 was an increase of 15.0% in the commercial loan portfolio, which reflects our continuing strategic focus on commercial lending. In addition, noninterest bearing demand deposits increased while time deposits, which typically pay a higher rate of interest, decreased. The net interest margin was 3.38% in the first three months of 2014 versus 3.17% in 2013. The higher margin reflected a decline in funding costs offset by lower yields on earning assets.

Net income in the first three months of 2014 was negatively impacted by a non-cash provision for state income tax expense of $431,000, which resulted from a revaluation of the Company’s state deferred tax items. During the first quarter of 2014, the Indiana legislature approved new tax rates for financial institutions. The tax rate, currently 8.0%, is scheduled to drop to 6.5% for 2017. The new legislation further reduces the rate to 4.9%, phased-in beginning in 2019. One effect of the lower, future rates is to reduce the benefit that will be provided by the Company’s existing net deferred tax asset items requiring the non-cash adjustment. Excluding the effect of the adjustment, net income for the first three months of 2014 would have been $10.3 million, representing an increase of 11.9% over the comparable period of 2013.

Net Interest Income

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

	Three Months Ended March 31,
	2014				2013
	Average	Interest	Yield (1)/		Average	Interest	Yield (1)/
(fully tax equivalent basis, dollars in thousands)	Balance	Income	Rate		Balance	Income	Rate
Earning assets
Loans:
�� Taxable (2)(3)	$ 2,530,356	$ 25,334	4.06	%	$ 2,246,688	$ 24,486	4.42	%
Tax exempt (1)	8,266	148	7.27		8,817	154	7.08
Investments: (1)
Available for sale	473,184	3,251	2.79		478,098	2,045	1.74
Short-term investments	5,480	1	0.07		9,157	2	0.09
Interest bearing deposits	4,154	7	0.68		25,168	22	0.35
Total earning assets	$ 3,021,440	$ 28,741	3.86	%	$ 2,767,928	$ 26,709	3.91	%
Less: Allowance for loan losses	(48,592)				(51,645)
Nonearning Assets
Cash and due from banks	61,742				82,210
Premises and equipment	39,627				34,716
Other nonearning assets	112,916				110,558
Total assets	$ 3,187,133				$ 2,943,767

Interest bearing liabilities
Savings deposits	$ 242,161	$ 134	0.22	%	$ 216,828	$ 172	0.32	%
Interest bearing checking accounts	1,099,980	1,062	0.39		999,319	1,640	0.67
Time deposits:
In denominations under $100,000	285,467	823	1.17		352,509	1,300	1.50
In denominations over $100,000	551,290	1,168	0.86		523,738	1,525	1.18
Miscellaneous short-term borrowings	170,733	151	0.36		114,105	91	0.32
Long-term borrowings and
subordinated debentures (4)	30,964	252	3.30		36,798	307	3.38
Total interest bearing liabilities	$ 2,380,595	$ 3,590	0.61	%	$ 2,243,297	$ 5,035	0.91	%
Noninterest bearing liabilities
Demand deposits	463,664				380,759
Other liabilities	14,816				16,485
Stockholders' equity	328,058				303,226
Total liabilities and stockholders' equity	$ 3,187,133				$ 2,943,767

Interest Margin Recap
Interest income/average earning assets		28,741	3.86			26,709	3.91
Interest expense/average earning assets		3,590	0.48			5,035	0.74
Net interest income and margin		$ 25,151	3.38	%		$ 21,674	3.17	%

(1)	Tax exempt income was converted to a fully taxable equivalent basis at a 35 percent tax rate for 2014 and 2013. The tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983 included the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) adjustment applicable to nondeductible interest expenses.
(2)	Loan fees, which are immaterial in relation to total taxable loan interest income for the three months ended March 31, 2014 and 2013, are included as taxable loan interest income.
(3)	Nonaccrual loans are included in the average balance of taxable loans.

Net interest income increased $3.4 million, or 16.2%, for the three months ended March 31, 2014 compared with the first three months of 2013. The increased level of net interest income during the first quarter of 2014 compared with the first quarter of 2013 was largely driven by an increase in net earning assets as well as a deceleration in the amortization of premiums on agency mortgage-backed securities. The deceleration was primarily the result of rising long-term mortgage interest rates which have reduced prepayments in the loans underlying the securities. In addition, the Company’s cost of funds decreased by 26 basis points during the first three months of 2014 compared to the first three months of 2013. The tax equivalent net interest margin was 3.38% for the first three months of 2014 compared to 3.17% during the first three months of 2013. The yield on earning assets totaled 3.86% during the three months ended March 31, 2014 compared to 3.91% in the same period of 2013 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.48% during the first three months of 2014 compared to 0.74% in the same period of 2013.

The decline in the yield on earning assets in the first three months of 2014 compared with the first three months of 2013 was largely attributable to the continued downward pressure on commercial loan yields being driven by a historically low market interest rate environment and a competitive marketplace for lending opportunities. The decline was also caused in part by the scheduled amortization of existing fixed rate commercial loans. The decline was mitigated by the deceleration in premium amortization of agency mortgage-backed securities. The decline in the Company’s ~~Annual Report on Form 10-K~~cost of funds by approximately 26 basis points during the first three months of 2014 compared to the first three months 2013 was largely driven by a continued decline in deposit rates as well as an increase of $82.9 million in average noninterest bearing demand deposits.

Average earning assets increased by $253.5 million for the ~~year~~three months ended March 31, 2014 compared with the same period of 2013. Average loans outstanding increased $283.1 million during the three months ended March 31, 2014 compared with the first three months of 2013, with most of the growth being in commercial loans. The average securities portfolio decreased $4.9 million in the three months ended March 31, 2014 compared with the first three months of 2013.

Provision for Loan Losses

No provisions for loan loss expense were recorded during the three-month periods ended March 31, 2014 and 2013. The allowance for loan losses represented 1.79% of the loan portfolio, versus 1.92% at December 31, ~~2012.~~2013 and 2.25% at March 31, 2013. Factors impacting the decision not to record a provision in the first three months of 2014 included the stabilization or improvement in key loan quality metrics including strong reserve coverage of nonperforming loans, a decrease in historical loss percentages, continuing signs of stabilization in economic conditions in the Company’s markets and general signs of improvement in borrower performance and future prospects. In addition, management gave consideration to changes in the allocation for specific watch list credits in determining the appropriate level of the loan loss provision. Management’s overall view on current credit quality was also a factor in the determination of the provision for loan losses. The Company’s management continues to monitor the adequacy of the provision based on loan levels, asset quality, economic conditions and other factors that may influence the assessment of the collectability of loans.

