SEC Filing | Lake City Bank

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission File No. 0-11487 LAKELAND FINANCIAL CORPORATION (exact name of registrant as specified in its charter) INDIANA 35-1559596 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46581-1387 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 1-219-267-6144 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: COMMON (Title of Class) 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 other 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 if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Aggregate market value of the voting stock held by non-affiliates of the registrant, computed solely for the purposes of this requirement on the basis of the book value at February 28, 1995, and assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates": $29,135,839. Number of shares of common stock outstanding at February 28, 1995: 1,438,496 Cover page 1 of 2 pages

DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in the Part of 10-K indicated: Part Document I, II & IV Lakeland Financial Corporation's Annual Report to Shareholders for year ended December 31, 1994, parts of which are incorporated into Parts I, II and IV of this Form 10-K. III Proxy statement mailed to Shareholders on March 16, 1995, which is incorporated into Part III of this Form 10-K. Cover page 2 of 2 pages

PART I. ITEM 1. BUSINESS The registrant was incorporated under the laws of the State of Indiana on February 8, 1983. As used herein, the term "Registrant" refers to Lakeland Financial Corporation or, if the context dictates, the Lakeland Financial Corporation and its wholly owned subsidiary, Lake City Bank, Warsaw, Indiana. General Registrant's Business. The Registrant is a bank holding company as defined in the Bank Holding Company Act of 1956, as amended. Registrant owns all of the outstanding stock of Lake City Bank, Warsaw, Indiana, a full service commercial bank organized under Indiana law (the "Bank"). Registrant conducts no business except that incident to its ownership of the outstanding stock of the Bank and the operation of the Bank. The Bank's deposits are insured by the Federal Deposit Insurance Corporation. The Bank's activities cover all phases of commercial banking, including checking accounts, savings accounts, time deposits, the sale of securities under agreements to repurchase, discount brokerage services, commercial and agricultural lending, direct and indirect consumer lending, real estate mortgage lending, safe deposit box service and trust services. The Bank's main banking office is located at 202 East Center Street, Post Office Box 1387, Warsaw, Indiana. As of December 31, 1994, the Bank had nine branch offices and one drive-up facility in Kosciusko County, five branch offices in Elkhart County, three branch offices in Wabash County, two branch offices in Marshall County, two branch offices in Noble County, one branch office in Whitley County, one branch office in LaGrange County and one branch office and one drive-up facility in Fulton County. The Bank's operations center is located at 113 East Market Street, Warsaw, Indiana. Supervision and Regulation. The Registration is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHC Act"). As a bank holding company, the registrant is required to file with the Federal Reserve Board (the "FRB") annual reports and such additional information as the FRB may require. The FRB may also make an examination or inspection of the Registrant. The BHC Act prohibits a bank holding company from engaging in, or acquiring direct or indirect control of more than five percent of the voting shares of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be "closely relating to banking". Under current regulations, bank holding companies and their subsidiaries may engage in such bank related business ventures as consumer finance, equipment leasing, computer service bureau and software operations and mortgage banking. The BHC Act also governs banking expansion by bank holding companies. Before a bank holding company acquires more than five percent of the voting shares of any other bank it must receive the prior written approval of the FRB or its delegate. Furthermore, the BHC Act does not permit a bank holding company to acquire a bank located outside the State of Indiana unless the acquisition is specifically authorized by the laws of the State in which such bank is located. The acquisition of banking subsidiaries by bank holding companies is subject to the jurisdiction of, and requires the prior approval of, the Federal Reserve, and for institutions resident in Indiana, the Indiana Department of Financial Institutions. Bank holding companies located in Indiana are permitted to acquire banking subsidiaries throughout the state, subject to limitations based upon the percentage of total state deposits of the holding company's subsidiary banks. Indiana law permits the Registrant to acquire banks, and be acquired by bank holding companies, located in any state in the country which permits reciprocal entry by Indiana bank holding companies. The Registrant is an "affiliate" of the Bank within the meaning of Section 23A of the Federal Reserve Act (as made applicable to the Bank by the Federal Deposit Insurance Act) and Indiana Code 28-1-18.1. As a result, the Bank is restricted in making loans to, investments in, or loans secured by securities of, the Registrant. The BHC Act also prohibits the Registrant and its subsidiaries from imposing "tie-in" requirements in connection with extensions of credit and other services. Under the provisions of Indiana law, the registrant may not acquire more than twenty-five percent of the voting stock in any banks other than the Bank without the approval of the Indiana Department of Financial Institutions. In any such event, the Registrant would be required to obtain the prior approval of the FRB as described above to purchase interest of five percent or more in another bank. The Bank is under supervision of and subject to examination by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors and not shareholders. The earnings of commercial banks are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, the discount rate on bank borrowing, setting the reserves that banks must maintain against certain bank deposits and the regulation of interest rates payable by banks on certain time and savings deposits. These policies have a significant effect on the overall growth and distribution of bank loans, investments and deposits. They influence interest rates charged on loans, earned on investments and paid for time and savings deposits. FRB monetary policies have had significant effect on the operating results of commercial banks in the past, and are expected to exert similar influence in the future. The general effect, if any, of such policies upon the future business and earnings of the Registrant and the Bank cannot be reasonably predicted. Material Changes and Business Developments From the date of the Registrant's incorporation, February 8, 1983, until October 31, 1983, the Registrant conducted no business and had no assets (except nominal assets necessary to complete the acquisition of the Bank). The Registrant has conducted no business since October 31, 1983, except that incident to its ownership of the stock of the Bank, the collection of dividends from the Bank, and the disbursement of dividends to the Registrant's shareholders. During the period from 1985 to 1987, the Registrant owned all of the outstanding shares of Lakeland Mortgage Corp., a mortgage lending and servicing corporation doing business in Indiana. Lakeland Mortgage Corp. discontinued business operations on December 15, 1987. The Registrant continued to own all of the stock of Lakeland Mortgage Corp. until 1992, during which year, Lakeland Mortgage Corp. was liquidated and all stock was redeemed. Competition The Bank was originally organized in 1872 and has continuously operated under the laws of the State of Indiana since its organization. The Bank is a full service bank providing both commercial and personal banking services. Bank products offered include interest and noninterest bearing demand accounts, savings and time deposit accounts, sale of securities under agreements to repurchase, discount brokerage, commercial loans, mortgage loans, consumer loans, letters of credit, and a wide range of trust services. The interest rates for both deposits and loans, as well as the range of services provided, are nearly the same for all banks competing within the Bank's service area. The Bank's service area is described as all of Kosciusko, Elkhart, and Wabash Counties and portions of St. Joseph, Marshall, Fulton, Miami, Huntington, Whitley, Noble, and LaGrange Counties. Within this area the Bank competes with 20 other banks, 6 of which are larger than the Bank. Of the 14 which are smaller than the Bank, 4 are members of Bank Holding Companies which are larger than the Registrant. Eight of these institutions have home offices outside the Bank's defined business area but operate branches within this area. In addition to the banks located within its service area, the Bank also competes with savings and loan associations, credit unions, farm credit services, finance companies, personal loan companies, insurance companies, money market funds, and other non-depository financial intermediaries. In addition, financial intermediaries such as money market mutual funds and large retailers are not subject to the same regulations and laws that govern the operation of traditional depository institutions and accordingly may have an advantage in competing for funds. In addition to the banks within its service area, the Bank competes with other major banks for the large commercial deposit and loan accounts. The Bank is presently subject to an aggregate maximum loan limit to any single account in the amount of $5,445,000 pursuant to Indiana law. This maximum prohibits the Bank from providing a full range of banking services to those businesses or personal accounts whose borrowing periodically exceed this amount. In order to retain at least a portion of the bank business of these large borrowers, the Bank maintains correspondent relationships with: Norwest Bank, Indiana, N.A., Fort Wayne, Indiana; NBD, N.A., Indianapolis, Indiana and Detroit, Michigan; Northern Trust Company, Chicago, Illinois; Bank One, N.A., Indianapolis, Indiana; and Mellon Bank, N.A., Pittsburgh, Pennsylvania. The Bank also participates with local and other banks in the placement of large borrowings in excess of its lending limit. The Bank is also a member of the Federal Home Loan Bank of Indianapolis in order to broaden its mortgage lending and investment activities and to provide additional funds, if necessary, to support these activities. Foreign Operations The Bank has no investments with any foreign entity other than a nominal demand deposit account which is maintained with a Canadian bank in order to facilitate the clearing of checks drawn on banks located in that country. There are no foreign loans. Employees At December 31, 1994, the Registrant, including its subsidiary corporation, had approximately 278 full time equivalent employees. Benefit programs include a pension plan, 401(k) plan, group medical insurance, group life insurance and paid vacations. The bank is not a party to any collective bargaining agreement, and employee relations are considered good. Industry Segments The Registrant and the Bank are engaged in a single industry and perform a single service -- commercial banking. On the pages that follow are tables which set forth selected statistical information relative to the business of the Registrant. (Intentionally Left Blank)

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (in thousands of dollars) 1994 1993 -------------------------------- -------------------------------- Average Interest Average Interest Balance Income Yield* Balance Income Yield* ---------- ---------- ---------- ---------- ---------- ---------- ASSETS Earning assets: Trading account investments $0 $0 0.00 % $72 $2 3.31 % Loans: Taxable ** 267,604 23,658 8.84 235,352 19,946 8.48 Tax Exempt * 3,787 413 10.91 5,114 529 10.34 Investments: Taxable 149,049 8,842 5.79 100,507 6,459 6.43 Tax Exempt * 11,436 1,102 9.27 9,463 971 10.26 Short-term investment 3,551 152 4.28 3,111 93 2.96 Interest bearing deposits 98 3 3.06 3,116 92 2.97 --------- --------- --------- --------- --------- --------- Total Earning Assets $435,525 $34,170 7.85 % $356,735 $28,092 7.87 % ========= ========= Nonearning assets: Cash and due from banks 18,164 0 12,505 0 Premises and equipment 10,104 0 8,119 0 Other assets 7,508 0 8,308 0 Less: allowance for loan losses (4,417) 0 (3,419) 0 --------- --------- --------- --------- Total assets $466,884 $34,170 $382,248 $28,092 ========= ========= ========= ========= * Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1994 and 1993. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expenses. Investment yields for 1994 are based on average balances excluding unrealized net gains or losses on securites available for sale. Nonaccrual loans are included in the above analysis as earning assets - loans. **Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1994, and 1993, are included as taxable loan interest income.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1993 1992 -------------------------------- -------------------------------- Average Interest Average Interest Balance Income Yield* Balance Income Yield* ---------- ---------- ---------- ---------- ---------- ---------- ASSETS Earning assets: Trading account investments $72 $2 3.31 % $135 $14 10.37 % Loans: Taxable ** 235,352 19,946 8.48 207,569 18,762 9.04 Tax Exempt * 5,114 529 10.34 6,030 605 10.03 Investments: Taxable 100,507 6,459 6.43 100,983 7,801 7.73 Tax Exempt * 9,463 971 10.26 6,959 722 10.37 Short-term investment 3,111 93 2.96 2,368 89 3.76 Interest bearing deposits 3,116 92 2.97 2,677 99 3.70 --------- --------- --------- --------- --------- --------- Total earning assets $356,735 $28,092 7.87 % $326,721 $28,092 8.60 % ========= ========= Nonearning assets: Cash and due from banks 12,505 0 10,722 0 Premises and equipment 8,119 0 7,070 0 Other assets 8,308 0 5,696 0 Less: allowance for loan losses (3,419) 0 (2,881) 0 --------- --------- --------- --------- Total assets $382,248 $28,092 $347,328 $28,092 ========= ========= ========= ========= * Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1993 and 1992. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expenses. Nonaccrual loans are included in the above analysis as earning assets - loans. **Loan fees, which are immaterial in relation to total taxable loan interest income for the years ended December 31, 1993, and 1992, are included as taxable loan interest income.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1994 1993 -------------------------------- -------------------------------- Average Interest Average Interest Balance Expense Rate Balance Expense Rate ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities Savings deposits $55,855 $1,517 2.72 % $38,263 $1,059 2.77 % Interest bearing checking accounts 58,945 1,394 2.36 54,197 1,380 2.55 Time deposits In denominations under $100,000 148,251 6,837 4.61 128,520 6,074 4.73 In denominations over $100,000 54,389 2,360 4.34 42,458 1,588 3.74 Miscellaneous short-term borrowings 47,220 1,879 3.98 42,919 1,428 3.33 Long-term borrowings 15,806 900 5.69 8,677 493 5.68 Capital notes 0 0 0.00 0 0 0.00 --------- --------- --------- --------- --------- --------- Total interest bearing liabilities $380,466 $14,887 3.91 % $315,034 $12,022 3.82 % ========= ========= Non-interest bearing liabilities and stockholders' equity Demand deposits 52,893 0 37,709 0 Other liabilities 4,606 0 3,847 0 Stockholders' equity 28,919 0 25,658 0 --------- --------- --------- --------- Total liabilities and stock- holders' equity $466,884 $14,887 3.19 % $382,248 $12,022 3.15 % ========= ========= ========= ========= ========= ========= Net interest differential - yield on average daily earning assets $19,283 4.43 % $16,070 4.50 % ========= ========= ========= =========

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1993 1992 -------------------------------- -------------------------------- Average Interest Average Interest Balance Expense Rate Balance Expense Rate ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCK- HOLDERS' EQUITY Interest bearing liabilities Savings deposits $38,263 $1,059 2.77 % $27,493 $935 3.40 % Interest bearing checking accounts 54,197 1,380 2.55 48,398 1,637 3.38 Time deposits In denominations under $100,000 128,520 6,074 4.73 143,430 7,997 5.58 In denominations over $100,000 42,458 1,588 3.74 26,448 1,215 4.59 Miscellaneous short-term borrowings 42,919 1,428 3.33 45,031 1,836 4.08 Long-term borrowings 8,677 493 5.68 43 2 5.63 Capital notes 0 0 0.00 0 0 0.00 --------- --------- --------- --------- --------- --------- Total interest bearing liabilities $315,034 $12,022 3.82 % $290,843 $13,622 4.68 % ========= ========= Non-interest bearing liabilities and stockholders' equity Demand deposits 37,709 0 31,503 0 Other liabilities 3,847 0 2,704 0 Stockholders' equity 25,658 0 22,278 0 --------- --------- --------- --------- Total liabilities and stock- holders' equity $382,248 $12,022 3.15 % $347,328 $13,622 3.92 % ========= ========= ========= ========= ========= ========= Net interest differential - yield on average daily earning assets $16,070 4.50 % $14,470 4.43 % ========= ========= ========= =========

ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS (Fully Taxable Equivalent Basis) (in thousands of dollars) YEAR ENDED DECEMBER 31, 1994 Over (under) 1993(1) 1993 Over (under) 1992(1) -------------------------------- -------------------------------- Volume Rate Total Volume Rate Total ---------- ---------- ---------- ---------- ---------- ---------- INTEREST AND LOAN FEE INCOME(2) Loans: Taxable 2,823 889 3,712 2,404 (1,220) 1,184 Tax exempt (143) 27 (116) (94) 18 (76) Investments: Taxable 2,912 (529) 2,383 (36) (1,306) (1,342) Tax exempt 193 (61) 132 257 (8) 249 Trading account investments (1) (1) (2) (5) (7) (12) Short-term investment 14 45 59 24 (20) 4 Interest bearing deposits (100) 10 (90) 15 (22) (7) --------- --------- --------- --------- --------- --------- Total interest income $5,698 $380 $6,078 $2,565 ($2,565) $0 --------- --------- --------- --------- --------- --------- INTEREST EXPENSE Savings deposits 478 (20) 458 320 (196) 124 Interest bearing checking accounts 116 (102) 14 180 (437) (257) Time deposits In denominations under $100,000 914 (150) 764 (780) (1,143) (1,923) In denominations over $100,000 492 280 772 631 (258) 373 Miscellaneous short-term borrowings 152 298 450 (82) (326) (408) Long-term borrowings 406 1 407 490 1 491 --------- --------- --------- --------- --------- --------- Total interest expense $2,558 $307 $2,865 $759 ($2,359) ($1,600) --------- --------- --------- --------- --------- --------- INCREASE (DECREASE) IN INTEREST DIFFERENTIALS $3,140 $73 $3,213 $1,806 ($206) $1,600 ========= ========= ========= ========= ========= ========= (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 1994, 1993 and 1992. The changes in volume represent "changes in volume times rate". The changes in rate represent "changes in rate times old volume". The change in rate/volume were also calculated by "change in rate times change in volume" and allocated consistently based upon the relative absolute values of the changes in volume and changes in rate. (2) Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1994, 1993 and 1992. Tax equivalent rate for tax exempt loans and tax exempt securities acquired after January 1, 1983, includes TEFRA adjustment applicable to nondeductible interest expense.

ANALYSIS OF TRADING ACCOUNT SECURITIES AND SECURITIES HELD FOR SALE (in thousands of dollars) The carrying value and the fair value of trading account securities and securities held for sale as of December 31, 1994, 1993 and 1992 are as follows: 1994 1993 1992 --------------------- --------------------- --------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value -------- -------- -------- -------- -------- -------- Part A: Trading account Government agencies and corporations $0 $0 $0 $0 $0 $0 ========= ========= ========= ========= ========= ========= Part B: Securities held for sale U.S. Treasury $0 $0 $0 $0 $6,187 $6,397 Government agencies and corporations 0 0 0 0 4,274 4,379 Other securities 0 0 0 0 0 0 --------- --------- --------- --------- --------- --------- Total securities held for sale $0 $0 $0 $0 $10,461 $10,776 ========= ========= ========= ========= ========= =========

ANALYSIS OF SECURITIES (in thousands of dollars) The amortized cost and the fair value of securities as of December 31, 1994, 1993 and 1992 are as follows: 1994 1993 1992 --------------------- --------------------- --------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- -------- -------- -------- -------- -------- Securities available for sale: U.S. Treasury securities 26,960 25,916 29,701 30,446 0 0 Government agencies and corporations 1,000 1,000 0 0 0 0 Mortgage-backed securities 30,734 28,987 26,798 26,810 0 0 Obligations of state and political subdivisions 887 933 882 975 0 0 Other securities 999 1,026 999 1,128 0 0 --------- --------- --------- --------- --------- --------- Total debt securities available for sale 60,580 57,862 58,380 59,359 0 0 Equity securities 1,760 1,738 1,774 1,774 0 0 --------- --------- --------- --------- --------- --------- Total securities available for sale 62,340 59,600 60,154 61,133 0 0 ========= ========= ========= ========= ========= ========= Securities held to maturity: U.S. Treasury securities 14,714 13,876 10,544 10,559 10,256 10,430 Government agencies and corporations 2,034 2,037 99 99 99 113 Mortgage-backed securities 78,781 73,673 77,085 77,067 69,826 69,898 Obligations of state and political subdivisions 13,608 13,061 10,825 11,457 7,513 7,822 Other securities 1,015 1,076 1,017 1,195 2,023 2,023 --------- --------- --------- --------- --------- --------- Total debt securities held to maturity 110,152 103,723 99,570 100,377 89,717 90,286 Equity securities 0 0 0 0 1,774 1,774 --------- --------- --------- --------- --------- --------- Total securities held to maturity 110,152 103,723 99,570 100,377 91,491 92,060 ========= ========= ========= ========= ========= ========= * Equity securities include $1,724, $1,724 and $1,724 as of December 31, 1994, 1993 and 1992, respectively, of the Federal Home Loan Bank of Indianapolis (FHLB) stock, The FHLB stock is redeemable at par upon six months notice to FHLB.

ANALYSIS OF SECURITIES (cont.) (Fully Tax Equivalent Basis) (in thousands of dollars) The maturity distribution (2) and weighted average yields (1) for debt securities portfolio at December 31, 1994 are as follows: After One After Five Within Year Years Over One Within Five Within Ten Ten Year Years Years Years ---------- ---------- ---------- ---------- Securities available for sale: U.S. Treasury securities Book value 3,017 23,942 0 0 Yield 6.04 5.25 Government agencies and corporations Book value 0 1,000 0 0 Yield 4.88 Mortgage-backed securities Book value 0 30,734 0 0 Yield 5.32 Obligations of state and political subdivisions Book value 300 587 0 0 Yield 9.38 10.19 Other debt securities Book value 0 1,000 0 0 Yield 7.91 --------- --------- --------- --------- Total debt securities available for sale: Book value 3,317 57,263 0 0 Yield 6.34 5.41 ========= ========= ========= ========= Securities held to maturity: U.S. Treasury securities Book value 0 14,714 0 0 Yield 4.92 Government agencies and corporations Book value 0 2,034 0 0 Yield 8.75 Mortgage-backed securities Book value 857 55,012 18,303 4,609 Yield 12.53 5.87 6.68 6.82 Obligations of state and political subdivisions Book value 342 284 2,371 10,611 Yield 9.77 6.38 11.16 7.88 Other debt securities Book value 0 0 1,015 0 Yield 10.36 --------- --------- --------- --------- Total debt securities held to maturity: Book value 1,199 72,044 21,689 15,220 Yield 11.74 5.71 7.23 7.50 ========= ========= ========= ========= (1) Tax exempt income converted to a fully taxable equivalent basis at a 34% rate. (2) The maturity distribution of mortgage-backed securities is based upon anticipated payments as computed by using the historic average repayment speed from date of issue. (3) There are no investments in securities of any one issuer that exceed 10% of stockholders' equity. Equity investments of $1,760 include $1,724 of stock of the Federal Home Loan Bank of Indianapolis (FHLB). The stock is redeemable at par upon presentation of a six month notice of withdrawal to the FHLB. Dividends are declared and paid as of the last day of each calendar quarter at the sole discretion of the Board of Directors of the FHLB. During 1994, the Registrant received dividends amounting to $99 for an average annualized yield of 5.74%.

ANALYSIS OF LOAN PORTFOLIO Analysis of Loans Outstanding (in thousands of dollars) The Registrant segregates its loan portfolio into four basic segments: commercial (including agri- business and agricultural loans), real estate mortgages, installment and credit cards (including personal line of credit loans). The loan portfolio as of December 31, 1994, 1993, 1992, 1991 and 1990 is as follows: 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Commercial loans: Taxable $173,325 $144,274 $128,268 $97,510 $86,788 Tax exempt 3,207 4,501 5,594 6,521 5,722 Total commercial loans $176,532 $148,775 $133,862 $104,031 $92,510 Real estate mortgage loans 47,296 49,816 50,413 50,697 36,976 Installment loans 48,228 46,914 36,111 33,312 32,676 Credit card and line of credit loans 15,900 14,680 13,816 11,986 10,222 --------- --------- --------- --------- --------- Total loans $287,956 $260,185 $234,202 $200,026 $172,384 Less allowance for loan losses 4,866 4,010 3,095 2,612 1,777 --------- --------- --------- --------- --------- Net loans $283,090 $256,175 $231,107 $197,414 $170,607 ========= ========= ========= ========= ========= The real estate mortgage loan portfolio includes construction loans totaling $426, $223, $1,164, $885 and $380 as of December 31, 1994, 1993, 1992, 1991 and 1990, respectively. Installment loans are net of unearned discount of $34, $151, $0, $0 and $0 as of December 31, 1994, 1993, 1992, 1991 and 1990 respectively. The above loan classifications are based on the nature of the loans as of the loan origination date, and are independent as to the use of the funds by the borrower. There are no foreign loans included in the above analysis.

ANALYSIS OF LOAN PORTFOLIO (cont.) Analysis of Loans Outstanding (cont.) (in thousands of dollars) Repricing opportunities of the loan portfolio occur either according to predetermined adjustable rate schedules included in the related loan agreements or upon scheduled maturity of each principal payment. The following table indicated the rate sensitivity of the loan portfolio as of December 31, 1994. The table includes the real estate loans held for sale and assumes these loans will not be sold during the various time horizons. Credit Card Real and Line Commercial Estate Installment of Credit Total Percent ---------- -------- ----------- ---------- -------- -------- Immediately adjustable interest rates or original maturity of one day $145,470 $1,876 $3,107 $13,086 $163,539 56.8 % Other within one year 2,989 22,356 19,900 0 45,245 15.7 After one year, within five years 20,904 16,449 24,539 2,814 64,706 22.4 Over five years 7,169 6,772 682 0 14,623 5.1 Nonaccrual loans 0 18 0 0 18 0.0 --------- --------- --------- --------- --------- --------- Total loans $176,532 $47,471 $48,228 $15,900 $288,131 100.0 % ========= ========= ========= ========= ========= ========= A portion of the Bank's loans are short-term maturities. At maturity, credits are reviewed, and if renewed, are renewed at rates and conditions that prevail at the time of maturity. Loans due after one year which have a predetermined interest rate and loans due after one year which have floating or adjustable interest rates as of December 31, 1994 amounted to $68,963 and $94,159 respectively.

ANALYSIS OF LOAN PORTFOLIO (cont.) Review of Nonperforming Loans (in thousands of dollars) The following is a summary of nonperforming loans as of December 31, 1994, 1993, 1992, 1991 and 1990. 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE) Real estate mortgage loans $0 $1 $79 $27 $56 Commercial and industrial loans 16 315 100 1,127 1,149 Loans to individuals for household, family and other personal expenditures 19 346 42 55 97 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 --------- --------- --------- --------- --------- Total past due loans $35 $662 $221 $1,209 $1,302 --------- --------- --------- --------- --------- PART B - NONACCRUAL LOANS Real estate mortgage loans $18 $0 $0 $22 $62 Commercial and industrial loans 0 0 0 198 957 Loans to individuals for household, family and other personal expenditures 0 0 0 5 15 Loans to finance agriculture production and other loans to farmers 0 0 0 628 0 --------- --------- --------- --------- --------- Total nonaccrual loans $18 $0 $0 $853 $1,034 --------- --------- --------- --------- --------- PART C - TROUBLED DEBT RESTRUCTURED LOANS $1,406 $0 $86 $4 $5 --------- --------- --------- --------- --------- Total nonperforming loans $1,459 $662 $307 $2,066 $2,341 ========= ========= ========= ========= ========= Nonearning assets of the Corporation include nonaccrual loans (as indicated above), nonaccrual investments, other real estate, and repossessions which amounted to $815 at December 31, 1994.

