SEC Filing | Lake City Bank

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 0-11487 LAKELAND FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1559596 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 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 (219)267-6144 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at June 30, 1997 Common Stock, $.50 Stated Value 2,902,502

Part I Item 1 - Financial Statements LAKELAND FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS As of June 30, 1997 and December 31, 1996 (in thousands) (Unaudited) (Page 1 of 2) June 30, December 31, 1997 1996 ----------- ----------- ASSETS - ------ Cash and cash equivalents Cash and due from banks $ 37,579 $ 41,190 Short-term investments 818 3,689 ----------- ----------- Total cash and cash equivalents 38,397 44,879 Securities available-for-sale U. S. Treasury and government agency securities 28,983 31,804 Mortgage-backed securities 47,132 46,839 State and municipal securities 2,156 2,167 Other debt securities 1,419 1,032 ----------- ----------- Total securities available-for-sale (carried at fair value) 79,690 81,842 Securities held-to-maturity U. S. Treasury and government agency securities 21,651 17,020 Mortgage-backed securities 85,426 86,073 State and municipal securities 22,427 21,172 Other debt securities 3,177 1,009 ----------- ----------- Total securities held-to-maturity (fair value of $133,885 at June 30, 1997, and $126,373 at December 31, 1996) 132,681 125,274 Real estate mortgages held-for-sale 926 895 Loans: Total loans 412,483 382,265 Less: Allowance for loan losses 5,301 5,306 ----------- ----------- Net loans 407,182 376,959 Land, premises and equipment, net 17,604 16,014 Accrued income receivable 4,437 4,254 Other assets 6,598 6,434 ----------- ----------- Total assets $ 687,515 $ 656,551 =========== =========== (Continued)

Part I Item 1 - Financial Statements LAKELAND FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS As of June 30, 1997 and December 31, 1996 (in thousands) (Unaudited) (Page 2 of 2) June 30, December 31, 1997 1996 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ LIABILITIES - ----------- Deposits: Noninterest bearing deposits $ 84,245 $ 77,664 Interest bearing deposits 441,753 418,889 ----------- ----------- Total deposits 525,998 496,553 Short-term borrowings Federal funds purchased 3,300 0 U.S. Treasury demand notes 4,000 2,769 Securities sold under agreements to repurchase 77,403 85,611 ----------- ----------- Total short-term borrowings 84,703 88,380 Accrued expenses payable 5,151 5,033 Other liabilities 941 1,011 Long-term debt 25,383 23,531 ----------- ----------- Total liabilities 642,176 614,508 Commitments, off-balance sheet risks and contingencies STOCKHOLDERS' EQUITY - -------------------- Common stock: $.50 stated value, 10,000 shares authorized, 2,903 shares issued and outstanding as of June 30, 1997, and 2,897 shares issued and outstanding at December 31, 1996 1,453 1,448 Additional paid-in capital 8,537 8,232 Retained earnings 35,122 31,967 Unrealized net gain (loss) on securities available-for-sale 370 396 Treasury stock (143) 0 ----------- ----------- Total stockholders' equity 45,339 42,043 ----------- ----------- Total liabilities and stockholders' equity $ 687,515 $ 656,551 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.

LAKELAND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Three Months and Six Months Ended June 30, 1997, and 1996 (in thousands except for share data) (Unaudited) (Page 1 of 2) Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- INTEREST AND DIVIDEND INCOME - ---------------------------- Interest and fees on loans: Taxable $ 9,650 $ 8,033 $ 18,606 $ 15,821 Tax exempt 57 60 115 121 ----------- ----------- ----------- ----------- Total loan income 9,707 8,093 18,721 15,942 Short-term investments 59 27 145 60 Securities: U.S. Treasury and government agency securities 789 696 1,552 1,329 Mortgage-backed securities 2,195 2,026 4,311 4,014 State and municipal securities 356 346 703 686 Other debt securities 74 79 148 170 ----------- ----------- ----------- ----------- Total interest and dividend income 13,180 11,267 25,580 22,201 INTEREST EXPENSE - ---------------- Interest on deposits 5,207 4,485 10,074 9,033 Interest on short-term borrowings 1,290 992 2,603 1,867 Interest on long-term debt 335 277 569 549 ----------- ----------- ----------- ----------- Total interest expense 6,832 5,754 13,246 11,449 ----------- ----------- ----------- ----------- NET INTEREST INCOME 6,348 5,513 12,334 10,752 - ------------------- Provision for loan losses 60 30 120 60 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,288 5,483 12,214 10,692 - ------------------------- ----------- ----------- ----------- ----------- NONINTEREST INCOME - ------------------ Trust fees 281 213 640 499 Service charges on deposit accounts 827 692 1,566 1,270 Other income (net) 676 455 1,073 847 Net gains on the sale of real estate mortgages held-for-sale 120 121 224 221 Net securities gains (losses) (18) (4) (18) (6) ----------- ----------- ----------- ----------- Total noninterest income 1,886 1,477 3,485 2,831 (Continued)

LAKELAND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 1997 and 1996 (in thousands except for shares) (Unaudited) Unrealized Net Gain (Loss) Common Stock Additional on Securities Total ---------------------- Paid-in Retained Available- Treasury Stockholders' Shares Amount Capital Earnings For-Sale Stock Equity ---------- -------- ---------- ---------- ------------- -------- ------------ Balances, January 1, 1996 1,438,496 $ 1,438 $ 7,827 $ 26,858 $ 631 $ 0 $ 36,754 Net income for six months ended June 30, 1996 3,218 3,218 Net change in unrealized net gain (loss) on securities available-for-sale (739) (739) Issued 10,000 shares of previously authorized, unissued shares 10,000 10 405 415 Shares issued in 2-for-1 stock split 1,448,496 Cash dividends declared - $.22 per share (639) (639) ---------- -------- ---------- ---------- ------------- -------- ------------ Balances, June 30, 1996 2,896,992 $ 1,448 $ 8,232 $ 29,437 $ (108) $ 0 $ 39,009 ========== ======== ========== ========== ============= ======== ============ Balances, January 1, 1997 2,896,992 $ 1,448 $ 8,232 $ 31,967 $ 396 $ 0 $ 42,043 Net income for six months ended June 30, 1997 4,027 4,027 Net change in unrealized net gain (loss) on securities available-for-sale (26) (26) Issued 10,000 shares of previously authorized, unissued shares 10,000 5 305 310 Acquired 4,490 shares of treasury stock (4,490) (143) (143) Cash dividends declared - $.30 per share (872) (872) ---------- -------- ---------- ---------- ------------- -------- ------------ Balances, June 30, 1997 2,902,502 $ 1,453 $ 8,537 $ 35,122 $ 370 $ (143) $ 45,339 ========== ======== ========== ========== ============= ======== ============ The accompanying notes are an integral part of these consolidated financial statements.

Part I LAKELAND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1997 and 1996 (in thousands) (Unaudited) (Page 1 of 2) 1997 1996 ----------- ----------- Cash flows from operating activities: Net income $ 4,027 $ 3,218 ----------- ----------- Adjustments to reconcile net income to net cash from operating activites: Depreciation 668 625 Provision for loan losses 120 60 Loans originated for sale (12,105) (17,076) Net (gain) loss on sale of loans (224) (221) Proceeds from sale of loans 12,298 17,019 Net (gain) loss on sale of premises and equipment 4 21 Net (gain) loss on calls of securities held-to-maturity 18 6 Net securities amortization (accretion) 17 166 Increase (decrease) in taxes payable 466 536 (Increase) decrease in income receivable (183) (159) Increase (decrease) in accrued expenses payable (63) (291) (Increase) decrease in other assets (266) (728) Increase (decrease) in other liabilities (70) 29 ----------- ----------- Total adjustments 680 (13) ----------- ----------- Net cash from operating activities 4,707 3,205 ----------- ----------- Cash flows from investing activities: Proceeds from maturities and calls of securities held-to-maturity 5,648 3,818 Proceeds from maturities and calls of securities available-for-sale 19,091 5,940 Purchases of securities available-for-sale (16,963) (8,311) Purchases of securities held-to-maturity (13,108) (10,343) Proceeds from sales of securities available-for-sale 0 0 Net (increase) decrease in total loans (30,510) (22,066) Purchases of land, premises and equipment (2,262) (1,389) ----------- ----------- Net cash from investing activities (38,104) (32,351) ----------- ----------- (Continued)

Part I LAKELAND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1997 and 1996 (in thousands) (Unaudited) (Page 2 of 2) 1997 1996 ----------- ----------- Cash flows from financing activities: Net increase (decrease) in total deposits $ 29,445 $ 36,349 Proceeds from short-term borrowings 467,972 389,963 Payments on short-term borrowings (471,649) (385,180) Proceeds from long-term borrowings 10,000 2,000 Payments on long-term borrowings (8,148) 0 Dividends paid (872) (639) Proceeds from sale of common stock 310 415 Purchase of treasury stock (143) 0 ----------- ----------- Net cash from financing activities 26,915 42,908 ----------- ----------- Net increase (decrease) in cash and cash equivalents (6,482) 13,762 Cash and cash equivalents at beginning of the period 44,879 26,895 ----------- ----------- Cash and cash equivalents at end of the period $ 38,397 $ 40,657 =========== =========== Cash paid during the period for: Interest $ 13,097 $ 11,190 =========== =========== Income taxes $ 1,743 $ 1,685 =========== =========== Loans transferred to other real estate $ 167 $ 0 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.