Noninterest Income

Noninterest income categories for the three-month periods ended March 31, 2014 and 2013 are shown in the following table:

	Three Months Ended
	March 31,
			Percent
(dollars in thousands)	2014	2013	Change
Wealth advisory fees	$ 1,039	$ 944	10.1	%
Investment brokerage fees	1,117	949	17.7
Service charges on deposit accounts	2,151	1,971	9.1
Loan, insurance and service fees	1,458	1,456	0.1
Merchant card fee income	350	276	26.8
Bank owned life insurance	372	393	(5.3)
Other income	875	982	(10.9)
Mortgage banking income	65	509	(87.2)
Net securities gains (losses)	0	1	N/A
Total noninterest income	$ 7,427	$ 7,481	(0.7)	%
Noninterest income to total revenue	23.1%	26.0%

The Company's noninterest income decreased 1% to $7.4 million for the first quarter of 2014 from $7.5 million for the first quarter of 2013. On a year-over-year basis, quarterly noninterest income was negatively impacted by a $444,000 decrease in mortgage banking income, driven by lower production volumes due to higher long-term mortgage rates. Service charges on deposit accounts increased by $180,000 driven by increases in account analysis service charges on commercial checking accounts, and investment brokerage fees increased by $168,000 driven by a shift towards fixed income investments by clients, which generally have a more favorable revenue impact to the Company.

Noninterest Expense

Noninterest expense categories for the three-month periods ended March 31, 2014 and 2013 are shown in the following table:

	Three Months Ended
	March 31,
			Percent
(dollars in thousands)	2014	2013	Change
Salaries and employee benefits	$ 9,987	$ 9,165	9.0	%
Net occupancy expense	1,110	846	31.2
Equipment costs	773	609	26.9
Data processing fees and supplies	1,491	1,293	15.3
Corporate and business development	416	406	2.5
FDIC insurance and other regulatory fees	477	463	3.0
Professional fees	800	595	34.5
Other expense	1,736	1,516	14.5
Total noninterest expense	$ 16,790	$ 14,893	12.7	%

The Company’s noninterest expense increased $1.9 million, or 13%, to $16.8 million in the first quarter of 2014 versus $14.9 million in the comparable quarter of 2013. Salaries and employee benefits increased by $822,000 in the three month period ended March 31, 2014 versus the same period of 2013. These increases in salary and employee benefits were driven by staff additions, normal merit increases and higher performance and incentive-based compensation costs such as investment brokerage sales commissions. Quarterly net occupancy expense increased $264,000 driven by higher snow removal costs. Professional fees increased $205,000 due to higher legal expenses as well as fees associated with the search for a new Chief Financial Officer, who took office in the second quarter. Data processing fees increased by $198,000 due to a larger customer base as well as greater utilization of services from the Company’s core processor, which the Company expects will improve marketing and cross-selling initiatives. In addition, equipment costs increased $164,000 during the first quarter of 2014, driven by higher depreciation expenses related to operating leases. The Company’s efficiency ratio was 52.3% for the first quarter of 2014 versus 51.8% for the comparable period of 2013.

Income Taxes

Income tax expense increased $806,000, or 17.5%, for the first three months of 2014, compared to the same period in 2013. The combined state franchise tax expense and the federal income tax expense, as a percentage of income before income tax expense, increased to 35.3% during the first three months of 2014 compared to 33.2% during the same period of 2013. The increase was driven by the previously disclosed $431,000 provision for state income tax expense due to a revaluation of the Company’s state net deferred tax asset items. Excluding the effect of the adjustment, income taxes for the three months ended March 31, 2014 would have been $5.0 million, representing 32.5% of pretax net income.

FINANCIAL CONDITION

Overview

Total assets of the Company were ~~$3.041~~$3.234 billion as of ~~September 30, 2013, a decrease~~March 31, 2014, an increase of ~~$22.9~~$58.0 million, or ~~0.8%~~1.8%, when compared to ~~$3.064~~$3.176 billion as of December 31, ~~2012.~~

2013. Total ~~cash and cash equivalents decreased~~loans increased by ~~$150.9~~$39.1 million, or ~~65.0%~~1.5%, to ~~$81.3 million~~$2.574 billion at ~~September 30, 2013~~March 31, 2014 from ~~$232.2 million~~$2.535 billion at December 31, ~~2012. The decrease resulted~~2013. Funding for the loan growth came from a $192.7 million increase in deposits offset by a $147.5 million decrease in total deposits as well as loan growth. Historically, the Company maintained higher compensating balances with correspondent financial institutions in order to avoid certain service fees. During a periodic review of this strategy during the first quarter of 2013, the Company determined that it would be more beneficial to maintain lower compensating balances although this may result in paying slightly higher service fees. The reduction in the compensating balances resulted in a lower level of cash and cash equivalents at September 30, 2013 compared to December 31, 2012.short-term borrowings.

5736

~~Total~~

Uses of Funds

Investment Portfolio

The amortized cost and the fair value of securities ~~available-for-sale decreased by $4.0 million, or 0.9%, to $463.1 million at September 30, 2013 from $467.0 million at~~as of March 31, 2014 and December 31, ~~2012. The decrease was a result~~2013 were as follows:

	March 31, 2014		December 31, 2013
	Amortized	Fair	Amortized	Fair
(dollars in thousands)	Cost	Value	Cost	Value
U.S. Treasury securities	$ 1,000	$ 1,011	$ 1,001	$ 1,017
Agency residential mortgage-backed securities	372,570	373,424	374,611	371,977
State and municipal securities	95,121	97,014	95,388	95,973
Total	$ 468,691	$ 471,449	$ 471,000	$ 468,967

At March 31, 2014 and December 31, 2013, there were no holdings of ~~a number~~securities of ~~transactions~~any one issuer, other than the U.S. government, government agencies and government sponsored agencies, in an amount greater than 10% of stockholders’ equity.

Purchases of securities available for sale totaled $13.5 million in the ~~securities portfolio. Securities purchases totaled $142.0~~first three months of 2014. Paydowns from prepayments and scheduled payments of $13.2 million were received in the first three months of 2014, and the amortization of premiums, net of the accretion of discounts, was $1.5 million. ~~Offsetting this increase were securities paydowns totaling $89.8 million, sales of securities totaling $30.0 million, maturities~~Maturities and calls of securities ~~totaling $7.4~~totaled $1.0 million ~~and securities amortization net~~in the first three months of ~~accretion totaling $7.1 million. In addition,~~2014. No other-than-temporary impairment was recognized in the ~~net unrealized gain~~first three months of the securities portfolio decreased by $11.7 million. The decrease in fair market value was primarily driven by rising interest rates during the second quarter, which led to lower market values for agency residential mortgage-backed securities and state and municipal securities.2014. The investment portfolio is ~~generally~~ managed to provide for an appropriate balance between, liquidity, credit risk and investment return and to limit the Company’s exposure to ~~credit~~ risk ~~by containing mostly mortgage-backed securities backed by the federal government, other securities which are either directly~~to an acceptable level. The Company does not trade or ~~indirectly backed by the federal government~~invest in or ~~a local municipal government. The securities sales referenced earlier included the remaining four non-agency residential mortgage backed securities~~sponsor certain unregistered investment companies defined as hedge funds and private equity funds in the ~~Company’s securities portfolio.~~Volcker Rule.

