<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
for the transition period from ____ to ____
Commission File Number 0-20899
FIRST LANCASTER BANCSHARES, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 61-1297318
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
208 LEXINGTON STREET, LANCASTER, KENTUCKY 40444-1131
----------------------------------------------------
(Address of Principal Executive Offices)
(606) 792-3368
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Registrant's Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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
--- ---
As of February 6, 1997, the issuer had 958,812 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996 (unaudited) 2
Consolidated Statement of Income for the Three Months
and Six Months Ended December 31, 1996 and 1995 (unaudited) 3
Consolidated Statement of Cash Flows for the Six Months Ended
December 31, 1996 and 1995 (unaudited) 4
Notes of Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES 15
EXHIBIT 27 16-17
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, JUNE 30,
1996 1996
<S> <C> <C>
Cash $ 326,634 $ 339,445
Interest-bearing cash deposits in other depository institutions 1,913,183 7,285,412
Investment securities available-for-sale, at market value (amortized
cost $24,158 at December 31, 1996 and June 30, 1996) 680,793 527,364
Mortgage-backed securities, held to maturity 584,115 114,979
Investments in nonmarketable equity securities, at cost 326,100 315,600
Loans receivable, net 32,433,600 31,385,400
Real estate acquired by foreclosure 168,965
Accrued interest receivable 177,565 138,213
Office property and equipment, at cost, less accumulated depreciation 407,039 427,390
Other assets 8,964 23,870
----------- -----------
Total assets $36,857,993 $40,726,638
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings accounts and certificates $21,742,512 $23,482,589
Advance payments by borrowers for taxes and insurance 13,130 24,840
Accrued interest payable 41,140 45,961
Federal Home Loan Bank advances 939,753 3,480,410
Accounts payable and other liabilities 159,502 113,958
Income tax payable 57,604 2,230
Deferred income tax payable 215,629 163,463
----------- -----------
Total liabilities 23,169,271 27,313,451
----------- -----------
Preferred stock, 500,000 shares authorized
Common stock, $.01 par value; 3,000,000 shares authorized;
885,306 and 882,108 shares issued and outstanding at
December 31, 1996 and June 30, 1996, respectively 9,588 9,588
Additional paid-in capital 9,094,020 9,149,403
Employee stock ownership plan (735,080) (767,040)
Unrealized gain on securities available-for-sale (net of deferred tax
liability of $223,256 and $171,090, respectively) 433,379 332,116
Retained earnings, substantially restricted 4,886,815 4,689,120
----------- -----------
Total stockholders' equity 13,688,722 13,413,187
----------- -----------
Total liabilities and stockholders' equity $36,857,993 $40,726,638
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three months and nine months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest on loans and mortgage-backed securities $ 724,306 $ 673,212 $ 1,453,616 $ 1,346,477
Interest and dividends on investments
and deposits in other depository institutions 43,809 57,586 119,704 94,369
---------- ---------- ----------- -----------
Total interest income 768,115 730,798 1,573,320 1,440,846
---------- ---------- ----------- -----------
Interest on savings accounts and certificates 302,522 368,864 576,978 718,591
Interest on other borrowings 22,734 76,472 63,896 153,683
---------- ---------- ----------- -----------
Total interest expense 325,256 445,336 640,874 872,274
---------- ---------- ----------- -----------
Net interest income 442,859 285,462 932,446 568,572
Provision for loan losses 7,907 39,985 13,560 39,985
---------- ---------- ----------- -----------
Net interest income after provision
for loan losses 434,952 245,477 918,886 528,587
---------- ---------- ----------- -----------
Other expenses:
Compensation 71,537 80,007 140,079 152,379
Employee retirement and other benefits 50,540 7,457 94,194 14,430
State franchise taxes 7,146 6,615 14,292 13,230
SAIF deposit insurance premium 16,312 13,814 190,037 32,819
Depreciation 10,176 8,467 20,351 16,935
Data processing 9,303 8,978 20,620 20,131
Other 50,087 35,659 132,471 68,702
---------- ---------- ----------- -----------
Total other expenses 215,101 160,997 612,044 318,626
---------- ---------- ----------- -----------
Income before income taxes 219,851 84,480 306,842 209,961
Provision for income taxes 77,489 28,723 109,152 71,387
---------- ---------- ----------- -----------