LAKELAND FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This report is filed for Lakeland Financial Corporation (the Company) and its wholly owned subsidiary, Lake City Bank (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate and do not make the information presented misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report and Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of the results for interim periods are reflected in the quarterly statements included herein. NOTE 2. EARNINGS PER SHARE The average common shares outstanding and the net income per share for the three months and six months ended June 30, 1996, have been restated to reflect a two-for-one stock split. The record date for the stock split was April 30, 1996, and the new shares were issued May 15, 1996. The average common shares outstanding for 1997 reflect the acquisition of 4,490 shares of Lakeland Financial Corporation common stock to offset a liability for a directors' deferred compensation plan. This stock is classified as treasury stock for financial reporting. (Intentionally left blank)

Part 1 LAKELAND FINANCIAL CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATION June 30, 1997 FINANCIAL CONDITION The financial statements reflect the Company's continued growth within traditional markets and expansion into new market areas. The Elkhart Northwest office of the Company at 1208 North Nappanee Street, Elkhart, IN, opened on April 21, 1997, and the Granger office at 12830 State Road 23, Granger, IN, opened on May 29, 1997. The construction of the Mishawaka office continues with the opening planned for later this year. The Company has also purchased property at 862 E. Jefferson Street, Plymouth, IN, and has received regulatory approval to establish a full-service office at that location. Total assets of the Company were $687,515,000 as of June 30, 1997. This is an increase of $30,964,000 or 4.7 percent from $656,551,000 reported at December 31, 1996. Total loans were $412,483,000 at June 30, 1997. This is an increase of $30,218,000 or 7.9 percent from the December 31, 1996, balance. Total securities (including available-for-sale (AFS) and held-to-maturity (HTM)) increased $5,255,000 or 2.5 percent to $212,371,000 as of June 30, 1997, from $207,116,000 at December 31, 1996. Earning assets increased to $626,598,000 at June 30, 1997. This is an increase of $32,633,000 or 5.5 percent from the December 31, 1996, total of $593,965,000. Total deposits and securities sold under agreements to repurchase (repurchase agreements) consist primarily of funds generated within the Company's primary market area as defined by its Community Reinvestment Act (CRA) statement. At June 30, 1997, these funds totaled $603,401,000. This represented a $21,237,000 or 3.6 percent increase from December 31, 1996. The growth has been primarily in certificates of deposit which increased $30,834,000 or 10.0 percent from the balance at December 31, 1996. In addition to these local funding sources, the Company borrows modestly through the Treasury, Tax and Loan program, occasionally through federal fund lines with correspondent banks and through term advances from the Federal Home Loan Bank of Indianapolis (FHLB). Including these non-local sources, funding totaled $636,084,000 at June 30, 1997. This is a $27,620,000 or 4.5 percent increase from $608,464,000 reported at December 31, 1996. On an average daily basis, total earning assets increased 14.1 percent and 14.2 percent for the three month period and the six month period ended June 30, 1997, respectively, as compared to similar periods ended June 30, 1996. On an average daily basis, total deposits and purchased funds increased

14.4 percent and 14.5 percent for the three month period and six month period ended June 30, 1997, as compared to the three month period and six month period ended June 30, 1996. The Company's investment portfolio consists of U.S. Treasuries, agencies, mortgage-backed securities, municipal bonds, and corporates. During 1997, new investments have been primarily U.S. Treasuries, municipal bonds and mortgage-backed securities. At June 30, 1997, and December 31, 1996, the Company's investment in mortgage-backed securities comprised approximately 62.4 and 64.2 percent, respectively, of the total securities and consisted mainly 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-backed securities purchased 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 Company uses Bloomberg analytics to evaluate and monitor all purchases. At June 30, 1997, the mortgage-backed securities in the HTM portfolio had a three year average life, with a potential for approximately 9 percent price depreciation should rates increase 300 basis points and approximately 7 percent price appreciation should rates decrease 300 basis points. The mortgage-backed securities in the AFS portfolio had a two year average life and a potential for approximately 7 percent price depreciation should rates move up 300 basis points and approximately 5 percent price appreciation should rates move down 300 basis points. As of June 30, 1997, all mortgage-backed securities continue to be in compliance with FFIEC guidelines and are performing in a manner consistent with management's original expectations. The Company's AFS portfolio is managed with consideration given to factors such as the Company's capital levels, growth prospects, asset/liability structure and liquidity needs. At June 30, 1997, the AFS portfolio constituted 37.5 percent of the total security portfolio. During the first six months of 1997 purchases for the HTM and AFS portfolios were $13,108,000 and $16,963,000, respectively. At June 30, 1997, the net after-tax unrealized gain in the AFS portfolio included in stockholders' equity was $370,000, a decrease of $26,000 from the unrealized gain included in stockholders' equity at December 31, 1996. Since the securities portfolio is primarily fixed rate, a negative equity adjustment is anticipated whenever interest rates increase. Future investment activity is difficult to predict, as it is dependent upon loan and deposit trends. As previously indicated, total loans increased $30,218,000 to $412,483,000 as of June 30, 1997, from $382,265,000 at December 31, 1996. Loan growth is net of loans reclassified to other real estate. The Company continues to experience good loan demand. Commercial loans at June 30, 1997, increased 10.2 percent from the level at December 31, 1996. Retail loans at June 30, 1997, increased 5.9 percent from December 31, 1996. Real estate loans (excluding mortgages held-for-sale) increased 2.3 percent from December 31, 1996. The balances in the real estate loan portfolio are impacted by the sale

of real estate mortgages in the secondary market and the level of refinance and new mortgage activity in the existing rate environment. The Company had 61.3 percent of its loans concentrated in commercial loans at June 30, 1997, and 60.1 percent at December 31, 1996. Traditionally, this type of lending may have more credit risk than other types of lending. This is attributed to the fact that individual commercial loans are generally larger than residential real estate and retail loans, and because the type of borrower and purpose of commercial loans are not as homogeneous as with residential and retail customers. The Company manages this risk by pricing to the perceived risk of each individual credit, and by diversifying the portfolio by customer, product, industry and geography. Customer diversification is accomplished through a relatively low administrative loan limit of $4,500,000. Product diversification is accomplished by offering a wide variety of financing options. Management reviews the loan portfolio to ensure loans are diversified by industry. The loan portfolios are distributed throughout the Company's principal trade area, which encompasses nine counties in Indiana. Other than loans disclosed elsewhere in this filing as past-due, nonaccrual or restructured, the Company is not aware of any loans classified for regulatory purposes at June 30, 1997, that are expected to have a material impact on the Company's future operating results, liquidity or capital resources. The Company is not aware of any material credits in which there is serious doubt as to the borrower's ability to comply with the loan repayment terms, other than those disclosed as past due, nonaccrual or restructured. The Company continues to actively serve the mortgage needs of its CRA defined market area by originating both conforming and nonconforming real estate mortgages. During the first six months of 1997 the Company originated mortgages for sale totaling $10,605,000 as compared to $11,784,000 during the first six months of 1996. This program of mortgage sales continues to produce the liquidity needed to meet the mortgage needs of the markets served by the Company, and to generate a long-term servicing portfolio. As a part of the CRA commitment to making real estate financing available in all markets, the Company continues to originate non-conforming loans which are held to maturity or prepayment. 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 restructurings totaled $1,423,000 at June 30, 1997, as compared to $1,284,000 at December 31, 1996. The loans classified as troubled debt restructurings at June 30, 1997, are performing in accordance with the modified terms. At June 30, 1997, there were no loans that would be considered impaired as defined in SFAS Nos. 114 and 118. The Indiana State legislature has enacted laws relating to a state chartered bank's legal lending limit, by adopting the basic regulations