Real Estate Mortgage Loans HFS

Real estate mortgage loans held-for-sale ~~decreased~~increased by ~~$8.4 million,~~$265,000, or ~~88.9%~~14.9%, to ~~$1.0~~$2.0 million at ~~September 30, 2013,~~March 31, 2014, from ~~$9.5~~$1.8 million at December 31, ~~2012.~~2013. The balance of this asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. ~~During~~The Company generally sells all of the ~~nine months ended September 30, 2013, $68.4~~mortgage loans it originates on the secondary market. Proceeds from sales totaled $6.9 million in ~~real estate mortgages were originated for sale~~the first three months of 2014.

Loan Portfolio

The loan portfolio by class as of March 31, 2014 and ~~$76.0 million in mortgages were sold.~~December 31, 2013 is summarized as follows:

							Current
	March 31,			December 31,			Period
(dollars in thousands)	2014			2013			Change
Commercial and industrial loans	$ 944,497	36.7	%	$ 901,567	35.6	%	$ 42,930
Commercial real estate and multi-family residential loans	1,015,055	39.4		986,207	38.9		28,848
Agri-business and agricultural loans	213,644	8.3		254,029	10.0		(40,385)
Other commercial loans	77,324	3.0		70,770	2.8		6,554
Consumer 1-4 family mortgage loans	279,954	10.9		277,030	10.9		2,924
Other consumer loans	44,319	1.7		46,125	1.8		(1,806)
Subtotal	2,574,793	100.0	%	2,535,728	100.0	%	39,065
Less: Allowance for loan losses	(46,137)			(48,797)			2,660
Net deferred loan fees	(603)			(630)			27
Loans, net	$ 2,528,053			$ 2,486,301			$ 41,752

Total loans, excluding real estate mortgage loans held for sale, increased by ~~$135.2~~$39.1 million to ~~$2.393~~$2.575 billion at ~~September 30, 2013~~March 31, 2014 from ~~$2.258~~$2.536 billion at December 31, ~~2012. Management expects loan growth to be moderate as~~2013. The increase was concentrated in the economic recovery moves along. The loan portfolio at September 30, 2013 consisted of 87% commercial and industrial, including commercial real estate and agri-business, 11% residential real estate and home equity and 2% consumer loans, versus 85% commercial and industrial, including commercial real estate and agri-business, 13% residential real estate and home equity and 2% consumer loans at December 31, 2012.

~~The Company has a relatively high percentage of~~ commercial and commercial real estate categories and reflected the Company’s long standing strategic plan that is focused on expanding and growing the commercial lending business throughout our market areas. The increase was partially offset by seasonal declines in agri-business loans.

The following table summarizes the Company’s non-performing assets as of March 31, 2014 and December 31, 2013:

	March 31,	December 31,
(dollars in thousands)	2014	2013
Nonaccrual loans including nonaccrual troubled debt restructured loans	$ 15,082	$ 23,899
Loans past due over 90 days and still accruing	20	46
Total nonperforming loans	$ 15,102	$ 23,945
Other real estate owned	1,192	469
Repossessions	9	12
Total nonperforming assets	$ 16,303	$ 24,426

Impaired loans including troubled debt restructurings	$ 34,101	$ 43,218

Nonperforming loans to total loans	0.59%	0.94%
Nonperforming assets to total assets	0.50%	0.77%

Performing troubled debt restructured loans	$ 16,222	$ 17,714
Nonperforming troubled debt restructured loans (included in nonaccrual loans)	10,721	18,531
Total troubled debt restructured loans	$ 26,943	$ 36,245

Total nonperforming assets decreased by $8.1 million, or 33.3%, to $16.3 million during the three-month period ended March 31, 2014. The decrease in nonperforming assets primarily resulted from the sale, to an independent party, of a single commercial relationship consisting of three loans ~~most~~totaling $6.7 million. The three loans were accounted for as troubled debt restructurings. The Company received proceeds of ~~which are extended~~$4.3 million and recognized charge offs of $2.4 million as a result of the sale. The amount charged-off had previously been reserved for by the Company. In addition, one commercial credit of $1.4 million was removed from the impaired category due to ~~small~~improved performance.

Net charge-offs totaled $2.6 million in the first quarter of 2014, versus net charge-offs of $626,000 during the first quarter of 2013 and net charge-offs of $1.0 million during the fourth quarter of 2013.

A loan is impaired when full payment under the original loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature not in nonaccrual or medium-sized businesses from a wide variety of industries. Commercial loans represent higher dollar amount loans to fewer customers and therefore higher credit risk than other types of loans. Pricing is adjusted to manage the higher credit risk associated with these types of loans. The majority of fixed-ratetroubled debt restructured status such as residential mortgage, consumer, and credit card loans, ~~which represent increased interest rate risk, are sold~~and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flow or at the fair value of collateral if repayment is expected solely from the collateral.

Total impaired loans decreased by $9.1 million, or 21.1%, to $34.1 million at March 31, 2014 from $43.2 million at December 31, 2013. The decrease in the ~~secondary market, as well as some variable rate residential mortgage loans. The remainder~~impaired loans category was primarily due to the sale proceeds received and charge offs recognized on a single commercial relationship consisting of three impaired loans totaling $6.7 million. In addition, one commercial credit of $1.4 million was removed from the ~~variable rate residential mortgage~~impaired category due to improved performance.

At March 31, 2014, the allowance for loan losses was 1.79% of total loans ~~and a small number~~outstanding, versus 1.92% of ~~fixed-rate residential mortgage~~total loans ~~are retained. Management~~outstanding, at December 31, 2013. At March 31, 2014, management believes the allowance for loan losses iswas at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions do not continue to improve, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require ~~further~~ increases in the ~~provision~~allowance for loan losses. The process of identifying probable credit losses is a subjective process. Therefore, the Company maintains a general allowance to cover probable incurred credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the loan loss reserve includes the considerations below.

Loans are charged against the allowance for loan losses when management believes that the principal is uncollectible. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses relating to specifically identified loans based on an evaluation of the loans by management, as well as other probable incurred losses inherent in the loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to repay. Management also considers trends in adversely classified loans based upon a monthly review of those credits. An appropriate level of general allowance is determined after considering the following factors: application of historical loss percentages, emerging market risk, commercial loan focus and large credit concentrations, new industry lending activity and current economic conditions. Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified ~~loans –~~loans: Substandard, Doubtful and Loss. The regulations also contain a Special Mention category. Special Mention is defined as loans that do not currently expose an insured institution to a sufficient degree of risk to warrant classification as Substandard, Doubtful or Loss but do possess credit deficiencies or potential weaknesses deserving management’s close attention. The Company’s policy is to establish a specific allowance for loan losses for any assets where management has identified conditions or circumstances that indicate an asset is impaired. If an asset or portion thereof is classified as loss, the Company’s policy is to either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge-off such amount.

5838

The Company has a relatively high percentage of commercial and commercial real estate loans, most of which are extended to small or medium-sized businesses from a wide variety of industries. Generally, this type of lending has more credit risk than other types of lending because of the size and diversity of the credits. The Company manages this risk by adjusting its pricing to the perceived risk of each individual credit and by diversifying the portfolio by customer, product, industry and geography.