ANALYSIS OF LOAN PORTFOLIO (cont.) Comments Regarding Nonperforming Assets PART A - CONSUMER LOANS Consumer installment loans, except those loans that are secured by real estate, are not placed on a nonaccrual status since these loans are charged off when they have been delinquent from 90 to 180 days, and when the related collateral, if any, is not sufficient to offset the indebtedness. Advances under Mastercard and Visa programs, as well as advances under all other consumer lines of credit programs, are charged off when collection appears doubtful. PART B - NONPERFORMING LOANS When a loan is classified as a nonaccrual loan, interest on the loan is no longer accrued and all accrued interest receivable is charged off. It is the policy of the Bank that all unsecured loans (i.e. loans for which the collateral is insufficient to cover all principal and accrued interest) will be reclassified as nonperforming loans to the extent they are unsecured, on or before the loan becomes 90 days delinquent. Thereafter, interest is recognized and included in income only when received. As of December 31, 1994, loans totaling $18,000 were on nonaccrual status. PART C - TROUBLED DEBT RESTRUCTURED LOANS Loans renegotiated as troubled debt restructuring are those loans for which either the contractual interest rate has been reduced and/or other concessions are granted to the borrower because of a deterioration in the financial condition of the borrower which results in the inability of the borrower to meet the terms of the loan. Loans renegotiated as troubled debt restructuring totaled $1,406,000 as of December 31, 1994. Interest income of $82,000 was recognized in 1994. Had these loans been performing under the original contract terms, an additional $31,000 would have been reflected in interest income during 1994. The Bank is not committed to lend additional funds to debtors whose loans have been modified. PART D - OTHER NONPERFORMING ASSETS The Bank will adopt SFAS No. 114 and SFAS No. 118 at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as bad debt expense. The effect of adopting these accounting standards on January 1, 1995 will be immaterial. The management of the Bank is of the opinion that there are no significant foreseeable losses relating to substandard or nonperforming assets, except as discussed above. PART E - LOAN CONCENTRATIONS There were no loan concentrations within industries which exceeded ten percent of total assets. It is estimated that over 98% of all the Bank's commercial, industrial, agri-business and agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its basic trade area. Basis For Determining Allowance For Loan Losses Management is charged with the responsibility of determining the adequacy of the allowance for loan losses. This responsibility is fulfilled by management in the following ways: 1. Management reviews the larger individual loans for unfavorable collectibility factors and assesses the requirement for specific reserves on such credits. For those loans not subject to specific reviews, management reviews previous loan loss experience to establish historical ratios and trends in charge-offs by loan category. The ratios of net charge-offs to particular types of loans enable management to estimate charge-offs in future periods by loan category and thereby establish appropriate reserves for loans not specifically reviewed. 2. Management reviews the current and anticipated economic conditions of its lending market to determine the effects on future loan charge-offs by loan category, in addition to the effects on the loan portfolio as a whole. 3. Management reviews delinquent loan reports to determine risk of future loan charge-offs. High delinquencies are generally indicative of an increase in future loan charge-offs. Based upon the above described policy and objectives, $795,000, $790,000 and $1,340,000 were charged to the provision for loan losses and added to the allowance for loan losses in 1994, 1993 and 1992, respectively. The allocation of the allowance for loan losses to the various lending areas is performed by management in relation to perceived exposure to loss in the various loan portfolios. However, the allowance for loan losses is available in its entirety to absorb losses in any particular loan category. (Intentionally Left Blank)

ANALYSIS OF LOAN PORTFOLIO (cont.) Summary of Loan Loss (in thousands of dollars) Following is a summary of the loan loss experience for the years ended December 31, 1994, 1993, 1992, 1991, and 1990. 1994 1993 1992 1991 1990 --------- --------- --------- --------- --------- Amount of loans outstanding, December 31, $287,956 $260,185 $234,202 $200,026 $172,384 ========= ========= ========= ========= ========= Average daily loans outstanding during the year ended December 31, $271,391 $240,466 $213,599 $178,619 $161,153 ========= ========= ========= ========= ========= Allowance for loan losses, January 1, $4,010 $3,095 $2,612 $1,777 $1,724 --------- --------- --------- --------- --------- Loans charged off Commercial $27 $99 $446 $1,016 $194 Real Estate 0 4 258 20 24 Installment 93 97 217 221 224 Credit cards and personal credit lines 15 28 39 66 28 --------- --------- --------- --------- --------- Total loans charged off $135 $228 $960 $1,323 $470 --------- --------- --------- --------- --------- Recoveries of loans previously charged off Commercial $107 $40 $11 $18 $76 Real Estate 1 1 0 0 0 Installment 81 56 85 106 80 Credit cards and personal credit lines 7 6 7 5 7 --------- --------- --------- --------- --------- Total recoveries $196 $103 $103 $129 $163 --------- --------- --------- --------- --------- Net loans charged off ($61) $125 $857 $1,194 $307 Purchase loan adjustment 0 250 0 59 0 Provision for loan loss charged to expense 795 790 1,340 1,970 360 Balance December 31, $4,866 $4,010 $3,095 $2,612 $1,777 ========= ========= ========= ========= ========= Ratio of net charge-offs during the period to average daily loans outstanding Commercial (0.03%) 0.02% 0.20% 0.56% 0.07% Real Estate 0.00% 0.00% 0.12% 0.01% 0.02% Installment 0.01% 0.02% 0.06% 0.07% 0.09% Credit cards and personal credit lines 0.00% 0.01% 0.03% 0.03% 0.01% --------- --------- --------- --------- --------- Total (0.02%) 0.05% 0.40% 0.67% 0.19% ========= ========= ========= ========= =========

ANALYSIS OF LOAN PORTFOLIO (cont.) Allocation of Allowance for Loan Losses (in thousands of dollars) The following is a summary of the allocation for loan losses as of December 31, 1994, 1993, 1992, 1991 and 1990. 1994 1993 1992 --------------------- --------------------- --------------------- Allowance Loans as Allowance Loans as Allowance Loans as For Percentage For Percentage For Percentage Loan of Gross Loan of Gross Loan of Gross Losses Loans Losses Loans Losses Loans --------- --------- --------- --------- --------- --------- Allocated allowance for loan losses Commercial $665 61.31 $1,120 57.18 $864 57.16 Real Estate 95 16.42 108 19.15 105 21.52 Installment 311 16.75 302 18.04 230 15.42 Credit cards and personal credit lines 101 5.52 95 5.63 87 5.90 --------- --------- --------- --------- --------- --------- Total allocated allowance for loan losses $1,172 100.00 $1,625 100.00 $1,286 100.00 ========= ========= ========= Unallocated allowance for loan losses 3,694 2,385 1,809 --------- --------- --------- Total allowance for loan losses $4,866 $4,010 $3,095 ========= ========= ========= 1991 1990 --------------------- --------------------- Allowance Loans as Allowance Loans as For Percentage For Percentage Loan of Gross Loan of Gross Losses Loans Losses Loans --------- --------- --------- --------- Allocated allowance for loan losses Commercial $1,168 52.01 $880 53.67 Real Estate 90 25.35 71 21.45 Installment 214 16.65 214 18.95 Credit cards and personal credit lines 76 5.99 64 5.93 --------- --------- --------- --------- Total allocated allowance for loan losses $1,548 100.00 $1,229 100.00 ========= ========= Unallocated allowance for loan losses 1,064 548 --------- --------- Total allowance for loan losses $2,612 $1,777 ========= =========

ANALYSIS OF DEPOSITS (in thousands of dollars) The average daily deposits for the years ended December 31, 1994, 1993 and 1992, and the average rates paid on those deposits are summarized in the following table: 1994 1993 1992 --------------------- --------------------- --------------------- Average Average Average Average Average Average Daily Rate Daily Rate Daily Rate Balance Paid Balance Paid Balance Paid --------- --------- --------- --------- --------- --------- Demand deposits $52,893 0.00 $37,709 0.00 $31,503 0.00 Savings accounts: Regular savings 55,855 2.72 38,263 2.77 27,493 3.40 Interest checking 58,945 2.36 54,197 2.55 48,398 3.38 Time deposits: Deposits of $100,000 or more 54,389 4.34 42,458 3.74 26,448 4.59 Other time deposits 148,251 4.61 128,520 4.73 143,430 5.58 --------- --------- --------- --------- --------- --------- Total deposits $370,333 3.27 $301,147 3.35 $277,272 4.25 ========= ========= ========= ========= ========= ========= As of December 31, 1994, time certificates of deposit in denominations of $100,000 or more will mature as follows: Within three months $32,380 Over three months, within six months 13,274 Over six months, within twelve months 6,151 Over twelve months 4,954 --------- Total time certificates of deposit in denominations of $100,000 or more $56,759 =========

RETURN ON EQUITY AND ASSETS The rates of return on average daily assets and stockholders' equity, the dividend payout ratio, and the average daily stockholders' equity to average daily assets for the years ended December 31, 1994, 1993 and 1992 are as follows: 1994 1993 1992 ---------- ---------- ---------- Percent of net income to: Average daily total assets 1.10 1.11 0.97 Average daily stockholders' equity 17.73 16.51 15.08 Percentage of dividends declared per common share to net income per weighted average number of common shares outstanding (1,438,496 shares in 1994, 1993 and 1992)* 16.57 17.01 17.79 Percentage of average daily stockholders' equity to average daily total assets 6.19 6.71 6.41 * Data adjusted for 10 percent stock dividend paid as of July 31, 1992.

SHORT-TERM BORROWINGS The following is a schedule of statistical information relating to securities sold under agreement to repurchase which are secured by either U.S. Government agency securities or mortgage-backed securities classified as other debt securities and maturing within one year. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of stockholders' equity at the end of the period. 1994 1993 1992 ---------- ---------- ---------- Outstanding at year end $41,750 $29,372 $31,058 Approximate average interest rate at year end 5.11 3.22 3.54 Highest amount outstanding as of any month end during the year $50,460 $42,485 $46,475 Approximate average outstanding during the year $42,584 $38,299 $38,122 Approximate average interest rate during the year 3.96 3.34 4.19 Securities sold under agreement to repurchase include both transactions initiated by the investment division of the Bank, as well as the automatic borrowings from selected demand deposit customers who had excess balances in their accounts.

ITEM 2. Properties The Bank conducts its operations from its main operations offices located in Warsaw, as well as branch offices in Warsaw (West), Warsaw (East), Winona Lake, Silver Lake, North Webster, Syracuse, Milford, Pierceton, Wabash (North), Wabash (South), Roann, Mentone, Akron, Nappanee, Goshen, Goshen (South), Columbia City, Argos, Bremen, Elkhart, Elkhart (East), Cromwell, Ligonier, and Shipshewana. In addition, the Bank operates a remote ATM in Warsaw. The facilities are described in the following table: [Intentionally Left Blank]

Retail Commercial Drive- Parking ATM Year of Type of Office Location Banking Banking Up Construction Construction Main Office - 202 Yes Yes No Yes Yes 1961 with Two story with East Center St., second story basement Warsaw, IN added in 1972 construction Downtown Drive-Up No No Yes No No 1980 Frame - East Center St., construction Warsaw, IN with brick veneer Warsaw - East - Yes Yes Yes Yes Yes 1990 Frame 3601 Commerce Dr., construction Warsaw, IN with brick veneer Warsaw - West - Yes Yes Yes Yes Yes 1972 Frame 1221 West Lake construction St., Warsaw, IN with brick veneer Winona Lake - 99 Yes Yes Yes Yes No 1965 Frame Chestnut, Winona construction Lake, IN with brick veneer Mentone - 202 East Yes Yes Yes Yes No 1946 and Block Main St., Mentone, completely construction IN remodeled in with brick 1983 veneer Milford - Indiana Yes Yes Yes Yes No Year of Block State Road 15 construction construction North, Milford, IN unknown, remodeled in 1984 North Webster - Yes Yes Yes Yes Yes 1974 Frame Indiana State Road construction 13 North, North with brick Webster, IN veneer Pierceton - 202 Yes Yes Yes Yes No 1984 Frame South First St., construction Pierceton, IN with brick veneer Silver Lake - Main Yes Yes No No No Year of Brick Street, Silver construction construction Lake, IN unknown, acquired in 1966 Syracuse - Indiana Yes Yes Yes Yes Yes 1982 Frame State Road 13 construction South, Syracuse, with brick IN veneer Wabash North - Yes Yes Yes Yes Yes 1989 Frame 1004 North Cass construction St., Wabash, IN with brick veneer Wabash South - Yes Yes Yes Yes No 1983 Frame 1940 South Wabash construction St., Wabash, IN with brick veneer Roann - 110 Yes Yes Yes Yes No Year of Frame and brick Chippewa St., construction construction Roann, IN unknown, remodeled in 1981 Akron - 102 East Yes Yes Yes No No Year of Brick Rochester, Akron, construction construction IN unknown, remodeled 1990, drive- thru added in 1993 Argos - 100 North Yes Yes Yes Yes Yes 1964 Limestone Michigan, Agros, construction IN Bremen - 1600 Yes Yes Yes Yes Yes 1977 Frame Indiana State Road construction 331, Bremen, IN with brick veneer Columbia City - Yes Yes Yes Yes Yes Year of Frame 507 North Main construction construction St., Columbia unknown, City, IN remodeled 1990 Goshen Downtown - Yes Yes No No No 1924 Limestone 102 North Main construction St., Goshen, IN Goshen South - Yes Yes Yes Yes Yes 1992 Frame 2513 South Main construction St., Goshen, IN with brick veneer Nappanee - 202 Yes Yes Yes Yes Yes 1980 Frame West Market St., construction Nappanee, IN with brick veneer Free-standing ATM No No No Yes Yes 1985 Frame enclosure - 2101 East Center St., Warsaw, IN Elkhart - 862 East Yes Yes Yes Yes Yes 1993 Frame Beardsley St., construction Elkhart, IN with brick veneer Cromwell - 111 Yes Yes Yes Yes No 1970 Frame North Jefferson construction St., Cromwell, IN with brick veneer Ligonier - 1470 Yes Yes Yes Yes Yes 1974 Frame U.S. Highway 33 construction South, Ligonier, with brick IN veneer Elkhart East- Yes Yes Yes Yes Yes 1994 Frame 22050 State Road construction 120, with brick Elkhart, IN veneer Shipshewana Yes Yes Yes Yes Yes 1985, Frame 895 North Van remodeled construction Buren St., in 1994 with brick Shipshewana, IN veneer The Bank leases from third parties the real estate and buildings upon which its branch offices in Milford and Akron are located. In addition, the Bank leases the real estate upon which it constructed its Wabash North branch office and its free-standing ATM facility in Warsaw. All of the other branch facilities are owned by the Bank. Other physical assets owned by the Bank include the property located at 110 South High Street, Warsaw, Indiana, which is unoccupied, parking lots in downtown Warsaw for the use and convenience of the Bank's employees and customers, as well as the leasehold improvements, equipment, furniture and fixtures necessary and appropriate to operate the foregoing banking facilities. The Bank also owns a 15,000 square foot Operations Center located at 113 East Market Street, Warsaw, Indiana, which it uses for office and computer facilities. This facility was acquired and extensively remodeled in 1984. The Bank also leases from third parties facilities in downtown Warsaw for the storage of supplies and for employee training. None of the Bank's assets are the subject of any material encumbrances.

ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings other than ordinary routine litigation incidental to the business to which the Registrant of the Bank are a party or of which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders from October 1, 1992 to December 31, 1994 (Intentionally Left Blank)

PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Information relating to the principal market for and the prices of the Registrant's common stock, and information as to dividends declared by the Registrant, are contained under the caption "Stock and Dividend Information" in the 1994 Annual Report and are incorporated herein by reference in response to this item. On December 31, 1994, the Registrant had 738 shareholders, including those employees who participate in the Registrant's 401(K) plan. ITEM 6. SELECTED FINANCIAL DATA A five year consolidated financial summary, containing the required selected financial data, appears under the caption "Selected Financial Data" in the 1994 Annual Report and is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appears under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1994 Annual Report and is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements appear in the 1994 Annual Report and are incorporated herein by reference in response to this item. Consolidated Balance Sheets at December 31, 1994 and 1993. Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992. Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. Notes to Consolidated Financial Statements. Report of Independent Auditors. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the Registrant's definitive Proxy Statement dated March 16, 1995, is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION The information appearing in the Registrant's definitive Proxy Statement dated March 16, 1995, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing in the Registrant's definitive Proxy Statement dated March 16, 1995, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing in the Registrant's definitive Proxy Statement dated March 16, 1995, is incorporated herein by reference in response to this item.

PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The documents listed below are filed as a part of this report: (1) Financial Statements. The following financial statements of the Registrant and its subsidiaries appear in the 1994 Annual Report and are specifically incorporated by reference under Item 8 of this Form 10-K, or are a part of this Form 10-K. Reference 1994 Annual Form 10-K Report Consolidated Balance Sheets at December 31, 1994 and 1993. X Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992. X Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992. X Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. X Notes to Consolidated Financial Statements. X Report of Independent Auditors. X (2) Financial Statement Schedules The financial statement schedules of the Registrant and its subsidiary have been omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. [Intentionally Left Blank]

SIGNATURES Pursuant to the requirements of Section 15(d) of the Securities and 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 Date: March 14, 1995 By R. Douglas Grant (R. Douglas Grant) President Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 14, 1995 R. Douglas Grant (R. Douglas Grant) Principal Executive Officer and Director Date: March 14, 1995 Terry M. White (Terry M. White) Principal Financial and Accounting Officer Date: March 14, 1995 Anna K. Duffin (Anna K. Duffin) Director Date: (W.E. Creighton) Director Date: March 14, 1995 Jerry L. Helvey (Jerry L. Helvey) Director Date: March 14, 1995 Homer A. Kent (Dr. Homer A. Kent) Director Date: (J. Alan Morgan) Director Date: March 14, 1995 Richard L. Pletcher (Richard L. Pletcher) Director Date: (Joseph P. Prout) Director Date: March 14, 1995 Philip G. Spear (Philip G. Spear) Director Date: March 16, 1995 Terry L. Tucker (Terry L. Tucker) Director Date: (G.L. White) Director Date: March 20, 1995 L. Craig Fulmer (L. Craig Fulmer) Director

EXHIBIT INDEX The following Exhibits are filed as part of this Report and not incorporated by reference from another document: Exhibit 13 - 1994 Report to Shareholders with Report of Independent Auditors. Exhibit 22 - Subsidiaries Exhibit 27 - Financial Data Schedules

EXHIBIT 13 1994 Report to Shareholders with Report of Independent Auditors.

EXHIBIT 22 Subsidiaries. The Registrant has one wholly owned subsidiary, Lake City Bank, Warsaw, Indiana, a banking corporation organized under the laws of the State of Indiana.

9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1994 ANNUAL REPORT AND THE DEFINITIVE PROXY STATEMENT DATED MARCH 16, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 21,306 40 2,801 0 59,600 110,152 103,723 287,956 4,866 496,963 396,740 48,323 4,579 17,432 1,438 0 0 28,451 496,963 23,931 9,569 155 33,655 12,108 14,887 18,768 795 (7) 14,092 8,150 5,126 0 0 5,126 3.56 3.56 4.31 18 35 1,406 0 4,010 135 196 4,866 1,172 0 3,694

Stock and Dividend Information ------------------------------------------------------------------------------------------------------------------------------- The table below lists the range of the bid-ask prices of common stock of Lakeland Financial Corporation and the dividend information on a quarterly basis over the last two calendar years. Roney & Company (P.O. Box 130, Elkhart, Indiana, 46515, telephone 219-293-7585 or 1-800-43-Roney) and McDonald and Company Securities, Inc. (214 South Main Street, Elkhart, Indiana, 46516, telephone 219-294-2526) have advised the Corporation that they are serving as "market makers" for the common stock of the Corporation. Edward D. Jones & Co. (117 W. Center Street, Suite B, Warsaw, Indiana 46580, telephone 219-267-2914 or 1-800-441-2914) is a trader in the stock of Lakeland Financial Corporation. These companies have reported to the Corporation the bid-ask prices for the common stock of the Corporation as set forth in the table below. Such bid-ask prices are not a definite indication that sales transactions occurred at the quoted prices or that sales transactions did not occur outside of the quoted prices. The trading volume of the Corporation's stock continues to be limited; as a result, these quotations do not necessarily reflect the price at which the Corporation's stock would trade in a more active market. Quarters -------------------------------------------------------- 1st 2nd 3rd 4th ----------- ----------- ----------- ----------- Trading Range:* 1993 $19.00-$22.00 $21.00-$25.50 $24.00-$26.00 $24.00-$26.00 1994 $26.00-$29.00 $29.50-$31.50 $31.00-$32.50 $32.50-$34.50 Dividends Declared: 1993 $.12 $.12 $.12 $.14 1994 $.14 $.14 $.14 $.17 * Based upon information supplied by the firms listed above. Annual Meeting - ----------------------------------------------------------------------------- The annual meeting of the shareholders of Lakeland Financial Corporation will be held at noon, April 11, 1995 at the Shrine Building, Kosciusko County Fair Grounds, Warsaw, Indiana. As of December 31, 1994, there were 738 shareholders. Special Notice: Form 10-K Available - ----------------------------------------------------------------------------- The Corporation will provide without charge to each shareholder, Lakeland Financial Corporation's Annual Report on Form 10-K, including Financial Statements and schedules thereto required to be filed with the Securities and Exchange Commission for the Corporation's most recent fiscal year upon written request of Mr. Terry M. White, Secretary and Treasurer, P.O. Box 1387, Warsaw, Indiana 46581-1387. Registrar and Transfer Agent - ----------------------------------------------------------------------------- Lake City Bank Trust Department P.O. Box 1387 Warsaw, Indiana 46581-1387

Selected Financial Data (In Thousands Except for Share and Per Share Data) - -------------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ----------- ----------- ----------- ----------- ----------- Interest income $33,655 $27,607 $27,683 $28,245 $25,286 Interest expense 14,887 12,022 13,622 16,408 15,287 ----------- ----------- ----------- ----------- ----------- Net interest income 18,768 15,585 14,061 11,837 9,999 Provision for loan losses 795 790 1,340 1,970 360 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 17,973 14,795 12,721 9,867 9,639 Other noninterest income 4,099 2,813 2,735 1,866 1,749 Net gains on the sale of real estate mortgages held for sale 177 676 176 174 5 Net trading gains (losses) 0 0 (2) 36 0 Net securities gains (losses) (7) 175 323 1,283 2 Noninterest expense (14,092) (12,378) (10,832) (9,238) (7,907) ----------- ----------- ----------- ----------- ----------- Income before income tax expense and cumulative effect of change in accounting principle 8,150 6,081 5,121 3,988 3,488 Income tax expense 3,024 2,171 1,762 1,281 1,081 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 5,126 3,910 3,359 2,707 2,407 Cumulative effect of adopting SFAS No. 109 0 325 0 0 0 ----------- ----------- ----------- ----------- ----------- Net income $5,126 $4,235 $3,359 $2,707 $2,407 =========== =========== =========== =========== =========== Average shares outstanding* 1,438,496 1,438,496 1,438,496 1,438,496 1,438,496 Per average common share outstanding:* Income before cumulative effect of change in accounting principle $3.56 $2.72 $2.34 $1.88 $1.67 =========== =========== =========== =========== =========== Net income $3.56 $2.94 $2.34 $1.88 $1.67 =========== =========== =========== =========== =========== Cash dividends declared $0.590 $0.500 $0.416 $0.374 $0.364 =========== =========== =========== =========== =========== Balances at December 31: Total assets $496,963 $449,954 $362,497 $339,458 $286,548 =========== =========== =========== =========== =========== Total deposits $396,740 $370,032 $284,308 $265,524 $244,108 =========== =========== =========== =========== =========== Long term debt $17,432 $9,300 $8,000 $0 $373 =========== =========== =========== =========== =========== Total stockholders' equity $29,889 $27,912 $23,750 $20,991 $18,820 =========== =========== =========== =========== =========== * Adjusted for a 10 percent stock dividend (Note 1)

