<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, 1998.
[_] 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.
-------------------------------------------------------
(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
--------------------------------------------------
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 12, 1999, the issuer had 919,412 shares of Common Stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
----
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION PAGE
--------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 (unaudited)
and June 30, 1998 2
Consolidated Statements of Income for the Three Months and Six Months
Ended December 31, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT 27 17
</TABLE>
1
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, JUNE 30,
1998 1998
(Unaudited)
<S> <C> <C>
Cash $ 1,207,738 $ 516,199
Interest-bearing cash deposits in other depository institutions 2,345,183 2,186,921
Investment securities available-for-sale, at market value (amortized cost
$24,158 at December 31, 1998 and June 30, 1998) 1,589,802 1,161,126
Mortgage-backed securities, held to maturity 370,026 434,635
Investments in nonmarketable equity securities, at cost 750,900 725,300
Loans receivable, net 48,992,173 47,593,855
Real estate acquired by foreclosure 270,200
Accrued interest receivable 446,381 465,527
Office property and equipment, at cost, less accumulated depreciation 392,491 379,490
Other assets 15,962 13,411
------------ ------------
Total assets $ 56,110,656 $ 53,746,664
============ ============
LIABILITIES
Savings accounts and certificates $ 29,065,439 $ 25,416,711
Advance payments by borrowers for taxes and insurance 11,514 28,802
Accrued interest payable 66,961 70,974
Federal Home Loan Bank advances 12,650,105 13,461,167
Accounts payable and other liabilities 461,061 365,827
Income tax payable 997
Deferred income tax payable 260,723 278,821
------------ ------------
Total liabilities 42,515,803 39,623,299
------------ ------------
Common stock owned by ESOP subject to put option 477,875 485,988
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized Common stock, $.01 par value;
3,000,000 shares authorized;
831,108 and 872,656 shares issued and outstanding at
December 31, 1998 and June 30, 1998, respectively 9,588 9,588
Additional paid-in capital 9,169,482 9,152,891
Treasury stock (70,236 and 23,534 shares at December 31, 1998
and June 30, 1998, respectively) (974,535) (350,871)
Unearned employee stock ownership plan shares (572,011) (626,221)
Common Stock owned by ESOP subject to put option (477,875) (485,988)
Accumulated comprehensive income 1,033,325 750,399
Retained earnings, substantially restricted 4,929,004 5,187,579
------------ ------------
Total stockholders' equity 13,116,978 13,637,377
------------ ------------
Total liabilities and stockholders' equity $ 56,110,656 $ 53,746,664
============ ============
</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 six months ended December 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest on loans and mortgage-backed securities $ 1,061,825 $ 987,730 $ 2,123,218 $ 1,900,304
Interest and dividends on investments and deposits in
other depository institutions 41,810 28,722 81,593 57,270
----------- ----------- ----------- -----------
Total interest income 1,103,635 1,016,452 2,204,811 1,957,574
----------- ----------- ----------- -----------
Interest on savings accounts and certificates 409,221 312,980 755,935 615,426
Interest on other borrowings 189,872 171,916 387,773 289,458
----------- ----------- ----------- -----------
Total interest expense 599,093 484,896 1,143,708 904,884
----------- ----------- ----------- -----------
Net interest income 504,542 531,556 1,061,103 1,052,690
Provision for loan losses 435,000 28,047 435,000 53,047
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 69,542 503,509 626,103 999,643
----------- ----------- ----------- -----------
Other expenses:
Compensation 103,641 88,511 212,293 166,159
Employee retirement and other benefits 66,105 82,228 157,934 163,196
State franchise taxes 6,646 6,434 13,292 12,868
SAIF deposit insurance premium 3,690 3,508 16,575 13,982
Loss on sale of real estate acquired by foreclosure 9,401
Occupancy expense 25,861 20,757 47,517 40,260
Data processing 18,276 11,048 36,553 24,007
Other 60,393 68,550 122,755 185,453
----------- ----------- ----------- -----------
Total other expenses 284,612 281,036 616,320 605,925
----------- ----------- ----------- -----------
Income (loss) before income taxes (215,070) 222,473 9,783 393,718
Provision for income taxes (70,503) 76,399 8,705 136,961
----------- ----------- ----------- -----------
Net income (loss) (144,567) 146,074 1,078 256,757
Other comprehensive income, net of income tax:
Unrealized gain on securities available for sale
arising in period 241,200 108,896 282,926 112,967
----------- ----------- ----------- -----------
Comprehensive income $ 96,633 $ 254,970 $ 284,004 $ 369,724
=========== =========== =========== ===========
Weighted shares outstanding for basic earnings (loss)
per share 858,211 885,069 863,698 886,575
Basic earnings (loss) per share $ (0.17) $ 0.17 $ - $ 0.29
Weighted shares outstanding for diluted earnings (loss)