At ~~September 30, 2013,~~March 31, 2014, on the basis of management’s review of the loan portfolio, the Company had 98 credits totaling ~~$167.3~~$165.3 million on the classified loan list versus ~~104~~98 credits totaling ~~$181.9~~$165.1 million on December 31, ~~2012.~~2013. As of ~~September 30, 2013,~~March 31, 2014, the Company had ~~$89.8~~$97.8 million of assets classified as Special Mention, ~~$77.5~~$65.8 million classified as Substandard, $0 classified as Doubtful and $0 classified as Loss as compared to ~~$82.7~~$90.4 million, ~~$99.2~~$72.1 million, ~~$66,000~~$0 and $0, respectively at December 31, 2012. As of September 30, 2013, the Company had 33 loans totaling $41.6 million accounted for as troubled debt restructurings. Included in the classified loan amounts above were 17 mortgage loans totaling $1.6 million with total allocations of $308,000, and 16 commercial loans totaling $39.9 million with total allocations of $9.5 million. The Company has no commitments to lend additional funds to any of the borrowers. At December 31, 2012, the Company had 41 loans totaling $50.8 million accounted for as troubled debt restructurings - one installment loan totaling $16,000 with an allocation of $4,000, 12 mortgage loans totaling $1.4 million with total allocations of $247,000, and 28 commercial loans totaling $49.4 million with total allocations of $12.2 million. The $9.3 million decrease of loans accounted for as troubled debt restructurings at September 30, 2013, as compared to December 31, 2012, was primarily due to the removal of two commercial credits totaling $8.4 million since these loans were modified at a market rate and were performing as of December 31, 2012.2013.

Allowance estimates are developed by management after taking into account actual loss experience adjusted for current economic conditions. The Company ~~generally~~ has regular discussions regarding this methodology with regulatory authorities. Allowance estimates are considered a prudent measurement of the risk in the Company’s loan portfolio and are applied to individual loans based on loan type. In accordance with current accounting guidance, the allowance is provided for losses that have been incurred as of the balance sheet date and is based on past events and current economic conditions and does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. For a more thorough discussion of the allowance for loan losses methodology see the Critical Accounting Policies section of this Item 2.

~~Net charge-offs totaled $831,000 in the third quarter of 2013, versus net recoveries of $96,000 during the third quarter of 2012 and net charge-offs of $183,000 during the second quarter of 2013.~~

The allowance for loan losses decreased ~~3.2%~~5.5%, or ~~$1.6~~$2.7 million, from ~~$51.4~~$48.8 million at December 31, ~~2012~~2013 to ~~$49.8~~$46.1 million at ~~September 30, 2013.~~March 31, 2014. Pooled loan allocations increased from ~~$36.6~~$39.5 million at December 31, ~~2012~~2013 to ~~$39.3~~$40.1 million at ~~September 30, 2013,~~March 31, 2014, which was ~~primarily a result of~~due to an increase in pooled loan ~~growth~~balances as well as management’s ~~overall~~ view onof current credit quality and the current economic environment, which included a change at March 31, 2013 in the lookback period for the determination of the qualitative factors from a three year lookback to a higher of a three year or five year lookback. Management believes it is prudent when determining the qualitative factors to consider the higher historical loss periods included in the five year lookback period that are now running off in the three year lookback period, due to the current macroeconomic and political uncertainty.environment. Impaired loan allocations decreased ~~$4.3~~$3.2 million from ~~$14.8~~$9.3 million at December 31, ~~2012~~2013 to ~~$10.5~~$6.1 million at ~~September 30, 2013.~~March 31, 2014. This decrease in impaired allocations was primarily due to decreases in the allocations of existing impaired loans as well as reductions to the impaired loans category. The unallocated component of the allowance for loan losses was ~~virtually~~ unchanged at $3.5 million at ~~September 30, 2013 compared to $3.4 million at~~March 31, 2014 and December 31, ~~2012.~~2013. While general trends in the overall economy and credit quality were stable or favorable, the Company believes that the unallocated component is appropriate given the uncertainty that exists regarding near term economic ~~conditions, including~~conditions.

Most of the ~~slow economic recovery.~~Company’s loan growth has been concentrated in the commercial loan portfolio, which can result in overall asset quality being influenced by a small number of credits. Management has historically considered growth and portfolio composition when determining loan loss allocations. Management believes ~~the allowance~~that it is prudent to continue to provide for loan losses ~~at September 30, 2013 was at~~in a ~~level commensurate~~manner consistent with its historical approach due to the loan growth described above and current economic conditions.

Economic conditions in the Company’s markets have generally improved and stabilized, management is cautiously optimistic that the recovery is positively impacting its borrowers. While the recovery is not robust, commercial real estate activity and manufacturing growth is occurring. The Company’s continued growth strategy promotes diversification among industries as well as continued focus on enforcement of a strong credit environment and an aggressive position in loan work-out situations. Although the Company believes that historical industry-specific issues in the Company’s markets have improved and continue to be somewhat mitigated by its overall ~~risk exposure~~expansion strategy, the economic environment impacting its entire geographic footprint will continue to present challenges. While the Company has seen indications of improved economic conditions in its markets, they are not wide spread or particularly strong improvements.

Sources of Funds

The following table summarizes deposits and borrowings as of March 31, 2014 and December 31, 2013:

			Current
	March 31,	December 31,	Period
(dollars in thousands)	2014	2013	Change
Non-interest bearing demand deposits	$ 482,189	$ 479,606	$ 2,583
Interest bearing demand, savings & money market accounts	1,356,858	1,338,653	18,205
Time deposits under $100,000	280,335	291,566	(11,231)
Time deposits of $100,000 or more	619,392	436,243	183,149
Total deposits	2,738,774	2,546,068	192,706
Short-term borrowings	114,361	261,876	(147,515)
Long-term borrowings	35	37	(2)
Subordinated debentures	30,928	30,928	0
Total borrowings	145,324	292,841	(147,517)
Total funding sources	$ 2,884,098	$ 2,838,909	$ 45,189

Deposits and Borrowings

Total deposits increased by $192.7 million, or 7.6%, from December 31, 2013. Most of the ~~loan portfolio. However, if economic conditions do not continue~~growth was concentrated in brokered time deposits of $100,000 or more, public fund certificates of deposit of $100,000 or more and money market accounts. The increase in money market balances as well as a decline in time deposits under $100,000 is reflective of the ongoing low interest rate environment and consumers’ desire to ~~improve, certain borrowers may experience difficulty and the level~~keep funds in a more liquid short-term deposit vehicle, in anticipation of ~~nonperforming loans, charge-offs and delinquencies could rise and require further increases~~higher rates in the ~~provision for loan losses.~~

future. Total ~~impaired loans decreased by $11.4 million, or 19.3%, to $47.4~~brokered deposits were $143.8 million at ~~September 30, 2013 from $58.9~~March 31, 2014 compared to $29.8 million at December 31, ~~2012. A loan is impaired when full payment~~2013. Total public funds deposits, including public funds transaction accounts, were $698.5 million at March 31, 2014 compared to $549.7 at December 31, 2013.

