SEC Filing | Lake City Bank

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ____________ 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 29, 1996, and assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates": $35,131,538. Number of shares of common stock outstanding at February 29, 1996: 1,448,496. 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, 1995, parts of which are incorporated into Parts I, II and IV of this Form 10-K. III Proxy statement mailed to Shareholders on March 11, 1996, 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, Warsaw, Indiana. As of December 31, 1995, the Bank had nine branch offices and one drive-up facility in Kosciusko County, seven branch offices in Elkhart County, three branch offices in Noble County, three branch offices in Wabash County, two branch offices in LaGrange County, two branch offices in Marshall County, one branch office in Whitley County and two branch offices 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 Registrant 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 related 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. 1

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. 2

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 22 other banks, 7 of which are larger than the Bank. Of the 15 which are smaller than the Bank, 2 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 $6,232,000 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; 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. 3

EMPLOYEES At December 31, 1995, the Registrant, including its subsidiary corporation, had approximately 292 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) 4

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (in thousands of dollars) 1995 1994 ------------------------------------ ------------------------------------- Average Interest Average Interest Balance Income Yield* Balance Income Yield* ----------- ----------- ----------- ----------- ----------- ----------- ASSETS Earning assets: Trading account investments $ 0 $ 0 0.00% $ 0 $ 0 0.00% Loans: Taxable ** 305,806 29,859 9.76 267,604 23,658 8.84 Tax Exempt * 3,435 389 11.32 3,787 413 10.91 Investments: Taxable 170,788 10,723 6.28 149,049 8,842 5.93 Tax Exempt * 16,724 1,572 9.40 11,436 1,102 9.64 Short-term investment 3,293 192 5.83 3,551 152 4.28 Interest bearing deposits 108 10 9.26 98 3 3.06 ----------- ----------- ----------- ----------- ----------- ----------- Total Earning Assets $ 500,154 $ 42,745 8.55% $ 435,525 $ 34,170 7.85% =========== =========== Nonearning assets: Cash and due from banks 20,725 0 18,164 0 Premises and equipment 12,386 0 10,104 0 Other assets 7,668 0 7,508 0 Less: allowance for loan losses (5,238) 0 (4,417) 0 ----------- ----------- ----------- ----------- Total assets $ 535,695 $ 42,745 $ 466,884 $ 34,170 =========== =========== =========== =========== Tax exempt income converted to fully taxable equivalent basis at a 34 percent tax rate for 1995 and 1994. 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, 1995, and 1994, are included as taxable loan interest income. 5

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (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 8.47 Tax Exempt * 3,787 413 10.91 5,114 529 10.34 Investments: Taxable 149,049 8,842 5.93 100,507 6,459 6.43 Tax Exempt * 11,436 1,102 9.610.26 9,463 971 Short-term investment 3,551 152 4.28 3,111 93 2.99 Interest bearing deposits 98 3 3.06 3,116 92 2.95 ----------- ----------- ---------- ----------- ----------- ---------- 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. 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. 6

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (cont.) (in thousands of dollars) 1995 1994 ------------------------------------- ------------------------------------- Average Interest Average Interest Balance Expense Rate Balance Expense Rate ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities Savings deposits $ 46,123 $ 1,069 2.32% $ 55,855 $ 1,517 2.72% Interest bearing checking accounts 55,355 1,333 2.41 58,945 1,394 2.36 Time deposits In denominations under $100,000 177,992 10,035 5.64 148,251 6,837 4.61 In denominations over $100,000 73,449 4,410 6.00 54,389 2,360 4.34 Miscellaneous short-term borrowings 66,610 3,803 5.71 47,220 1,879 3.98 Long-term borrowings 17,432 992 5.69 15,806 900 5.69 Capital notes 0 0 0.00 0 0 0.00 ----------- ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities $ 436,961 $ 21,642 4.95% $ 380,466 $ 14,887 3.91% =========== =========== Non-interest bearing liabilities and stockholders' equity Demand deposits 60,753 0 52,893 0 Other liabilities 4,897 0 4,606 0 Stockholders' equity 33,084 0 28,919 0 ----------- ----------- ----------- ----------- Total liabilities and stock- holders' equity $ 535,695 $ 21,642 4.04% $ 466,884 $ 14,887 3.19% =========== =========== =========== =========== =========== =========== Net interest differential - yield on average daily earning assets $ 21,103 4.22% $ 19,283 4.43% =========== =========== =========== =========== 7

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 STOCK- HOLDERS' 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% =========== =========== =========== ========== 8

ANALYSIS OF CHANGES IN INTEREST DIFFERENTIALS (Fully Taxable Equivalent Basis) (in thousands of dollars) YEAR ENDED DECEMBER 31, 1995 Over (under) 1994(1) 1994 Over (under) 1993(1) ------------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total ----------- ----------- ----------- ----------- ----------- ----------- INTEREST AND LOAN FEE INCOME(2) Loans: Taxable $ 3,581 $ 2,620 $ 6,201 $ 2,823 $ 889 $ 3,712 Tax exempt (39) 15 (24) (143) 27 (116) Investments: Taxable 1,344 537 1,881 2,912 (529) 2,383 Tax exempt 496 (26) 470 193 (61) 132 Trading account investments 0 0 0 (1) (1) (2) Short-term investment (12) 52 40 14 45 59 Interest bearing deposits 0 7 7 (100) 10 (90) ----------- ----------- ----------- ----------- ----------- ----------- Total interest income 5,370 3,205 8,575 5,698 380 6,078 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST EXPENSE Savings deposits (243) (205) (448) 478 (20) 458 Interest bearing checking accounts (86) 25 (61) 116 (102) 14 Time deposits In denominations under $100,000 1,517 1,681 3,198 914 (150) 764 In denominations over $100,000 979 1,071 2,050 492 280 772 Miscellaneous short-term borrowings 935 989 1,924 152 298 450 Long-term borrowings 93 (1) 92 406 1 407 ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense 3,195 3,560 6,755 2,558 307 2,865 ----------- ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN INTEREST DIFFERENTIALS $ 2,175 $ (355) $ 1,820 $ 3,140 $ 73 $ 3,213 =========== =========== =========== =========== =========== =========== (1) The earning assets and interest bearing liabilities used to calculate interest differentials are based on average daily balances for 1995, 1994 and 1993. The changes in volume represent "changes in volume times the old 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 1995, 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 expense. 9

ANALYSIS OF SECURITIES (in thousands of dollars) The amortized cost and the fair value of securities as of December 31, 1995, 1994 and 1993 are as follows: 1995 1994 1993 ------------------------ ------------------------ ------------------------ Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ----------- ----------- ----------- ----------- ----------- ----------- Securities available-for-sale: U.S. Treasury securities $ 27,549 $ 27,844 $ 26,960 $ 25,916 $ 29,701 $ 30,446 Government agencies and corporations 2,150 2,191 1,000 1,000 0 0 Mortgage-backed securities 48,302 48,843 30,734 28,987 26,798 26,810 Obligations of state and political subdivisions 2,076 2,176 887 933 882 975 Other securities 999 1,066 999 1,026 999 1,128 ----------- ----------- ----------- ----------- ----------- ----------- Total debt securities available-for-sale 81,076 82,120 60,580 57,862 58,380 59,359 =========== =========== =========== =========== =========== =========== Securities held-to-maturity: U.S. Treasury securities $ 13,611 $ 13,576 $ 14,714 $ 13,876 $ 10,544 $ 10,559 Government agencies and corporations 2,898 3,033 2,034 2,037 99 99 Mortgage-backed securities 77,319 77,471 78,781 73,673 77,085 77,067 Obligations of state and political subdivisions 19,047 20,077 13,608 13,061 10,825 11,457 Other securities 1,013 1,171 1,015 1,076 1,017 1,195 ----------- ----------- ----------- ----------- ----------- ----------- Total debt securities held-to-maturity 113,888 115,328 110,152 103,723 99,570 100,377 Equity securities 0 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- ----------- Total securities held to maturity $ 113,888 $ 115,328 $ 110,152 $ 103,723 $ 99,570 $ 100,377 =========== =========== =========== =========== =========== =========== 10

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, 1995, 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 100 27,449 0 0 Yield 6.56 5.97 Government agencies and corporations Book value 1,000 1,050 100 0 Yield 7.70 7.91 9.02 Mortgage-backed securities Book value 0 5,327 20,577 22,398 Yield 7.11 6.34 6.51 Obligations of state and political subdivisions Book value 0 591 0 1,485 Yield 11.55 8.57 Other debt securities Book value 0 999 0 0 Yield 9.34 ----------- ----------- ----------- ----------- Total debt securities available-for-sale: Book value 1,100 35,416 20,677 23,883 Yield 7.60 6.39 6.35 6.64 =========== =========== =========== =========== Securities held-to-maturity: U.S. Treasury securities Book value 2,549 11,062 0 0 Yield 4.39 5.28 Government agencies and corporations Book value 0 2,598 300 0 Yield 7.52 6.42 Mortgage-backed securities Book value 0 15,050 39,028 23,241 Yield 6.81 6.21 5.67 Obligations of state and political subdivisions Book value 7 586 758 17,696 Yield 4.27 9.92 10.53 9.12 Other debt securities Book value 0 1,013 0 0 Yield 9.73 ----------- ----------- ----------- ----------- Total debt securities held-to-maturity: Book value 2,556 30,309 40,086 40,937 Yield 4.38 6.47 6.30 7.16 =========== =========== =========== =========== (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. 11

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, 1995, 1994, 1993, 1992, and 1991 is as follows: 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Commercial loans: Taxable $ 192,359 $ 173,325 $ 144,274 $ 128,268 $ 97,510 Tax exempt 3,636 3,207 4,501 5,594 6,521 Total commercial loans 195,995 176,532 148,775 133,862 104,031 Real estate mortgage loans 55,948 47,296 49,816 50,413 50,697 Installment loans 58,175 48,228 46,914 36,111 33,312 Credit card and line of credit loans 17,499 15,900 14,680 13,816 11,986 ----------- ----------- ----------- ----------- ----------- Total loans 327,617 287,956 260,185 234,202 200,026 Less allowance for loan losses 5,472 4,866 4,010 3,095 2,612 ----------- ----------- ----------- ----------- ----------- Net loans $ 322,145 $ 283,090 $ 256,175 $ 231,107 $ 197,414 =========== =========== =========== =========== =========== The real estate mortgage loan portfolio includes construction loans totaling $1,224, $426, $223, $1,164, and $885 as of December 31, 1995, 1994, 1993, 1992 and 1991, 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. 12

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, 1995. 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 $ 155,694 $ 2,071 $ 3,503 $ 14,574 $ 175,842 53.6% Other within one year 8,761 25,515 22,932 0 57,208 17.4 After one year, within five years 25,551 22,753 31,070 2,925 82,299 25.1 Over five years 5,533 5,677 670 0 11,880 3.6 Nonaccrual loans 456 77 0 0 533 0.2 ----------- ----------- ----------- ----------- ----------- ----------- Total loans $ 195,995 $ 56,093 $ 58,175 $ 17,499 $ 327,762 100.0% =========== =========== =========== =========== =========== =========== 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, 1995 amounted to $76,568 and $109,332 respectively. 13