Net income $ 142,362 $ 55,757 $ 197,690 $ 138,574
========== ========== =========== ===========
Weighted shares outstanding 884,507 883,707
Earnings per share 0.16 0.22
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended December 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net income $ 197,690 $ 138,574
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 20,351 16,935
Provision for loan losses 13,560 39,985
Stock dividend, FHLB stock (10,500) (5,000)
Deferred income taxes (3,936)
Net loan origination fees deferred 14,953 16,487
Amortization of deferred loan fees (10,232) (8,635)
Noncash compensation related to ESOP 46,153
Loss on sale of real estate acquired by foreclosure 2,633
Change in assets and liabilities:
Accrued interest receivable (39,352) (23,769)
Other assets 14,911 11,601
Income tax receivable (56,583)
Accrued interest payable (4,821) (970)
Accounts payable and other liabilities 45,544 14,906
Income tax payable 55,374
------------ -----------
Net cash provided by operating activities 346,264 139,595
------------ -----------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure 166,332 10,000
Purchase mortgage backed securities (500,420)
Mortgage-backed securities principal repayments 31,284 14,334
Net incrase in loans receivable (1,066,481) (412,787)
------------ -----------
Net cash used in investing activities (1,369,285) (388,453)
------------ -----------
Cash flows from financing activities:
Net (decrease) increase in savings accounts and certificates (1,740,077) 1,355,944
Advance payments by borrowers for taxes and insurance (11,710) (11,990)
Federal Home Loan Bank advances
Federal Home Loan Bank advance principal repayments (2,540,657) (31,685)
Stock conversion costs (69,575) (23,500)
------------ -----------
Net cash (used in) provided by financing activities (4,362,019) 1,288,769
------------ -----------
Net (decrease) increase in cash and cash equivalents (5,385,040) 1,039,911
------------ -----------
Cash and cash equivalents at beginning of period 7,624,857 2,351,894
------------ -----------
Cash and cash equivalents at end of period $ 2,239,817 $ 3,391,805
============ ===========
Supplemental disclosure of non-cash investing activities:
Unrealized gain on securities available for sale, $ 101,263 $ 58,010
Loan transferred to real estate acquired by foreclosure $ 118,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The accompanying unaudited consolidated financial statements of First Lancaster
Bancshares, Inc. and Subsidiary (the Company) have been prepared in accordance
with the instructions for Form 10-QSB and therefore do not include certain
information or footnotes necessary for the presentation of complete consolidated
financial statements in accordance with generally accepted accounting
principles. However, in the opinion of management, the consolidated financial
statements reflect all adjustments (which consist of normal recurring accruals)
necessary for a fair presentation of the results for the unaudited periods. The
results of the operations for the three and six months ended December 31, 1996
are not necessarily indicative of the results which may be expected for the
entire year. The consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto for the year ended June 30, 1996.
2. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 24,672 shares $24,158 $656,635 $ $680,793
======== ========= ========== =========
JUNE 30, 1996
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 6,168 shares $24,158 $503,206 $ $527,364
======== ========= ========== =========
</TABLE>
5
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. MORTGAGED-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FHLMC certificates $580,985 $ $580,985
GNMA certificate 3,130 3,130
--------- ---------- ---------- ---------
$584,115 $ $584,115
========= ========== ========== =========
JUNE 30, 1996
FHLMC certificates $111,228 $ 9,699 $120,927
GNMA certificate 3,751 322 4,073
--------- ---------- ---------- ---------
$114,979 $ 10,021 $125,000
========= ========== ========== =========
</TABLE>
4. ALLOWANCE FOR LOAN LOSSES:
An analysis of the changes in the loan loss allowance for the three months and
six months ended December 31 follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1996 1995 1996 1995
-----------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance $100,000 $ 70,000 $100,000 $ 70,000
Provision 7,907 39,985 13,560 39,985
Charge offs (7,907) 9,985 (13,560) 9,985
--------- --------- --------- ---------
Ending balance $100,000 $100,000 $100,000 $100,000
========= ========= ========= =========
</TABLE>
Nonaccrual loans amounted to $131,781 and $417,981 at December 31, 1996 and 1995
respectively.