Total borrowings decreased by $147.5 million, or 50.4%, from December 31, 2013. Most of the decrease was concentrated in short-term advances from the Federal Home Loan Bank of Indianapolis as well as securities sold under agreements to repurchase. The Company uses wholesale funding, including brokered deposits, public funds and Federal Home Loan Bank advances, to augment deposit funding and to help maintain its desired interest rate risk position.

Capital

As of March 31, 2014, total stockholders’ equity was $332.0 million, an increase of $10.1 million, or 3.2%, from $321.9 million at December 31, 2013. In addition to net income of $9.9 million, other significant changes in equity during the ~~original loan terms~~first three months of 2014 included $3.1 million of dividends paid. The accumulated other comprehensive income component of equity increased $2.9 million during the three months ended March 31, 2014, driven by changes in the fair values of available-for-sale securities. The impact to equity due to other comprehensive income is not ~~expected. Impairment is evaluated~~included in regulatory capital. The banking regulators have established guidelines for leverage capital requirements, expressed in terms of Tier 1 or core capital as a percentage of average assets, to measure the ~~aggregate~~soundness of a financial institution. In addition, banking regulators have established risk-based capital guidelines for ~~smaller-balance loans~~U.S. banking organizations. The actual capital amounts and ratios of ~~similar nature such~~Lakeland Financial Corporation and Lake City Bank as ~~residential mortgage, and consumer loans, and on an individual loan basis for other loans. If a loan is impaired, a portion~~ of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The decrease in the impaired loans category was primarily due to the removal of three commercial credits totaling $10.5 million from the impaired category. The following table summarizes nonperforming assets at September 30, 2013March 31, 2014 and December 31, ~~2012.~~2013, are presented in the table below:

6040

September 30, December 31,
2013 2012
(in thousands)
NONPERFORMING ASSETS:
Nonaccrual loans including nonaccrual troubled debt restructured loans $         22,833 $         30,829
Loans past due over 90 days and still accruing               364                  50
Total nonperforming loans $         23,197 $         30,879
Other real estate owned               117                667
Repossessions                 10                     23
Total nonperforming assets $         23,324 $         31,569

Impaired loans including troubled debt restructurings $         47,347 $         58,935

Nonperforming loans to total loans 0.97% 1.37%
Nonperforming assets to total assets 0.77% 1.03%

Nonperforming troubled debt restructured loans (included in nonaccrual loans) $          19,398 $          28,506
Performing troubled debt restructured loans             23,017 22,332
Total troubled debt restructured loans $         42,415 $          50,838

Total nonperforming assets decreased by $8.2 million, or 26.1%, to $23.3 million during the nine-month period ended September 30, 2013. The decrease was primarily due to the aforementioned reclassification of three commercial credits from impaired to non-impaired. The loan upgrades also shifted two of the loans from the troubled debt restructured loan category. The third loan was never a troubled debt restructuring. In addition, the Company sold $592,000 in other real estate owned during the nine-month period ended September 30, 2013.

Three commercial relationships represented 67.6% of total nonperforming loans. A commercial relationship consisting of three loans totaling $6.8 million represented the largest exposure in the nonperforming category. These loans were classified as nonperforming in the fourth quarter of 2011. The borrower is engaged in commercial real estate development. Borrower collateral, including real estate and the personal guarantees of its principals, support the credit. The Company has not taken any charge-offs related to this credit.

A $5.0 million commercial relationship consisting of three loans represents the second largest exposure in the nonperforming category. These loans were classified as nonperforming in the fourth quarter of 2009. The borrower is engaged in real estate development. Borrower collateral, including real estate and the personal guarantees of its principals, support the credit. The Company took a $1.7 million charge-off related to this credit in the fourth quarter of 2009, and no charge-offs were taken in 2010 or 2011. The Company took a $601,000 charge-off related to this credit in the first quarter of 2012. The Company has not taken any charge-offs on this credit since then.

A $3.6 million credit to a manufacturer tied to the housing industry represented the third largest exposure in the nonperforming category. This loan was classified as nonperforming in the second quarter of 2008. The credit is accounted for as a troubled debt restructuring. Borrower collateral including receivables, inventory and equipment support the credit; however, there are no guarantors. The Company took a $906,000 charge-off related to this credit in 2008, a $1.7 million charge-off related to this credit in 2012 and an $88,000 charge-off related to this credit in the first quarter of 2013.

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

The Company has begun offering a new derivative product to certain commercial banking customers. This product allows the commercial banking customers to enter into an agreement with the Company to swap a variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the borrower's interest rate exposure. The extension of credit incurred in connection with these derivative products is subject to the same approval and underwriting standards as traditional credit products. The Company limits its risk exposure by simultaneously entering into a similar, offsetting swap agreement with a separate, well-capitalized and highly rated counterparty previously approved by the Company’s Asset Liability Committee. By using these interest rate swap arrangements, the Company is also better insulated from the interest rate risk associated with underwriting fixed-rate loans and is better able to meet customer demand for fixed rate loans. These derivative contracts are not designated against specific assets or liabilities and, therefore, do not qualify for hedge accounting. The derivatives are recorded as assets and liabilities on the balance sheet at fair value with changes in fair value recorded in non-interest income for both the commercial banking customer swaps and the related offsetting swaps.

Total deposits decreased by $136.9 million, or 5.3%, to $2.445 billion at September 30, 2013 from $2.582 billion at December 31, 2012. The decrease resulted from decreases of $101.3 million in interest bearing transaction accounts, $49.4 million in other certificates of deposit, $43.6 million in certificates of deposit of $100,000 and over, $28.0 million in brokered certificates of deposit and $19.5 in CDARS certificates of deposit. The decrease in interest bearing transaction accounts was driven by a $66.4 million decline in Rewards Checking. The Company proactively made changes in the Rewards program, including lowering the rate and lowering the cap on the level which earns the highest rate. The Company believes that the decline in certificates of deposit are reflective of the ongoing low interest rate environment and the consumers’ desire to seek the highest rate in the market, which the Company sometimes does not match. Offsetting these decreases were increases of $41.7 million in demand deposits, $23.8 million in money market accounts and $23.7 million in savings accounts and $15.7 million in public fund certificates of deposit of $100,000 or more. The increase in demand deposits occurred as a result of a $46.2 million increase in commercial demand deposits.

Total short-term borrowings increased by $114.1 million, or 93.6%, to $236.0 million at September 30, 2013 from $121.9 million at December 31, 2012. The increase resulted from increases of $75.0 million in other short-term borrowings, primarily advances from the Federal Home Loan Bank of Indianapolis as well as increases of $57.0 million in federal funds purchased offset by decreases of $17.9 million in securities sold under agreements to repurchase.

Total equity increased by $16.7 million, or 5.6%, to $314.5 million at September 30, 2013 from $297.8 million at December 31, 2012. The increase in total equity resulted from net income of $28.3 million, minus the decrease in the accumulated other comprehensive income of $7.2 million, minus dividends of $6.3 million, plus $1.4 million in stock compensation expense, plus $498,000 related to stock options exercises (including tax benefit).