applied by the Office of the Comptroller of the Currency (OCC) to national banks. These guidelines set overall limits on lending activity, but actual bank limits are subject to Board of Director approval. Based upon these new regulations, the Company's June 30, 1997 legal loan limit was approximately $7,496,000. The legal loan limit will continue to increase as the Company's combined equity and allowance for loan losses continues to increase. At its February 11, 1997, meeting, the Company's Board of Directors modestly increased the Company's policy limit by $500,000, to $4,500,000 for any one borrower. With a relatively low administrative loan limit of $4,500,000, the Company's loan portfolios consist primarily of loans to consumers and small businesses. For the first six months of 1997, loans have been increasing slightly faster than deposits. The increase in loans is also affected by the sale of mortgage loans in the secondary market as discussed earlier. While demand accounts have increased $6,581,000 during the first six months of 1997, other transaction accounts have decreased $7,971,000 during the same period. During this period there has been a significant increase in time deposits which increased $30,834,000 or 10.0 percent. During this six month period, loans increased $30,218,000 or 7.9 percent. As a result of these loan and deposit trends, the Company's average daily loans/deposits ratio amounted to 79.0 percent at June 30, 1997, which is an increase from 78.8 percent at year-end 1996. The Company's average daily loans/total deposits and repurchase agreements ratio amounted to 71.3 percent at June 30, 1997. This is an increase from 70.0 percent at year-end 1996. The Company, through its Asset/Liability Committee (ALCO), manages interest rate risk by monitoring both its GAP position and the computer simulated earnings impact of various rate scenarios. The Company then modifies its long-term risk parameters by attempting to generate the type of loans, investments, and deposits that currently fit ALCO needs. The current long-term guideline approved by the Board of Directors defines a neutral rate sensitivity ratio (GAP/Total Assets) as plus or minus 20 percent. However, the ALCO is authorized to manage this ratio outside these limits on a short-term basis, as the committee's expectation of interest rates dictates. Management has estimated that as of June 30, 1997, the Company's GAP/Total Assets ratios were (9.9) percent, (13.9) percent, and (12.5) percent for the three, six, and twelve month time periods, respectively. For this analysis, savings accounts have been assumed to be repriceable beyond twelve months, and therefore are not included as repriceable liabilities in each of these ratios. The December 31, 1996, three, six, and twelve month GAP ratios were (5.9) percent, (12.3) percent, and (17.6) percent respectively. Management supplements the GAP analysis with a computer simulation approach to manage the interest rate risk of the Company. This computer simulation analysis measures the net interest income impact of a 300 basis point change in interest rates during the next 12 months. If the change in net interest income is less than 3 percent of primary capital, the balance sheet structure is considered to be within acceptable risk levels. At June 30, 1997,

the Company's potential pretax exposure was within the Company's policy limit. This policy was last reviewed and approved by the Board of Directors in May, 1997. The Company is a member of the FHLB of Indianapolis. Membership has enabled the Company to participate in the housing programs sponsored by the FHLB, thereby enhancing the Company's ability to offer additional programs throughout its trade area. At its meeting in March, 1996, the Board of Directors of the Company passed a resolution authorizing the Company to borrow up to $50 million under the FHLB program. As of June 30, 1997, the borrowings from the FHLB totaled $25,300,000 with $10,000,000 due April 27, 1998, $4,000,000 due December 7, 1998, $10,000,000 due December 28, 1998, and $1,300,000 due June 24, 2003. All borrowings are collateralized by residential real estate mortgages. Membership in the FHLB requires an equity investment in FHLB stock. The amount required is computed annually, and is based upon a formula which considers the Company's total investment in residential real estate loans, mortgage-backed securities and any FHLB advances outstanding at year-end. The Company's investment in FHLB stock at June 30, 1997, was $2,839,200. The Federal Deposit Insurance Corporation's (FDIC) risk based capital regulations require that all banks maintain an 8.0 percent Tier II risk based capital ratio. The FDIC has also established definitions of "well capitalized" as a 5.0 percent Tier I leverage capital ratio, a 6.0 percent Tier I risk based capital ratio and a 10.0 percent Tier II risk based capital ratio. As of June 30, 1997, the Company's ratios were 6.5 percent, 10.0 percent and 11.2 percent, respectively, excluding the SFAS No. 115 adjustment. These are comparable to the ratios of 6.3 percent, 9.9 percent and 11.2 percent reported at December 31, 1996, respectively, and ratios of 6.3 percent, 10.1 percent and 11.3 percent reported at June 30, 1996, respectively. All ratios continue to be above "well capitalized" levels. The Company was examined by the Indiana Department of Financial Institutions (DFI) as of March 31, 1997, in May, 1997. The Company was also examined by the FDIC as of March 31, 1996, in June, 1996. Management is not aware of any regulatory recommendations that if implemented would have a material effect on liquidity, capital or results of operations. Total stockholders' equity increased $3,296,000 or 7.8 percent from December 31, 1996, to $45,339,000 at June 30, 1997. Net income of $4,027,000, less dividends of $872,000, less the decrease in the unrealized net gain on securities available for sale of $26,000, plus $310,000 from the issuance of common stock, less $143,000 for the cost of treasury stock acquired comprise this increase. Total Company assets have grown from $356,979,000 at June 30, 1992, to $687,515,000 at June 30, 1997. This is an increase of $330,536,000 or 92.6 percent which equates to a 14.0 percent rate of growth per year. Stockholders' equity has increased from $22,435,000 to $45,339,000 for the same time period. That is an increase of $22,904,000 or 102.1 percent which equates to a 15.1

percent rate of growth per year. Net income for the six months ended June 30, 1992, compared to the net income for the same period of 1997, increased $2,302,000 or 133.4 percent from $1,725,000 to $4,027,000. From June 30, 1992, to June 30, 1997, the number of Lake City Bank offices increased from 19 to 33. This growth has been funded through results of operation and existing capital. RESULTS OF OPERATIONS Net Interest Income For the six month period ended June 30, 1997, total interest and dividend income increased $3,379,000 or 15.2 percent to $25,580,000, from $22,201,000 during the same six months of 1996. Interest and dividend income increased $1,913,000 or 17.0 percent for the three month period ended June 30, 1997, as compared to the three month period ended June 30, 1996. Daily average earning assets for the first two quarters of 1997 increased to $618,923,000, a 14.2 percent increase over the same period in 1996. For the second quarter alone, the daily average earning assets increased to $628,531,000 or 14.1 percent increase over the daily average earning assets of the second quarter of 1996. The tax equivalent yields on average earning assets increased by 7 basis points for the six month period ended June 30, 1997, when compared to the same respective period of 1996. For the three month period ended June 30, 1997, this yield increased 24 basis points over the yield for the three month period ended June 30, 1996. The increase in the yield on average earning assets was mainly due to rising interest rates. The Company's investment portfolio, which is primarily fixed rate, experienced a 17 basis point increase in yield between the first six months of 1997 compared to the first six months of 1996. The 8 basis point reduction in the overall tax equivalent yield on loans for the first two quarters of 1997 as compared to the first two quarters of 1996 was offset by good loan demand. Strong local economies and expansion into new markets produced growth in average daily loan balances of 18.6 percent between the first two quarters of 1997 and the same period of 1996. This growth in loan balances, coupled with the decline in average yield, resulted in a 17.4 percent increase in total loan income to $18,721,000 during the first six months of 1997, from $15,942,000 reported for the first six months of 1996. For the three months ended June 30, 1997, as compared to the same period for 1996, loan income increased $1,614,000 or 19.9 percent from $8,093,000 to $9,707,000. Total security income amounted to $6,714,000 for the six month period ended June 30, 1997, and $3,414,000 for the three month period ended June 30, 1997. This compares to the $6,199,000 and $3,147,000 recorded for the same periods in 1996. These increases in income reflect increases in average daily balances of 5.2 percent and 4.9 percent, respectively, and security yield

increases of 17 basis points and 20 basis points, respectively, when comparing the six and three months ending June 30, 1997, to the same periods for 1996. Income from short-term investments amounted to $145,000 for the six month period ended June 30, 1997 and $59,000 for the three month period ended June 30, 1997. This compares to $60,000 and $27,000 for the same respective periods in 1996. The difference in the short-term investment income for the six months ending June 30, 1997, compared to the six months ending June 30, 1996, results from a higher average balance in short-term investments during the six months of 1997, partially offset by a 26 basis point reduction in the tax equivalent yield. The higher income for the three months ending June 30, 1997, as compared to the three months ending June 30, 1996, is due to a $2,248,000 increase in the average daily balance along with a 16 basis point increase in the tax equivalent yield. Total interest expense increased $1,797,000 or 15.7 percent to $13,246,000 for the six month period ended June 30, 1997, from $11,449,000 for the six month period ended June 30, 1996, and it increased $1,078,000 or 18.7 percent for the three month period ended June 30, 1997, from the $5,754,000 for the three month period ended June 30, 1996. This is a result of the overall growth of deposits and the change in the deposit mix. On an average daily basis, total deposits (including demand deposits) increased 11.3 percent and 12.3 percent for the six and three month periods ended June 30, 1997, as compared to the similar periods ended June 30, 1996. When comparing these same periods, the average daily balances of the demand deposit accounts rose $8,476,000 and $7,263,000, respectively, while the average daily balances of savings and transaction accounts combined rose $1,885,000 and $1,859,000, respectively. The average daily balance of time deposits, which pay a higher rate of interest as compared to demand deposit and transaction accounts, increased $39,305,000 and $45,726,000 for the six and three months ended June 30, 1997, compared to the six and three months ended June 30, 1996. On an average daily basis, total deposits (including demand deposits) and purchased funds increased 14.5 percent and 14.4 percent for the six and three month periods ended June 30, 1997, as compared to the six and three month periods ended June 30, 1996. The Company's daily cost of funds during the six month period ended June 30, 1997, increased 4 basis points when compared to the same period of 1996, and increased 16 basis points when comparing the three month periods ended June 30, 1997 and June 30, 1996. The net effect of all factors affecting total interest and dividend income and total interest expense was to increase net interest income. For the six month period ended June 30, 1997, net interest income totaled $12,334,000, an increase of 14.7 percent or $1,582,000 over the first six months of 1996. For the three month period ended June 30, 1997, net interest income totaled $6,348,000, an increase of $835,000 or 15.1 percent over the three months ended June 30, 1996.