6
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances at December 31, 1996 and June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996
----------------- ---------------------------
DATE OF ISSUE YEAR OF MATURITY AMOUNT AMOUNT INTEREST RATE
- ------------- ---------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
8/11/94 8/11/14 $ 1,500,000 6.23%
10/27/94 11/01/04 $ 142,627 177,160 8.45
11/18/94 11/18/14 1,000,000 5.89
1/31/95 1/30/15 650,000 5.46
5/09/95 6/01/05 147,126 153,250 7.35
---------- -----------
$ 939,753 $ 3,480,410
========== ===========
</TABLE>
6. SUBSEQUENT EVENTS:
On January 9, 1997 the shareholders of the Corporation approved the First
Lancaster Bancshares Inc. 1996 Stock Option and Incentive Plan and the First
Lancaster Federal Savings Bank Management Recognition Plan.
Under the 1996 Stock Option and incentive Plan, the Company may grant either
incentive (ISO) or non-qualified stock options to key employees and directors
for an aggregate of 95,881 shares of the Company's common stock. On January 9,
1997 options covering 71,910 shares were granted under the plan and are
exercisable at an exercise price of $14.625 per share which equaled 100% of the
fair market on the date such options were granted. The option price is equal to
110% of the fair market value on the grant date in the case of ISO granted to
persons owning more than 10% of the outstanding common shares. Each option will
become exercisable with respect to twenty percent of the optioned shares upon an
optionee's completion of each of five years of future service as an employee,
director or advisory or emeritus director, provided that an option shall become
100% exercisable immediately if an optionee's continuous service terminates due
to death or disability. The options expire ten years after the date of grant.
7
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Under the First Lancaster Federal Savings Bank Management Recognition Plan
(MRP), the MRP trust may purchase, in the aggregate, up to a maximum of 38,352
shares of common stock. Those eligible to receive shares (at no exercise price)
under the MRP include certain directors, advisory directors, directors emeritus
and executive officers of the Company as determined by members of a committee
appointed by the Board of Directors. On January 9, 1997 awards covering 28,761
shares of common stock had been granted. Awards to directors and eligible
employees will vest 20% on each anniversary date of the award. Vesting will,
however, accelerate to 100% if the participants service terminates due to death
or disability. Shares are held by the trustee and are voted by the MRP trustee
in the same proportion as the trustee of the Company's ESOP plan votes shares
held therein. Assets of the trust are subject to the general creditors of the
Company.
7. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARD:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-based
Compensation". This Statement encourages entities to adopt the fair value based
method of accounting for employee stock options or other stock compensation
plans. However, it allows an entity to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principal Board (APB) Opinion No 25, "Accounting for Stock Issued to
Employees". Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic value
based method, compensation cost is the excess of the quoted market price of the
stock at grant date over the amount an employee must pay to acquire the stock.
This statement is effective for transactions entered into in fiscal years that
begin after December 15, 1995. The Company adopted the Statement on January 9,
1997, the date the shareholders approved the 1996 Stock Option and Incentive
Plan and the First Lancaster Federal Savings Bank Management Recognition Plan.
The Company has determined it will use the accounting prescribed by APB Opinion
No. 25.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
GENERAL
The Company's consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
incurred on interest-bearing liabilities, such as deposits and borrowings. The
Company's operating expenses consist primarily of employee compensation,
occupancy expenses, federal deposit insurance premiums and other general and
administrative expenses. The Company's results of operations are significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory agencies.
Any forward-looking statements included in this report or in any report included
by reference, which reflect management's best judgement based on factors known,
involve risks and uncertainties, including but not limited to those discussed
above. Actual results could differ materially from those expressed or implied.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND JUNE 30, 1996
The Bank's total assets decreased by approximately $3.8 million, or 9.3%, from
$40.7 million at June 30, 1996 to $36.9 million at December 31, 1996. The
decrease resulted primarily from a decrease in interest-bearing deposits in
other depository institutions of $5.4 million from $7.3 million at June 30, 1996
to $1.9 million at December 31, 1996 offset by an increase in net loans
receivable of $1 million, or 3.2%, from $31.4 million at June 30, 1996 to $32.4
million at December 31, 1996 and an increase in mortgage backed securities, held
to maturity of $469 thousand from $115 thousand at June 30, 1996, to $584
thousand at December 31, 1996. The Bank's savings accounts decreased by $1.7
million, or 7.2%, from $23.5 million at June 30, 2996 to $21.8 million at
December 31, 1996. The Bank's FHLB advances decreased by $2.5 million, or
71.4%, from $3.5 million at June 30, 1996 to $1.0 million at December 31, 1996,
as the Bank utilized excess liquidity to reduce outstanding FHLB advances which
carried high interest rates.