The FDIC’s risk-based capital regulations require that all insured banking organizations maintain an 8.0% total risk-based capital ratio. The FDIC has also established definitions of “well capitalized” as a 5.0% Tier I leverage capital ratio, a 6.0% Tier I risk-based capital ratio and a 10.0% total risk-based capital ratio. As of September 30, 2013, the Bank had regulatory capital in excess of these minimum requirements with a Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 10.8%, 13.1% and 14.4%, respectively, versus ratios of 10.3%, 12.7% and 14.0% as of December 31, 2012. The Federal Reserve also has established minimum “well capitalized” regulatory capital requirements for bank holding companies. As of September 30, 2013, the Company had a Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio of 11.0%, 13.4% and 14.7%, respectively, versus ratios of 10.5%, 13.0% and 14.3% as of December 31, 2012. These ratios exceeded the Federal Reserve’s “well capitalized” minimums of 5.0%, 6.0% and 10.0%, respectively

					Minimum Required to
			Minimum Required		Be Well Capitalized
			For Capital		Under Prompt Corrective
	Actual		Adequacy Purposes		Action Regulations
(dollars in thousands)	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of March 31, 2014:
Total Capital (to Risk
Weighted Assets)
Consolidated	$ 390,512	14.34%	$ 217,857	8.00%	$ 272,321	10.00%
Bank	$ 381,103	14.03%	$ 217,280	8.00%	$ 271,601	10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated	$ 356,322	13.08%	$ 108,929	4.00%	$ 163,393	6.00%
Bank	$ 347,002	12.78%	$ 108,640	4.00%	$ 162,960	6.00%
Tier I Capital (to Average Assets)
Consolidated	$ 356,322	11.20%	$ 127,277	4.00%	$ 159,096	5.00%
Bank	$ 347,002	10.94%	$ 126,904	4.00%	$ 158,630	5.00%

As of December 31, 2013:
Total Capital (to Risk
Weighted Assets)
Consolidated	$ 382,951	14.23%	$ 215,229	8.00%	$ 269,036	10.00%
Bank	$ 373,685	13.92%	$ 214,704	8.00%	$ 268,380	10.00%
Tier I Capital (to Risk
Weighted Assets)
Consolidated	$ 349,134	12.98%	$ 107,614	4.00%	$ 161,422	6.00%
Bank	$ 339,949	12.67%	$ 107,352	4.00%	$ 161,028	6.00%
Tier I Capital (to Average Assets)
Consolidated	$ 349,134	11.25%	$ 124,152	4.00%	$ 155,190	5.00%
Bank	$ 339,949	10.98%	$ 123,809	4.00%	$ 154,761	5.00%

Beginning January 1, 2015, the Company and Bank will be subject to the new capital regulations of Basel III. The new regulations establish higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conservation buffer. The new regulations also include revisions to the definition of capital and changes in the risk-weighting of certain assets. The new regulations establish definitions of “well-capitalized” including the capital conservation buffer, as a 7.0% common equity Tier 1 risk-based capital ratio, an 8.5% Tier 1 risk-based capital ratio and a 10.5% total risk-based capital ratio. The capital conservation buffer is being phased-in and will be in full effect beginning January 1, 2019. Under the new regulations, all financial institutions must maintain a Tier 1 leverage ratio of 4% to be considered “adequately capitalized” and 5% to be considered “well-capitalized.” Management has completed a preliminary analysis of the impact of these new regulations to the capital ratios of both the Company and the Bank and estimates that the ratios for both the Company and the Bank ~~will comfortably~~would exceed the new minimum capital ratio requirements for “well-capitalized” including the capital conservation buffer under Basel III if they were effective at ~~September 30, 2013.~~

March 31, 2014.

FORWARD-LOOKING STATEMENTS

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

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

Legislative or regulatory changes or actions, including the “Dodd-Frank Wall Street Reform and Consumer Protection Act” and the regulations required to be promulgated thereunder, as well as rules recently implemented by the federal banking regulatory agencies concerning certain increased capital requirements, among other items, which may adversely affect the business of the Company and its subsidiaries.

·	The costs, effects and outcomes of existing or future litigation.

·	Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board.

·	The ability of the Company to manage risks associated with the foregoing as well as anticipated.

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

ITEM 3 – QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk represents the Company’s primary market risk exposure. The Company does not have a material exposure to foreign currency exchange risk, does not have any material amount of derivative financial instruments and does not maintain a trading portfolio. The Board of Directors annually reviews and approves the policy used to manage interest rate risk. The policy was last reviewed and approved in May 2013. The policy sets guidelines for balance sheet structure, which are designed to protect the Company from the impact that interest rate changes could have on net income but does not necessarily indicate the effect on future net interest income. The Company, through its Asset and Liability Committee, manages interest rate risk by monitoring the computer simulated earnings impact of various rate scenarios and general market conditions. The Company then modifies its long-term risk parameters by attempting to generate the types of loans, investments, and deposits that currently fit the Company’s needs, as determined by ~~the~~its Asset and Liability Committee. This computer simulation analysis measures the net interest income impact of various interest rate scenario changes during the next twelve months. If the change in net interest income is less than 3% of primary capital, the balance sheet structure is considered to be within acceptable risk levels. As of ~~September 30, 2013,~~March 31, 2014, the Company’s potential pretax exposure was within the Company’s policy limit and not significantly different from the potential pretax exposure from December 31, ~~2012.~~2013.

ITEM 4 –CONTROLSAND PROCEDURES

As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, management has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of ~~September 30, 2013.~~March 31, 2014. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

During the quarter ended ~~September 30, 2013,~~March 31, 2014, there were no changes to the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

6542

~~LAKELAND FINANCIAL CORPORATION~~

~~FORM 10-Q~~

~~September 30, 2013~~

~~Part~~PART II ~~- Other Information~~– OTHER INFORMATION

Item 1. Legal proceedings

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

Item 1A.RiskFactors

There have been no material changes to the risk factors disclosed in Item 1A. of Part I of the Company’s ~~2012~~2013 Form 10-K. Please refer to that section of the Company’s Form 10-K and Item 2 of Part I of this Form 10-Q for disclosures regarding the risks and uncertainties related to the Company’s business.

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

The following table provides information as of ~~September 30, 2013~~March 31, 2014 with respect to shares of common stock repurchased by the Company during the quarter then ended:

Issuer Purchases of Equity Securities(a)

Maximum Number (or
Total Number of Appropriate Dollar
Shares Purchased as Value) of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Announced Plans or Under the Plans or
Period Shares Purchased Paid per Share Programs Programs

July 1-31                           5,989 $                28.72                                         0 $                                          0
August 1-31                              572                    32.24                                         0                                              0
September 1-30                                  0                           0                                         0                                              0

Total                           6,561 $                29.03                                         0 $                                          0

ISSUER PURCHASES OF EQUITY SECURITIES

				Maximum Number (or
			Total Number of	Appropriate Dollar
			Shares Purchased as	Value) of Shares that
			Part of Publicly	May Yet Be Purchased
	Total Number of	Average Price	Announced Plans or	Under the Plans or
Period	Shares Purchased	Paid per Share	Programs	Programs

January 1-31	4,924	$ 38.59	0	$ 0
February 1-28	522	36.38	0	0
March 1-31	0	0	0	0

Total	5,446	$ 38.38	0	$ 0

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

Item 3.DefaultsUpon Senior Securities

None

Item 4.Mine Safety Disclosures

N/A

Item 5.Other Information

None

Item 6. Exhibits

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)


31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	Interactive Data File

	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012;~~2013; (ii) Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 and ~~September 30, 2012;~~March 31, 2013; (iii) Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2013~~March 31, 2014 and ~~September 30, 2012;~~March 31, 2013; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and ~~September 30, 2012;~~March 31, 2013; and (v) Notes to Unaudited Consolidated Financial Statements.