per share 873,250 907,792 878,668 909,253
Diluted earnings (loss) per share $ (0.17) $ 0.16 $ - $ 0.28
</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, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,078 $ 256,757
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 20,927 16,977
Provision for loan losses 435,000 53,047
Stock dividend, Federal Home Loan Bank stock (13,000) (6,900)
Deferred income taxes (163,846) (32,838)
Net loan origination fees 19,997 (42,936)
Employee Stock Ownership Plan benefit expense 70,801 52,784
Management Retirement Plan benefit expense 50,417 50,214
Loss on sale of real estate acquired by foreclosure 9,401
Change in assets and liabilities:
Accrued interest receivable 6,146 (153,381)
Other assets (2,551) 1,460
Accrued interest payable (4,013) 29,279
Accounts payable and other liabilities 48,800 51,802
Income tax payable (997) (63,464)
------------ ------------
Net cash provided by operating activities 478,160 212,801
------------ ------------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure 396,000
Purchase of property and equipment (33,928) (5,656)
Purchase of Federal Home Loan Bank common stock (259,705)
Mortgage-backed securities principal repayments 64,609 52,590
Net increase in loans receivable (1,988,518) (6,770,957)
------------ ------------
Net cash used in investing activities (1,561,837) (6,983,728)
------------ ------------
Cash flows from financing activities:
Net increase in savings accounts and certificates 3,648,728 949,747
Net decrease in advance payments by borrowers for taxes and insurance (17,288) (11,703)
Purchase of treasury stock (627,288) (118,441)
Dividends paid (259,612) (221,940)
Federal Home Loan Bank advances 2,500,000 7,750,000
Federal Home Loan Bank advance principal repayments (3,311,062) (1,791,188)
------------ ------------
Net cash provided by financing activities 1,933,478 6,556,475
------------ ------------
Net (decrease) increase in cash and cash equivalents 849,801 (214,452)
Cash and cash equivalents at beginning of period 2,703,120 2,108,111
------------ ------------
Cash and cash equivalents at end of period $ 3,552,921 $ 1,893,659
============ ============
Supplemental disclosure of non-cash investing activities:
Unrealized gain on securities available for sale, net of deferred tax liability
of $145,749 and $58,195 at December 31, 1998 and 1997, respectively $ 282,926 $ 112,967
</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
months and six months ended December 31, 1998 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, 1998.
2. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1998 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 $ 1,565,644 $ $ 1,589,802
=========== ============ ========== ============
JUNE 30, 1998
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 24,672 shares $ 24,158 $ 1,136,968 $ $ 1,161,126
=========== ============ =========== =============
</TABLE>
3. 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
1998 1997 1998 1997
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 200,000 $ 150,000 $ 200,000 $ 125,000
Provision charged to operations 435,000 28,047 435,000 53,047
Loans charged off (28,047) (28,047)
------------ ------------- ------------ --------------
Balance at end of period $ 635,000 $ 150,000 $ 635,000 $ 150,000
============ ============= ============ ==============
</TABLE>
The significant increase in the allowance for loan losses relates primarily
to a specific construction loan which became doubtful for collection in
December, 1998. Nonaccrual loans amounted to $599,822 and $692,479 at
December 31, 1998 and 1997, respectively.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances at December 31, 1998 and June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
-------------- ---------------------------
DATE OF INTEREST
ISSUE YEAR OF MATURITY AMOUNT AMOUNT RATE
<S> <C> <C> <C> <C>
10/27/94 11/01/04 $ 75,030 $ 107,242 8.45
1/31/95 1/30/15 650,000 650,000 5.75
5/09/95 6/01/05 90,588 116,095 7.35
3/25/97 3/24/00 500,000 500,000 6.75
7/31/97 7/31/98 1,000,000 5.88
8/14/97 8/14/98 500,000 5.95
10/22/97 10/22/98 250,000 6.05
1/27/98 1/22/99 1,000,000 1,000,000 5.75
1/28/98 2/01/08 84,487 87,830 6.37
2/17/98 8/14/98 500,000 5.61
2/20/98 2/20/99 500,000 500,000 5.67
3/03/98 3/03/99 1,000,000 1,000,000 5.75
3/13/98 3/12/99 1,250,000 1,250,000 5.74
3/20/98 3/19/99 750,000 750,000 5.77
3/25/98 3/25/99 2,000,000 2,000,000 5.81
3/31/98 9/25/98 500,000 5.71
4/24/98 4/23/99 1,750,000 1,750,000 5.84
4/28/98 10/23/98 250,000 5.74
5/13/98 11/09/98 500,000 500,000 5.72
5/23/98 11/18/98 250,000 5.72
7/31/98 7/30/99 1,000,000 5.80
8/14/98 8/13/99 500,000 5.73
8/24/98 8/24/99 250,000 5.69
8/25/98 8/24/99 250,000 5.69
9/25/98 3/24/99 500,000 5.27
-------------- --------------
$12,650,105 $ 13,461,167
============== ==============
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS:
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
(EPS). This statement specifies the computation, presentation, and
disclosure requirements for EPS. SFAS No. 128 is designed to improve the
EPS information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements,
and increasing the comparability of EPS data on an international basis.
Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic
EPS, with the principal difference being that common stock equivalents
are not considered in computing basic EPS, (b) eliminating the modified
treasury stock method and three percent materiality provision, and (c)
revising the contingent share provisions and the supplemental EPS data
requirements. SFAS No. 128 requires presentation of basic EPS amounts
from income for continuing operations and net income on the face of the
income statement for entities with simple capital structures and dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures regardless of whether
basic and diluted EPS are the same. The statement also requires a
reconciliation of the numerator and denominator used in computing basic
and diluted EPS and is applicable to all entities with publicly held
common stock or potential common stock. SFAS No. 128 was adopted as of
January 1, 1998. The Company has restated the December 31, 1997 earnings
per share computations in accordance with the provisions of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of reporting
comprehensive income is to present a measure of all changes in equity
that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
If used with related disclosures and other information in the
consolidated financial statements, the FASB believes that the information
provided by reporting comprehensive income should help investors,
creditors, and others in assessing an enterprise's activities and the
timing and magnitude of its future cash flows. The statement requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the statement of
financial condition. This statement is effective for fiscal years
beginning after December 31, 1997 and reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The only transactions that meet the definition of other
comprehensive income for the Corporation include the unrealized gains on
securities available for sale. The Company adopted the provision of SFAS
No. 130 on July 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards
for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. This statement also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires
the reporting of financial and descriptive information about an
enterprise's reportable operating segments. This statement is effective
for financial statements for periods beginning after December 15, 1997.
This statement need not be applied to interim financial
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS, CONTINUED:
statements in the initial year of its application. As a result, the
Company will adopt the provision of SFAS No. 131 with the presentation of
the annual financial statements for the year ended June 30, 1999.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132
standardizes the disclosure requirements for pensions and other
postretirement benefits. This statement is effective for financial
statements for fiscal periods beginning after December 15, 1997. The
Company adopted the provisions of the statement on July 1, 1998. The
adoption of the statement did not materially affect the Company's
financial position or operating results.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 established
a new model for accounting for derivatives and hedging activities and
supersedes and amends a number of existing standards. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, but earlier
applications is permitted as of the beginning of any fiscal quarters
subsequent to June 15, 1998. Upon the statements initial application, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. Adoption of SFAS
No. 133 is not expected to have a material financial statement impact on
the Company.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Banking Enterprise". SFAS No. 134 amends SFAS 65 and
SFAS 115. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. Adoption of SFAS No. 134 is not
expected to have a material financial statement impact on the Company.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the six months ended December 31,1998 For the six months ended December 31, 1997
----------------------------------------- ---------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income available to common
shareholders $ 1,078 863,698 $ - $ 256,757 886,575 $ 0.29
Effect of dilutive securities
Stock options 4,328
Management recognition plan 14,970 18,350
Diluted earnings per share
Income available to common
shareholders plus assumed
conversions $ 1,078 878,668 $ - $ 256,757 909,253 $ 0.28
<CAPTION>
For the three months ended December 31,1998 For the three months ended December 31, 1997
------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per share
Income (loss) available to
common shareholders $ (144,567) 858,211 $ (0.17) $ 146,074 885,069 $ 0.17
Effect of dilutive securities
Stock options 5,006
Management recognition plan 15,039 17,717
Diluted earnings (loss) per share
Income (loss) available to
common shareholders plus
assumed conversions $ (144,567) 873,250 $ (0.17) $ 146,074 907,792 $ 0.16
</TABLE>
There were no preferred dividends that would effect the computation of earnings
per share.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
When used in this Form 10-QSB, the words or phrases "will likely result," "are
expected to" "will continue," "is anticipated," "estimate," "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties including changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
YEAR 2000 READINESS DISCLOSURE
The following information constitutes "Year 2000 Readiness Disclosure" under the
Year 2000 Readiness and Disclosure Act.