Consolidated Balance Sheets ------------------------------------------------------------------------------------------------------------------------------- December 31 -------------------------- 1994 1993 ------------ ------------ ASSETS Cash and due from banks $21,346,000 $11,960,000 Short term investments 2,801,000 909,000 ------------ ------------ Total cash and cash equivalents 24,147,000 12,869,000 Securities available for sale (Note 2) (carried at fair value) 59,600,000 61,133,000 Securities held to maturity (Note 2) (market value of $103,723,000 at 1994 and $100,377,000 at 1993) 110,152,000 99,570,000 Real estate mortgages held for sale 175,000 2,191,000 Total loans (Note 3) 287,956,000 260,185,000 Less allowance for loan losses (Note 4) 4,866,000 4,010,000 ------------ ------------ Net loans 283,090,000 256,175,000 Land, premises and equipment, net (Note 5) 11,295,000 9,734,000 Accrued income receivable 3,464,000 2,858,000 Other assets 5,040,000 5,424,000 ------------ ------------ Total assets $496,963,000 $449,954,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest bearing deposits $62,830,000 $46,719,000 Interest bearing deposits (Note 6) 333,910,000 323,313,000 ------------ ------------ Total deposits 396,740,000 370,032,000 Short-term borrowings Federal funds purchased 4,000,000 1,450,000 Securities sold under agreements to repurchase (Note 7) 41,750,000 29,372,000 U.S. Treasury demand notes 2,573,000 7,115,000 ------------ ----------- Total short-term borrowings 48,323,000 37,937,000 Accrued expenses payable 3,280,000 3,022,000 Other liabilities 1,299,000 1,751,000 Long-term debt (Note 8) 17,432,000 9,300,000 ------------ ------------ Total liabilities 467,074,000 422,042,000 ============ ============ Commitments, off-balance sheet risks and contingencies (Note 14) STOCKHOLDERS' EQUITY Common stock: $1.00 stated value, 2,750,000 shares authorized, 1,438,496 shares outstanding as of December 31, 1994 and 1993 (Note 1) 1,438,000 1,438,000 Additional paid-in capital (Note 1) 7,827,000 7,827,000 Retained earnings 22,279,000 18,001,000 Unrealized net gain (loss) on securities available for sale (Note 1) (1,655,000) 646,000 ------------ ------------ Total stockholders' equity 29,889,000 27,912,000 ----------- ----------- Total liabilities and stockholders' equity $496,963,000 $449,954,000 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 --------------------------------------- 1994 1993 1992 ----------- ----------- ----------- NET INTEREST INCOME Interest and fees on loans Taxable $23,658,000 $19,946,000 $18,762,000 Tax exempt 273,000 371,000 435,000 Interest and dividends on securities Taxable 8,842,000 6,459,000 7,801,000 Tax exempt 727,000 644,000 483,000 Interest on short-term investments 155,000 185,000 188,000 Interest on trading account securities 0 2,000 14,000 ----------- ----------- ----------- Total interest income 33,655,000 27,607,000 27,683,000 ----------- ----------- ----------- Interest on deposits 12,108,000 10,101,000 11,784,000 Interest on borrowings 2,779,000 1,921,000 1,838,000 ----------- ----------- ----------- Total interest expense 14,887,000 12,022,000 13,622,000 ----------- ----------- ----------- NET INTEREST INCOME 18,768,000 15,585,000 14,061,000 Provision for loan losses (Note 4) 795,000 790,000 1,340,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,973,000 14,795,000 12,721,000 ----------- ----------- ----------- NONINTEREST INCOME Trust income 609,000 524,000 420,000 Service charges on deposit accounts 2,078,000 1,775,000 1,546,000 Other income 1,412,000 514,000 769,000 Net gains on the sale of real estate mortgages held for sale 177,000 676,000 176,000 Net trading account securities losses 0 0 (2,000) Net securities gains (losses) (Note 2) (7,000) 175,000 323,000 ----------- ----------- ----------- Total noninterest income 4,269,000 3,664,000 3,232,000 ----------- ----------- ----------- NONINTEREST EXPENSE Salaries and employee benefits (Note 9) 7,278,000 6,236,000 5,318,000 Net occupancy expense 1,057,000 996,000 887,000 Equipment costs 1,001,000 780,000 728,000 Other expense (Note 10) 4,756,000 4,366,000 3,899,000 ----------- ----------- ----------- Total noninterest expense 14,092,000 12,378,000 10,832,000 ----------- ----------- ----------- Income before income tax expense and cumulative effect of change in accounting principle 8,150,000 6,081,000 5,121,000 Income tax expense (Notes 1 and 11) 3,024,000 2,171,000 1,762,000 ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 5,126,000 3,910,000 3,359,000 Cumulative effect of adopting SFAS No. 109 (Notes 1 and 11) 0 325,000 0 ----------- ----------- ----------- NET INCOME $5,126,000 $4,235,000 $3,359,000 =========== =========== =========== AVERAGE COMMON SHARES OUTSTANDING (Note 1) 1,438,496 1,438,496 1,438,496 =========== =========== =========== INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE PER COMMON SHARE (Notes 1 and 11) $3.56 $2.72 $2.34 =========== =========== =========== CUMULATIVE EFFECT OF ADOPTING SFAS No.109 PER COMMON SHARE (Notes 1 and 11) $0.00 $0.22 $0.00 =========== =========== =========== NET INCOME PER COMMON SHARE (Note 1) $3.56 $2.94 $2.34 =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------- Unrealized Net Gain (Loss) Common Stock Additional on Securities Total ------------------------- Paid-in Retained Available Stockholders' Shares Amount Capital Earnings for Sale Equity ----------- ----------- ----------- ----------- ----------- ----------- Balances, January 1, 1992 1,307,844 $1,308,000 $5,475,000 $14,208,000 $0 $20,991,000 10% Common Stock Dividend (Note 1) 130,652 130,000 2,352,000 (2,485,000) (3,000) Net income for 1992 3,359,000 3,359,000 Cash dividends declared ($.416 per share) (Note 1) (597,000) (597,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1992 1,438,496 1,438,000 7,827,000 14,485,000 0 23,750,000 Net income for 1993 4,235,000 4,235,000 Net change in unrealized net gain (loss) on securities available for sale (Note 1) 646,000 646,000 Cash dividends declared ($.50 per share) (Note 1) (719,000) (719,000) ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1993 1,438,496 1,438,000 7,827,000 18,001,000 646,000 27,912,000 Net income for 1994 5,126,000 5,126,000 Net change in unrealized net gain (loss) on securities available for sale (Note 1) (2,301,000) (2,301,000) Cash dividends declared ($.59 per share) (Note 1) (848,000) (848,000) ----------- ----------- ----------- ---------- ----------- ----------- Balances, December 31, 1994 1,438,496 $1,438,000 $7,827,000 $22,279,000 ($1,655,000) $29,889,000 =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 ---------------------------------------- 1994 1993 1992 ------------ ------------ ------------ Cash flows from operating activities Net income $5,126,000 $4,235,000 $3,359,000 ------------ ------------ ------------ Adjustments to reconcile net income to net cash from operating activities: Cumulative effect of change in accounting principle 0 325,000 0 Depreciation 928,000 797,000 706,000 Provision for loan loss 795,000 790,000 1,340,000 Write down of other real estate owned 0 262,000 85,000 Loans originated for sale (9,426,000) (20,810,000) 0 Net gain on sale of loans (177,000) (676,000) (176,000) Proceeds from sale of loans 11,619,000 23,509,000 5,064,000 Net loss on sale of premises and equipment 1,000 6,000 0 Purchases of trading account securities 0 (485,000) 0 Proceeds from sales of trading account securities 0 487,000 1,377,000 Net loss on sale of trading account securities 0 0 2,000 Net (gain) on sale of securities available for sale 0 (53,000) 0 Net (gain) loss on sale of securities held to maturity 7,000 (122,000) (323,000) Net investment amortization (accretion) 444,000 369,000 (153,000) (Increase) decrease in market value, securities held for sale 0 0 18,000 Increase (decrease) in taxes payable (15,000) (969,000) (431,000) (Increase) decrease in income receivable (606,000) (541,000) 406,000 Increase (decrease) in accrued expenses payable 340,000 434,000 (139,000) (Increase) decrease in other assets 1,735,000 (94,000) (827,000) Increase (decrease) in other liabilities (495,000) 246,000 (80,000) ------------ ------------ ------------ Total adjustments 5,150,000 3,475,000 6,869,000 ------------ ------------ ------------ Net cash from operating activities 10,276,000 7,710,000 10,228,000 ------------ ------------ ------------ Cash flows from investing activities Proceeds from sale of securities held to maturity 0 6,588,000 16,460,000 Proceeds from sale of securities held for sale 0 1,613,000 31,817,000 Proceeds from maturities and calls of securities held to maturity 8,899,000 17,683,000 50,353,000 Proceeds from maturities and calls of securities available for sale 6,409,000 1,123,000 2,856,000 Purchases of securities available for sale (9,033,000) 0 0 Purchases of securities held to maturity (19,494,000) (84,976,000) (88,178,000) Net (increase) decrease in total loans (27,709,000) (8,240,000) (44,135,000) Purchases of new premises and equipment (2,490,000) (1,602,000) (1,869,000) Net proceeds from branch acquisitions (Note 12) 0 29,839,000 0 ------------ ------------ ------------ Net cash from investing activities (43,418,000) (37,972,000) (32,696,000) ------------ ------------ ------------ Cash flows from financing activities Net increase in total deposits 26,708,000 37,569,000 18,784,000 Proceeds from short-term borrowings 395,939,000 327,360,000 336,881,000 Payments on short-term borrowings (385,553,000) (332,700,000) (343,901,000) Proceeds from long-term borrowings 8,132,000 1,300,000 8,000,000 Dividends paid (806,000) (676,000) (579,000) ------------ ------------ ------------ Net cash from financing activities 44,420,000 32,853,000 19,185,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 11,278,000 2,591,000 (3,283,000) Cash and cash equivalents at beginning of year 12,869,000 10,278,000 13,561,000 ------------ ------------ ------------ Cash and cash equivalents at end of year $24,147,000 $12,869,000 $10,278,000 ============ ============ ============ Cash paid during the year for: Interest $14,496,000 $12,254,000 $14,114,000 ============ ============ ============ Income taxes $3,038,000 $2,490,000 $2,160,000 ============ ============ ============ Investment securities transferred to securities held for sale $0 $0 $26,808,000 ============ ============ ============ Loans transferred to real estate mortgages held for sale $0 $0 $9,204,000 ============ ============ ============ In-substance foreclosure transferred to loans $1,100,000 $0 $0 ============ ============ ============ Loans transferred to other real estate $107,000 $420,000 $3,050,000 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements.

Notes to Consolidated Financial Statements - ----------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include Lakeland Financial Corporation (the Corporation) and its wholly-owned subsidiary, Lake City Bank (the Bank). All significant intercompany balances and transactions are eliminated in consolidation. Securities: On December 31, 1993, the Corporation elected to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Corporation now classifies securities into held to maturity, available for sale and trading categories. Held to maturity securities are those which the Corporation has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available for sale securities are those the Corporation may decide to sell if needed for liquidity, asset-liability management or other reasons. Available for sale securities are reported at fair value, with unrealized gains and losses included as a separate component of equity, net of tax. Trading securities are bought principally for sale in the near term, and are reported at fair value with unrealized gains and losses included in earnings. Prior to December 31, 1993, securities were reported at amortized cost except for securities held for sale, which were reported at the lower of cost or market. This reclassification increased equity by $646,000 at December 31, 1993. Realized gains and losses resulting from the sale of securities are computed by the specific identification method. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. Real Estate Mortgages Held for Sale: Real estate mortgages classified as held for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Net unrealized losses are recognized in a valuation allowance by charges to income. Gains and losses on sales of mortgages are recognized on the settlement date. Gains and losses are determined by the difference between sales proceeds and the carrying value of the mortgages. Interest Income on Loans: Interest is accrued over the loan term based upon the principal balances outstanding. Loans are placed on nonaccrual when interest collection becomes doubtful. Loan fees and related costs are netted and deferred. The deferral is included in loans and recognized in interest income over the loan term on the level yield method. Concentration of Credit: The Bank is a full service bank with headquarters in Warsaw, Indiana with offices in 20 cities and towns located within Kosciusko and contiguous counties. It is estimated that over 98% of all the Bank's commercial, industrial, agri-business and agricultural real estate mortgage, real estate construction mortgage and consumer loans are made within its basic trade area. This area generally lies within a radius of 10 miles or less from any of its existing offices. The loan portfolios are well diversified and are secured to the extent deemed appropriate by management. Mortgage-backed securities are collateralized by mortgages located throughout the United States. Substantially all mortgage-backed securities are insured directly or indirectly by the U. S. Government. Allowance for Loan Losses: The allowance is judgmentally determined by management and is maintained at a level considered adequate to cover possible losses currently anticipated based on past loss experience, general national and local economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which may change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-off that might occur. A loan is charged-off as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Increases to the allowance are recorded by a charge to expense and are based upon subjective judgments. The Corporation will adopt SFAS No. 114 and SFAS No. 118 at January 1, 1995. Under these standards, loans considered to be impaired are reduced to the present value of future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require increase, such increase is reported as bad debt expense. The effect of adopting this accounting standard on January 1, 1995 will not be material. Land, Premises and Equipment: Land, premises, and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on both straight-line and declining-balance methods based on estimated useful lives of the assets. Other Real Estate Owned: Other real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value at the date of acquisition. Any reduction to fair value from the carrying value of the related loan at the time of acquisition is accounted for as a loan loss and charged against the allowance for loan losses. After acquisition, a valuation allowance is recorded through a charge to income for the amount of estimated selling costs. Valuations are periodically performed by management, and valuation allowances are adjusted through a charge to income for changes in fair value or estimated selling costs. Income Taxes: The Corporation files annual consolidated federal income tax returns. Prior to 1993, income tax expense was based upon the liability method under SFAS No. 96. Beginning in 1993, the Corporation adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The Corporation records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between carrying amounts and tax bases of assets and liabilities, using enacted tax rates. The effect of the adoption of SFAS No. 109, as of January 1, 1993 is shown as the cumulative effect of an accounting change in the 1993 income statement. Stock Dividend: A 10% stock dividend was declared payable as of July 31, 1992. The market value of shares issued was transferred from retained earnings to common and additional paid-in capital. Cash payments were made in lieu of issuing fractional shares. Dividend Restriction: The Bank is subject to banking regulations which require the maintenance of certain capital levels and which may limit the amount of dividends which may be paid to the Corporation. At December 31, 1994, approximately $4,136,000 of the Bank's retained earnings is available for distribution to the Corporation without prior regulatory approval. Earnings Per Share: Earnings per common share are based upon the weighted average number of common shares outstanding, with prior periods adjusted to reflect the 10 percent stock dividend in 1992. Pension Plan: A noncontributory defined benefit pension plan covers substantially all employees. Funding of the plan equals or exceeds the minimum funding requirement determined by the actuary. The projected unit credit cost method is used to determine expense. Benefits are based on years of service and compensation levels. Statement of Cash Flows: Cash and cash equivalents include cash on hand, demand deposits in other institutions and short-term investments with maturities of 90 days or less. Reclassifications: Certain amounts appearing in the financial statements and notes thereto for the years ended December 31, 1993 and 1992 have been reclassified to conform with the December 31, 1994, presentation.