COMPARISON OF OPERATING RESULTS FOR THREE MONTHS ENDED DECEMBER 31, 1996 AND
1995.
Net Income. The Bank's net income increased by $86 thousand or 153.5%, from
$56 thousand for the quarter ended December 31, 1995 to $142 thousand for the
quarter ended December 31, 1996. Such increase was due primarily to an increase
in net interest income of $157 thousand or 55.1%, a decrease in the provision
for loan loss of $32 thousand offset by an increase in other expense of $54
thousand and an increase in provision for income taxes of $49 thousand.
9
<PAGE>
Net Interest Income. Net interest income increased by $157 thousand, or 55.1%,
from $285 thousand for the quarter ended December 31, 1995 to $442 thousand for
the quarter ended December 31, 1996. The increase is attributed to an increase
in interest income $37 thousand and a reduction of interest expense of $120
thousand.
Interest Income. Total interest and dividend income increased by $37 thousand
or 5.1%, to $768 thousand for the quarter ended December 31, 1996 from $731
thousand for the quarter ended December 31, 1995. The increase primarily
reflects an increase in interest income on loans. Interest on loans increased
by $51 thousand, or 7.6%, during the quarter ended December 31, 1996, as
compared to the quarter ended December 31, 1995, as the Bank continued its
policy of loan growth through originations. Interest and dividends on
investments and deposits in other depository institutions decreased by $14
thousand or 23.9%, during the quarter ended December 31, 1996, as compared to
the quarter ended December 31, 1995. The decrease in dividends on investments
and deposits in other depository institutions is attributed to the use of these
short term investments to fund loan growth and pay down Federal Home Loan Bank
Advances.
Interest Expense. Total interest expense decreased by $120 thousand, or 26.9%,
to $325 thousand for the quarter ended December 31, 1996 from $445 thousand for
the quarter ended December 31, 1995. Most of such decreases were due to
decreases in interest on savings accounts and certificates of deposit, as these
deposits were converted to equity as a result of the conversion to a stock bank.
Interest on other borrowings decreased by $53 thousand, or 70.3%, to $23
thousand for the quarter ended December 31, 1996 from $76 thousand for the
quarter ended December 31, 1995 due to repayments of debt funded by proceeds
from the conversion.
Provision for Loan Losses. The Bank established provisions for loan losses of
$8 thousand and $40 thousand in the quarter ended December 31, 1996 and 1995,
respectively. The Bank's provision for loan losses is based on management's
assessment of the general risk inherent in the loan portfolio based on all
relevant factors and conditions.
Noninterest Expense. Total noninterest expense increased by $54 thousand, or
33.6%, from $161 thousand for the quarter ended December 31, 1995 to $215
thousand for the quarter ended December 31, 1996. The increase was caused
primarily by increases of $43 thousand and $14 thousand, respectively, in
employee benefits expense and other expenses. The increase in other expense is
related to costs associated with becoming a public company during 1996.
Employee benefits increased as a result of the new employee ESOP plan and the
directors retirement program. These increases were offset by a reduction in
compensation cost. In 1995 employee bonuses totaling $35 thousand declared by
the board of directors were accrued prorata as expense in the first and second
quarter of 1995. Effective January 1, 1996 the board adopted a new bonus
arrangement which would pay a maximum bonus of $40 thousand assuming certain
target goals were attained. Such bonus was accrued prorata over the entire
calendar year of 1996.
10
<PAGE>
Income Tax. The effective tax rates for the quarters ended December 31, 1996
and 1995 were 35.2% and 34.0%, respectively. The increase in the effective rate
was caused by nondeductible expenses related to the ESOP. Income tax expense
increased by $49 thousand , or 169.8%, from $29 thousand for the quarter ended
December 31, 1995 to $78 thousand for the quarter ended December 31, 1996.
Income tax expense increased as a result of the increase in income before income
taxes.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
1995
Net Income. The Bank's net income increased by $59 thousand or 42.7% from $139
thousand for the six months ended December 31, 1995 to $198 thousand for the
six months ended December 31, 1996. Such increase was due primarily to an
increase in net interest income of $363 thousand or 64.0%, a decrease in the
provision for loan loss of $26 thousand, offset by an increase in other expense
of $293 thousand and an increase in income taxes of $38 thousand.