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, 1995, 1994, 1993, 1992 and 1991. 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- PART A - PAST DUE ACCRUING LOANS (90 DAYS OR MORE) Real estate mortgage loans $ 122 $ 0 $ 1 $ 79 $ 27 Commercial and industrial loans 69 16 315 100 1,127 Loans to individuals for household, family and other personal expenditures 18 19 346 42 55 Loans to finance agriculture production and other loans to farmers 0 0 0 0 0 ----------- ----------- ----------- ----------- ----------- Total past due loans 209 35 662 221 1,209 ----------- ----------- ----------- ----------- ----------- PART B - NONACCRUAL LOANS Real estate mortgage loans 76 18 0 0 22 Commercial and industrial loans 456 0 0 0 198 Loans to individuals for household, family and other personal expenditures 0 0 0 0 5 Loans to finance agriculture production and other loans to farmers 0 0 0 0 628 ----------- ----------- ----------- ----------- ----------- Total nonaccrual loans 532 18 0 0 853 ----------- ----------- ----------- ----------- ----------- PART C - TROUBLED DEBT RESTRUCTURED LOANS 1,432 1,484 0 86 4 ----------- ----------- ----------- ----------- ----------- Total nonperforming loans $ 2,173 $ 1,537 $ 662 $ 307 $ 2,066 =========== =========== =========== =========== =========== Nonearning assets of the Corporation include nonaccrual loans (as indicated above), nonaccrual investments, other real estate, and repossessions which amounted to $1,207 at December 31, 1995. 14

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, 1995, loans totaling $532,000 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 $1,432,000 as of December 31, 1995. Interest income of $96,000 was recognized in 1995. Had these loans been performing under the original contract terms, an additional $53,000 would have been reflected in interest income during 1995. The Bank is not committed to lend additional funds to debtors whose loans have been modified. PART D - OTHER NONPERFORMING ASSETS The Bank adopted SFAS No. 114 and SFAS No. 118, 'Accounting by Creditors for Impairment of a Loan' 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. As part of the loan review process, management reviews all loans classified as 'special mention' or below, as well as other loans that might warrant application of SFAS No. 114 and SFAS No. 118. The effect of adopting these accounting standards on January 1, 1995 was immaterial and at December 31, 1995, no loans were considered as impaired. 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. 15

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, $120,000, $795,000 and $790,000 were charged to the provision for loan losses and added to the allowance for loan losses in 1995, 1994 and 1993, 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) 16

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, 1995, 1994, 1993, 1992, and 1991. 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Amount of loans outstanding, December 31, $ 327,617 $ 287,956 $ 260,185 $ 234,202 $ 200,026 =========== =========== =========== =========== =========== Average daily loans outstanding during the year ended December 31, $ 309,241 $ 271,391 $ 240,466 $ 213,599 $ 178,619 =========== =========== =========== =========== =========== Allowance for loan losses, January 1, $ 4,866 $ 4,010 $ 3,095 $ 2,612 $ 1,777 ----------- ----------- ----------- ----------- ----------- Loans charged-off Commercial 137 27 99 446 1,016 Real Estate 48 0 4 258 20 Installment 112 93 97 217 221 Credit cards and personal credit lines 58 15 28 39 66 ----------- ----------- ----------- ----------- ----------- Total loans charged-off 355 135 228 960 1,323 ----------- ----------- ----------- ----------- ----------- Recoveries of loans previously charged-off Commercial 26 107 40 11 18 Real Estate 0 1 1 0 0 Installment 63 81 56 85 106 Credit cards and personal credit lines 6 7 6 7 5 ----------- ----------- ----------- ----------- ----------- Total recoveries 95 196 103 103 129 ----------- ----------- ----------- ----------- ----------- Net loans charged-off 260 (61) 125 857 1,194 Purchase loan adjustment 746 0 250 0 59 Provision for loan loss charged to expense 120 795 790 1,340 1,970 ----------- ----------- ----------- ----------- ----------- Balance December 31, $ 5,472 $ 4,866 $ 4,010 $ 3,095 $ 2,612 =========== =========== =========== =========== =========== Ratio of net charge-offs during the period to average daily loans outstanding Commercial 0.03% (0.03)% 0.02% 0.20% 0.56% Real Estate 0.01 0.00 0.00 0.12 0.01 Installment 0.02 0.01 0.02 0.06 0.07 Credit cards and personal credit lines 0.02 0.00 0.01 0.02 0.03 ----------- ----------- ----------- ----------- ----------- Total 0.08% (0.02)% 0.05% 0.40% 0.67% =========== =========== =========== =========== =========== 17

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, 1995, 1994, 1993, 1992 and 1991. 1995 1994 1993 ------------------------ ------------------------ ------------------------ 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 $ 811 59.82 $ 665 61.31 $ 1,120 57.18 Real Estate 112 17.08 95 16.42 108 19.15 Installment 376 17.76 311 16.75 302 18.04 Credit cards and personal credit lines 112 5.34 101 5.52 95 5.63 ----------- ----------- ----------- ----------- ----------- ----------- Total allocated allowance for loan losses 1,411 100.00 1,172 100.00 1,625 100.00 =========== =========== =========== 4,061 3,694 2,385 ----------- ----------- ----------- Total allowance for loan losses $ 5,472 $ 4,866 $ 4,010 =========== =========== =========== 1992 1991 ------------------------ ------------------------ 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 $ 864 57.16 $ 1,168 52.01 Real Estate 105 21.52 90 25.35 Installment 230 15.42 214 16.65 Credit cards and personal credit lines 87 5.90 76 5.99 ----------- ----------- ----------- ----------- Total allocated allowance for loan losses 1,286 100.00 1,548 100.00 =========== =========== 1,809 1,064 ----------- ----------- Total allowance for loan losses $ 3,095 $ 2,612 =========== =========== 18

ANALYSIS OF DEPOSITS (in thousands of dollars) The average daily deposits for the years ended December 31, 1995, 1994 and 1993, and the average rates paid on those deposits are summarized in the following table: 1995 1994 1993 ------------------------ ------------------------ ----------------------- Average Average Average Average Average Average Daily Rate Daily Rate Daily Rate Balance Paid Balance Paid Balance Paid ----------- ----------- ----------- ----------- ----------- ----------- Demand deposits $ 60,753 0.00 $ 52,893 0.00 $ 37,709 0.00 Savings accounts: Regular savings 46,123 2.32 55,855 2.72 38,263 2.77 Interest bearing checking 55,355 2.41 58,945 2.36 54,197 2.55 Time deposits: Deposits of $100,000 or more 73,449 6.00 54,389 4.34 42,458 3.74 Other time deposits 177,992 5.64 148,251 4.61 128,520 4.73 ----------- ----------- ----------- ----------- ----------- ----------- Total deposits $ 413,672 4.07 $ 370,333 3.27 $ 301,147 3.35 =========== =========== =========== =========== =========== =========== As of December 31, 1995, time certificates of deposit in denominations of $100,000 or more will mature as follows: Within three months $ 33,382 Over three months, within six months 12,922 Over six months, within twelve months 9,237 Over twelve months 6,822 ----------- Total time certificates of deposit in denominations of $100,000 or more $ 62,363 =========== 19

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, 1995, 1994 and 1993 are as follows: 1995 1994 1993 --------- --------- --------- Percent of net income to: Average daily total assets 1.05 1.10 1.11 Average daily stockholders' equity 17.06 17.73 16.51 Percentage of dividends declared per common share to net income per weighted average number of common shares outstanding (1,438,496 shares in 1995, 1994 and 1993) 18.88 16.57 17.01 Percentage of average daily stockholders' equity to average daily total assets 6.18 6.19 6.71 20

SHORT-TERM BORROWINGS The following is a schedule of statistical information relating to securities sold under agreement to repurchase maturing within one year and are secured by either U.S. Government agency securities or mortgage-backed securities classified as other debt securities. There were no other categories of short-term borrowings for which the average balance outstanding during the period was 30 percent or more of shareholders' equity at the end of the period. 1995 1994 1993 --------- --------- --------- Outstanding at year end $ 58,151 $ 41,750 $ 29,372 Approximate average interest rate at year end 5.35 5.11 3.22 Highest amount outstanding as of any month end during the year $ 79,334 $ 50,460 $ 42,485 Approximate average outstanding during the year $ 61,398 $ 42,584 $ 38,299 Approximate average interest rate during the year 5.69 3.96 3.34 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. 21

ITEM 2. PROPERTIES The Bank conducts its operations from the following locations: Main Office Ligonier 202 E. Center St. 1470 U.S. Highway 33 South Warsaw, IN Ligonier, IN Warsaw Drive-Up Mentone East Center St. 202 East Main St. Warsaw, IN Mentone, IN Akron Middlebury 102 East Rochester 712 Wayne Ave. Akron, IN Middlebury, IN Argos Milford 100 North Michigan Indiana State Road 15 North Argos, IN Milford, IN Bremen Nappanee 1600 Indiana State Rod 331 202 West Market St. Bremen, IN Nappanee, IN Columbia City North Webster 507 North Main St. 644 North Main St. Columbia City, IN North Webster, IN Concord Pierceton 4202 Elkhart Rd. 202 South First St. Goshen, IN Pierceton, IN Cromwell Roann 111 North Jefferson St. 110 Chippewa Cromwell, IN Roann, IN Elkhart Rochester 864 East Beardsley St. 507 East 9th St. Elkhart, IN Rochester, IN Elkhart East Shipshewana 22050 State Road 120 895 North Van Buren St. Elkhart, IN Shipshewana, IN Goshen Downtown Silver Lake 102 North Main St. 102 Main St. Goshen, IN Silver Lake, IN Goshen South Syracuse 2513 South Main St. 502 South Huntington Goshen, IN Syracuse, IN LaGrange Wabash North 901 South Detroit 1004 North Cass St. LaGrange, IN Wasbash, IN 22

Wabash South Winona Lake 1940 South Wabash St. 99 Chestnut St. Wabash, IN Winona Lake, IN Warsaw East Free-standing ATM 3601 Commerce Dr. 2101 East Center St. Warsaw, IN Warsaw, IN Warsaw West 1221 West Lake St. Warsaw, IN The Bank leases from third parties the real estate and buildings for its offices in Akron and Milford. In addition, the Bank leases the real estate for its Wabash North office and its free-standing ATM. All the other branch facilities are owned by the Bank. The Bank also owns parking lots in downtown Warsaw for the use and convenience of Bank employees and customers, as well as leasehold improvements, equipment, furniture and fixtures necessary and appropriate to operate the banking facilities. In addition, the Bank owns a building at 110 South High St., Warsaw, Indiana, which it uses for various offices and a building at 113 East Center St., Warsaw, Indiana, which it uses for office and computer facilities. The Bank also leases from third parties facilities in Warsaw, Indiana, 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 and 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, 1995. (Intentionally Left Blank) 23

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 1995 Annual Report and are incorporated herein by reference in response to this item. On December 31, 1995, the Registrant had 870 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 1995 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 1995 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 1995 Annual Report and are incorporated herein by reference in response to this item. Consolidated Balance Sheets at December 31, 1995 and 1994. Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. Report of Independent Auditors. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 24

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing in the Registrant's definitive Proxy Statement dated March 11, 1996, 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 11, 1996, 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 11, 1996, 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 11, 1996, is incorporated herein by reference in response to this item. 25

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 1995 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, as indicated and at the pages set forth below. Reference --------- 1995 Annual Form 10-K Report --------- ----------- Consolidated Balance Sheets at December 31, 1995 and 1994. 7 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993. 8 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993. 9 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. 10 Notes to Consolidated Financial Statements. 11 - 20 Report of Independent Auditors. 20 (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] 26