NOTE 2 - SECURITIES Information related to the amortized cost and fair value of securities at December 31 is provided in the table below. Unrealized Unrealized Amortized Gross Gross Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- Securities Available for Sale at December 31, 1994: U.S. Treasury securities $26,960,000 $2,000 ($1,046,000) $25,916,000 U.S. Government agencies and corporations 1,000,000 0 0 1,000,000 Mortgage-backed securities 30,734,000 1,000 (1,748,000) 28,987,000 State and municipal securities 887,000 46,000 0 933,000 Other debt securities 999,000 27,000 0 1,026,000 ----------- ----------- ----------- ----------- Total debt securities 60,580,000 76,000 (2,794,000) 57,862,000 Equity securities 1,760,000 0 (22,000) 1,738,000 ----------- ----------- ----------- ----------- Total securities available for sale at December 31, 1994 $62,340,000 $76,000 ($2,816,000) $59,600,000 =========== =========== =========== =========== Securities Held to Maturity at December 31, 1994: U.S. Treasury securities $14,714,000 $0 ($838,000) $13,876,000 U.S. Government agencies and corporations 2,034,000 4,000 (1,000) 2,037,000 Mortgage-backed securities 78,781,000 22,000 (5,130,000) 73,673,000 State and municipal securities 13,608,000 73,000 (620,000) 13,061,000 Other debt securities 1,015,000 61,000 0 1,076,000 ----------- ----------- ----------- ----------- Total securities held to maturity at December 31, 1994 $110,152,000 $160,000 ($6,589,000) $103,723,000 =========== =========== =========== =========== Securities Available for Sale at December 31, 1993: U.S. Treasury securities $29,701,000 $818,000 ($73,000) $30,446,000 Mortgage-backed securities 26,798,000 142,000 (130,000) 26,810,000 State and municipal securities 882,000 93,000 0 975,000 Other debt securities 999,000 129,000 0 1,128,000 ----------- ----------- ----------- ----------- Total debt securities 58,380,000 1,182,000 (203,000) 59,359,000 Equity securities 1,774,000 0 0 1,774,000 ----------- ----------- ----------- ----------- Total securities available for sale at December 31, 1993 $60,154,000 $1,182,000 ($203,000) $61,133,000 =========== =========== =========== =========== Securities Held to Maturity at December 31, 1993: U.S. Treasury securities $10,544,000 $27,000 ($12,000) $10,559,000 U.S. Government agencies and corporations 99,000 0 0 99,000 Mortgage-backed securities 77,085,000 613,000 (631,000) 77,067,000 State and municipal securities 10,825,000 651,000 0 1,195,000 ----------- ----------- ----------- ----------- Total securities held to maturity at December 31, 1993 $99,570,000 $1,469,000 ($662,000) $100,377,000 =========== =========== =========== =========== Information regarding the amortized cost and fair value of debt securities by maturity as of December 31, 1994 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without prepayment penalty. Available for Sale Held to Maturity December 31, 1994 December 31, 1994 -------------------------- ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Due in one year or less $3,317,000 $3,325,000 $342,000 $343,000 Due after one year through five years 26,529,000 25,550,000 17,032,000 16,205,000 Due after five years through ten years 0 0 3,386,000 3,369,000 Due after ten years 0 0 10,611,000 10,133,000 ----------- ----------- ----------- ----------- 29,846,000 28,875,000 31,371,000 30,050,000 Mortgage-backed securities 30,734,000 28,987,000 78,781,000 73,673,000 ----------- ----------- ----------- ----------- Total debt securities $60,580,000 $57,862,000 $110,152,000 $103,723,000 =========== =========== =========== =========== There were no sales of securities in 1994. During 1994, the proceeds from the call of securities held to maturity amounted to $249,000, with gross gains of $10,000 and gross losses of $17,000. In 1993, proceeds from the sales of securities held for sale amounted to $1,613,000 with gross gains of $53,000 and gross losses of $0 and proceeds from sales of securities held to maturity amounted to $6,588,000 with gross gains of $149,000 and gross losses of $27,000. Securities with a carrying value of $81,206,000 were pledged as of December 31, 1994 as collateral for deposits of public funds, securities sold under agreements to repurchase and for and for other purposes as permitted or required by law. NOTE 3 - TOTAL LOANS Total loans outstanding as of December 31, 1994 and 1993 consist of the following: 1994 1993 ------------ ------------ Commercial and industrial loans $154,326,000 $127,839,000 Agri-business and agricultural loans 22,206,000 20,936,000 Real estate mortgage loans 46,870,000 49,593,000 Real estate construction loans 426,000 223,000 Installment loans and credit cards 64,128,000 61,594,000 ------------ ------------ Total loans $287,956,000 $260,185,000 ============ ============ Loans aggregating $60,000 or more with executive officers and directors (including their associates) amounted to $7,109,000 and $5,862,000 as of December 31, 1994 and 1993, respectively. During 1994, new loans or advances were $16,111,000, loan repayments were $14,864,000 and other changes were $0. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31 are summarized as follows: 1994 1993 ----------- ----------- Mortgage loan portfolios serviced for: FHLMC $28,909,000 $23,372,000 Other investors 1,456,000 2,050,000 ----------- ----------- Total mortgage loan portfolios serviced $30,365,000 $25,422,000 =========== =========== Income earned for loan servicing was $68,000 and $41,000 for 1994 and 1993, respectively. NOTE 4 - ALLOWANCE FOR LOAN LOSSES The following is an analysis of the allowance for loan losses for 1994, 1993 and 1992: 1994 1993 1992 ----------- ----------- ----------- Balance, January 1 $4,010,000 $3,095,000 $2,612,000 Allowance related to assets acquired 0 250,000 0 Provision for loan losses 795,000 790,000 1,340,000 Less: Loans charged-off (recovered) (net of recoveries of $196,000 in 1994; $103,000 in 1993; and $103,000 in 1992) (61,000) 125,000 857,000 ----------- ----------- ----------- Balance, December 31 $4,866,000 $4,010,000 $3,095,000 =========== =========== =========== Nonaccrual loans at December 31, 1994, 1993 and 1992 totaled $18,000,$0, and $0, respectively. 1994 nonaccrual loans consisted of one mortgage loan of $18,000. Loans renegotiated as troubled debt restructuring totaled $1,406,000 as of December 31, 1994. Interest income of $82,000 was recognized in 1994. Had these loans been performing under the original contract terms, an additional $31,000 would have been reflected in interest income during 1994. The Bank is not committed to lend additional funds to debtors whose loans have been modified. Amounts for restructured loans in periods prior to 1994 were not material. NOTE 5 - LAND, PREMISES AND EQUIPMENT Land, premises and equipment and related accumulated depreciation were as follows at December 31: 1994 1993 ----------- ----------- Land $2,872,000 $2,520,000 Buildings 8,824,000 7,940,000 Equipment 6,117,000 4,881,000 ----------- ----------- Total Cost 17,813,000 15,341,000 Less accumulated depreciation 6,518,000 5,607,000 ----------- ----------- Land, premises and equipment, net $11,295,000 $9,734,000 =========== =========== NOTE 6 - INTEREST BEARING DEPOSITS The following is an analysis of interest bearing deposits as of December 31: 1994 1993 ------------ ------------ Super NOW $44,335,000 $46,343,000 Insured money market 17,993,000 18,935,000 Savings 52,091,000 56,971,000 Time: In denominations under $100,000 162,732,000 143,871,000 In denominations of $100,000 or more 56,759,000 57,193,000 ------------ ------------ Total interest bearing deposits $333,910,000 $323,313,000 ============ ============ NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase (repo accounts) represent collateralized borrowings with customers located primarily within the Bank's trade area. Liabilities and the related collateral consisting of U.S. Treasury securities and mortgage-backed securities, as of December 31, 1994 were as follows: Collateral Value Weighted ----------------------------------------------------- Average U.S. Treasury Securities Mortgage-backed Securities Repurchase Interest ------------------------- ------------------------- TERM Liability Rate Book Fair Value Book Fair Value ------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- On demand $10,487,000 3.75% $0 $0 $12,467,000 $11,352,000 Less than 90 days 19,091,000 5.67% 1,885,000 1,794,000 20,773,000 19,347,000 Over 90 days 12,172,000 5.28% 12,067,000 11,444,000 1,724,000 1,633,000 ----------- ----------- ----------- ----------- ----------- ----------- Total $41,750,000 5.11% $13,952,000 $13,238,000 $34,964,000 $32,332,000 =========== =========== =========== =========== =========== =========== As indicated in Note 2, securities are pledged to meet both current and potential collateral requirements applicable to deposits of public funds, securities sold under agreements to repurchase and for other purposes permitted or required by law. The Bank retains the right to substitute similar type securities, and has the right to withdraw all collateral applicable to repo accounts whenever the collateral values are in excess of the related repurchase liabilities. At December 31, 1994, there were no material amounts of assets at risk with any one customer. NOTE 8 - LONG-TERM DEBT Long-term debt at December 31 consisted of: 1994 1993 ----------- ----------- Federal Home Loan Bank of Indianapolis Notes, 5.55%, Due January 2, 1996 $8,000,000 $8,000,000 Federal Home Loan Bank of Indianapolis Notes, 5.59%, Due January 14, 1997 8,132,000 0 Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300,000 1,300,000 ----------- ----------- Total $17,432,000 $9,300,000 =========== =========== All notes require monthly interest payments and are secured by residential real estate loans with a carrying value of $27,217,000 at December 31, 1994. NOTE 9 - EMPLOYEE BENEFIT PLANS Information as to the Corporation's pension plan at December 31 is as follows: 1994 1993 ----------- ----------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $640,000 for 1994 and $626,000 for 1993 $719,000 $673,000 =========== =========== Projected benefit obligation for service rendered to date $949,000 $973,000 Plan assets at fair value (primarily money market funds and equity and fixed income investments) (893,000) (686,000) Unrecognized gains 193,000 27,000 Unrecognized prior service cost 33,000 (24,000) ----------- ----------- Accrued balance sheet pension liability $282,000 $290,000 =========== =========== Net pension expense includes the following: 1994 1993 1992 ----------- ----------- ----------- Service cost for benefits earned $119,000 $113,000 $91,000 Interest cost 66,000 58,000 49,000 Actual return on plan assets (56,000) (52,000) (35,000) Net amortization and deferrals (3,000) 4,000 (10,000) ----------- ----------- ----------- Net pension expense $126,000 $123,000 $95,000 =========== =========== =========== The following assumptions were used in calculating the net pension cost. Weighted average discount rate 8.00% 6.75% 7.75% Rate of increase in future compensation 4.50% 4.50% 4.75% Expected long-term rate of return 8.00% 8.00% 8.00% Under a 401(k) profit sharing plan, Corporation contributions are based upon the rate of return on January 1st stockholders' equity. Expense recognized was $370,000, $332,000 and $248,000 in 1994, 1993 and 1992, respectively. NOTE 10 - OTHER EXPENSE Other expense for the years ended December 31, were as follows: 1994 1993 1992 ----------- ----------- ----------- Regulatory fees and FDIC insurance $904,000 $783,000 $715,000 Data processing fees and supplies 769,000 873,000 694,000 Office supplies 519,000 440,000 431,000 Telephone and postage 535,000 466,000 419,000 Miscellaneous 2,029,000 1,804,000 1,640,000 ----------- ----------- ----------- Total other expense $4,756,000 $4,366,000 $3,899,000 =========== =========== =========== NOTE 11 - INCOME TAXES Effective January 1, 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. The adjustment of $325,000 to apply the new accounting method is included in income for the year ended December 31, 1993. The change in method had no affect on income before cumulative effect of the change in accounting principle in 1993. Income tax expense consists of the following: 1994 1993 1992 ----------- ----------- ----------- Current federal income tax expense $2,301,000 $1,831,000 $1,580,000 Deferred federal income tax expense (credit) 11,000 (158,000) (283,000) Current state income tax expense 673,000 600,000 529,000 Deferred state income tax expense (credit) 39,000 (102,000) (64,000) ----------- ----------- ----------- Total income tax expense $3,024,000 $2,171,000 $1,762,000 =========== =========== =========== Income tax expense (credit) included $(34,000), $58,000 and $75,000 applicable to security transactions for 1994, 1993 and 1992, respectively. The differences between financial statement tax expense and amounts computed by applying the statutory federal income tax rate of 34% for all three years to income before income taxes are as follows: 1994 1993 1992 ----------- ----------- ----------- Income taxes at statutory federal rate $2,771,000 $2,068,000 $1,741,000 Increase (decrease) in taxes resulting from: Tax exempt income (338,000) (339,000) (310,000) Nondeductible expense 73,000 45,000 43,000 State income tax, net of federal tax effect 471,000 328,000 307,000 Other 47,000 69,000 (19,000) ----------- ----------- ----------- Total income tax expense $3,024,000 $2,171,000 $1,762,000 =========== =========== =========== The components of the net deferred tax asset recorded in the balance sheet as of December 31, are as follows: 1994 1993 ----------- ----------- Total deferred federal tax assets $1,850,000 $1,545,000 Total deferred federal tax liabilities (745,000) (429,000) Total deferred state tax assets 542,000 455,000 Total deferred state tax liabilities (201,000) (75,000) Total valuation allowance 0 0 ----------- ----------- Net deferred tax asset $1,446,000 $1,496,000 =========== =========== The deferred federal tax asset in 1994 consists of the following: bad debts of $1,247,000, ORE of $194,000, pension and deferred compensation liability of $255,000, deferred loan fees of $144,000 and other of $10,000. The deferred federal tax liability consists of: depreciation of $243,000, state taxes of $146,000 and other of $356,000. The deferred federal tax asset in 1993 consisted of the following: bad debts of $885,000, ORE of $274,000, pension and deferred compensation liability of $217,000, deferred loan fees of $151,000 and other of $18,000. The deferred federal tax liability consisted of: depreciation of $203,000 and other of $226,000. The deferred state tax asset in 1994 consists of the following: bad debts of $392,000, ORE of $48,000, pension and deferred compensation liability of $64,000, deferred loan fees of $36,000 and other of $2,000. The deferred state tax liability consists of: depreciation of $61,000 and other of $140,000. The deferred state tax asset in 1993 consisted of the following: bad debts of $290,000, ORE of $68,000, pension and deferred compensation liability of $54,000, deferred loan fees of $38,000 and other of $5,000. The deferred state tax liability consisted of: depreciation of $51,000 and other of $24,000. In addition to the net deferred tax assets included above, income taxes (credits) allocated to the unrealized net gain (loss) account included in equity were ($1,085,000) and $333,000 for 1994 and 1993, respectively. NOTE 12 - NET PROCEEDS, BRANCH ACQUISITION On November 20, 1993, the Bank acquired the Cromwell, Ligonier and Elkhart offices of another financial institution, purchasing certain assets and assuming certain liabilities associated with those offices: Liabilities assumed (including deposits of $48,155,000) $49,074,000 Less: Assets purchased at fair value: Loans, net of allowance for loan losses 17,618,000 Fixed assets ($1,193,000), covenants and other assets 1,617,000 ----------- Net proceeds, branch acquisitions $29,839,000 =========== Subsequent to this transaction, the Elkhart office operations were transferred to an existing office. NOTE 13 - PARENT COMPANY STATEMENTS The Corporation operates primarily in the banking industry, which accounts for more than 90 percent of its revenues, operating income, and assets. Presented below are parent only financial statements: CONDENSED BALANCE SHEETS December 31 ------------------------- 1994 1993 ----------- ----------- ASSETS Deposits with Lake City Bank $15,000 $24,000 Investment in subsidiary 30,085,000 27,979,000 Other assets 12,000 110,000 ----------- ----------- Total assets $30,112,000 $28,113,000 =========== =========== LIABILITIES Dividends payable and other liabilities $223,000 $201,000 STOCKHOLDERS' EQUITY 29,889,000 27,912,000 ----------- ----------- Total liabilities and stockholders' equity $30,112,000 $28,113,000 =========== =========== CONDENSED STATEMENTS OF INCOME Years Ended December 31 --------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Dividends from Lake City Bank $982,000 $458,000 $567,000 Interest on deposits and repurchase agreements, Lake City Bank 3,000 0 4,000 Security gains 0 0 35,000 Miscellaneous income 22,000 (10,000) 0 Equity in undistributed income of subsidiary 4,168,000 3,782,000 2,740,000 Miscellaneous expense (credit) 68,000 (2,000) (4,000) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 5,107,000 4,232,000 3,350,000 Income tax expense (credit) (19,000) (3,000) (9,000) ----------- ----------- ----------- NET INCOME $5,126,000 $4,235,000 $3,359,000 =========== =========== =========== CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31 --------------------------------------- 1994 1993 1992 ----------- ----------- ----------- Cash flows from operating activities Net income $5,126,000 $4,235,000 $3,359,000 Adjustments to net cash from operating activities Equity in undistributed earnings of subsidiary (4,168,000) (3,782,000) (2,740,000) Other changes 18,000 36,000 23,000 ----------- ---------- ----------- Net cash from operating activities 976,000 489,000 642,000 Cash flows from investing activities (137,000) 0 59,000 Cash flows from financing activities (848,000) (716,000) (598,000) ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents (9,000) (227,000) 103,000 Cash and cash equivalents at beginning of year 24,000 251,000 148,000 ----------- ---------- ----------- Cash and cash equivalents at end of year $15,000 $24,000 $251,000 =========== =========== =========== NOTE 14 - COMMITMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES During the normal course of business, the Bank becomes a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments include commitments to make loans and open-ended revolving lines of credit. Amounts as of December 31, 1994 were as follows: Fixed Variable Rate Rate Total ----------- ----------- ------------ Commercial loan lines of credit $3,267,000 $71,075,000 $74,342,000 Commercial loan standby letters of credit 0 6,807,000 6,807,000 Real estate mortgage loans 0 485,000 485,000 Real estate construction mortgage loans 0 460,000 460,000 Credit card open-ended revolving lines 4,444,000 0 4,444,000 Home equity mortgage open-ended revolving lines 0 11,317,000 11,317,000 Consumer loan open-ended revolving lines 0 2,384,000 2,384,000 ----------- ----------- ------------ Total $7,711,000 $92,528,000 $100,239,000 =========== =========== ============ At December 31, 1994, the range of interest rates for commercial loan commitments with a fixed rate was 6.99 to 9.50 percent. The range of interest rates for commercial loan commitments with variable rates was 8.50 to 13.50 percent. The index on variable rate commercial loan commitments is primarily the prime rate. Commitments, excluding open-ended revolving lines, generally have fixed expiration dates of one year or less. Credit card open-ended revolving lines of credit are normally reviewed bi-annually and other personal lines of credit are normally reviewed annually. Since many commitments expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank follows the same credit policy (including requiring collateral, if deemed appropriate) to make such commitments as is followed for those loans that are recorded in its financial statements. The Bank's exposure to credit losses in the event of nonperformance is represented by the contractual amount of the commitments. Management does not expect any losses as a result of these commitments. There are presently no lawsuits which, in the opinion of management and legal counsel, would have a material affect on the financial statements. NOTE 15 - FAIR VALUE ACCOUNTING The SFAS No. 107 requires management to estimate the fair value of its financial instruments. The following table contains these values and the related carrying values at December 31, 1994 and 1993. Items which are not financial instruments are not included. 1994 1993 ------------------------- ------------------------ Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----------- ----------- ----------- ----------- Cash and cash equivalents $24,147,000 $24,147,000 $12,869,000 $12,869,000 Real estate mortgages held for sale 175,000 179,000 2,191,000 2,253,000 Securities available for sale 59,600,000 59,600,000 61,133,000 61,133,000 Securities held to maturity 110,152,000 103,723,000 99,570,000 100,377,000 Loans, net 283,090,000 279,035,000 256,175,000 260,000,000 Accrued income receivable 3,464,000 3,464,000 2,858,000 2,858,000 Certificates of deposit (219,491,000) (218,739,000) (201,064,000) (203,121,000) All other deposits (177,249,000) (177,249,000) (168,968,000) (168,968,000) Securities sold under agreements to repurchase (41,750,000) (41,833,000) (29,372,000) (29,416,000) Other short-term debt (6,573,000) (6,573,000) (8,737,000) (8,737,000) Long-term debt (17,432,000) (16,337,000) (9,300,000) (9,448,000) Accrued expenses payable (3,280,000) (3,280,000) (3,022,000) (3,022,000) For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1994 and 1993. The estimated fair value for cash, cash equivalents and accruals is considered to approximate cost. Real estate mortgages held for sale are based upon either the actual contracted price for those loans sold but not yet delivered, or the current FHLMC price for normal delivery of mortgages with similar coupons and maturities at year-end. The estimated fair value for securities is based on quoted market rates for individual securities or for equivalent quality, coupon and maturity securities. The estimated fair value of loans is based on estimates of the rate the Bank would charge for similar such loans at December 31, 1994 and 1993, applied for the time period until estimated repayment. The estimated fair value for demand and savings deposits is based on their carrying value. The estimated fair value for certificates of deposit and borrowings is based on estimates of the rate the Bank would pay on such deposits or borrowings at December 31, 1994 and 1993, applied for the time period until maturity. The estimated fair value of short-term borrowed funds is considered to approximate cost. The estimated fair value of other financial instruments and off-balance sheet loan commitments approximate cost and are not considered significant to this presentation. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Bank to have disposed of such items at December 31, 1994 and 1993, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1994 and 1993, should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as land, premises and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the earnings potential of the Bank's trust department, the trained work force, customer goodwill and similar items. REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Lakeland Financial Corporation Warsaw, Indiana We have audited the accompanying consolidated balance sheets of Lakeland Financial Corporation and subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1994, 1993 and 1992. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lakeland Financial Corporation and subsidiary as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years ended December 31, 1994, 1993 and 1992, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 11, the Corporation changed its method of accounting for income taxes in 1993, and as discussed in Notes 1 and 2, the Corporation elected to classify its securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115 at December 31, 1993. CROWE, CHIZEK AND COMPANY South Bend, Indiana January 27, 1995 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the Corporation's consolidated financial statements and related information appearing in this annual report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Corporation's financial position and results of operations and were prepared in conformity with generally accepted accounting principles. Management also has included in the Corporation's financial statements, amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. The independent auditors have audited the Corporation's consolidated financial statements in accordance with generally accepted auditing standards and provide an objective, independent review of the fairness of the reported operating results and financial position. The Board of Directors of the Corporation has an Audit Review Committee composed of five non-management Directors. The Committee meets periodically with the internal auditors and the independent auditors.