The variation in net interest income reflects both local and national market conditions as well as the ALCO's efforts to manage the margin and asset growth. Provision for Loan Losses It is the policy of the Company to maintain the allowance for loan losses at a level that is deemed appropriate based upon loan loss experience, the nature of the portfolio, the growth expected for the portfolio and the evaluation of the economic outlook for the current year and subsequent years. Special consideration is given to nonperforming and nonaccrual loans as well as factors that management feels deserve recognition during the entire life of the portfolio. For several years, the Company has maintained a quarterly loan review program designed to provide reasonable assurance that the allowance is maintained at an appropriate level and that changes in the status of loans are reflected in the financial statements in a timely manner. The adherence to this policy may result in fluctuations in the provision for loan losses. Consequently, the increase in net interest income before provision for loan losses, discussed above, may not necessarily flow through to the net interest income after provision for loan losses. The process of identifying credit losses that may occur based upon current circumstances is subjective. Therefore, management 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 (primarily in the commercial loan portfolio) 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 loan 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 modestly higher in 1997, as

compared to 1996. The provision amounted to $120,000 and $60,000, respectively, for the six month periods ended June 30, 1997 and 1996. These provisions reflect the modest levels of past due accruing loans (90 days or more) and nonaccrual loans over the same periods. These levels of non-performing loans reflect both the general economic conditions that have promoted growth and expansion in the Company's trade area during the last several years, and a credit risk management strategy that promotes diversification. The Company increased its provision for loan losses to $120,000 for the first six months of 1997 versus $60,000 for the same period in 1996. This increase was in response to continued good loan growth in the first six months of 1997. The Company is currently evaluating the provision for loan losses for the third and fourth quarters of 1997, as a result of the Company's expansion into new markets and the continued strong commercial loan growth. As of June 30, 1997, loans delinquent 30 days or more that were included in the accompanying financial statements as accrual loans totaled approximately $4,146,000. At June 30, 1997, there were loans totaling $266,000 on nonaccrual. At December 31, 1996, there were $2,070,000 in loans delinquent 30 days or more included as accruing loans in the financial statements and $384,000 in nonaccrual loans. During the second quarter of 1997, loans totaling $167,000 were transferred into other real estate owned. As part of the loan review process, management also 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, `Accounting by Creditors for Impairment of a Loan'. As of June 30, 1997, no loans were considered impaired. Following is a summary of the loan loss experience for the six months ending June 30, 1997, and the year ending December 31, 1996.

June 30, December 31, 1997 1996 ------------ ------------ (in thousands) Amount of loans outstanding $ 412,483 $ 382,265 ------------ ------------ Average daily loans outstanding for the period $ 402,184 $ 352,811 ------------ ------------ Allowance for loan losses at the beginning of the period $ 5,306 $ 5,472 Charge-offs Commercial 50 171 Real estate 0 0 Installment 100 158 Credit card and personal lines of credit 19 39 ------------ ------------ Total charge-offs 169 368 Recoveries Commercial 16 12 Real estate 0 0 Installment 25 54 Credit card and personal lines of credit 3 16 ------------ ------------ Total recoveries 44 82 ------------ ------------ Net charge-offs 125 286 Provision charged to expense 120 120 ------------ ------------ Allowance for loan losses at the end of the period $ 5,301 $ 5,306 ============ ============ Ratio of net charge-offs during the period to average daily loans during the period (annualized) Commercial 0.02% 0.04% Real estate 0.00% 0.00% Installment 0.04% 0.03% Credit card and personal credit lines 0.00% 0.01% ------------ ------------ Total 0.06% 0.08% ============ ============

Net interest income after provision for loan losses totaled $12,214,000 and $6,288,000 for the six and three month periods ended June 30, 1997. This represents increases of 14.2 percent and 14.7 percent over the same respective periods ended June 30, 1996. Noninterest Income Total noninterest income increased $654,000 or 23.1 percent to $3,485,000 for the six month period ended June 30, 1997, from $2,831,000 recorded for the six month period ended June 30, 1996. Total noninterest income for the three month period ended June 30, 1997, was $1,886,000 which was $409,000 or 27.7 percent higher than the noninterest income for the three months ended June 30, 1996. Trust fees, which represent basic recurring service fee income, increased $141,000 or 28.3 percent to $640,000 for the six month period ended June 30, 1997, as compared to $499,000 for the first six months of 1996. For the three month period ended June 30, 1997, trust fees were $281,000, an increase of $68,000 over the fees for the same period in 1996. The major fee increases were in testamentary trust fees, employee benefit plan fees and stock transfer service fees. Service charges on deposit accounts increased 23.3 percent or $296,000 during the six month period ended June 30, 1997, totaling $1,566,000, as compared to the same period in 1996. These service charges increased $135,000 for the three month period ended June 30, 1997, over the amount recorded for the three month period ended June 30, 1996. Fees on the LCB Club account (the Company's low cost checking account service), business checking account fees and overdraft fees were the primary sources for the increase. These increases reflect the growth of the Company and adjustments to the schedule of deposit account fees implemented in 1996. Other income (net) consists of normal recurring fee income, as well as other income that management classifies as nonrecurring. Other income (net) increased 26.7 percent or $226,000 to $1,073,000 for the six month period ended June 30, 1997, as compared to the same period in 1996. It increased $221,000 or 48.6 percent for the three months ended June 30, 1997, as compared to the same months in 1996. The major increases in other income were in letter of credit fees and ATM fees. The profits from the sale of mortgages during the six month period ended June 30, 1997, totaled $224,000, as compared to $221,000 during the same period in 1996. For the second quarter of 1997 only, these profits were $120,000 as compared to $121,000 for the same period in 1996. These profits are a reflection of the steady volume of mortgages originated and sold in the secondary market. Net investment security gains (losses) amounted to $(18,000) and $(18,000) for the six and three month periods ended June 30, 1997, as compared

to $(6,000) and $(4,000) for the six and three month periods ended June 30, 1996. In the first six months of 1997 and 1996, special calls of zero coupon bonds were responsible for these small losses. Additional calls are expected in future periods. Noninterest Expense Noninterest expense increased $984,000 or 11.6 percent to $9,481,000 for the six month period ended June 30, 1997, as compared to the first six months of 1996. Noninterest expense increased $552,000 or 12.9 percent when comparing the three months ended June 30, 1997, to the three months ended June 30, 1996. For the six months ended June 30, 1997, salaries and employee benefits increased to $5,261,000, a $643,000 increase or 13.9 percent as compared to the first six months of 1996. When comparing the three months ended June 30, 1997, to the same period in 1996, the increase was $340,000 or 14.3 percent. These increases reflect the staffing of the Elkhart Northwest, Granger, Hubbard Hill and Kendallville locations, as well as normal salary increases. Full-time equivalent employees increased to 350 at June 30, 1997, from 310 at June 30, 1996. For the six and three month periods ended June 30, 1997, occupancy and equipment expenses were $1,557,000 and $774,000 respectively, a $144,000 increase or 10.2 percent and $84,000 or 12.2 percent from the same periods one year ago. This performance reflects the ordinary timing differences incurred with these types of expenses, as well as additional occupancy expense related to the new locations added in 1997 and 1996. These expenses are expected to continue to increase in 1997 with the Company's continued growth and expansion. For the six month period ended June 30, 1997, other expenses totaled $2,663,000 as compared to $2,466,000 during the same period in 1996. This is an increase of 8.0 percent or $197,000. For the second quarter of 1997 as compared to the second quarter of 1996 the increase was $128,000 or 10.7 percent. Income Before Income Tax Expense As a result of the above factors, income before income tax expense increased to $6,218,000 for the first six months of 1997, as compared to $5,026,000 for the same period in 1996. This is an increase of $1,192,000 or 23.7 percent. For the three months ended June 30, 1997, as compared to the three months ended June 30, 1996, the increase in income before income tax expense was $662,000 or 24.6 percent. Income Tax Expense Income tax expense increased to $2,191,000 for the first six months of 1997, as compared to $1,808,000 for the same period in 1996. This is a

$383,000 or 21.2 percent increase. Income tax expense for the second quarter of 1997 increased $176,000 or 18.1 percent as compared to the second quarter of 1996. The combined State franchise tax expense and the Federal income tax expense as a percent of income before income tax expense decreased to 35.2 percent during the first six months of 1997, as compared to 36.0 percent during the same period in 1996. It decreased to 34.3 percent for the three months ended June 30, 1997, as compared to 36.2 percent for the same three months in 1996. Currently the State franchise tax rate is 8.5 percent and is a deductible expense for computing Federal income tax. Net Income As a result of all factors indicated above, net income increased to $4,027,000 for the first six months of 1997, an increase of $809,000 or 25.1 percent from the $3,218,000 recorded over the same period in 1996. Earnings per share for the first six months of 1997 were $1.39 per share as compared to $1.11 per share for the first six months of 1996. The 1996 earnings per share have been restated to reflect a two-for-one stock split on April 30, 1996. For the three months ended June 30, 1997, net income was $2,200,000 as compared to $1,714,000 for the three months ended June 30, 1996, an increase of $486,000 or 28.4 percent.