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 12, 1996 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 12, 1996 R. Douglas Grant (R. Douglas Grant) Principal Executive Officer and Director Date: March 12, 1996 Terry M. White (Terry M. White) Principal Financial and Accounting Officer Date: March 12, 1996 Anna K. Duffin (Anna K. Duffin) Director Date: (Eddie Creighton) Director Date: March 12, 1996 L. Craig Fulmer (L. Craig Fulmer) Director Date: March 12, 1996 Jerry L. Helvey (Jerry L. Helvey) Director Date: March 12, 1996 Homer A. Kent (Dr. Homer A. Kent) Director Date: March 12, 1996 J. Alan Morgan (J. Alan Morgan) Director Date: March 12, 1996 Richard L. Pletcher (Richard L. Pletcher) Director Date: (Joseph P. Prout) Director Date: March 12, 1996 Philip G. Spear (Philip G. Spear) Director Date: (Terry L. Tucker) Director Date: (G.L. White) Director 27

EXHIBIT INDEX The following Exhibits are filed as part of this Report and not incorporated by reference from another document: Exhibit 13 - 1995 Report to Shareholders with Report of Independent Auditors. Exhibit 21 - Subsidiaries 28

EXHIBIT 13 1995 Report to Shareholders with Report of Independent Auditors. 29

EXHIBIT 21 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. 30

ANNUAL MEETING The annual meeting of the shareholders of Lakeland Financial Corporation will be held at noon, April 9, 1996, at the Shrine Building, Kosciusko County Fair Grounds, Warsaw, Indiana. As of December 31, 1995, there were 870 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. The Form 10-K and related exhibits are also available on the Internet at http://www.sec.gov. REGISTRAR AND TRANSFER AGENT Lake City Bank Trust Department P.O. Box 1387 Warsaw, Indiana 46581-1387

PRESIDENT'S LETTER Your corporation earned $5,645,000, or $3.92 per share in 1995. This is a 10 percent increase over 1994, when we reported earnings of $5,126,000, or $3.56 per share. This is the eighth consecutive year of increased earnings. One of the keys to increasing earnings is growth. Total assets grew $71,616,000, or 14 percent, to end the year at $568,579,000. This increase reflects an on-going geographical expansion and continued growth throughout the markets the Corporation has traditionally served. These assets were funded by a record level of deposits and repurchase agreements. Each office offers a wide variety of deposit products and repurchase agreements to provide core funding for loan demand. During 1995, total deposits and repurchase agreements grew $51,595,000, or 12 percent to end the year at $490,085,000. Loan demand continued strong in 1995, as loans grew $39,661,000, or about 14 percent, to finish the year at $327,617,000. [Picture of R. Douglas Grant - President, Lakeland Financial Corporation] Another important component of profitability is growth in net interest income. This fundamental measure of performance is the difference between the interest earned on our assets and the interest paid on our liabilities. As with most financial institutions, intense competition and the interest rate environment in 1995, resulted in a reduced interest spread during the year. However, this reduced spread was more than offset by our strong asset growth. As a result, net interest income in 1995 rose $1,669,000, or 9 percent, to $20,437,000. We are also pleased that asset quality remains excellent. Deteriorating asset quality reduces the earnings of the Corporation by creating nonearning assets, and necessitating a larger provision for loan losses. The quality of your Corporation's assets allowed for a $675,000 reduction in the provision for loan losses, to $120,000 in 1995. Noninterest income in 1995 increased $367,000, or about 9 percent, to end the year at $4,636,000. Recurring noninterest fees such as Trust, service charges on deposit accounts, mortgage servicing, loan and insurance fees all contributed to this increase. Noninterest income was also enhanced by security gains of $315,000 during the year. Noninterest expense increased $2,152,000, or 15 percent, to finish 1995 at $16,244,000. This increase reflects the ordinary expenses associated with the new offices added in late 1994 and throughout 1995. It also reflects the Corporation's continuing commitment to offer high quality customer service by implementing the most current banking technology. The Corporation's stock price reflects our strong financial performance. At year-end 1995, the Corporation's stock was being bought for about $41.50 per share. This represents a 20 percent increase during 1995. Higher earnings enabled your Board of Directors to authorize an increase in the cash dividend during 1995. The annual dividend rate is now $.80 per share, an 18 percent increase. 1

PRESIDENT'S LETTER (continued) Trust income increased by 16 percent in 1995. Customer interest in our Trust services continues strong, particularly for retirement and estate planning. Our six "BANNER" Investment Portfolios performed exceptionally in 1995, reflecting their investments in high quality stocks and bonds. We continue to experience keen interest from our commercial customers for our 40l(k) product and have seen significant growth in the number of plans we manage. [ Picture of Directors Phillip G. Spear, Terry L. Tucker, Anna K. Duffin, Richard L. Pletcher and Jerry L. Helvey] In late 1994 the Corporation opened its first branch office in LaGrange County, in the town of Shipshewana. Expansion into LaGrange County is both a natural extension of the Corporation's market area to the east of Elkhart County, and is necessary if the Corporation is to capitalize on the expectation that LaGrange County will be one of the fastest growing counties in Indiana over the next few years. In 1995, the Corporation had the opportunity to acquire another location. After careful review and negotiation, your Corporation purchased for cash, the outstanding shares of Gateway Bank, a $20 million bank located in LaGrange, Indiana. The Gateway Bank was merged into Lake City Bank on July 15, 1995, and now operates as a branch office. This location extends our market coverage to the east of our office in Shipshewana, and gives us market coverage in the two primary towns in the county. The assets acquired in this transaction included about $9 million of loans and $10 million of securities. The loans were mostly real estate. The Corporation also acquired approximately $18 million of deposits. These funds were primarily time deposits. Although this acquisition is small in relation to the overall size of our Corporation, the deposits we acquired represent about 6% of the LaGrange County market. These two locations will provide the necessary market presence to capitalize on the expected economic growth in this county in the coming years, and will have a positive impact on your Corporation's earnings. 2

PRESIDENT'S LETTER (continued) We opened new offices in Middlebury, Concord and Rochester. The previously announced Kendallville office will open this spring. Current plans call for an expansion of the Elkhart office on Beardsley Avenue as well as the construction of a third full service Elkhart office located at Hubbard Hill. This brings our total to 31 full service offices throughout Northeast Indiana. Twenty-one of these locations have 24 Hour Tellers that permit customer access to their accounts around the clock. The convenience of Lake City Bank locations staffed with well known local people supported by the latest technology enables your bank to provide full service competitively while remaining small enough to keep the local personal touch. [Picture of Directors G. L. White, Eddie Creighton, J. Alan Morgan, L. Craig Fulmer, Joseph P. Prout and Dr. Homer A. Kent] Technology trends in the industry are continuously monitored as we carefully choose to add those services that will enhance our existing product line while offering the greatest opportunity for increased income and growth. We strive to remain competitive and to deliver our services in the most efficient way in an ever changing marketplace. In January 1995 we provided customers with an improved bank statement. Simultaneously, we introduced check "imaging" as a way to reduce the bulky storage of checks for customers while still providing all the necessary information. The imaging system has enabled us to simplify our research process and provide customers with information on their accounts more quickly. In 1996, imaging will be used to further simplify and update our check processing, making our daily operations more efficient. The 24 Hour Visa Check Card was added as an enhancement to our checking account products. It enables a customer to pay for goods and services 3

PRESIDENT'S LETTER (continued) from their checking account without writing a check anywhere Visa is accepted. This product has been popular with our customers. There is no charge to the customer to have or use the card. It is a new source of revenue to the bank via the interchange income from Visa. Everyone wins with a 24 Hour Visa Check Card! In the fall, our new Telephone Banking service was introduced. Through Telephone Banking a customer can check balances, inquire on cleared checks, transfer funds, stop payment on a check, access a line of credit, check the status of a loan, or any of a variety of other banking activities at any time. And all this from the convenience of the home, office or virtually anywhere there is a telephone. A special Voice Recognition feature allows customers with rotary telephones to enjoy the benefits of this new service by speaking directly to the service. In 1996, we look forward to adding an electronic bill payment service. This will enable a customer to pay their bills without writing a check through either the Telephone Banking service or by personal computer. We are also developing a product to provide other home and business banking services via the personal computer. We are committed to the communities in which we live. Lake City Bank and Creighton Brothers co-host the annual Egg Breakfast, which celebrates the important egg industry in our area. The annual Harvest Breakfast with Amish Acres in Elkhart County is an equally popular occasion. Both are attended by hundreds of our customers and friends. The Bank also honors our valued, retired friends with a Valentine party each year. A Leading Ladies Luncheon, fashioned for our female customers is a dynamic, innovative and popular event. It provides an opportunity for guests to interact and to benefit from the economic expertise of the guest speaker. Lake City Bank hosted two Economic Briefings in 1995. Christopher Chocola, President, Choretime-Brock, Inc., and Wes Stouder, President, Penguin Point Franchise Systems were the local speakers for the Spring and Fall briefings, respectively, which also included a panel of distinguished economists from Indiana University. Business leaders have expressed their appreciation of these economic forecast briefings. The Lake City Bank has been a successful locally owned and operated financial institution for 124 years. We have about 870 shareholders, most of whom have connections with this area. We have remained independent because of the strong contribution from our employees in satisfying local customers' needs. We have built a strong partnership with our customers. Through convenient locations, local personal touch, and innovative technology, we have resisted the mega-bank impersonal approach to franchise banking. We look forward to future opportunities. R. Douglas Grant President 4

SELECTED FINANCIAL DATA (in thousands except for share and per share data) - ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- Interest income $ 42,079 $ 33,655 $ 27,607 $ 27,683 $ 28,245 Interest expense 21,642 14,887 12,022 13,622 16,408 ----------- ----------- ----------- ----------- ----------- Net interest income 20,437 18,768 15,585 14,061 11,837 Provision for loan losses 120 795 790 1,340 1,970 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 20,317 17,973 14,795 12,721 9,867 Other noninterest income 4,162 4,099 2,813 2,735 1,866 Net gains on sale of real estate mortgages held-for-sale 159 177 676 176 174 Net trading gains (losses) 0 0 0 (2) 36 Net securities gains (losses) 315 (7) 175 323 1,283 Noninterest expense (16,244) (14,092) (12,378) (10,832) (9,238) ----------- ----------- ----------- ----------- ----------- Income before income tax expense and cumulative effect of change in accounting principle 8,709 8,150 6,081 5,121 3,988 Income tax expense 3,064 3,024 2,171 1,762 1,281 ----------- ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle 5,645 5,126 3,910 3,359 2,707 Cumulative effect of adopting SFAS No. 109 0 0 325 0 0 ----------- ----------- ----------- ----------- ----------- Net income $ 5,645 $ 5,126 $ 4,235 $ 3,359 $ 2,707 =========== =========== =========== =========== =========== 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 $ 3.92 $ 3.56 $ 2.72 $ 2.34 $ 1.88 =========== =========== =========== =========== =========== Net income $ 3.92 $ 3.56 $ 2.94 $ 2.34 $ 1.88 =========== =========== =========== =========== =========== Cash dividends declared $ 0.74 $ 0.59 $ 0.50 $ 0.42 $ 0.37 =========== =========== =========== =========== =========== Balances at December 31: Total assets $ 568,579 $ 496,963 $ 449,954 $ 362,497 $ 339,458 =========== =========== =========== =========== =========== Total deposits $ 431,934 $ 396,740 $ 370,032 $ 284,308 $ 265,524 =========== =========== =========== =========== =========== Long-term debt $ 17,432 $ 17,432 $ 9,300 $ 8,000 $ 0 =========== =========== =========== =========== =========== Total stockholders' equity $ 36,754 $ 29,889 $ 27,912 $ 23,750 $ 20,991 =========== =========== =========== =========== =========== * Adjusted for a 10 percent stock dividend July 31, 1992. 5