Net Interest Income. Net interest income increased by $364 thousand , or 64.0%
from $568 thousand for the six months ended December 31, 1995 to $932 thousand
for the six months ended December 31, 1996, due primarily to an increase in
loans and investments which was funded by the conversion to a stock bank and a
reduction in interest expense which was also attributed to the conversion to a
stock bank.
Interest Income. Total interest and dividend income increased by $132 thousand
or 9.2% from $1.4 million for the six months ended December 31, 1995 to $1.6
million for the six months ended December 31, 1996. The increase primarily
reflects and increase in interest income on loans and an increase in interest
and dividends on investments and deposits in other depository institutions.
Interest on loans increased by $107 thousand or 7.9%, during the six months
ended December 31, 1996, as compared to the six months ended December 31, 1995,
as the Bank continued its policy of loan growth through originations. Interest
and dividends on investments and deposits in other depository institutions
increased by $25 thousand or 26.9%, during the six months ended December 31,
1996, as compared to the six months ended December 31, 1995. Such increase
reflects increases in the average balance of such deposits as the Bank increased
its liquidity through its conversion to a stock bank.
Interest Expense. Total interest expense decreased by $231 thousand , or 26.5%
for the six months ended December 31, 1996 from $872 thousand at December 31,
1995 to $641 thousand at December 31, 1996. Most of such decreases were due to
decreases in interest on savings accounts and certificates of deposit, as these
deposits were converted to equity as a result of the conversion to a stock bank.
Interest on other borrowings decreased by $90 thousand, or 58.4% to $64 thousand
for the six months ended December 31, 1996 from $154 thousand for the six
months ended December 31, 1995 due to repayments of debt funded by proceeds
from the conversion.
11
<PAGE>
Noninterest Expense. Total noninterest expense increased by $293 thousand or
92.0% from $319 thousand for the six months ended December 31, 1995 to $612
thousand at the six months ended December 31, 1996. Employee benefits
increased $80 thousand primarily as a result of the new employee ESOP plan and
the directors retirement program. SAIF deposit premium increased $157 thousand
as a result of the one time special SAIF assessment as more fully described
below and other expenses increased $64 thousand and are related to costs
associated with becoming a public company during 1996. These increases were
offset by a reduction in compensation cost. In 1995 employee bonuses totaling
$35 thousand declared by the board of directors was accrued as expense prorata
in the second and third quarter of 1995. Effective January 1, 1996 the board
adopted a new bonus arrangement which would pay a maximum bonus of $40 thousand
assuming certain target goals were attained. Such bonus was accrued prorata
over the entire calendar year of 1996.
Income Tax. The effective tax rates for the six months ended December 31, 1996
and 1995 were 35.6% and 34.0%, respectively. The increase in the effective
rate was caused by nondeductible expenses related to the ESOP. Income tax
expense increased by $38 thousand or 52.9%, from $72 thousand for the six months
ended December 31, 1995 to $109.1 thousand for the six months ended December 31,
1996. Income tax expense increased as a result of the increase in income before
income taxes.
IMPACT OF DEPOSIT INSURANCE FUNDS ACT OF 1996
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which included provisions recapitalizing the SAIF, provides
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocates payment of the annual Financing Corp. ("FICO") bond obligation.
As part of the package, the Federal Deposit Insurance Corp. ("FDIC") imposed a
special one-time assessment of 65.7 basis points to be applied against all SAIF-
assessable deposits as of March 31, 1995, which will bring the SAIF up to the
statutorily prescribed 1.25 percent designated reserve ratio. The special
assessment which was paid in November 1996, was included as a $153 thousand
pretax charge to the Bank operations in September 1996.
Effective January 1, 1997, SAIF members will have the same risk-based assessment
schedule as BIF members. The Bank, as a healthy bank, will effectively pay no
assessment for deposit insurance coverage beginning January 1, 1997. However,
all SAIF and BIF institutions including the Bank will be responsible for sharing
the cost of interest payments of the FICO bonds. The cost will be an annualized
charge of 1.3 basis points for BIF deposits and 6.4 basis points for SAIF
deposits.