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Company. Data
processing is also essential to most other financial institutions and many other
companies.
Data processing of the Company is provided by a third party service bureau. The
service bureau of the Company has advised the Company that it expects to resolve
this potential problem before the year 2000. However, if the service bureau is
unable to resolve this potential problem in time, the Company would likely
experience significant data processing delays, mistakes or failures. These
10
<PAGE>
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Company.
The Company has also installed a new teller computer network system which is
Year 2000 compliant and has established a Year 2000 committee to monitor the
progress of achieving and certifying overall Year 2000 compliance. The Company's
current plan is to complete the Year 2000 project by March 31, 1999. Final
validation testing with the Company's third party service bureau was completed
in November, 1998, with favorable results showing that all transactions ran
successfully in a Year 2000 sequence. Based upon preliminary analysis by the
Company, the total costs of the new computer network system and for the services
of the third party service bureau will not exceed $150,000. The Company will
seek out other third party data processing bureaus to prevent interruption of
the Company's data processing. The Company has developed a contingency plan in
the event there is an interruption of its on-line system, whereby transaction
processing will be done in a store and forward mode for short term
interruptions, and for extended interruptions, manual processing or the use of a
local database will be used.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE 30, 1998
The Bank's total assets increased by approximately $2.4 million, or 4.4%, from
$53.7 million at June 30, 1998 to $56.1 million at December 31, 1998. The
increase resulted primarily from an increase in net loans receivable of $1.4
million, or 2.9%, from $47.6 million at June 30, 1998 to $49 million at December
31, 1998. During the quarter ended December 31, 1998 the Bank did not hold any
real estate acquired by foreclosure. The Bank's total liabilities increased by
approximately $2.9 million, or 7.3%, from $39.6 million at June 30, 1998 to
$42.5 million at December 31, 1998. This increase was due to an increase in the
Bank's savings accounts of $3.6 million, or 14.4%, from $25.4 million at June
30, 1998 to $29.1 million at December 31, 1998. During the three month period
ended December 31, 1998 the Company acquired 39,400 of common shares for a
purchase price of $514,331. These purchases were in accordance with the
Company's stock repurchase program.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
1997
NET INCOME/LOSS: The Bank incurred a net loss of $145 thousand for the quarter
ended December 31, 1998, as compared to net income of $146 thousand for the
quarter ended December 31, 1997. The loss was due primarily to the increase in
the provision for loan losses of $407 thousand, offset by a corresponding
decrease in the provision for income taxes of $147 thousand.
NET INTEREST INCOME: Net interest income decreased by $27 thousand, or 5.1%,
from $532 thousand for the quarter ended December 31, 1997 to $505 thousand for
the quarter ended December 31, 1998. This decrease is attributed to an increase
in interest income of $87 thousand offset by an increase in interest expense of
$114 thousand. These increases in interest income and expense were primarily
caused by increasing volumes of loans, savings accounts and certificates.
INTEREST INCOME: Total interest income increased by $87 thousand, or 8.6%, to
$1.1 million for the quarter ended December 31, 1998 from $1 million for the
quarter ended December 31, 1997. The increase primarily reflects an increase in
interest income on loans. Interest on loans and mortgage backed securities
increased by $74 thousand, or 7.5%, during the quarter ended December 31, 1998,
as compared to the quarter ended December 31, 1997, as the Bank continued its
policy of loan growth through originations. Interest and dividends on
investments and deposits in other depository
11
<PAGE>
institutions increased by $13 thousand, or 45.6%, during the quarter ended
December 31, 1998, as compared to the quarter ended December 31, 1997.