SELECTED QUARTERLY DATA (in thousands except for per share data) (unaudited) - ----------------------------------------------------------------------------------------------------------------------------------- 1995 ----------------------------------------------------- Quarter 4 Quarter 3 Quarter 2 Quarter 1 ----------- ----------- ----------- ----------- Interest income $ 11,138 $ 10,961 $ 10,289 $ 9,691 Interest expense 5,796 5,805 5,232 4,809 ----------- ----------- ----------- ----------- Net interest income 5,342 5,156 5,057 4,882 Provision for loan losses 30 30 30 30 Noninterest income 1,420 1,144 1,055 1,017 Noninterest expense 4,315 4,016 4,087 3,826 Income tax expense 865 814 648 737 ----------- ----------- ----------- ----------- Net income $ 1,552 $ 1,440 $ 1,347 $ 1,306 =========== =========== =========== =========== Net income per common share $ 1.08 $ 1.00 $ 0.93 $ 0.91 =========== =========== =========== =========== 1994 ----------------------------------------------------- Quarter 4 Quarter 3 Quarter 2 Quarter 1 ----------- ----------- ----------- ----------- Interest income $ 9,192 $ 8,647 $ 8,099 $ 7,717 Interest expense 4,220 3,920 3,471 3,276 ----------- ----------- ----------- ----------- Net interest income 4,972 4,727 4,628 4,441 Provision for loan losses 180 270 75 270 Noninterest income 911 969 1,050 1,339 Noninterest expense 3,926 3,450 3,445 3,271 Income tax expense 653 724 813 834 ----------- ----------- ----------- ----------- Net income $ 1,124 $ 1,252 $ 1,345 $ 1,405 =========== =========== =========== =========== Net income per common share $ 0.78 $ 0.87 $ 0.93 $ 0.98 =========== =========== =========== =========== STOCK AND DIVIDEND INFORMATION The following companies have reported to the Corporation the bid-ask prices for the common stock of Lakeland Financial Corporation as set forth in the table below. Roney & Company, P.O. Box 130, Elkhart, Indiana, 46515, 1-800-43-Roney McDonald and Company Securities, Inc., 214 South Main Street, Elkhart, Indiana, 46516, 219-294-2526 Edward D. Jones & Co., P.O. Box 1097, Warsaw, Indiana, 46581, 1-800-441-2914 Such bid-ask prices are not a definite indication that sales transactions occurred at these prices or that sales transactions did not occur outside of these 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. Quarter 4 Quarter 3 Quarter 2 Quarter 1 ------------ ------------ ------------ ------------ Trading Range (per share): 1995 - Bid $ 39.50 $ 36.00 $ 34.00 $ 33.00 Ask 41.50 39.50 37.50 35.50 1994 - Bid $ 32.50 $ 31.00 $ 29.50 $ 26.00 Ask 34.50 32.50 31.50 29.00 Dividends Declared (per share): 1995 $ 0.20 $ 0.20 $ 0.17 $ 0.17 1994 0.17 0.14 0.14 0.14 6

CONSOLIDATED BALANCE SHEETS (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ December 31 ------------------------- 1995 1994 ----------- ----------- ASSETS Cash and due from banks $ 26,185 $ 21,346 Short-term investments 710 2,801 ----------- ----------- Total cash and cash equivalents 26,895 24,147 Securities available-for-sale (Note 3) (carried at fair value) 82,120 57,876 Securities held-to-maturity (Note 3) (fair value of $115,328 at 1995 and $103,723 at 1994) 113,888 110,152 Real estate mortgages held-for-sale 145 175 Total loans (Note 4) 327,617 287,956 Less allowance for loan losses (Note 5) 5,472 4,866 ----------- ----------- Net loans 322,145 283,090 Land, premises and equipment, net (Note 6) 13,736 11,295 Accrued income receivable 4,003 3,464 Other assets 5,647 6,764 ----------- ----------- Total assets $ 568,579 $ 496,963 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Noninterest bearing deposits $ 67,856 $ 62,830 Interest bearing deposits (Note 7) 364,078 333,910 ----------- ----------- Total deposits 431,934 396,740 Short-term borrowings Federal funds purchased 17,100 4,000 Securities sold under agreements to repurchase (Note 8) 58,151 41,750 U.S. Treasury demand notes 1,880 2,573 ----------- ----------- Total short-term borrowings 77,131 48,323 Accrued expenses payable 4,481 3,280 Other liabilities 847 1,299 Long-term debt (Note 9) 17,432 17,432 ----------- ----------- Total liabilities 531,825 467,074 Commitments, off-balance sheet risks and contingencies (Note 15) STOCKHOLDERS' EQUITY Common stock: $1.00 stated value, 2,750,000 shares authorized, 1,438,496 shares outstanding as of December 31, 1995 and 1994 (Note 1) 1,438 1,438 Additional paid-in capital (Note 1) 7,827 7,827 Retained earnings 26,858 22,279 Unrealized net gain (loss) on securities available-for-sale (Note 1) 631 (1,655) ----------- ----------- Total stockholders' equity 36,754 29,889 ----------- ----------- Total liabilities and stockholders' equity $ 568,579 $ 496,963 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 7

CONSOLIDATED STATEMENTS OF INCOME (in thousands except for share data) - ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 ------------------------------------------ 1995 1994 1993 ------------ ------------ ------------ NET INTEREST INCOME Interest and fees on loans Taxable $ 29,859 $ 23,658 $ 19,946 Tax exempt 257 273 371 Interest and dividends on securities Taxable 10,723 8,842 6,459 Tax exempt 1,038 727 644 Interest on short-term investments 202 155 185 Interest on trading account securities 0 0 2 ------------- ------------ ------------ Total interest income 42,079 33,655 27,607 Interest on deposits 16,847 12,108 10,101 Interest on borrowings 4,795 2,779 1,921 ------------ ------------ ------------ Total interest expense 21,642 14,887 12,022 NET INTEREST INCOME 20,437 18,768 15,585 Provision for loan losses (Note 5) 120 795 790 ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,317 17,973 14,795 NONINTEREST INCOME Trust income 709 609 524 Service charges on deposits 2,262 2,078 1,775 Other income 1,191 1,412 514 Net gains on the sale of real estate mortgages held-for-sale 159 177 676 Net securities gains (losses) (Note 3) 315 (7) 175 ------------ ------------ ------------ Total noninterest income 4,636 4,269 3,664 NONINTEREST EXPENSE Salaries and employee benefits (Note 10) 8,521 7,278 6,236 Net occupancy expense 1,229 1,057 996 Equipment costs 1,375 1,001 780 Other expense (Note 11) 5,119 4,756 4,366 ------------ ------------ ------------ Total noninterest expense 16,244 14,092 12,378 ------------ ------------ ------------ Income before income tax expense and cumulative effect of change in accounting principle 8,709 8,150 6,081 Income tax expense (Note 12) 3,064 3,024 2,171 ------------ ------------ ------------ Income before cumulative effect of change in accounting principle 5,645 5,126 3,910 Cumulative effect of adopting SFAS No. 109 (Notes 1 and 12) 0 0 325 ------------ ------------ ------------ NET INCOME $ 5,645 $ 5,126 $ 4,235 ============ ============ ============ 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 12) $ 3.92 $ 3.56 $ 2.72 ============ ============ ============ CUMULATIVE EFFECT OF ADOPTING SFAS No. 109 PER COMMON SHARE (Notes 1 and 12) $ 0.00 $ 0.00 $ 0.22 ============ ============ ============ NET INCOME PER COMMON SHARE (Note 1) $ 3.92 $ 3.56 $ 2.94 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 8

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands except for share data) - ------------------------------------------------------------------------------------------------------------------------------- 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, 1993 1,438,496 $ 1,438 $ 7,827 $ 14,485 $ 0 $ 23,750 Net income for 1993 4,235 4,235 Net change in unrealized gain (loss) on securities available-for-sale (Note 1) 646 646 Cash dividend declared ($.50 per share) (719) (719) ------------ ------------ ------------ ------------ ---------------- -------------- Balances, December 31, 1993 1,438,496 1,438 7,827 18,001 646 27,912 Net income for 1994 5,126 5,126 Net change in unrealized gain (loss) on securities available-for-sale (Note 1) (2,301) (2,301) Cash dividend declared ($.59 per share) (848) (848) ------------ ------------ ------------ ------------ ---------------- -------------- Balances, December 31, 1994 1,438,496 1,438 7,827 22,279 (1,655) 29,889 Net income for 1995 5,645 5,645 Net change in unrealized gain (loss) on securities available-for-sale (Note 1) 2,286 2,286 Cash dividend declared ($.74 per share) (1,066) (1,066) ------------ ------------ ------------ ------------ ---------------- -------------- Balances, December 31, 1995 1,438,496 $ 1,438 $ 7,827 $ 26,858 $ 631 $ 36,754 ============ ============ ============ ============ ================ ============== The accompanying notes are an integral part of these consolidated financial statements. 9