LAKELAND FINANCIAL CORPORATION FORM 10-Q June 30, 1997 Part II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders At the annual meeting of shareholders held on April 8, 1997, the shareholders voted on a proposal to amend the Articles of Incorporation. The proposed amendment reduces the required vote to amend the Articles of Incorporation to a simple majority of those shares voted in person or by proxy at the annual or special meeting of the shareholders of the Company. The Articles of Incorporation of Lakeland Financial Corporation, prior to such amendment, required an affirmative vote of two-thirds of the issued and outstanding shares of the Company in order to amend the Articles of Incorporation. There were 2,903,799 votes entitled to be cast. At the annual meeting there were 2,194,751 votes for the proposal, and 56,991 votes against the proposal. All abstentions and non-votes were treated as no votes. In order for the proposal to pass there needed to be 1,935,866 shares voted for the proposal. There being more than the required two-thirds vote for the proposal, the proposal passed. There were no other submissions of matters to a vote by security holders during the quarter ended June 30, 1997.

LAKELAND FINANCIAL CORPORATION FORM 10-Q June 30, 1997 Part II - Other Information Item 5 - Other Information RECENT DEVELOPMENTS On July 28, 1997, the Bank entered into a definitive agreement to purchase selected assets and assume all of the deposits, approximately $25 million, of the branch office of NBD Bank, N.A. located in Huntington, Indiana (the "Proposed NBD Branch Purchase"). On July 31, 1997, the Bank entered into a definitive agreement to purchase selected assets, including approximately $24 million of loans, and assume all of the deposits, approximately $70 million, of six branch offices of KeyCorp located in North Central Indiana (the "Proposed KeyCorp Branch Purchases" and together with the Proposed NBD Branch Purchase, the "Proposed Branch Purchases"). The Proposed Branch Purchases will be accounted for as purchase transactions. In addition to customary regulatory conditions and approvals applicable to the Proposed Branch Purchases, the definitive agreement for the Proposed KeyCorp Branch Purchases provides that KeyCorp may terminate the agreement, without liability to either party, in the event that the Company, prior to October 1, 1997, has not issued at least $15 million of trust preferred securities constituting Tier 1 capital for bank regulatory purposes or otherwise increased its capital such that the Company would be considered "well capitalized", as defined for purposes of the FDICIA, on a pro forma basis giving effect to the consummation of the transaction. Neither the Proposed NBD Branch Purchase nor the Proposed KeyCorp Branch Purchases are conditioned upon the consummation of the other. Regulatory applications for the Proposed Branch Purchases will be filed in the near future and the Proposed Branch Purchases are expected to be completed in the fourth quarter of 1997. There can be no assurance that all necessary regulatory approvals will be obtained or that all conditions to the proposed Branch Purchases will be satisfied such that the Proposed Branch Purchases will be consummated. REGULATION AND SUPERVISION General The Company and the Bank are extensively regulated under federal and state law. These laws and regulations are intended to protect depositors, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the

particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company, and the operations of the Company may be affected by legislative changes and by the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effects on its business and earnings that fiscal or monetary policies, economic controls or new federal or state legislation may have in the future. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Company is required to file annual reports with the Federal Reserve and to provide the Federal Reserve such additional information as it may require. The Bank, as an Indiana state bank, is supervised by the Indiana Department of Financial Institutions (the "DFI") and the Federal Deposit Insurance Corporation ("FDIC"). As such, the Bank is regularly examined by, and is subject to regulations promulgated by, the DFI and the FDIC. Recent and Pending Legislation The enactment of the legislation described below has significantly affected the banking industry generally and will have an ongoing effect on the Company and the Bank in the future. Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") reorganized and reformed the regulatory structure applicable to financial institutions generally. FIRREA, among other things, enhanced the supervisory and enforcement powers for the federal bank regulatory agencies, required insured financial institutions to guaranty repayment of losses incurred by the FDIC in connection with the failure of an affiliated financial institution, required financial institutions to provide their primary federal regulator with notice (under certain circumstances) of changes in senior management and broadened authority for bank holding companies to acquire savings institutions. Under FIRREA, federal banking regulators have greater flexibility to bring enforcement actions against insured institutions and institution-affiliated parties, including cease and desist orders, prohibition orders, civil money penalties, termination of insurance and the imposition of operating restrictions and capital plan requirements. These enforcement actions, in general, may be initiated for violations of laws and regulations and unsafe or unsound practices. FIRREA also requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies.

The Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was adopted to recapitalize the FDIC's Bank Insurance Fund ("BIF"), which in general insures the deposits of commercial banks such as the Bank, and imposes certain supervisory and regulatory reforms on insured depository institutions. FDICIA includes provisions, among others, to (i) increase the FDIC's line of credit with the U.S. Treasury in order to provide the FDIC with additional funds to cover the losses of federally insured banks, (ii) reform the deposit insurance system, including the implementation of risk-based deposit insurance premiums, (iii) establish a format for closer monitoring of financial institutions to enable prompt corrective action by banking regulators when a financial institution begins to experience financial difficulty and create five capital levels for financial institutions ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") that would impose more scrutiny and restrictions on less capitalized institutions, (iv) require the federal banking regulators to set operational and managerial standards for all insured depository institutions and their holding companies, including limits on excessive compensation to executive officers, directors, employees and principal shareholders, and establish standards for loans secured by real estate, (v) adopt certain accounting reforms, including the authority of banking regulators to require independent audits of banks and thrifts, and require on-site examinations of federally insured institutions within specified timeframes, (vi) revise risk-based capital standards to ensure that they (a) take adequate account of interest-rate changes, concentration of credit risk and the risks of nontraditional activities, and (b) reflect the actual performance and expected risk of loss of multi-family mortgages, and (vii) restrict state-chartered banks from engaging in activities not permitted for national banks unless they are adequately capitalized and have FDIC approval. FDICIA also permits the FDIC to make special assessments on insured depository institutions, in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary and grants authority to the FDIC to establish semiannual assessment rates on financial institutions that are members of either the BIF or the Savings Association Insurance Fund ("SAIF"), which in general insures the deposits of thrifts, in order to maintain these funds at the designated reserve ratios. FDICIA also contained the Truth in Savings Act, which requires clear and uniform disclosure of the rates of interest payable on deposit accounts by depository institutions, and the fees assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of financial institutions with regard to deposit accounts and products. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") in September 1994. Beginning in September 1995, bank holding companies have the right to expand, by acquiring existing banks, into all states, even those which had theretofore restricted entry. The

legislation also provides that holding companies have the right, starting on June 1, 1997, to convert the banks that they own in different states to branches of a single bank. A state was permitted to "opt out" of this law but was not permitted to "opt out" of the law allowing bank holding companies from other states to enter the state. A state may also determine, at its option, to permit interstate branching through the establishment of de novo branches by out-of-state banks. The State of Indiana did not "opt out" of the interstate branching provisions of the Interstate Act and has authorized the establishment of de novo branches of out-of-state banks. The Interstate Act also establishes limits on acquisitions by large banking organizations by providing that no acquisition may be undertaken if it would result in the organization having deposits exceeding either 10% of all bank deposits in the United States or 30% of the bank deposits in the state in which the acquisition would occur. Economic Growth and Regulatory Paperwork Reduction Act of 1996. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the non-banking activities application process for well-capitalized and well-managed bank holding companies. Under EGRPRA, qualified bank holding companies may commence a regulatorily approved non-banking activity without prior notice to the Federal Reserve; written notice is required within 10 days after commencing the activity. Under EGRPRA, the prior notice period is reduced to 12 days in the event of any non-banking acquisition or share purchase, assuming the size of the acquisition does not exceed 10% of risk-weighted assets of the acquiring bank holding company and the consideration does not exceed 15% of Tier 1 capital. EGRPRA also provided for the recapitalization of the SAIF in order to bring it into parity with the BIF. Pending Legislation. Because of concerns relating to competitiveness and the safety and soundness of the banking industry, Congress is considering a number of wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. Among such bills are new proposals to merge the BIF and the SAIF insurance funds, to alter the statutory separation of commercial and investment banking and to further expand the powers of banks, bank holding companies and competitors of banks. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Company may be affected thereby. Bank and Bank Holding Company Regulation As noted above, both the Company and the Bank are subject to extensive regulation and supervision. Bank Holding Company Act. Under the BHCA, the activities of a bank holding company, such as the Company, are limited to business so closely related to banking, managing or controlling banks as to be a proper incident thereto. The Company is also subject to capital requirements applied on a