FINANCIAL CONDITION Liquidity The Corporation manages its primary liquidity position to provide funding at the lowest possible cost for anticipated loan demand and/or deposit run-off that occurs in the regular course of business. Such sources of liquidity are: federal fund lines with correspondent banks, advances from the Federal Home Loan Bank, repurchase agreements with local bank customers and cash flow from the securities portfolio. This cash flow from the securities portfolio could total approximately $18,700,000 in 1995, given current prepayment assumptions. Additionally, continuous growth into new markets in northern Indiana has diversified the retail deposit base, reducing volatility that might occur in one geographical location. Kosciusko county provides less than 50 percent of the Corporation's funding today, as compared to nearly 90 percent only five years ago. The Corporation manages a secondary liquidity position to provide funding in the event of unanticipated loan demand and/or deposit run-off. Management has designated approximately 35 percent of its investment portfolio as available for sale (AFS). This designation provides the liquidity to fund abnormal loan demand, or to manage the loss of deposits. The Corporation's securities are all very high quality and easily marketable, with 89 percent either U.S. Treasuries, federal agency securities or mortgage-backed securities directly or indirectly guaranteed by the Federal government. The following is a brief description of the sources and uses of funds for the indicated periods: During the year ended December 31, 1994, there was a net increase of $11.3 million in cash and cash equivalents. The major uses of cash during the period included the funding of a $27.7 million increase in loans and the purchase of securities totaling $28.5 million. Major sources of funds were: a net increase in cash from operating activities of $10.3 million, maturing securities of $15.3 million, an increase in deposits of $26.7 million and an $18.5 million increase in total borrowings. During the year ended December 31, 1993, there was a net increase of $2.6 million in cash and cash equivalents. The major uses of cash during the period included the funding of a $8.2 million increase in loans and the purchase of securities totaling $85.0 million. Major sources of funds were: a net increase in cash from operating activities of $7.7 million, proceeds from the sale or maturity of securities totaling $27.0 million, an increase in deposits of $37.6 million, and proceeds from branch acquisitions of $29.8 million. During the year ended December 31, 1992, there was a net decrease of $3.3 million in cash and cash equivalents. The major uses of cash during the period included the funding of a $44.1 million increase in loans and the purchase of securities totaling $88.2 million. Major sources of funds were: a net increase in cash from operating activities of $10.2 million, proceeds from the sale or maturity of securities totaling $101.6 million and an increase in deposits of $18.8 million. Asset/Liability Management (ALCO) The Board of Directors annually reviews and approves the ALCO policy used to manage interest rate risk. This policy sets guidelines for balance sheet structure that protect the Corporation from excessive net income volatility that could result from changing interest rates. The Corporation uses a GAP report, which details the relative mismatch of asset and liability cash flows occurring in specified time horizons, as a rough estimate of the current rate sensitivity position. In 1993 the Corporation began using a computer program to test the balance sheet's performance under a wide variety of interest rate scenarios. This model quantifies the impact on income of such things as: changes in customer preference for bank products, basis risk between the Bank's assets and the funds supporting them and the risk inherent in different yield curves. The ALCO committee reviews these possible outcomes and makes loan, investment and deposit decisions that maintain reasonable balance sheet structure in light of potential interest rate movements. After the committee has specified a maximum risk tolerance for dollar margin volatility, the committee develops guidelines for the GAP ratios. As indicated in Table 1, the Corporation's GAP ratio at December 31, 1994, for the next 12 months is a negative 7.4 percent of total assets. This ratio indicates that the interest margin could be somewhat lower if interest rates rise, as compared to flat or falling interest rate environments. The computer model also produces this result. The computer generated forecast indicates that the percentage margin would decline only modestly if rates rose approximately 200 basis points. Both measures are well within policy limits. Capital Management The Corporation believes that a strong capital position is vital to long-term earnings and expansion. Currently the Bank maintains capital levels in excess of "well-capitalized" levels as defined by the FDIC. Bank regulatory agencies have recently ruled that the market value adjustment created by SFAS No. 115 (AFS adjustment) should be excluded from capital adequacy calculations. Therefore, excluding this market valuation adjustment from the calculation, the Bank attained tier I leverage capital, tier I risk based capital and tier II risk based capital ratios of 6.3 percent, 10.1 percent and 11.3 percent, respectively at December 31, 1994. All three ratios are well above the "well-capitalized" minimums of 5.0 percent, 6.0 percent and 10.0 percent, respectively. The ability to maintain these ratios at these levels are a function of net income growth and a prudent dividend policy. Total stockholders' equity increased by 7.1 percent, to $29,889,000 as of December 31, 1994, from $27,912,000 as of December 31, 1993. Total stockholders' equity increased by 25.8 percent or $6,139,000 from $23,750,000 as of December 31, 1992. The 1994 growth of $1,977,000 resulted from the retention of net income of $5,126,000, minus cash dividends declared of $848,000 and change in the AFS adjustment of $2,301,000. The 1993 growth of $4,162,000 resulted from the retention of net income of $4,235,000, minus cash dividends declared of $719,000 plus the AFS adjustment of $646,000. Inflation For a financial institution, the effects of price changes and inflation can vary substantially. Inflation affects the growth of total assets, but it is difficult to assess its impact since neither the timing nor the magnitude of the changes in the consumer price index (CPI) coincides with changes in interest rates. The price of one or more of the important components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding affect on interest rates or upon the cost of those goods and services normally purchased by the Corporation. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the reverse situation may occur. Growth and Expansion The assets of the Corporation increased 10.5 percent, or $47,009,000, to $496,963,000 as of December 31, 1994, from $449,954,000 as of December 31, 1993. Assets at December 31, 1994, increased 37.1 percent, or $134,466,000, from $362,497,000 as of December 31, 1992. The Corporation has been pursuing expansion into contiguous markets since 1990. Most recently, the Corporation purchased two offices from Prime Bank in Noble county (see Note 12 to the Consolidated Financial Statements), and opened an additional office in Elkhart county in 1993. In 1994, another office was opened in Elkhart county and the Corporation opened its first location in LaGrange county in Shipshewana, Indiana. Plans call for additional expansion in Elkhart county in 1995. Although growth continues to be strong in the traditional markets served by the Bank, clearly the ability to grow earnings at a rate that will maximize the value of the Corporation's stock depends on the ability to access new markets. Expansion has opened new markets for the Corporation's loan and deposit products in Elkhart, Fulton, LaGrange, Marshall, Noble and Whitley counties. Further, diversifying the retail deposit base continues to be a key long-term liquidity and ALCO management objective, since these funds are typically less volatile, and less costly, than purchased funds. However, the Corporation continues to protect its traditional markets by modifying its existing market coverage by adding new products, offices and ATM's in areas where the demographic trends dictate. All of these factors have contributed significantly to net income in recent years. Changes in Accounting Methods At December 31, 1993, the Corporation elected to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 115. This deals with the accounting for certain debt and equity securities. Stockholders' equity includes the impact of this accounting standard. During the first quarter of 1993, the Corporation adopted the provisions of SFAS No. 109, Accounting for Income Taxes. Net income in 1993 includes the cumulative impact of this change in accounting standard. Effective January 1, 1995, the Corporation will adopt SFAS No. 114, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan. The affect on the Corporation of the adoption of these accounting standards will not be material. RESULTS OF OPERATIONS 1994 versus 1993 Record assets and earnings characterized 1994. Loans increased 10.7 percent, or $27,771,000, to $287,956,000 at year-end 1994. Total deposits increased 7.2 percent, or $26,708,000, to $396,740,000 at December 31, 1994, while deposits and securities sold under agreement to repurchase increased 9.8 percent, or $39,086,000, to $438,490,000. Net income totaled $5,126,000, surpassing 1993 results by 21.0 percent. On an average daily basis, gross earning assets increased by 22.1 percent and total deposits and purchased funds increased by 22.9 percent. The Prime Bank offices added in late 1993 account for approximately two-thirds of this average daily earning asset growth. Total interest income increased 21.9 percent, or $6,048,000 to $33,655,000 for the year ended December 31, 1994. The 22.1 percent growth in average daily earning assets was solely responsible for this increase, as the overall tax equivalent yield of 7.70 percent on average earning assets in 1994 was unchanged from 1993. Nonearning assets of the Corporation include non-accrual loans and investments, other real estate, and repossessions, and amounted to $815,000, $2,379,000 and $3,132,000 as of December 31, 1994, 1993 and 1992, respectively. There was one $18,000 nonaccrual loan at year-end 1994. Interest expense totaled $14,887,000 in 1994, a 23.8 percent, or $2,865,000 increase over 1993. Average daily deposits and purchased funds increased by 22.9 percent in 1994, and rising interest rates during the year increased the average rate paid on interest bearing liabilities by 3 basis points to 3.44 percent for the year. As interest rates rose during 1994, Bank customers have returned to fixed rate certificates of deposit. This shift in mix modestly increased the Bank's overall cost of funds during 1994. Net interest income increased 20.4 percent, or $3,183,000, to $18,768,000 in 1994, from $15,585,000 in 1993. Net interest income as a percentage of average earning assets was 4.41 percent in 1994. This represents an 8 basis point decline from 4.49 percent in 1993. This reduction is due in equal measure to the modest increase in the cost of funds and a lower level of loan fees. The Corporation expects net interest income growth to be comparable to the growth of earning assets in 1995. As indicated in Notes 1 and 4 to the Consolidated Financial Statements, management maintains the allowance for loan losses at an appropriate level given many different factors. The December 31, 1994, allowance for loan losses of $4,866,000 is believed by management to be adequate to absorb all potential inherent risk applicable to the classification of loans as loss, doubtful, substandard or special mention. This allowance does not represent or result from trends that will materially adversely impact future operating results, liquidity or capital resources. Net interest income after provision for loan losses increased 21.5 percent, or $3,178,000, to $17,973,000 in 1994, from $14,795,000 in 1993. Trust income and service charges on deposit accounts, two large components of noninterest income, increased 16.9 percent, or $388,000 to $2,687,000 in 1994, from $2,299,000 in 1993. Trust income totaled $609,000, an increase of 16.2 percent from 1993. This reflects increased corporate trust business. Service charges on deposit accounts increased by 17.1 percent, to $2,078,000 in 1994, reflecting the growth in individual and corporate deposit accounts paying fees. Other income increased $898,000 to $1,412,000 in 1994. A portion of this growth reflects the reversal of certain other real estate valuation allowances totaling $404,000 that were related to two large loans. These situations were resolved in 1994 and the reserves were no longer necessary. Other components of other income such as wire transfer fees, credit card fees and mortgage service fees increased 15.0 percent in 1994. The Corporation continues its program of originating and selling real estate mortgages in the secondary market. During the course of 1994, the Bank sold approximately $8,800,000 of mortgages through the FHLMC Gold program. Gains on the sale of these loans totaled $177,000, a decrease of $499,000 over 1993. This decrease represents the higher rate environment that substantially reduced the level of home refinancing during the year. Net investment securities losses totaled $(7,000) in 1994, as compared to net investment security gains of $175,000 in 1993. The ALCO committee reviews the portfolio monthly and makes investment decisions based upon the projected balance sheet needs. During 1994, there were no securities sold from either the AFS or HTM portfolios. The small security losses experienced during 1994 were the result of several partial calls on zero coupon bonds. It is difficult to predict the level of future sales of securities. Salaries and employee benefit costs increased 16.7 percent in 1994, to $7,278,000 from $6,236,000. This increase reflects an 10.8 percent increase in full-time equivalent employees (FTE) in 1994, to 278, and normal annual salary increases. This increase in FTE relates to the full year impact of the offices added in Noble county in late 1993 and the two new offices added in 1994. There has also been an increase in fringe benefit costs and indirect payroll costs, as some of these programs reflect corporate performance that has been at record levels. Another component of other expense that is growing due to expansion is net occupancy expense of premises and equipment costs. These expenses totaled $2,058,000 in 1994, an increase of 15.9 percent over 1993. Again, the additional offices added in 1994, as well as, a full year of expense on the offices added in Elkhart and Noble counties in 1993 contributed to this increase. As indicated in Note 10 to the Consolidated Financial Statements, all major components of other expense contributed to the 8.9 percent, or $390,000 increase to $4,756,000 for 1994, from $4,366,000 in 1993. Regulatory and FDIC insurance premiums are the largest component of other expense, totaling $904,000 in 1994. This is an increase of $121,000, or 15.5 percent from 1993. This increase reflects the overall growth in deposits. Data processing and supplies are the second largest component of other expense, totaling $766,000 in 1994. This represents a decrease of 11.9 percent, or $104,000 from 1993. Included in the 1993 amount were certain non-recurring expenses related to the acquisition of the branches of Prime Bank. As a result of all of these factors, income before income tax and cumulative effect of change in accounting principle totaled $8,150,000, an increase of 34.0 percent, or $2,069,000 from the $6,081,000 reported in 1993. Income before cumulative change in accounting principle was $5,126,000, an increase of 31.1 percent, or $1,216,000 over 1993. In the first quarter of 1993, the Corporation applied the provisions of SFAS No. 109, Accounting for Income Taxes. Included in 1993 income is the cumulative adjustment of $325,000 to apply this new accounting method. Net income totaled $5,126,000 in 1994, an increase of 21.0 percent, or $891,000, from $4,235,000 in 1993. On a per share basis, income before cumulative change in accounting principle was $3.56 in 1994, as compared to $2.72 in 1993. Also on a per share basis, net income was $3.56 in 1994, as compared to $2.94 in 1993. Net income of $5,126,000 represents a 18.8 percent return on January 1, 1994, stockholders' equity (excluding the equity adjustment related to SFAS No. 115), and a 1.10 percent return on average daily assets. RESULTS OF OPERATIONS 1993 VERSUS 1992 Record breaking growth and earnings characterized 1993. Loans increased 11.1 percent, or $25,983,000, to $260,185,000 at year-end 1993. Total deposits increased 30.2 percent, or $85,724,000, to $370,032,000 at December 31,1993, while deposits and securities sold under agreement to repurchase increased 26.6 percent, or $84,038,000, to $399,404,000. Net income totaled $4,235,000, surpassing 1992 results by 26.1 percent. On an average daily basis, gross earning assets increased by 9.2 percent and total deposits and purchased funds increased by 9.4 percent. Without the acquisition of the Prime Bank offices, growth in average daily gross earning assets would have been approximately 7.4 percent. Total interest income decreased .3 percent, or $76,000 to $27,607,000 for the year ended December 31, 1993. The 9.2 percent growth in average daily earning assets was more than offset by the decline in the overall yield of earning assets in 1993. The decline in average daily tax equivalent yields was 91 basis points. This decrease resulted from the reinvestment of cash flow in lower yielding assets as rates remained at historically low levels in 1993, and from the assumption of the deposits of Prime Bank, a portion of which were invested in lower yielding short-term investments. Nonearning assets of the Corporation include nonaccrual loans and investments, other real estate, in substance foreclosure accounts and repossessions, and amounted to $2,379,000, $3,132,000 and $2,731,000 as of December 31, 1993, 1992 and 1991, respectively. There were no nonaccrual loans at year-end 1993. The slight decline in interest income was more than offset by the decline in interest expense. Interest expense totaled $12,022,000 in 1993, an 11.7 percent, or $1,600,000 decrease from $13,622,000 experienced in 1992. Average daily deposits and purchased funds increased by 9.4 percent in 1993, but the decline in interest rates more than offset this growth. During 1993, the Bank's interest expense decreased for a variety of reasons. To the extent that customers renewed or purchased time deposits in 1993, these funds were generally at lower rates than the time deposits that matured. The low rate environment also encouraged the growth of transaction accounts as Bank customers were hesitant to extend the maturities of their deposits. Transaction accounts are generally the lowest cost sources of funds for the Bank since they earn rates at the lowest end of the yield curve. Finally, the Bank benefited from the growth in demand deposit accounts that are interest free. These last two reasons for the decline in interest expense are temporary, as they are customer driven by the low rate environment. The Bank expects that as rates increase, these funds will at some point return to time deposits thus increasing interest expense to a greater degree than if these funds stayed strictly in transaction accounts. Net interest income increased 10.8 percent, or $1,524,000, to $15,585,000 in 1993, from $14,061,000 in 1992. Net interest income as a percent of average earning assets was 4.48 percent in 1993. Management anticipates that this percentage will decline somewhat in 1994. Two factors will contribute to this: the loan-to-deposit ratio will be lower in 1994, as it will take time to generate loan volume to employ the deposits assumed from Prime Bank, and the cost of funds has probably reached its low point in this economic cycle. In dollar terms, the Bank expects to generate a reasonable increase in net interest income in 1994, as the Bank anticipates earning on an average asset base approximately 20 percent larger than in 1993. As indicated in Notes 1 and 4 to the Consolidated Financial Statements, the allowance for loan losses is maintained at a level deemed appropriate by management. The December 31, 1993, allowance for loan losses of $4,010,000 is believed by management to be adequate to absorb all potential inherent risk applicable to the classification of loans as loss, doubtful, substandard or special mention. It does not represent or result from trends that will materially adversely impact future operating results, liquidity or capital resources. Net interest income after provision for loan losses increased 16.3 percent, or $2,074,000, to $14,795,000 in 1993, from $12,721,000 in 1992. Trust income and service charges on deposit accounts, two large components of noninterest income, increased 16.9 percent, or $333,000 to $2,299,000 in 1993, from $1,966,000 in 1992. Trust income totaled $524,000, an increase of 24.8 percent, from 1992. This reflects increased business in corporate trust accounts such as employee benefit plans. As reported last year, it is a major long-term strategy to increase these recurring sources of trust income in order to provide for a stable and growing source of noninterest income. Service charges of deposit accounts increased by 14.8 percent, to $1,775,000 in 1993, reflecting the growth in individual and corporate deposit accounts paying fees, and adjustments made to the fee schedules in 1992 and 1993. Other income declined $255,000 to $514,000 in 1993. The 1993 results reflect the net write-down of the carrying value of other real estate totaling $262,000. Other components of other income such as wire transfer fees, mortgage service fees and mortgage loan fees increased 12.0 percent in 1993. The Bank instituted a formal policy for the origination and sale of real estate mortgages in the secondary market in 1993. During the course of the year, the Bank sold mortgage loans totaling approximately $19,700,000 through the FHLMC Gold program. Gains on the sale of these loans totaled $676,000, an increase of $500,000 over 1992. This increase represents a full year of sales and the high level of home refinancing during the year due to the low interest rate environment. Net investment securities gains totaled $175,000 in 1993, as compared to $323,000 in 1992. The ALCO committee reviews the portfolio monthly and makes investment decisions based upon the projected balance sheet needs. During 1993, investment activity included the sale of selected securities in anticipation of SFAS No. 115, and the anticipation that certain adjustable rate securities tied to the 11th District Cost of Funds (COFI) would not perform well under the anticipated rate environment. Salaries and employee benefit costs increased 17.3 percent in 1993, to $6,236,000 from $5,318,000. This increase reflects a 15.7 percent increase in full-time equivalent employees (FTE) in 1993, to 251, and normal annual salary increases. The increase in FTE relates to the addition of the two acquired offices in Noble county and the new Elkhart location. There has also been an increase in fringe benefit costs and indirect payroll costs, as some of these programs depend on corporate performance that has been running at record levels. Another component of other expense that is growing due to expansion is net occupancy expense and equipment costs. These expenses totaled $1,776,000 in 1993, an increase of 10.0 percent over 1992. Again, the additional office in Elkhart, the new drive-up in Akron and the Noble county locations contributed to this increase. The full impact of these expenses will be reflected in 1994, since these additions occurred late in 1993. As indicated in Note 10 to the Consolidated Financial Statements, all major components of other expense contributed to the 12.0 percent, or $467,000 increase to $4,366,000 for 1993, from $3,899,000 in 1992. Data processing and supplies are the largest component of other expense, totaling $873,000 in 1993. This represents an increase of 25.8 percent, or $179,000 from 1992. Included in this amount are certain non-recurring expenses related to the acquisition of the offices of Prime Bank. Regulatory and FDIC insurance premiums are the second largest component of other expense, totaling $783,000 in 1993. This is an increase of $68,000, or 9.5 percent from 1992. This increase reflects the overall growth in deposits, as there was no change in the Bank's FDIC insurance rate during 1993. As a result of all of these factors, income before income tax and cumulative effect of change in accounting principle totaled $6,081,000, an increase of 18.7 percent, or $960,000 from $5,121,000 reported in 1992. Income before cumulative change in accounting principle was $3,910,000, an increase of 16.4 percent, or $551,000 over 1992. In the first quarter of 1993, the Corporation applied the provisions of SFAS No. 109, Accounting for Income Taxes. Included in 1993 net income is the cumulative adjustment of $325,000 to apply this new accounting method. Net income totaled $4,235,000 in 1993, an increase of 26.1 percent, or $876,000, from $3,359,000 in 1992. On a per share basis, income before cumulative change in accounting principle was $2.72 in 1993, as compared to $2.34 in 1992. Also on a per share basis, net income was $2.94 in 1993, as compared to $2.34 in 1992. Net income of $4,235,000 represents a 17.8 percent return on January 1, 1993 stockholders' equity, and a 1.11 percent return on average daily assets.