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 --------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Cash flows from operating activities Net income $ 5,645 $ 5,126 $ 4,235 Adjustments to reconcile net income to net cash from operating activities Cumulative effect of change in accounting principle 0 0 325 Depreciation 1,209 928 797 Provision for loan losses 120 795 790 Write down of other real estate owned 0 0 262 Loans originated for sale (29,679) (9,426) (20,810) Net gain on sale of loans (159) (177) (676) Proceeds from sale of loans 29,868 11,619 23,509 Net loss on sale of premises and equipment 0 1 6 Purchases of trading account securities 0 0 (485) Proceeds from sales of trading account securities 0 0 487 Net gain on sale of securities available-for-sale (331) 0 (53) Net (gain) loss on calls of securities held-to-maturity 16 7 (122) Net securities amortization 180 444 369 Increase (decrease) in taxes payable (822) (15) (969) (Increase) decrease in income receivable (539) (606) (541) Increase (decrease) in accrued expenses payable 1,227 340 434 (Increase) decrease in other assets 411 1,735 (94) Increase (decrease) in other liabilities 888 (495) 246 ----------- ----------- ----------- Total adjustments 2,389 5,150 3,475 ----------- ----------- ----------- Net cash from operating activities 8,034 10,276 7,710 Cash flows from investing activities Proceeds from sale of securities held-to-maturity 0 0 6,588 Proceeds from sale of securities available-for-sale 7,563 0 1,613 Proceeds from maturities and calls of securities held-to-maturity 6,268 8,899 17,683 Proceeds from maturities and calls of securities available-for-sale 5,022 6,409 1,123 Purchases of securities available-for-sale (20,014) (9,033) 0 Purchases of securities held-to-maturity (22,900) (19,494) (84,976) Net (increase) decrease in total loans (39,174) (27,709) (8,240) Purchases of new premises and equipment (3,650) (2,490) (1,602) Net proceeds (payments) from acquisitions (Note 13) (1,380) 0 29,839 ----------- ----------- ----------- Net cash from investing activities (68,265) (43,418) (37,972) Cash flows from financing activities Net increase in total deposits 35,194 26,708 37,569 Proceeds from short-term borrowings 522,102 395,939 327,360 Payments on short-term borrowings (493,294) (385,553) (332,700) Proceeds from long-term borrowings 0 8,132 1,300 Dividends paid (1,023) (806) (676) ----------- ----------- ----------- Net cash from financing activities 62,979 44,420 32,853 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,748 11,278 2,591 Cash and cash equivalents at beginning of the year 24,147 12,869 10,278 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 26,895 $ 24,147 $ 12,869 =========== =========== =========== Cash paid during the year for: Interest $ 21,052 $ 14,496 $ 12,254 =========== =========== =========== Income taxes $ 3,116 $ 3,038 $ 2,490 =========== =========== =========== Securities transferred from held-to-maturity to available-for-sale (Note 1) $ 12,918 $ 0 $ 0 =========== =========== =========== Loans transferred to other real estate $ 0 $ 107 $ 420 =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: Lakeland Financial Corporation (the Corporation) is a bank holding company as defined in the Bank Holding Company Act of 1956. The Corporation owns all of the outstanding stock of Lake City Bank (the Bank), a full service commercial bank organized under Indiana law, and conducts no business except that incident to its ownership of the Bank. The Bank is headquartered in Warsaw, Indiana, and has 29 branch offices in eight counties in northern Indiana. Use of Estimates: In preparing financial statements in conformity with generally accepted accounting principles, management must make estimates and assumptions. These estimates and assumptions affect the amounts reported therein and the disclosures provided. Actual results could differ from these estimates. Areas involving the use of management's estimates and assumptions include the allowance for loan losses, the realization of deferred tax assets, fair values of certain securities, the determination and carrying value of impaired loans, the carrying value of loans held-for-sale, the carrying value of other real estate, the determination of other-than-temporary reductions in the fair value of securities, recognition and measurement of loss contingencies, depreciation of premises and equipment, the carrying value and amortization of intangibles, the actuarial present value of pension benefit obligations, and net periodic pension expense and accrued pension costs recognized in the Corporation's financial statements. Estimates that are more susceptible to change in the near term include the allowance for loan losses and the realization of deferred tax assets. Principles of Consolidation: The consolidated financial statements include Lakeland Financial Corporation and its wholly-owned subsidiary, Lake City 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. In November 1995, the Financial Accounting Standards Board issued its Special Report 'A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities' (Guide). As permitted by the Guide, on December 4, 1995, the Corporation made a one-time reassessment and transferred securities from the held-to-maturity portfolio to the available-for-sale portfolio. At the date of the transfer, these securities had an amortized cost of $12,918,000 and increased the unrealized gain on securities available-for-sale in stockholders' equity by $446,000, net of tax. 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 25 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 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. 11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Corporation adopted 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. As part of the loan review process, management reviews all loans classified as 'special mention' or below for impairment, as well as other loans that might warrant application of SFAS No. 114. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, home equity and second mortgage loans. The effect of adopting this accounting standard on January 1, 1995, was not material. The carrying value of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as bad debt expense. 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. Other real estate owned, other than Corporate premises, amounted to $1,109,000, net of a $415,000 valuation allowance and $1,279,000, net of a $445,000 valuation allowance at December 31, 1995 and 1994, respectively, and is included in other assets in the consolidated balance sheets. Income Taxes: The Corporation files annual consolidated federal income tax returns. Beginning in 1993, the Corporation adopted the provisions of 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. 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, 1995, approximately $4,939,000 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. 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, 1994 and 1993, have been reclassified to conform with the December 31, 1995, presentation. NOTE 2 - PENDING ACCOUNTING CHANGES SFAS No. 122 on accounting for mortgage servicing rights was issued in May, 1995. The Corporation will adopt this Statement on January 1, 1996, as required. SFAS No. 122 eliminates the accounting distinction between originated and purchased mortgage servicing rights. Beginning in 1996, when a loan is originated with the intent to sell, a separate asset will be recognized for the mortgage servicing right, which is consistent with the current treatment of purchased mortgage servicing rights. SFAS No. 122 also changes the manner in which impairment of capitalized mortgage servicing rights is recognized. Impairment will be recognized using the fair value of individual stratum of servicing rights based upon the underlying risk characteristics of the serviced loan portfolio, compared to an aggregate portfolio approach under existing accounting guidance. Based on its current volume of mortgage banking activity, the Corporation does not expect SFAS No. 122 to have a significant impact on its financial condition and operations for 1996. The impact in subsequent years is difficult to predict. SFAS No. 122 will initially result in the recognition of larger gains on sales of mortgage loans, because of the initial capitalization of the originated mortgage servicing right asset. However, the larger gains on sales of loans will be offset by the future amortization of the mortgage servicing right asset. In addition, the valuation allowance on impaired mortgage servicing rights may fluctuate significantly in the future, because the impairment evaluation is based on assumed loan prepayment and default rates, interest rates, and other factors. 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - 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 ------------ ------------ ------------ ------------ (in thousands) Securities Available-for-Sale at December 31, 1995 U.S. Treasury securities $ 27,549 $ 378 $ (83) $ 27,844 U.S. Government agencies and corporations 2,150 41 0 2,191 Mortgage-backed securities 48,302 785 (244) 48,843 State and municipal securities 2,076 100 0 2,176 Other debt securities 999 67 0 1,066 ------------ ------------ ------------ ------------ Total securities available-for-sale at December 31, 1995 $ 81,076 $ 1,371 $ (327) $ 82,120 ============ ============ ============ ============ Securities Held-to-Maturity at December 31, 1995 U.S. Treasury securities $ 13,611 $ 34 $ (69) $ 13,576 U.S. Government agencies and corporations 2,898 141 (6) 3,033 Mortgage-backed securities 77,319 878 (726) 77,471 State and municipal securities 19,047 1,066 (36) 20,077 Other debt securities 1,013 158 0 1,171 ------------ ------------ ------------ ------------ Total securities held-to-maturity at December 31, 1995 $ 113,888 $ 2,277 $ (837) $ 115,328 ============ ============ ============ ============ Securities Available-for-Sale at December 31, 1994 U.S. Treasury securities $ 26,960 $ 2 $ (1,046) $ 25,916 U.S. Government agencies and corporations 1,000 0 0 1,000 Mortgage-backed securities 30,734 1 (1,748) 28,987 State and municipal securities 887 46 0 933 Other debt securities 999 27 0 1,026 ------------ ------------ ------------ ------------ Total debt securities 60,580 76 (2,794) 57,862 Equity securities 36 0 (22) 14 ------------ ------------ ------------ ------------ Total securities available-for-sale at December 31, 1994 $ 60,616 $ 76 $ (2,816) $ 57,876 ============ ============ ============ ============ Securities Held-to-Maturity at December 31, 1994 U.S. Treasury securities $ 14,714 $ 0 $ (838) $ 13,876 U.S. Government agencies and corporations 2,034 4 (1) 2,037 Mortgage-backed securities 78,781 22 (5,130) 73,673 State and municipal securities 13,608 73 (620) 13,061 Other debt securities 1,015 61 0 1,076 ------------ ------------ ------------ ------------ Total securities held-to-maturity at December 31, 1994 $ 110,152 $ 160 $ (6,589) $ 103,723 ============ ============ ============ ============ Information regarding the amortized cost and fair value of debt securities by maturity as of December 31, 1995, 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, 1995 December 31, 1995 -------------------------- -------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------ ------------ ------------ ------------ (in thousands) Due in one year or less $ 1,100 $ 1,121 $ 2,556 $ 2,544 Due after one year through five years 30,089 30,516 16,395 16,710 Due after five years through ten years 100 100 1,193 1,220 Due after ten years 1,485 1,540 16,425 17,383 ------------ ------------ ------------ ------------ 32,774 33,277 36,569 37,857 Mortgage-backed securities 48,302 48,843 77,319 77,471 ------------ ------------ ------------ ------------ Total debt securities $ 81,076 $ 82,120 $ 113,888 $ 115,328 ============ ============ ============ ============ 13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3 - SECURITIES (continued) In 1995, proceeds from the sales and calls of securities available-for-sale amounted to $7,563,000 with gross gains of $348,000 and gross losses of $17,000. The proceeds from calls of securities held-to-maturity amounted to $414,000 with gross gains of $0 and gross losses of $16,000. There were no sales or calls of securities available-for-sale 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. Securities with a carrying value of $100,572,000 were pledged as of December 31, 1995, as collateral for deposits of public funds, securities sold under agreements to repurchase and for other purposes as permitted or required by law. NOTE 4 - TOTAL LOANS Total loans outstanding as of December 31, 1995 and 1994, consist of the following: 1995 1994 -------- -------- (in thousands) Commercial and industrial loans $173,368 $154,326 Agri-business and agricultural loans 22,627 22,206 Real estate mortgage loans 54,724 46,870 Real estate construction loans 1,224 426 Installment loans and credit cards 75,674 64,128 -------- -------- Total loans $327,617 $287,956 ======== ======== Loans aggregating $60,000 or more with executive officers and directors (including their associates) amounted to $6,028,000 and $7,109,000 as of December 31, 1995 and 1994, respectively. During 1995, new loans or advances were $17,334,000, loan repayments were $18,367,000 and other changes were $48,000. 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: 1995 1994 -------- -------- (in thousands) Mortgage loan portfolios serviced for: FHLMC $ 35,899 $ 28,909 Other investors 1,218 1,456 -------- -------- Total mortgage loan portfolios serviced $ 37,117 $ 30,365 ======== ======== Income earned for loan servicing was $82,000, $68,000 and $41,000 for 1995, 1994 and 1993, respectively. NOTE 5 - ALLOWANCE FOR LOAN LOSSES The following is an analysis of the allowance for loan losses for 1995, 1994 and 1993: 1995 1994 1993 -------- -------- -------- (in thousands) Balance, January 1 $ 4,866 $ 4,010 $ 3,095 Allowance related to acquisitions 746 0 250 Provision for loan losses 120 795 790 Less: Loans charged-off (recovered) (net of recoveries of $95 in 1995; $196 in 1994; and $103 in 1993) 260 (61) 125 -------- -------- -------- Balance, December 31 $ 5,472 $ 4,866 $ 4,010 ======== ======== ======== Nonaccrual loans at December 31, 1995, 1994 and 1993, totaled $532,000, $18,000 and $0, respectively. Interest lost on nonaccrual loans was approximately $29,000 for 1995. The amount of interest lost for 1994 and 1993, was immaterial. Loans renegotiated as troubled debt restructuring totaled $1,432,000 and $1,484,000 as of December 31, 1995 and 1994, respectively. Interest income of $96,000 and $82,000 was recognized in 1995 and 1994. Had these loans been performing under the original contract terms, an additional $53,000 would have been reflected in interest income during 1995 and $31,000 in 1994. The Corporation is not committed to lend additional funds to debtors whose loans have been modified. During 1995, the Corporation had no loans meeting the definition of impaired under SFAS No. 114. 14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6 - LAND, PREMISES AND EQUIPMENT, NET Land, premises and equipment and related accumulated depreciation were as follows at December 31: 1995 1994 -------- -------- (in thousands) Land $ 3,648 $ 2,872 Buildings 10,568 8,824 Equipment 7,069 6,117 -------- -------- Total cost 21,285 17,813 Less accumulated depreciation 7,549 6,518 -------- -------- Land, premises and equipment, net $ 13,736 $ 11,295 ======== ======== NOTE 7 - INTEREST BEARING DEPOSITS The following is an analysis of interest bearing deposits as of December 31: 1995 1994 -------- -------- (in thousands) Super NOW $ 41,985 $ 44,335 Insured money market 14,151 17,993 Savings 42,904 52,091 Time: In denominations under $100,000 202,675 162,732 In denominations of $100,000 or more 62,363 56,759 -------- -------- Total interest bearing deposits $364,078 $333,910 ======== ======== NOTE 8 - 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, 1995 were as follows: Collateral Value ------------------------------------------------------ U.S. Treasury Mortgage-backed Weighted Securities Securities Average -------------------------- -------------------------- Repurchase Interest Amortized Fair Amortized Fair Term Liability Rate Cost Value Cost Value - --------------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------ (in thousands) (in thousands) On demand $ 19,114 4.36% $ 0 $ 0 $ 19,439 $ 19,481 Less than 90 days 19,627 5.72 8,298 8,407 11,966 12,186 Over 90 days 19,410 5.98 14,311 14,348 5,920 6,036 ------------ ------------- ------------ ------------ ------------ ------------ Total $ 58,151 5.35% $ 22,609 $ 22,755 $ 37,325 $ 37,703 ============ ============= ============ ============ ============ ============ As indicated in Note 3, 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, 1995, there were no material amounts of securities at risk with any one customer. NOTE 9 - LONG -TERM DEBT Long-term debt at December 31 consisted of: 1995 1994 ------------ ------------ (in thousands) Federal Home Loan Bank of Indianapolis Notes, 5.55%, Due January 2, 1996 $ 8,000 $ 8,000 Federal Home Loan Bank of Indianapolis Notes, 5.59%, Due January 14, 1997 8,132 8,132 Federal Home Loan Bank of Indianapolis Notes, 6.15%, Due June 24, 2003 1,300 1,300 ----------- ----------- Total $ 17,432 $ 17,432 =========== =========== All notes require monthly interest payments and are secured by residential real estate loans with a carrying value of $26,179,000 at December 31, 1995. 