consolidated basis in a form substantially similar to those required of the Bank. The BHCA requires a bank holding company to obtain approval from the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares), (ii) acquiring all or substantially all of the assets of another bank or bank holding company, or (iii) merging or consolidating with another bank holding company. The Federal Reserve will not approve any acquisition, merger or consolidation that would have a substantially anticompetitive result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in meeting the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in reviewing acquisitions or mergers. The BHCA also prohibits a bank holding company, with certain limited exceptions, (i) from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or (ii) from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks. The Federal Reserve, in making such determination, considers whether the performance of such activities by a bank holding company can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency in resources, which can be expected to outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest or unsound banking practices. Insurance of Accounts. The FDIC provides insurance, through the BIF, to deposit accounts at the Bank to a maximum of $100,000 for each insured depositor. On January 1, 1996, the FDIC adopted an amendment to its BIF risk-based assessment schedule which effectively eliminated deposit insurance assessments for most commercial banks and other depository institutions with deposits insured by the BIF only. Following enactment of EGRPRA, the overall assessment rate for 1997 for institutions in the lowest risk-based premium category was revised to equal 1.29 cents for each $100 of BIF-assessable deposits. Deposits insured by the SAIF continue to be assessed at a higher rate. At this time, the deposit insurance assessment rate for institutions in the lowest risk-based premium category is zero, and all of the assessments paid by institutions in this category are used to service debt issued by the Financing Corporation, a federal agency established to finance the recapitalization of the former Federal Savings and Loan Insurance Corporation.

Regulations Governing Capital Adequacy. The federal bank regulatory agencies use capital adequacy guidelines in their examination and regulation of bank holding companies and banks. If the capital falls below the minimum levels established by these guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or nonbank businesses or to open facilities. The Federal Reserve and the FDIC adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Under these guidelines, all bank holding companies and federally regulated banks must maintain a minimum risk-based total capital ratio equal to 8%, of which at least one-half must be Tier 1 capital. The Federal Reserve also has implemented a leverage ratio, which is Tier 1 capital to total assets, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The Federal Reserve requires a minimum leverage ratio of 3%. For all but the most highly-rated bank holding companies and for bank holding companies seeking to expand, however, the Federal Reserve expects that additional capital sufficient to increase the ratio by at least 100 to 200 basis points will be maintained. Management of the Company believes that the risk-weighting of assets and the risk-based capital guidelines do not have a material adverse impact on the Company's operations or on the operations of the Bank. Community Reinvestment Act. The Community Reinvestment Act of 1977 requires that, in connection with examinations of financial institutions within their jurisdiction, the federal banking regulators must evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Regulations Governing Extensions of Credit. The Bank is subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its subsidiaries, or investments in their securities and on the use of their securities as collateral for loans to any borrowers. These regulations and restrictions may limit the ability of the Company to obtain funds from the Bank for its cash needs, including funds for acquisitions and for payment of dividends, interest and operating expenses.

Further, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Bank is also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest-rates and collateral as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not covered above and who are not employees, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons. Reserve Requirements. The Federal Reserve requires all depository institutions to maintain reserves against their transaction accounts and non-personal time deposits. Reserves of 3% must be maintained against total transaction accounts of $49.3 million or less (subject to adjustment by the Federal Reserve) and an initial reserve of $1,479,000 plus 10% (subject to adjustment by the Federal Reserve to a level between 8% and 14%) must be maintained against that portion of total transaction accounts in excess of such amount. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. Dividends. The ability of the Bank to pay dividends and management fees is limited by various state and federal laws, by the regulations promulgated by its primary regulators and by the principles of prudent bank management. Monetary Policy and Economic Control. The commercial banking business in which the Company engages is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowing, availability of borrowing at the "discount window," open market operations, the imposition of changes in reserve requirements against member banks deposits and assets of foreign branches, and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and such use may affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on the future business and earnings of the Company and the Bank cannot be predicted.

FORWARD-LOOKING STATEMENTS Statements contained in this Report and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). There can be no assurance, in light of certain risks and uncertainties, that such forward-looking statements will in fact transpire. The following important factors, risks and uncertainties, among others, could cause actual results to differ materially from such forward-looking statements: Credit risk: Approximately 60.1% and 61.3% of the Company's loans at December 31, 1996 and June 30, 1997, respectively, were commercial in nature (including agri-business and agricultural loans), and, as of both December 31, 1996 and June 30, 1997, the Company estimates that in excess of 95% of the Bank's commercial, industrial, agri-business and agricultural real estate mortgage loans, real estate construction mortgage and consumer loans are made within the Bank's basic trade area. Changes in local and national economic conditions could adversely affect credit quality in the Company's loan portfolio. Interest rate risk: Although the Company actively manages its interest rate sensitivity, such management is not an exact science. Rapid increases or decreases in interest rates could adversely impact the Company's net interest margin if changes in its cost of funds do not correspond to the changes in income yields. Competition: The Company's activities involve competition with other banks as well as other financial institutions and enterprises. Also, the financial service markets have and likely will continue to experience substantial changes, which could significantly change the Company's competitive environment in the future. Legislative and regulatory environment: The Company operates in a rapidly changing legislative and regulatory environment. It cannot be predicted how or to what extent future developments in these areas will affect the Company. These developments could negatively impact the Company through increased operating expenses for compliance with new laws and regulations, restricted access to new products and markets, or in other ways.

General business and economic trends: General business and economic trends, including the impact of inflation levels, influence the Company's results in numerous ways, including operating expense levels, deposit and loan activity, and availability of trained individuals needed for future growth. The use of estimates and assumptions: In preparing financial statements in conformity with generally accepted accounting principles, management must make estimates and assumptions that affect the amounts reported therein and the disclosures provided. Actual results could differ from these estimates. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation to subsequently update or revise any forward-looking statements after the date of this Report.

LAKELAND FINANCIAL CORPORATION FORM 10-Q June 30, 1997 Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: Exhibit 3(i) Restated Articles of Incorporation of Lakeland Financial Corporation (b) Reports on Form 8-K: There were no reports on Form 8-K filed by the Registrant during the last 30 weeks ending July 25, 1997.

LAKELAND FINANCIAL CORPORATION FORM 10-Q June 30, 1997 Part II - Other Information Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LAKELAND FINANCIAL CORPORATION (Registrant) Date: July 31, 1997 R. Douglas Grant R. Douglas Grant - President Date: July 31, 1997 Terry M. White Terry M. White - Secretary/Treasurer

EXHIBIT INDEX Exhibit No. Description Page ------- ------------------------------------------- ------- 3(i) Restated Articles of Incorporation of Lakeland Financial Corporation 27 Financial Data Schedule (EDGAR filing only)

EXHIBIT 3(i) RESTATED ARTICLES OF INCORPORATION OF LAKELAND FINANCIAL CORPORATION ARTICLE I -------- NAME The name of the Corporation is Lakeland Financial Corporation. ARTICLE II ---------- PURPOSES The purposes for which the Corporation is formed are: SECTION 1. To acquire control of the Lake City Bank, of Warsaw, Indiana and to operate as a bank holding company. SECTION 2. GENERAL POWERS. To possess, exercise, and enjoy all rights, powers and privileges conferred upon bank holding companies by the Bank Holding Company Act of 1956 as amended and as hereafter amended or supplemented, and all other rights and powers authorized by the laws of the State of Indiana, and the laws of the United States of America applicable to bank holding companies and the regulations of the Board of Governors of the Federal Reserve System. SECTION 3. TO DEAL IN REAL PROPERTY. Subject to the limitations of Section 2 above, to acquire by purchase, exchange, lease or otherwise, and to hold, own, use, construct, improve, equip, manage, occupy, mortgage, sell, lease, convey, exchange or otherwise dispose of, alone or in conjunction with others, real estate and leaseholds of every kind, character and description whatsoever and wheresoever situated, and any other interests therein, including, but without limiting the generality thereof, buildings, factories, warehouses, offices and structures of all kinds. SECTION 4. CAPACITY TO ACT. Subject to the limitations of Section 2 above, to have the capacity to act possessed by natural persons and to perform such acts as are necessary and advisable to accomplish the purposes, activities and business of the Corporation.