TABLE 1 - REPRICING OPPORTUNITIES (In Thousands) The table below illustrates the funding gaps for selected maturity periods as of December 31, 1994. Repricing opportunities for fixed rate loans and mortgage-backed securities are based upon anticipated prepayment speeds. Demand deposit accounts and savings accounts are classified as having maturities beyond twenty-four months. The effect of the current rate sensitivity position is to make the Corporation's earnings slightly vulnerable to rising rates. Repricing or Maturing Within --------------------------------------- Six Twelve Twenty-four Months Months Months ----------- ----------- ----------- Rate Sensitive Assets: Overnight Investments $2,841 $2,841 $2,841 Loans 190,199 212,788 240,427 Securities 16,026 18,697 40,024 ----------- ----------- ----------- Total 209,066 234,326 283,292 ----------- ----------- ----------- Rate Sensitive Liabilities: Deposits 189,963 225,689 264,824 Borrowings 39,190 45,353 55,434 ----------- ----------- ----------- Total 229,153 271,042 320,258 ----------- ----------- ----------- Rate sensitive assets under rate sensitive liabilities ($20,087) ($36,716) ($36,966) =========== =========== =========== Rate sensitive assets under rate sensitive liabilities as a percent of total assets (4.0)% (7.4)% (7.4)% =========== =========== =========== TABLE 2 - CAPITAL RATIOS Regulatory agencies specifically exclude the equity adjustment associated with SFAS No. 115 from the calculation of capital adequacy. The following table presents the Bank's current capital adequacy ratios, as well as the FDIC defined levels to be considered well-capitalized" and the Bank's current excess capital position in relation to these "well-capitalized" levels. Regulatory Capital Ratio --------------------------------------- December 31, Well- Excess 1994 Capitalized Capital ----------- ----------- ----------- Ratio Tier I leverage 6.27% 5.00% $6,351,000 Tier I risk based 10.07% 6.00% $12,709,000 Tier II risk based 11.33% 10.00% $4,136,000