15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10 - EMPLOYEE BENEFIT PLANS Information as to the Corporation's pension plan at December 31 is as follows: 1995 1994 ----------- ----------- (in thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $949,000 for 1995 and $640,000 for 1994 $ 1,060 $ 719 =========== =========== Projected benefit obligation for service rendered to date $ 1,355 $ 949 Plan assets at fair value (primarily money market funds and equity and fixed income investments) (1,131) (893) Unrecognized gains (losses) (29) 193 Unrecognized prior service cost 31 33 ----------- ----------- Accrued balance sheet pension liability $ 226 $ 282 =========== =========== Net pension expense includes the following: 1995 1994 1993 ----------- ----------- ----------- (in thousands) Service cost for benefits earned $ 116 $ 119 $ 113 Interest cost 77 66 58 Actual return on plan assets (97) (56) (52) Net amortization and deferrals 19 (3) 4 ----------- ----------- ----------- Net pension expense $ 115 $ 126 $ 123 =========== =========== =========== The following assumptions were used in calculating the net pension cost: Weighted average discount rate 7.50% 8.00% 6.75% Rate of increase in future compensation 4.50% 4.50% 4.50% Expected long-term rate of return 8.00% 8.00% 8.00% Under a 401(k) profit sharing plan, the Corporation contributions are based upon the rate of return on January 1 stockholders' equity. The expense recognized was $455,000, $370,000 and $332,000 in 1995, 1994 and 1993, respectively. NOTE 11 - OTHER EXPENSE Other expense for the years ended December 31, were as follows: 1995 1994 1993 ----------- ----------- ----------- (in thousands) Regulatory fees and FDIC insurance $ 616 $ 904 $ 783 Data processing fees and supplies 913 769 873 Office supplies 632 519 440 Telephone and postage 616 535 466 Miscellaneous 2,342 2,029 1,804 ----------- ----------- ----------- Total other expense $ 5,119 $ 4,756 $ 4,366 =========== =========== =========== NOTE 12 - INCOME TAXES Effective January 1, 1993, the Corporation adopted 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: 1995 1994 1993 ----------- ----------- ----------- (in thousands) Current federal income tax expense $ 2,297 $ 2,301 $ 1,831 Deferred federal income tax expense (credit) 5 11 (158) Current state income tax expense 734 673 600 Deferred state income tax expense (credit) 28 39 (102) ----------- ----------- ----------- Total income tax expense $ 3,064 $ 3,024 $ 2,171 =========== =========== =========== Income tax expense (credit) included $114,000, $(34,000) and $58,000 applicable to security transactions for 1995, 1994 and 1993, 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: 16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 12 - INCOME TAXES (continued) 1995 1994 1993 ----------- ----------- ----------- (in thousands) Income taxes at statutory federal rate $ 2,961 $ 2,771 $ 2,068 Increase (decrease) in taxes resulting from: Tax exempt income (433) (338) (339) Nondeductible expense 119 73 45 State income tax, net of federal tax effect 503 471 328 Net operating loss, Gateway (29) 0 0 Tax credits (30) 0 0 Other (27) 47 69 ----------- ----------- ----------- Total income tax expense $ 3,064 $ 3,024 $ 2,171 =========== =========== =========== The components of the net deferred tax asset recorded in the consolidated balance sheets at December 31 consist of the following: 1995 1994 ------------------------- ------------------------- Federal State Federal State ----------- ----------- ----------- ----------- (in thousands) Deferred tax assets Bad debts $ 1,344 $ 445 $ 1,247 $ 392 ORE 142 35 194 48 Pension and deferred compensation liability 289 72 255 64 Deferred loan fees 83 21 144 36 Net operating loss carryforward 385 0 0 0 Other 98 23 10 2 ----------- ----------- ----------- ----------- 2,341 596 1,850 542 Deferred tax liabilities Depreciation 409 102 243 61 State taxes 190 0 146 0 Other 320 26 356 140 ----------- ----------- ----------- ----------- 919 128 745 201 Valuation allowance 158 0 0 0 ----------- ----------- ----------- ----------- Net deferred tax asset $ 1,264 $ 468 $ 1,105 $ 341 =========== =========== =========== =========== For tax purposes, the acquisition of Gateway Bank (See Note 13) was a pooling. Therefore, Gateway Bank's net operating loss carryforward of approximately $1,339,000 is available to the Corporation. However, due to the ownership change, the Internal Revenue Service has certain limitations on the amount of net operating loss carryforward that can be utilized by the Corporation. As a result, at the date of acquisition the Corporation recorded a deferred tax asset of approximately $385,000 and an offsetting valuation reserve of approximately $158,000. 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 $414,000 and $(1,085,000) for 1995 and 1994, respectively. NOTE 13 - ACQUISITIONS On July 15, 1995, the Bank acquired Gateway Bank ("Gateway"), LaGrange, Indiana. The Bank paid $1,380,000 for all the issued and outstanding shares of Gateway common stock. The transaction was accounted for using the purchase method of accounting. The acquisition added the following assets and liabilities to the Bank: (in thousands) ---------------- Assets Cash and due from banks $ 292 Securities 10,307 Gross loans 9,073 Allowance for loan losses (746) Other assets 1,636 Liabilities Deposits $ 18,528 Other liabilities 102 As of the date of the acquisition, the former Gateway Bank became an office of Lake City Bank. Gateway's results of operations are included in the income statement of the Corporation beginning as of the purchase date. 17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 14 - 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 -------------------------- 1995 1994 ------------ ------------ (in thousands) ASSETS Deposits with Lake City Bank $ 25 $ 15 Investment in subsidiary 36,987 30,085 Other assets 11 12 ------------ ------------ Total assets $ 37,023 $ 30,112 ============ ============ LIABILITIES Dividends payable and other liabilities $ 269 $ 223 STOCKHOLDERS' EQUITY 36,754 29,889 ------------ ------------ Total liabilities and stockholders' equity $ 37,023 $ 30,112 ============ ============ CONDENSED STATEMENTS OF INCOME Years Ended December 31 ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ (in thousands) Dividends from Lake City Bank $ 928 $ 982 $ 458 Interest on deposits and repurchase agreements, Lake City Bank 6 3 0 Miscellaneous income 10 22 (10) Equity in undistributed income of subsidiary 4,719 4,168 3,782 Miscellaneous expense (credit) 14 68 (2) ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 5,649 5,107 4,232 Income tax expense (credit) 4 (19) (3) ------------ ------------ ------------ NET INCOME $ 5,645 $ 5,126 $ 4,235 ============ ============ ============ CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31 ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ (in thousands) Cash flows from operating activities Net income $ 5,645 $ 5,126 $ 4,235 Adjustments to net cash from operating activities Equity in undistributed income of subsidiary (4,719) (4,168) (3,782) Other changes 3 18 36 ------------ ------------ ------------ Net cash from operating activities 929 976 489 Cash flows from investing activities 104 (137) 0 Cash flows from financing activities (1,023) (848) (716) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 10 (9) (227) Cash and cash equivalents at beginning of the year 15 24 251 ------------ ------------ ------------ Cash and cash equivalents at end of the year $ 25 $ 15 $ 24 ============ ============ ============ 18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 15 - 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, 1995 and 1994, were as follows: 1995 1994 -------------------------- -------------------------- Fixed Variable Fixed Variable Rate Rate Rate Rate ------------ ------------ ------------ ------------ (in thousands) Commercial loan lines of credit $ 2,558 $ 100,033 $ 3,267 $ 71,075 Commercial loan standby letters of credit 0 4,608 0 6,807 Real estate mortgage loans 699 199 0 485 Real estate construction mortgage loans 0 963 0 460 Credit card open-ended revolving lines 4,153 0 4,444 0 Home equity mortgage open-ended revolving lines 0 13,955 0 11,317 Consumer loan open-ended revolving lines 0 2,556 0 2,384 ------------ ------------ ------------ ------------ Total $ 7,410 $ 122,314 $ 7,711 $ 92,528 ============ ============ ============ ============ At December 31, 1995, the range of interest rates for commercial loan commitments with a fixed rate was 6.99 to 12.00 percent. The range of interest rates for commercial loan commitments with variable rates was 6.89 to 12.50 percent. The index on variable rate commercial loan commitments is principally the Bank's base 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 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following table contains the estimated fair values and the related carrying values of the Corporation's financial instruments at December 31, 1995 and 1994. Items which are not financial instruments are not included. 1995 1994 -------------------------- -------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------ ------------ ------------ ------------ (in thousands) Cash and cash equivalents $ 26,895 $ 26,895 $ 24,147 $ 24,147 Real estate mortgages held-for-sale 145 147 175 179 Securities available-for-sale 82,120 82,120 59,600 59,600 Securities held-to-maturity 113,888 115,328 110,152 103,723 Loans, net 322,145 322,692 283,090 279,035 Accrued income receivable 4,003 4,003 3,464 3,464 Certificates of deposit (265,038) (266,600) (219,491) (218,739) All other deposits (166,896) (166,896) (177,249) (177,249) Securities sold under agreements to repurchase (58,151) (58,496) (41,750) (41,833) Other short-term debt (18,980) (18,980) (6,573) (6,573) Long-term debt (17,432) (17,505) (17,432) (16,337) Accrued expenses payable (4,481) (4,481) (3,280) (3,280) For purposes of the above disclosures of estimated fair value, the following assumptions were used as of December 31, 1995 and 1994. 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, 1995 and 1994, 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, 1995 and 1994, 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. 19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (continued) 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, 1995 and 1994, 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, 1995 and 1994, 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, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, and the results of its operations and its cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 12, the Corporation changed its method of accounting for income taxes in 1993, as discussed in Notes 1 and 3, the Corporation elected to classify its securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115 at December 31, 1993, and as discussed in Note 1, the Corporation adopted the accounting for impaired loans as required by SFAS No. 114, and amended by SFAS No. 118. CROWE CHIZEK AND COMPANY LLP South Bend, Indiana January 19, 1996 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. 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $21.0 million in 1996, 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. 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 41.9 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 88 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, 1995, there was a net increase of $2.7 million in cash and cash equivalents. The major uses of cash during the period included the funding of a $39.2 million increase in loans, the purchase of securities totaling $42.9 million and the purchase of new premises and equipment of $3.7 million. Major sources of funds were: a net increase in cash from operating activities of $8.1 million, maturities and sales of securities totaling $18.9 million, an increase in deposits of $35.2 million and a $28.8 million increase in total borrowings. 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 an $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. Asset/Liability Management (ALCO) and Securities 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, and a computer program to stress test the balance sheet 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 on page 25, the Corporation's cumulative GAP ratio at December 31, 1995, for the next 12 months is a negative 14.2 percent of total assets. This ratio indicates that the interest margin could be slightly lower if interest rates rise, as compared to flat or falling interest rate environments. The computer model produces a slightly different result, and highlights one of the major problems with GAP analysis. While GAP may provide a basic guide to rate risk exposure in certain rate environments, it cannot effectively provide a dollar margin impact since it ignores the rates on maturing assets and liabilities, the different indexes used to price bank products and the changes in customer preference that occur whenever interest rates change. Factoring all of these things into the computer simulation, the Corporation is slightly exposed to falling rates. That is, the interest margin could be slightly lower if rates fall. The degree of this exposure is well within policy limits. The Corporation's investment portfolio consists of U.S. Treasuries, agencies, mortgage-backed securities, municipal bonds and corporates. During 1995, purchases have been primarily municipal bonds and mortgage-backed securities. At December 31, 1995, the Corporation's investment in mortgage-backed securities comprised approximately 64 percent of total securities and consisted of CMO's and mortgage pools issued by GNMA, FNMA and FHLMC. As such, these securities are backed directly or indirectly by the Federal government. All mortgage securities are purchased to conform to the FFIEC high risk standards which prohibit the purchase of securities that have excessive price, prepayment, extension and original life risk characteristics. The Corporation uses Bloomberg analytics to evaluate and monitor all purchases. At December 31, 1995, the mortgage securities in the AFS portfolio had a two year average life, with approximately 6 percent price depreciation should rates move up 300 basis points and approximately 4 perccent price appreciation should rates move down 300 basis points. The mortgage securities in the HTM portfolio had a three and one-half year average life and the potential for approximately 9 percent price depreciation should rates increase 300 basis points and approximately 10 percent price appreciation should rates move down 300 basis points. As of December 31, 1995, all mortgage securities continue to be in compliance with FFIEC guidelines, and are performing in a manner consistent with management's original expectations. 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 exclude the market value adjustment created by SFAS No. 115 (AFS adjustment) from capital adequacy calculations. Therefore, excluding this 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 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) percent and 11.4 percent, respectively at December 31, 1995. 