As a result of the Deposit Insurance Funds Act of 1996, the Secretary of the
Treasury is to review recommendations in 1997 for the establishment of a common
charter for banks and savings associations. Accordingly, the Bank may be
required to convert its federal savings bank charter to either a national bank
charter, a state depository institution charter, or a newly designed charter.
The Bank may also become regulated at the holding company level by the Board of
Governors of the Federal Reserve System ("Federal Reserve") rather than by the
Office of Thrift Supervision ("OTS"). Regulation by the Federal Reserve could
subject the Bank to capital requirements that are not currently applicable to
the Company as a holding company under OTS regulation and may result in
statutory limitations on the type of business activities in which the Company
may engage at the holding company level, which business activities currently are
not restricted. The Bank is unable to predict
12
<PAGE>
whether such initiatives will result in enacted legislation requiring a charter
and if so whether the charter change would significantly impact the Company's
operations.
REPEAL OF SPECIAL THRIFT BAD DEBT DEDUCTION
On August 20, 1996, President Clinton signed into law the Small Business Job
Protection act of 1996 which included the repeal of the special thrift bad debt
provision. Although the percentage of taxable income method bad debt deduction
will no longer be available to the Bank, the tax requirement to invest in
certain qualifying types of investments and loans has been eliminated, thus
providing greater freedom to the Company in structuring its balance sheet to
maximize returns These tax related changes had no impact on the Company's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits; principal and interest
payments on loans and mortgage-backed securities; proceeds from the sale of
available-for-sale securities; proceeds from maturing debt securities; advances
from the FHLB; and other borrowed funds. While scheduled maturities of
securities and amortization of loans are predictable sources of funds, deposit
flows and prepayments on mortgage loans and mortgage-backed securities are
greatly influenced by the general level of interest rates, economic conditions
and competition.
The Bank is required to maintain an average daily balance of liquid assets and
short-term liquid assets as a percentage of net withdrawable deposit accounts
plus short-term borrowings as defined by OTS regulations. The minimum required
liquidity and short-term liquidity ratios are currently 5% and 1%, respectively.
For December 31, 1996, the Bank had liquidity and short-term liquidity ratios of
11.43% and 9.11%, respectively.
At December 31, 1996, the Company had outstanding commitments to originate first
mortgage loans totaling $252 thousand. The Company anticipates that it will
have significant funds available to meet its current origination commitments.
The Bank is required by federal regulations to maintain minimum amounts of
capital. Currently, the minimum required levels are tangible capital of 1.5% of
tangible assets, core capital of 3.0% of adjusted tangible assets, and risk-
based capital of 8.0% of risk-weighted assets. At December 31, 1996, the Bank
had tangible capital of 33.66% of tangible assets, core capital of 33.66% of
adjusted tangible assets, and risk-based capital of 65.05% of risk-weighted
assets.
13
<PAGE>
PART 11 OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS
None.
EXHIBITS
Exhibit 27 Financial Data Schedule
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST LANCASTER BANCSHARES, INC.
Date: February 12, 1997 /s/ Virginia R.S. Stump
----------------------------------
Virginia R.S. Stump
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1997 /s/ Tony A. Merida
----------------------------------
Tony A. Merida
Executive Vice President
(Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 326,634
<INT-BEARING-DEPOSITS> 1,913,183
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 680,793
<INVESTMENTS-CARRYING> 584,115
<INVESTMENTS-MARKET> 584,115
<LOANS> 32,433,600
<ALLOWANCE> 100,000
<TOTAL-ASSETS> 36,857,993
<DEPOSITS> 21,742,512
<SHORT-TERM> 0
<LIABILITIES-OTHER> 487,005
<LONG-TERM> 939,753
0
0
<COMMON> 9,588
<OTHER-SE> 13,679,134
<TOTAL-LIABILITIES-AND-EQUITY> 36,857,993
<INTEREST-LOAN> 1,453,616
<INTEREST-INVEST> 119,704
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,573,320
<INTEREST-DEPOSIT> 576,978
<INTEREST-EXPENSE> 640,874
<INTEREST-INCOME-NET> 932,446
<LOAN-LOSSES> 13,560
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 612,044
<INCOME-PRETAX> 306,842
<INCOME-PRE-EXTRAORDINARY> 306,842
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197,690
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 3.30
<LOANS-NON> 131,781
<LOANS-PAST> 82,184
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 100,000
<CHARGE-OFFS> 13,560
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 100,000
<ALLOWANCE-DOMESTIC> 100,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