6744

LAKELAND FINANCIAL CORPORATION

FORM 10-Q

~~September 30, 2013~~March 31, 2014

Part II - Other Information

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LAKELAND FINANCIAL CORPORATION

(Registrant)

Date: ~~November~~May 12, ~~2013~~	~~/s/ Michael L. Kubacki~~
	~~Michael L. Kubacki – Chief Executive Officer~~

~~Date: November 12, 2013~~2014	/s/ David M. Findlay
	David M. Findlay ~~–President~~– President and
	Chief Executive Officer

Date: May 12, 2014	/s/ Lisa M. O’Neill
	Lisa M. O’Neill – Executive Vice President and
	Chief Financial Officer

Date: ~~November~~May 12, ~~2013~~2014	/s/ Teresa A. Bartman
	Teresa A. Bartman – Senior Vice President-
	Finance and Controller

6845

	September 30,	December 31,
	2013	2012
	(Unaudited)
ASSETS
Cash and due from banks	$ 72,982	$ 156,666
Short-term investments	8,358	75,571
Total cash and cash equivalents	81,340	232,237

Securities available for sale (carried at fair value)	463,070	467,021
Real estate mortgage loans held for sale	1,047	9,452

Loans, net of allowance for loan losses of $49,804 and $51,445	2,342,911	2,206,075

Land, premises and equipment, net	38,514	34,840
Bank owned life insurance	62,397	61,112
Accrued income receivable	8,333	8,491
Goodwill	4,970	4,970
Other intangible assets	12	47
Other assets	38,643	39,899
Total assets	$ 3,041,237	$ 3,064,144

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2013	2012	2013	2012
NET INTEREST INCOME
Interest and fees on loans
Taxable	$ 24,595	$ 25,803	$ 73,469	$ 77,789
Tax exempt	100	109	304	333
Interest and dividends on securities
Taxable	1,463	2,034	3,560	7,425
Tax exempt	802	698	2,307	2,094
Interest on short-term investments	10	16	46	43
Total interest income	26,970	28,660	79,686	87,684

Interest on deposits	3,589	5,989	12,365	19,352
Interest on borrowings
Short-term	146	112	349	329
Long-term	263	399	831	1,198
Total interest expense	3,998	6,500	13,545	20,879

NET INTEREST INCOME	22,972	22,160	66,141	66,805

Provision for loan losses	0	0	0	1,299

NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES	22,972	22,160	66,141	65,506

NONINTEREST INCOME
Wealth advisory fees	980	959	2,895	2,770
Investment brokerage fees	1,503	695	3,449	2,435
Service charges on deposit accounts	2,325	2,045	6,548	5,937
Loan, insurance and service fees	1,524	1,421	4,792	4,062
Merchant card fee income	356	297	925	902
Other income	856	669	2,937	1,614
Mortgage banking income	159	590	1,206	1,574
Net securities gains (losses)	106	(380)	107	(377)
Other than temporary impairment loss on available-for-sale securities:
Total impairment losses recognized on securities	0	(67)	0	(1,052)
Loss recognized in other comprehensive income	0	0	0	26
Net impairment loss recognized in earnings	0	(67)	0	(1,026)
Total noninterest income	7,809	6,229	22,859	17,891

			Three months ended September 30,		Nine months ended September 30,
			2013	2012	2013	2012
Net income			$ 9,769	$ 9,347	$ 28,251	$ 26,792
Other comprehensive income (loss)
	Change in securities available for sale:
		Unrealized holding gain (loss) on securities available for sale
		arising during the period	(1,242)	(251)	(11,642)	818
		Reclassification adjustment for (gains) losses included in net income	(106)	380	(107)	377
		Reclassification adjustment for other than temporary impairment	0	67	0	1,026
		Net securities gain (loss) activity during the period	(1,348)	196	(11,749)	2,221
		Tax effect	484	(76)	4,589	(880)
		Net of tax amount	(864)	120	(7,160)	1,341
	Defined benefit pension plans:
		Net gain (loss) on defined benefit pension plans	0	0	(151)	110
		Amortization of net actuarial loss	62	55	183	164
		Net gain activity during the period	62	55	32	274
		Tax effect	(25)	(22)	(13)	(110)
		Net of tax amount	37	33	19	164

		Total other comprehensive income (loss), net of tax	(827)	153	(7,141)	1,505

Comprehensive income			$ 8,942	$ 9,500	$ 21,110	$ 28,297

				Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013
						Cash Basis			Cash Basis
	Unpaid		Allowance for	Average	Interest	Interest	Average	Interest	Interest
	Principal	Recorded	Loan Losses	Recorded	Income	Income	Recorded	Income	Income
	Balance	Investment	Allocated	Investment	Recognized	Recognized	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$ 64	$ 64	$ 0	$ 64	$ 0	$ 0	$ 65	$ 0	$ 0
Non-working capital loans	0	0	0	0	0	0	11	0	0

Commercial real estate and multi-family residential loans:
Owner occupied loans	1,072	476	0	616	0	0	575	0	0

Agri-business and agricultural loans:
Loans secured by farmland	612	613	0	479	0	0	480	0	0

Consumer 1-4 family loans:
Closed end first mortgage loans	1,158	1,054	0	719	0	0	275	0	0
Open end and junior lien loans	41	41	0	27	0	0	23	0	0

Other consumer loans	1	1	0	1	0	0	1	0	0

With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	5,196	2,587	1,024	2,988	12	14	3,019	39	41
Non-working capital loans	15,695	13,842	3,321	14,017	120	126	14,081	391	402

Commercial real estate and multi-family residential loans:
Construction and land development loans	2,569	2,569	595	2,848	11	20	3,860	63	67
Owner occupied loans	3,946	3,906	505	3,707	20	20	3,592	88	96
Nonowner occupied loans	19,166	19,176	4,631	19,183	87	86	20,960	255	258
Multifamily loans	0	0	0	0	0	0	64	0	0

Agri-business and agricultural loans:
Loans secured by farmland	1,033	534	45	536	0	0	418	0	0

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	3,355	2,384	385	2,347	5	6	2,461	28	43
Open end and junior lien loans	15	15	5	22	0	0	40	0	0