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 is a function of net income growth and a prudent dividend policy. Total stockholders' equity increased by 23.0 percent, to $36,754,000 as of December 31, 1995, from $29,889,000 as of December 31, 1994. Total stockholders' equity increased by 31.7 percent or $8,842,000 from $27,912,000 as of December 31, 1993. The 1995 growth of $6,865,000 resulted from the retention of net income of $5,645,000, minus cash dividends declared of $1,066,000 plus the change in the AFS adjustment of $2,286,000, net of tax. The AFS adjustment reflects a 250 basis point decrease in three to five year U. S. Treasury rates during 1995. Since the securities portfolio is primarily fixed rate, a positive equity adjustment should occur whenever interest rates decline. Management has factored this into the determination of the size of the AFS portfolio, to assure that stockholders' equity is adequate under various scenarios. 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 less the AFS adjustment of $2,301,000. At December 31, 1994, the change in stockholders' equity reflected an AFS adjustment that decreased equity by $2,301,000, as compared to December 31, 1993. This adjustment reflected a 294 basis point increase in three to five year U. S. Treasury rates during 1994. Management is not aware of any known trends, events or uncertainties that would have a material effect on the Corporation's liquidity, capital and results of operations. Nor is management aware of any regulatory recommendations, that if implemented, would have such an effect. Allowance for Credit Risk At December 31, 1995, the allowance for loan losses was $5,472,000 or 1.67 percent of total loans outstanding, compared with $4,866,000 or 1.69 percent of total loans outstanding at December 31, 1994. The process of identifying credit losses that may occur based upon current circumstances is subjective. Therefore, the Corporation maintains a general allowance to cover all credit losses within the entire portfolio. The methodology management uses to determine the adequacy of the loan loss reserve is as follows: 1. Management reviews the larger individual loans for unfavorable collectibility factors (including impairment) 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 enables management to establish 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 charge-offs. High delinquencies are generally indicative of an increase in future loan charge-offs. Given this methodology for determining the adequacy of the loan loss reserve, the provision for loan losses was substantially lower in 1995 as compared to prior periods. This reduction reflects the trend in past due accruing loans (90 days of more) which have been declining steadily, and are currently at historically low levels. It also reflects the immaterial level of nonaccrual loans over the same period. These trends in non-performing loans reflect both general economic conditions that have promoted growth and expansion in the Corporation's market area, and a credit risk management strategy that promotes diversification. At December 31, 1995, 70 percent of the Corporation's allowance for loan losses was classified as unallocated. To a large extent, this reflects the growth in total loans over the last three years of $93 million, or about 39.9 percent, and the concentration of this loan growth in the commercial loan portfolio. With this type of commercial loan growth, management believes that it is prudent to continue to provide for loan losses, due to the inherent risk associated with commercial loans. 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 14.4 percent, or $71,616,000, to $568,579,000 as of December 31, 1995, from $496,963,000 as of December 31, 1994. Assets at December 31, 1994, increased 10.5 percent, or $47,009,000, from $449,954,000 as of December 31, 1993. The Corporation has been pursuing expansion into contiguous markets since 1990. Most recently, the Corporation acquired the Gateway Bank in LaGrange county (see Note 13 to Consolidated Financial Statements), and opened three additional offices during 1995. Plans call for additional expansion in Elkhart and Noble counties in 1996. Although growth continues to be strong in the traditional markets served by the Bank, much of the growth experienced in 1995 was in the new markets served by the Corporation. The Corporation's market area now includes: Elkhart, Fulton, Kosciusko, LaGrange, Marshall, Noble and Whitley counties. As in the past, the Corporation expects to continue to serve its market by adding new products, offices and ATM's in areas where the demographic trends dictate. This activity will contribute to net income in future 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 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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 adopted SFAS No. 114, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan. The effect on the Corporation of the adoption of this accounting standard was not material. Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights", requires recognition of an asset when servicing rights are retained on in-house originated loans that are sold. Based upon its current volume of mortgage banking activity, The Corporation does not expect SFAS No. 122 to have a significant impact on its financial condition and operations for 1996. The impact in subsequent years is difficult to predict. RESULTS OF OPERATIONS 1995 vs 1994 Corporation assets and earnings were at record levels in 1995. Total assets were at $568,579,000 at December 31, 1995, an increase of $71,616,000 or 14.4 percent over the assets at December 31, 1994. Loans increased 13.8 percent, or $39,661,000, to $327,617,000 at year-end 1995. Total deposits increased 8.9 percent, or $35,194,000, to $431,934,000 at December 31, 1995. Core funding, deposits plus securities sold under agreement to repurchase, increased 11.8 percent, or $51,595,000, to $490,085,000. Net income totaled $5,645,000, exceeding 1994 by 10.1 percent. On an average daily basis, gross earning assets increased by 14.8 percent and total deposits and purchased funds increased by 14.3 percent. The Gateway Bank office added in July, 1995 accounted for approximately one-third of this average daily earning asset growth. Total interest income increased 25.0 percent, or $8,424,000 to $42,079,000 for the year ended December 31, 1995. This increase was a result of the increase in daily average earning assets and a 97 basis point increase in the overall tax equivalent yield on earning assets as compared to the 1994 overall tax equivalent yield. The increase in the tax equivalent yield on earning assets is reflective of the 168 basis point increase in the average prime rate during 1995, and the effect this prime rate increase had on the commercial loan portfolio yield. Nonearning assets of the Corporation include nonaccrual loans and investments, other real estate, and repossessions. These nonearning assets amounted to $1,207,000, $815,000 and $2,379,000 as of December 31, 1995, 1994 and 1993, respectively. Nonaccrual loans totaled $532,000, $18,000 and $0, respectively at the end of the years 1995, 1994 and 1993. Four mortgage loans acquired from Gateway account for the majority of the amount in nonaccrual loans for 1995. Interest expense for 1995 was $21,642,000. This is an increase of $6,755,000, or 45.4 percent, over the interest expense for 1994. The increase in interest expense is attributable to the continued growth in time deposit balances and rising interest rates. Average daily balances of time deposits increased 24.1 percent over the prior year average daily balances and the average rate paid on time deposits increased 161 basis points. Net interest income increased $1,669,000 or 8.9 percent, to $20,437,000 in 1995, from $18,768,000 in 1994. Net interest income as a percentage of earning assets was 4.18 percent for 1995. This is a decrease of 23 basis points from the 4.41 percentage for 1994. This decrease results from the increase in the rates paid on deposits and purchased funds being 25 basis points higher than the increase in the rates for earning assets. The increase in rates paid on deposits and purchased funds reflects both the effects of competition and the shift of balances from savings and money market funds to higher cost time deposits. As indicated in the Notes to Consolidated Financial Statements (Notes 1 and 5) and the discussion of Financial Condition above, management maintains the allowance for loan losses at an appropriate level given many different factors. The December 31, 1995, allowance of $5,472,000 is believed by management to be adequate to absorb all potential 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 $2,344,000, or 13.0 percent, to $20,317,000 in 1995, from $17,973,000 in 1994. Trust income and service charges on deposit accounts, two major components of noninterest income, increased 10.6 percent, or $284,000 in 1995 to $2,971,000 in 1995, from $2,687,000 in 1994. Trust income increased to $709,000 for 1995, as compared to $609,000 for 1994, an increase of 16.4 percent. Service charges on deposit accounts increased 8.9 percent to $2,262,000 in 1995. This increase is reflective of the continued acceptance of the Bank's individual deposit accounts paying fees. Other income decreased by $221,000 when compared to 1994. Other income in 1994 included a one-time event relating to the reversal of certain other real estate valuation allowances that contributed $404,000 to other income. Without that one-time event in 1994, the other income for 1995 would have increased $183,000 over the amount for 1994. The Bank continues its program of originating mortgages for sale on the secondary market. Loans originated for sale in 1995 were $10,878,000 as compared to $9,426,000 originated for sale in 1994. Gains on the sales of these loans totaled $159,000 a decrease of $18,000 from the gains recorded in 1994. The ALCO committee reviews the portfolio monthly and makes investment decisions based upon the projected balance sheet needs. During 1995, there were sales of securities available-for-sale which resulted in net gains of $331,000 and there were calls of securities held-to-maturity which resulted in losses of $16,000. The net of these activities resulted in security gains of $315,000 for 1995 as compared to net security losses of $7,000 in 1994. The small security losses in 1994 were the result of several partial calls on zero coupon bonds. The result of the changes in all components of noninterest income was an increase in total noninterest income of $367,000, or 8.6 percent, over the amounts recorded for 1994. Salaries and employee benefit costs for 1995 increased $1,243,000, or 17.1 percent, to $8,521,000. This increase is attributable to a 5.0 percent increase in full-time equivalent employees (FTE) in 1995, to 292, along with normal salary increases. The increase in FTE is a result of the opening of three new offices and the acquisition of Gateway Bank during 1995. Additionally, the increase in salaries and employee benefits reflects the increased cost of fringe benefit and indirect payroll programs which are tied to Corporate performance. 23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net occupancy and equipment costs increased to $2,604,000 in 1995, from $2,058,000 in 1994, an increase of $546,000 or 26.5 percent. This increase is also due to the new offices added during 1995 as well as having the expenses for the full year for the two offices opened in the fourth quarter of 1994. This increase is also a result of investments in the equipment needed to stay current with Bank technology. Other expense increased 7.6 percent, or $363,000, to $5,119,000 for 1995. As indicated in Note 11 to Consolidated Financial Statements, all components of other expense increased from 1994 to 1995 except for Regulatory Fees and FDIC Insurance. During 1995, the FDIC announced that the Bank Insurance Fund reached its capitalization target in May. As a result, the FDIC refunded excess premiums that banks paid from June to September and reduced the FDIC premium rates. This refund and the reduction in FDIC premiums resulted in the $288,000 decrease in Regulatory Fees and FDIC Insurance for 1995 as compared to 1994. The reduced FDIC premiums should have a continued positive effect on these costs. As a result of all these factors, income before income tax expense increased $559,000, or 6.9 percent, to $8,709,000 from the $8,150,000 for 1994. Income tax expense was $3,064,000 and $3,024,000 in 1995 and 1994, respectively, which represent 35.2 percent and 37.1 percent of income before taxes. The reduction in the average tax rate is due to a higher level of tax exempt income, the net operating loss carryforward related to the Gateway acquisition and an increase in Federal and State tax credits. Net income increased to $5,645,000 for 1995 from $5,126,000 for 1994, an increase of $519,000, or 10.1 percent. Net income per share was $3.92 for 1995, as compared to $3.56 for 1994. Net income of $5,645,000 represents a 17.9 percent return on January 1, 1995, stockholders' equity (excluding the equity adjustment related to SFAS No. 115), and a 1.05 percent return on average daily assets. 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 accounted 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 nonaccrual 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 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 represented an 8 basis point decline from 4.49 percent in 1993. This reduction was due in equal measure to the modest increase in the cost of funds and a lower level of loan fees. As indicated in the Notes to Consolidated Financial Statements (Notes 1 and 5), 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 was 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. 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 reflected 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 reflected 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 continued 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 represented 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. 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. Salaries and employee benefit costs increased 16.7 percent in 1994, to $7,278,000 from $6,236,000. This increase reflected a 10.8 percent increase in full-time equivalent employees (FTE) in 1994, to 278, and normal annual salary increases. This increase in FTE related to the full year impact of the offices added in Noble county in late 1993 and the two new offices added in 1994. There was also an increase in fringe benefit costs and indirect payroll costs, as some of these programs reflected corporate performance that was at record levels. Another component of other expense that grew due to expansion was 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. 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As indicated in the Note 11 to 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 was an increase of $121,000, or 15.5 percent from 1993. This increase reflected the overall growth in deposits. Data processing and supplies were the second largest component of other expense, totaling $766,000 in 1994. This represented 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 an 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. TABLE 1 - REPRICING OPPORTUNITIES The table below illustrates the funding gaps for selected maturity periods as of December 31, 1995, for Lake City Bank only. 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 five years. Repricing or Maturing Within ---------------------------------------------------- 6 7-12 1-5 Months Months Years --------------- ---------------- ---------------- (in thousands) Earning Assets Loans $ 209,596 $ 26,777 $ 79,374 Securities 16,413 11,225 128,619 Short-term investments 512 0 198 --------------- ---------------- ---------------- Total 226,521 38,002 208,191 --------------- ---------------- ---------------- Deposits and Purchased Funds Transaction accounts 95,469 0 0 Time deposits 116,525 43,239 57,986 Short-term borrowings 68,066 7,540 1,610 Long-term borrowings 8,000 0 8,132 --------------- ---------------- ---------------- Total 288,060 50,779 67,728 --------------- ---------------- ---------------- Interest sensitivity GAP $ (61,539) $ (12,777) $ 140,463 =============== ================ ================ Cumulative interest sensitivity GAP $ (61,539) $ (74,316) $ 66,147 =============== ================ ================ Cumulative GAP as percent of earning assets (11.7)% (14.2)% 12.6% =============== ================ ================ 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 Ratio 1995 Capitalized Capital - ----- --------------- ---------------- ---------------- (in thousands) Tier I leverage 6.31% 5.00% $ 7,523 Tier I risk based 10.13% 6.00% $ 14,763 Tier II risk based 11.38% 10.00% $ 4,939 25