SECTION 5. TO ACT AS AGENT. Subject to the limitations of Section 2 above, to act as agent or representative for any firm, association, corporation, partnership, government or person, public or private, with respect to any activity or business of the Corporation. SECTION 6. TO MAKE CONTRACTS AND GUARANTEES. Subject to the limitations of Section 2 above, to make, execute and perform, or cancel and rescind, contracts of every kind and description, including guarantees and contracts of suretyship, with any firm, association, corporation, partnership, government or person, public or private. SECTION 7. TO BORROW FUNDS. Subject to the limitations of Section 2 above, to borrow moneys for any activity or business of the Corporation and, from time to time, without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, notes, trust receipts, and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment thereof, and the interest thereon, by mortgage, pledge, conveyance, or assignment in trust of all or any part of the assets of the Corporation, real, personal or mixed, including contract rights, whether at the time owned or thereafter acquired, and to sell, exchange, or otherwise dispose of such securities or other obligations of the Corporation. SECTION 8. TO DEAL IN ITS OWN SECURITIES. Subject to the limitations of Section 2 above, to purchase, take, receive or otherwise acquire, and to hold, own, pledge, transfer or otherwise dispose of shares of its own capital stock and other securities. Purchases of the Corporation's own shares, whether direct or indirect, may be made without shareholder approval only to the extent of unreserved and unrestricted earned surplus available therefor. ARTICLE III ----------- PERIOD OF EXISTENCE The period during which the Corporation shall continue is perpetual. ARTICLE IV ---------- RESIDENT AGENT AND PRINCIPAL OFFICE SECTION 1. RESIDENT AGENT. The name and address of the Corporation's Resident Agent for service of process is R. Douglas Grant, 202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46580.

SECTION 2. PRINCIPAL OFFICE. The post office address of the principal office of the Corporation is 202 East Center Street, P.O. Box 1387, Warsaw, Indiana 46580. ARTICLE V --------- AUTHORIZED SHARES SECTION 1. NUMBER OF SHARES. The total number of shares which the Corporation is to have authority to issue is 10,000,000, all of which are without par value. SECTION 2. GENERAL TERMS. All of the authorized shares shall be designated as "Common Stock", and each share of Common Stock shall be equal to every other share of Common Stock and shall participate equally in all earnings and profits of the Corporation and on distribution of assets, either on dissolution, liquidation or otherwise. SECTION 3. VOTING RIGHTS. Each holder of the Common Stock shall have the right to vote on all matters presented to shareholders and shall be entitled on all matters including elections of directors to one vote for each share of Common Stock registered in his name on the books of the Corporation. ARTICLE VI ---------- REQUIREMENTS PRIOR TO DOING BUSINESS The stated capital of the Corporation as of the date of filing of these Restated Articles of Incorporation is at least One Thousand Dollars ($1,000.00). ARTICLE VII ----------- DIRECTOR(S) SECTION 1. NUMBER OF DIRECTORS. The Board of Directors shall be composed of such number of directors ranging from nine (9) to eighteen (18), inclusive, as shall be established from time to time by the By-laws of the Corporation. In the absence of the establishment of such a number, the number of directors shall be ten (10). SECTION 2. NAMES AND POST OFFICE ADDRESSES OF THE DIRECTORS. The names and post office addresses of the Board of Directors of the Corporation at the date of adoption of these Restated Articles of Incorporation are:

NUMBER AND NAME STREET OR BUILDING CITY STATE ZIP - -------------- ------------------------ ------- ----- ----- Eddie Creighton P.O. Box 1058 Warsaw IN 46580 Anna K. Duffin 2300 S. Main Goshen IN 46526 L. Craig Fulmer 120 W. Lexington, Ste. 310 Elkhart IN 46516 R. Douglas Grant P.O. Box 1387 Warsaw IN 46580 Jerry L. Helvey 2808 E. Turnberry Rd. Warsaw IN 46580 Homer A. Kent 305 Sixth Street Winona Lake IN 46590 J. Alan Morgan 114 EMS T36 Lane Leesburg IN 46538 Richard L. Pletcher 1600 W. Market St. Nappanee IN 46550 Joseph P. Prout P.O. Box 877 Warsaw IN 46580 Philip G. Spear 111 S. High St. Warsaw IN 46580 Terry L. Tucker P.O. Box 308 Milford IN 46542 George L. White 1727 Betsy Ct. Warsaw IN 46580 SECTION 3. QUALIFICATIONS OF DIRECTORS. (a) Directors need not be shareholders of the Corporation. (b) For the period of at least six (6) months prior to his election to the Board of Directors of the Corporation and during his tenure thereon, each director shall be a resident of the market area of the Corporation as determined annually by the Board of Directors as required by the Community Reinvestment Act of 1977, as now in effect or as hereafter amended. (c) No director shall be a director, officer, employee, or the holder of 5% or more of the outstanding shares of any class of voting securities or securities convertible into voting securities of any financial institution, including but not limited to banks, trust companies, savings and loan associations, whether stock or mutual, credit unions, bank holding companies, savings and loan holding companies, or any other entity controlling, controlled by or in common control with a financial institution, other than (a) the Corporation, (b) any subsidiary of or other entity controlled by the Corporation, or (c) serving in any capacity at the request of the Corporation. (d) Those directors holding office as of the date of these amended Articles, who would otherwise be precluded from serving as directors of this

Corporation because of the restrictions imposed by this Section 3 of the Article VII, shall be permitted to continue to serve as directors of the Corporation for such continuous period of time as they are elected or reelected by the shareholders. SECTION 4. TERMS OF DIRECTORS. (a) The terms of the Directors shall be staggered as set forth herein. For purposes of this section, the Board of Directors shall be divided into three classes consisting, to the extent possible, of equal numbers. The classes shall be designated Class A, Class B and Class C, respectively. To the extent that the number of directors is not divisible by three (3), the first additional director shall be placed in Class A and the second additional director, if there is one, shall be placed in Class B. (b) At the annual meeting of shareholders to be held in 1984, the shareholders shall vote for the total number of directors as shall be set by the Board of Directors pursuant to Section 1 of this Article VII. Class A shall be elected for a term of three (3) years. Class B shall be elected for an initial term of two (2) years and for terms thereafter of three (3) years. Class C shall be elected for an initial term of one (1) year and for terms thereafter of three (3) years. Each person elected shall serve for the term of the class to which he has been designated and until his successor is duly elected and qualified or until his earlier death, resignation, disqualification, or removal from office. (c) At the annual meeting of shareholders to be held in 1985, the shareholders shall vote for the number of directors comprising Class B to hold office for a term of three (3) years. At the annual meeting of shareholders to be held in 1986, the shareholders shall vote for the number of directors comprising Class C to hold office for a term of three years. At subsequent annual meetings, the shareholders shall vote for the number of directors comprising the class whose term is expiring, which class shall be elected for a term of three (3) years. SECTION 5. REMOVAL OF DIRECTORS. Except as provided below, a director may not be removed or suspended from the Board of Directors except with cause as determined by procedures established from time to time by the By-laws of the Corporation. Any or all members of the Board of Directors may be removed, with or without cause, at a meeting of the shareholders called expressly for that purpose, by a vote of the holders of not less than two-thirds of the outstanding shares of common stock of the Corporation entitled to vote at that meeting. Any director shall immediately cease being a director when he no longer satisfies the standards for qualification established by Section 3 of this Article VII.

ARTICLE VIII ------------ OFFICERS The name and post office address of the President and Secretary of the Corporation at the date of adoption of these Restated Articles of Incorporation are, respectively: NUMBER AND NAME STREET OR BUILDING CITY STATE ZIP - ------------------ --------------------- ------ ----- ----- R. Douglas Grant, President P.O. Box 1387 Warsaw IN 46581 Terry M. White, Secretary P.O. Box 1387 Warsaw IN 46581 ARTICLE IX ---------- PROVISIONS FOR REGULATION OF BUSINESS AND CONDUCT OF AFFAIRS OF CORPORATION SECTION 1. MEETINGS OF SHAREHOLDERS. Meetings of shareholders of the Corporation shall be held at such place, within or without the State of Indiana, as may be specified in the notices or waivers of notice of such meetings. SECTION 2. MEETINGS OF DIRECTORS. Meetings of Directors of the Corporation shall be held at such place, within or without the State of Indiana, as may be specified in the notices or waivers of notice of such meetings. SECTION 3. CONSIDERATION FOR SHARES. Shares of stock of the Corporation shall be issued or sold in such manner and for such amount of consideration as may be fixed from time to time by the Board of Directors. SECTION 4. BY-LAWS OF THE CORPORATION. The Board of Directors by a majority vote of the actual number of directors elected and qualified from time to time shall have the power, without the assent or vote of the shareholders, to make, alter, amend or repeal the By-Laws of the Corporation. SECTION 5. COMMITTEES. If the By-Laws so provide, the Board of Directors may, by resolution adopted by a majority of the actual number of directors elected and qualified from time to time, designate from among its members an executive committee and one or more other committees, each of which to the extent provided in such resolution, the Articles of Incorporation or the