Other consumer loans	96	96	32	99	0	0	86	1	1

Total	$ 54,019	$ �� 47,358	$ 10,543	$ 47,653	$ 255	$ 272	$ 50,010	$ 865	$ 908

				Three Months Ended September 30, 2012			Nine Months Ended September 30, 2012
						Cash Basis			Cash Basis
	Unpaid		Allowance for	Average	Interest	Interest	Average	Interest	Interest
	Principal	Recorded	Loan Losses	Recorded	Income	Income	Recorded	Income	Income
	Balance	Investment	Allocated	Investment	Recognized	Recognized	Investment	Recognized	Recognized
With no related allowance recorded:
Commercial and industrial loans:
Non-working capital loans	$ 70	$ 70	$ 0	$ 70	$ 0	$ 0	$ 136	$ 0	$ 0

Commercial real estate and multi-family residential loans:
Owner occupied loans	781	601	0	611	0	0	513	0	0
Nonowner occupied loans	385	385	0	385	10	13	217	10	13

Agri-business and agricultural loans:
Loans secured by farmland	666	487	0	489	0	0	252	0	0
Loans for ag production	0	0	0	0	0	0	68	0	0

Consumer 1-4 family loans:
Closed end first mortgage loans	277	276	0	417	1	0	432	1	0
Open end and junior lien loans	0	0	0	0	0	0	20	0	0

Other consumer loans	1	1	0	0	0	0	0	0	0

With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	5,915	3,074	1,417	3,059	13	10	4,420	42	38
Non-working capital loans	19,357	17,175	5,154	17,072	171	168	17,353	528	528

Commercial real estate and multi-family residential loans:
Construction and land development loans	3,786	3,396	672	2,436	18	13	1,814	35	30
Owner occupied loans	6,900	6,287	1,527	5,702	30	19	4,859	48	35
Nonowner occupied loans	27,957	27,255	6,670	27,382	78	77	28,115	280	281

Agri-business and agricultural loans:
Loans secured by farmland	654	333	67	343	0	0	437	0	0
Loans for agricultural production	0	0	0	63	0	0	91	0	0

Other commercial loans	0	0	0	0	0	0	0	0	0

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,562	1,564	267	1,730	12	10	1,787	32	32
Open end and junior lien loans	354	354	192	353	0	0	340	0	0

Other consumer loans	45	45	18	30	1	1	14	1	1

Total	$ 68,710	$ 61,303	$ 15,984	$ 60,142	$ 334	$ 311	$ 60,866	$ 977	$ 958

	September 30, 2013		December 31, 2012
		Loans Past Due		Loans Past Due
		Over 90 Days		Over 90 Days
		Still		Still
	Nonaccrual	Accruing	Nonaccrual	Accruing

Commercial and industrial loans:
Working capital lines of credit loans	$ 1,765	$ 0	$ 1,899	$ 0
Non-working capital loans	3,895	0	4,812	50

Commercial real estate and multi-family residential loans:
Construction and land development loans	0	0	398	0
Owner occupied loans	2,646	0	2,461	0
Nonowner occupied loans	11,633	0	19,200	0
Multifamily loans	0	0	286	0

Agri-business and agricultural loans:
Loans secured by farmland	1,147	0	797	0
Loans for agricultural production	0	0	0	0

Other commercial loans	0	0	0	0

Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,607	239	504	0
Open end and junior lien loans	56	126	391	0
Residential construction loans	0	0	0	0

Other consumer loans	83	0	77	0

Total	$ 22,832	$ 365	$ 30,825	$ 50

		Modifications
		Nine Months Ended September 30, 2013

		All Modifications

			Pre-Modification	Post-Modification
			Outstanding	Outstanding
		Number of	Recorded	Recorded
		Loans	Investment	Investment

Troubled Debt Restructurings

	Commercial real estate and multi-family residential loans:
	Construction and land development loans	6	$ 2,198	$ 2,198

	Consumer 1-4 family loans:
	Closed end first mortgage loans	4	317	328

	Total	10	$ 2,515	$ 2,526

		Interest Rate Reductions			Principal and Interest Forgiveness					Modified Repayment Terms


			Interest at	Interest at				Interest at	Interest at		Extension
		Number of	Pre-Modification	Post-Modification	Number of	Principal at	Principal at	Pre-Modification	Post-Modification	Number of	Period or
		Loans	Rate	Rate	Loans	Pre-Modification	Post-Modification	Rate	Rate	Loans	Range
											(in months)
Troubled Debt Restructurings

	Commercial real estate and:
	multi-family residential loans
	Construction and land development loans	6	$ 85	$ 63	0	$ 0	$ 0	$ 0	$ 0	0	0

	Consumer 1-4 family loans:
	Closed end first mortgage loans	2	142	158	2	156	161	164	149	0	0

	Total	8	$ 227	$ 221	2	$ 156	$ 161	$ 164	$ 149	0	0

��		Interest Rate Reductions			Modified Repayment Terms


			Interest at	Interest at		Extension
		Number of	Pre-Modification	Post-Modification	Number of	Period or
		Loans	Rate	Rate	Loans	Range
						(in months)
Troubled Debt Restructurings

	Commercial and industrial loans:
	Non-working capital loans	0	$ 0	$ 0	0	0

	Commercial real estate and multi-family residential loans:
	Construction and land development loans
	Owner occupied loans	1	440	117	1	18
	Nonowner occupied loans	0	0	0	1	14

	Consumer 1-4 family loans:
	Closed end first mortgage loans	1	76	15	0	0

	Other consumer loans	0	0	0	0	0

	Total	2	$ 516	$ 132	2	14-18

Offsetting of Financial Assets and Derivative Assets
	September 30, 2013
				Gross Amounts Not Offset in the Statement of Financial Position

	Gross Amounts of Recognized Assets	Gross Amounts Offset in the Statement of Financial Position	Net Amounts of Assets presented in the Statement of Financial Position	Financial Instruments	Cash Collateral Received	Net Amount
Description
Interest Rate Swap Derivatives	$ 297	$ 0	$ 297	$ 0	$ (270)	$ 27
Total	$ 297	$ 0	$ 297	$ 0	$ (270)	$ 27

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
(in thousands of dollars)

	Nine Months Ended September 30,
		2013				2012
	Average	Interest			Average	Interest
	Balance	Income	Yield (1)		Balance	Income	Yield (1)
ASSETS
Earning assets:
Loans:
Taxable (2)(3)	$ 2,295,352	$ 73,469	4.28	%	$ 2,207,594	$ 77,789	4.71	%
Tax exempt (1)	8,651	459	7.10		9,634	498	6.91
Investments: (1)
Available for sale	475,077	7,036	1.98		475,028	10,562	2.97
Short-term investments	6,972	4	0.08		22,891	16	0.09
Interest bearing deposits	10,611	42	0.53		2,178	27	1.66

Total earning assets	2,796,663	81,010	3.87	%	2,717,325	88,892	4.37	%

Nonearning assets:
Cash and due from banks	83,945	0			162,385	0
Premises and equipment	35,692	0			34,995	0
Other nonearning assets	110,922	0			94,853	0
Less allowance for loan losses	(50,944)	0			(53,076)	0

Total assets	$ 2,976,278	$ 81,010			$ 2,956,482	$ 88,892