LAKELAND FINANCIAL CORPORATION AND LAKE CITY BANK BOARD OF DIRECTORS Eddie Creighton Partner and General Manager, Creighton Brothers Anna K. Duffin Civic Leader L. Craig Fulmer Chairman, Heritage Financial Group, Inc. R. Douglas Grant Chairman and President, Lakeland Financial Corporation and Lake City Bank Jerry L. Helvey President, Helvey & Associates, Inc. Dr. Homer A. Kent President Emeritus of Grace Theological Seminary and Grace College J. Alan Morgan Former President of Zimmer USA and Vice President of Bristol Myers Co. Richard L. Pletcher President, Pletcher Enterprises, Inc. Joseph P. Prout President, Owens Supermarket, Inc. Philip G. Spear Former President, W.R. Thomas Stores, Inc. Terry L Tucker President, Maple Leaf Farms, Inc. G.L.White Former President, United Telephone Company of Indiana LAKELAND FINANCIAL CORPORATION OFFICERS R. Douglas Grant Chairman and President William A. Henthorn Executive Vice President Paul S. Siebenmorgen Executive Vice President Terry M. White Secretary and Treasurer James J. Nowak Assistant Treasurer 26

LAKE CITY BANK OFFICERS R. Douglas Grant President Retail Services William A. Henthorn Executive Vice President Kevin L. Deardorff Senior Vice President Paul S. Siebenmorgen Executive Vice President Dale L. Cramer Vice President Thomas P. Frantz Vice President Commercial Services Burl Nifong Vice President Charles D. Smith Senior Vice President Janet K. Anderson Assistant Vice President David A. Bickel Vice President Barry A. Bailey Assistant Vice President James R. Cowan Vice President Dennis E. Dolby Assistant Vice President Michael E. Gavin Vice President Glenn A. Goudey Assistant Vice President William D. Leedy Vice President April J. Gayton Mortgage Banking Officer J. Randall Leininger Vice President Jill L. Warstler Retail Banking Officer H.A. "Rocky" Meyer Vice President Willard N. Schieler Vice President Marketing and Human Resources Thomas G. Stark Vice President D. Jean Northenor Senior Vice President James C. Stout Vice President Gregory D. Lawrence Vice President Randal U. Vutech Vice President Cathy L. Teghtmeyer Vice President Edward D. Jarrett Assistant Vice President Paul S. Purvis Assistant Vice President Chad D. Brouyette Commercial Banking Officer Bettie S. Moore Assistant Human Resource Officer Brent E. Hoffman Commercial Banking Officer J. Chad Stoltzfus Commercial Banking Officer Operations Michael A. Zimmerman Commercial Banking Officer E. Ray Younce Senior Vice President Judy K. Harvey Vice President Trust Lisa M. Bicknese Assistant Vice President Bradley C. Brail Senior Vice President Ruth A. Hutcherson Assistant Vice President Coral G. Amspaugh Vice President Vicki D. Martin Assistant Vice President Max A. Mock Vice President Rebecca M. Siery Assistant Vice President Jeannine D. Knowles Assistant Vice President William L. Hilliard Operations Officer Shelley A. Moore Trust Operations Officer Linda A. Owens Operations Officer Connie Miller Trust Officer Angela K. Ritchey Operations Officer Linda Swoverland Operations Officer Investments Dennis E. Cultice Senior Vice President Financial Anne M. Bailey Assistant Vice President Terry M. White Senior Vice President James J. Nowak Vice President and Controller Office Administration Jill A. Hester Assistant Vice President Walter L. Weldy Senior Vice President Pamela J. Cooper Vice President Audit Timothy L. Sutton Vice President Betty L. McHenry Senior Vice President and Auditor Peggy A. Guyas Assistant Vice President Kris J. Kerlin Assistant Vice President Jeannine P. Cooley Teller Training Officer Cynthia A. Studebaker Assistant Auditor OFFICES Akron Jane Murphy Assistant Vice President Argos Michael D. Burroughs Assistant Vice President Bremen Matthew K. Bixel Vice President Columbia City Lisa A. Hockemeyer Assistant Vice President Concord Jeri L. Yoder Assistant Vice President Cromwell Jerry L. Stoner Retail Banking Officer Elkhart Rosalie M. Smith Vice President Elkhart East Mervin "Bud" Hammon Assistant Vice President Goshen Downtown Thomas E. Marquis Assistant Vice President Goshen South Clarence J. Yoder Vice President Kendallville Duane Smith Vice President LaGrange Michael P. Schlemmer Vice President Ligonier Craig R. Atz Vice President Mentone Karen A. Francis Assistant Vice President Middlebury Jerry S. Troyer Vice President Milford Jack A. Heeter Assistant Vice President Nappanee Larry L. Penrod Vice President North Webster Jeanne G. Bowen Vice President Pierceton Pamela J. Messmore Office Manager Roann Merrill Templin Assistant Vice President Rochester Gail D. Law Assistant Vice President Shipshewana John R. Munsell Assistant Vice President Silver Lake Deborah A. Lotz Assistant Vice President Syracuse Donna J. Beck Assistant Vice President Wabash North T.F. "Bob" Fuller Vice President Wabash South Jody A. Slacian Assistant Office Manager Warsaw Downtown Traci Dahlinger Office Manager Warsaw East Tricia G. Hess Office Manager Warsaw West Tricia G. Hess Office Manager Winona Lake Allan L. Disbro Vice President 27

9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995 REPORT TO SHAREHOLDERS AND THE 1995 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 DEC-31-1995 26,185 240 470 0 82,120 113,888 115,328 327,762 5,472 568,579 431,934 77,131 5,328 17,432 0 0 1,438 35,316 568,579 30,116 11,761 202 42,079 16,847 21,642 20,437 120 315 16,244 8,709 5,645 0 0 5,645 3.92 3.92 4.09 532 192 1,432 0 4,866 355 95 5,472 1,411 0 4,061