By-Laws, may exercise all of the authority and powers of the Board of Directors of the Corporation, and shall have the power to authorize the execution of all documents and the affixing of the Seal of the Corporation to all papers which may require it; but no such committee shall have the authority of the Board of Directors in reference to amending the Articles of Incorporation, adopting an agreement or plan of merger or consolidation, proposing a special corporate transaction, recommending to the shareholders a voluntary dissolution of the Corporation or a revocation thereof, electing or removing officers, or amending the By-Laws of the Corporation. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by law. No member of any such committee shall continue to be a member thereof after he ceases to be a Director of the Corporation. SECTION 6. CONSENT ACTION BY SHAREHOLDERS. Any action required by statute to be taken at a meeting of the shareholders, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting if, prior to such action, a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof, and such written consent is filed with the minutes of the proceedings of the shareholders. SECTION 7. CONSENT ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if prior to such action a written consent to such action is signed by all members of the Board of Directors or such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee. SECTION 8. INTEREST OF DIRECTORS IN CONTRACTS. Any contract or other transaction between the Corporation and any corporation in which this Corporation owns a majority of the capital stock shall be valid and binding, notwithstanding that the directors or officers of this Corporation are identical or that some or all of the directors of officers, or both, are also directors or officers of such other corporation. Any contract or other transaction between the Corporation and one or more of its directors or members or employees, or between the Corporation and any firm of which one or more of its directors are members or employees or in which they are interested, or between the Corporation and any corporation or association of which one or more of its directors are stockholders, members, directors, officers, or employees or in which they are interested, shall be valid for all purposes notwithstanding the presence of such director or directors at the meeting of the Board of Directors of the Corporation which acts upon, or in reference to, such contract or transaction and notwithstanding his or their participation in such action, if the fact of such interest shall be disclosed or known to the Board of Directors and the Board of Directors shall authorize, approve and ratify such contract or transaction by a vote of a majority of the directors present, such interested director or

directors to be counted in determining whether a quorum is present, but not to be counted in calculating the majority of such quorum necessary to carry such vote. This Section shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common statutory law applicable thereto. SECTION 9. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. Every person who is or was a director, officer or employee of this Corporation or of any other corporation for which he is or was serving in any capacity at the request of this Corporation shall be indemnified by this Corporation against any and all liability and expense that may be incurred by him in connection with or resulting from or arising out of any claim, action, suit or proceeding, provided that such person is wholly successful with respect thereto or acted in good faith in what he reasonably believed to be in or not opposed to the best interests of this Corporation or such other corporation, as the case may be, and, in addition, in any criminal action or proceeding in which he had no reasonable cause to believe that his conduct was unlawful. As used herein, "claim, action, suit or proceeding" shall include any claim, action, suit or proceeding (whether brought by or in the right of this Corporation or such other corporation or otherwise), civil, criminal, administrative or investigative, whether actual or threatened or in connection with an appeal relating thereto, in which a director, officer or employee of this Corporation may become involved, as a party or otherwise, (i) by reason of his being or having been a director, officer or employee of this Corporation or such other corporation or arising out of his status as such or (ii)by reason of any past or future action taken or not taken by him in any such capacity, whether or not he continues to be such at the time such liability or expense is incurred. The terms "liability" and "expense" shall include, but shall not be limited to, attorneys' fees and disbursements, amounts of judgments, fines or penalties, and amounts paid in settlement by or on behalf of a director, officer or employee, but shall not in any event include any liability or expenses on account of profits realized by him in the purchase or sale of securities of the Corporation in violation of the law. The termination of any claim, action, suit or proceeding, by judgment, settlement (whether with or without court approval) or conviction or upon a plea of guilty or of nolo contendere, or its equivalent, shall not create a presumption that a director, officer or employee did not meet the standards of conduct as forth in this paragraph. Any such director, officer or employee who has been wholly successful with respect to any such claim, action, suit or proceeding shall be entitled to indemnification as a matter of right. Except as provided in the preceding sentence, any indemnification hereunder shall be made only if (i) the Board of Directors acting by a quorum consisting of Directors who are not parties to or

who have been wholly successful with respect to such claim, action, suit or proceeding shall find that the director, officer or employee has met the standards of conduct set forth in the preceding paragraph; or (ii) independent legal counsel shall deliver to the Corporation their written opinion that such director, officer or employee has met such standards of conduct. If several claims, issues or matters of action are involved, any such person may be entitled to indemnification as to some matters even though he is not entitled as to other matters. The Corporation may advance expenses to or, where appropriate, may at its expense undertake the defense of any such director, officer or employee upon receipt of an undertaking, in form and substance satisfactory to the Board of Directors, by or on behalf of such person to repay such expenses if it should ultimately be determined that he is not entitled to indemnification hereunder. The provisions of this Section shall be applicable to claims, actions, suits or proceedings made or commenced after the adoption hereof, whether arising from acts or omissions to act during, before or after the adoption hereof. The rights of indemnification provided hereunder shall be in addition to any rights to which any person concerned may otherwise be entitled by contract or as a matter of law and shall inure to the benefit of the heirs, executors and administrators of any such person. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation against any liability asserted against him and incurred by him in any capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Section or otherwise. SECTION 10. DISTRIBUTIONS OUT OF CAPITAL SURPLUS. The Board of Directors of the Corporation may from time to time distribute to its shareholders out of the capital surplus of the Corporation a portion of its assets, in cash or property, without the assets or vote of the shareholders, provided that with respect to such a distribution the requirements of The Indiana General Corporation Act other than shareholder approval are satisfied. SECTION 11. POWERS OF DIRECTORS. In addition to the powers and the authority granted by these Articles or by statute expressly conferred, the Board of Directors of the Corporation is hereby authorized to exercise all powers and to do all acts and things as may be exercised or done under the laws of the State of Indiana by a corporation organized and existing under the

provisions of The Indiana General Corporation Act and not specifically prohibited or limited by these Articles. SECTION 12. VOTE REQUIRED ON CERTAIN MATTERS. (a) The affirmative vote of the holders of not less than two-thirds of the outstanding shares of common stock of the Corporation shall be required for the authorization or adoption of the following transactions: (1) any merger or consolidation of the Corporation or any subsidiary thereof with or into any control person, whether or not the Corporation or any such subsidiary is the surviving corporation of any such merger or consolidation; (2) any sale, lease, exchange, transfer or other disposition (including, without limitation, the granting of a mortgage or other security interest), to a control person by the Corporation or any subsidiary thereof, of any material part of the assets of the Corporation or of any subsidiary thereof; (3) a liquidation or dissolution of the Corporation or any material subsidiary thereof or adoption of any plan with respect thereto; or (b) Prior to the approval of any of the transactions referred to in subsection (a) of this Section, the Board of Directors shall make an evaluation of all relevant factors and issues arising out of or in connection with any such transaction and shall report to the shareholders the conclusions which the Board of Directors reaches from such evaluation. Relevant factors and issues shall include consideration of the impact which any such transaction would have on the community in which the Corporation or its subsidiaries conduct business, the employees of the Corporation or any of its subsidiaries, and the suppliers and customers of the Corporation and its subsidiaries, and shall also include any and all other factors which the Board of Directors in its discretion deems relevant. (c) The following definitions shall apply when used in this Section: (1) "Control person" shall include any person, whether an individual, a corporation, a partnership, a group, or otherwise, who separately or in association with one or more other persons (i)owns, or controls the vote of, in the aggregate, directly or indirectly, ten percent (10%) or more of the outstanding voting securities of the Corporation, or (ii) during the twelve month period preceding any such vote, has acquired or obtained control of the vote of five percent (5%) or more of the voting securities of the Corporation.

(2) "Controls the vote" and "control of the vote" shall mean the ability, directly or indirectly, to direct or cause the direction of the vote, whether by reason of agreement, an exercisable option or otherwise. (3) "Voting securities of the Corporation" includes (i) any securities of the Corporation which are entitled to vote on any matter referred to in this Section; (ii) any securities, including but not limited to, preferred stock, bonds, debentures, or options, which can be converted into voting securities at the time of the vote referred to in this Section; and (iii) security agreements of any nature for which voting securities are pledged as collateral.

9 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 37,579 254 564 0 79,690 132,681 133,885 413,409 5,301 687,515 525,998 84,703 6,092 25,383 0 0 1,453 43,886 687,515 18,721 6,714 145 25,580 10,074 13,246 12,334 120 (18) 9,481 6,218 4,027 0 0 4,027 1.39 1.39 4.02 266 807 1,413 0 5,306 168 125 5,301 2,091 0 3,210