INTEREST EXPENSE: Total interest expense increased by $114 thousand, or 23.6%,
to $599 thousand for the quarter ended December 31, 1998 from $485 thousand for
the quarter ended December 31, 1997. Interest on savings accounts and
certificates increased by $96 thousand, or 30.8%, to $409 thousand for the
quarter ended December 31, 1998 from $313 thousand for the quarter ended
December 31, 1997 due to the increase in these deposits from an average of $22.9
million to $28 million for the quarters ended December 31, 1997 and 1998,
respectively. Also contributing to the increase in interest expense was the
increase in average balance of FHLB advances from $11.1 million to $12.9 million
for the quarters ended December 31, 1997 and 1998, respectively.
PROVISION FOR LOAN LOSSES: The Bank established loan loss provisions of $435,000
and $28,047 for the quarters ended December 31, 1998 and 1997, respectively. The
increase in the provision for loan losses for the quarter ended December 31,
1998 results primarily from a specific construction loan which became doubtful
for collection in December, 1998. The Bank's provision for loan losses is based
on management's assessment of specific risk and general risk inherent in the
loan portfolio based on all relevant factors and conditions including the
general increases in the overall loan balance outstanding at December 31, 1998.
OTHER EXPENSE: Total other expense increased by $4 thousand, or 1.3%, from $281
thousand for the quarter ended December 31, 1997 to $285 thousand for the
quarter ended December 31, 1998. The increase was caused primarily by increases
of $15 thousand in compensation, $5 thousand in occupancy expense and $7
thousand in data processing fees. These increases were the result of general pay
increases, the addition of employees, and the purchase and installation of a new
teller computer network. These increases were offset by reductions in benefit
expense of $16 thousand and other expenses of $8 thousand. Benefit expense
decreased due to the Directors' Retirement Plan being fully accrued at quarter
end. Other expense decreased primarily due to a decrease in professional fees.
INCOME TAX: The effective tax rates for the quarters ended December 31, 1998 and
1997 were 32.8% and 34.3%, respectively. The provision for income taxes
decreased by $147 thousand from expense of $76 thousand for the quarter ended
December 31, 1997 to a benefit of $71 thousand for the quarter ended December
31, 1998. The provision for income taxes decreased as a result of the decrease
in income before taxes caused primarily by the increase in the provision for
loan losses.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND
1997
NET INCOME: The Bank's net income for the six months ended December 31, 1998 was
$1 thousand as compared to $257 thousand for the six months ended December 31,
1997. The decrease in net income was due primarily to an increase in the
provision for loan losses of $382 thousand, offset by a decrease in the
provision for income taxes of $128 thousand.
NET INTEREST INCOME: Net interest income increased by $8 thousand, or .8%, from
$1.1 million for the six months ended December 31, 1997 to $1.1 million for the
six months ended December 31, 1998. This increase is attributed to an increase
in interest income of $247 thousand offset by an increase in interest expense of
$239 thousand. These increases in interest income and expense were primarily
caused by increasing volumes of loans, savings accounts and certificates.
12
<PAGE>
INTEREST INCOME: Total interest income increased by $247 thousand, or 12.6%, to
$2.2 million for the six months ended December 31, 1998 from $2.0 million for
the six months ended December 31, 1997. The increase primarily reflects an
increase in interest income on loans. Interest on loans and mortgage backed
securities increased by $223 thousand, or 11.7%, during the six months ended
December 31, 1998, as compared to the quarter ended December 31, 1997, as the
Bank continued its policy of loan growth through originations. Interest and
dividends on investments and deposits in other depository institutions increased
by $24 thousand, or 42.5%, during the six months ended December 31, 1998, as
compared to the six months ended December 31, 1997.
INTEREST EXPENSE: Total interest expense increased by $239 thousand, or 26.4%,
to $1.1 million for the six months ended December 31, 1998 from $905 thousand
for the six months ended December 31, 1997. Interest on savings accounts and
certificates increased by $141 thousand, or 22.8%, to $756 thousand for the six
months ended December 31, 1998 from $615 thousand for the six months ended
December 31, 1997 due to the increase in these deposits from an average of $23
million to $27.2 million for the six months ended December 31, 1997 and 1998,
respectively. Also contributing to the increase in interest expense was the
increase in average balance of FHLB advances from $11.7 million to $12.7 million
for the six months ended December 31, 1997 and 1998, respectively.
PROVISION FOR LOAN LOSSES: The Bank established loan loss provisions of $435,000
and $53,047 for the six months ended December 31, 1998 and 1997, respectively.
The increase in the provision for loan losses for the six months ended December
31, 1998 results primarily from a specific construction loan which became
doubtful for collection in December, 1998. The Bank's provision for loan losses
is based on management's assessment of specific risk and general risk inherent
in the loan portfolio based on all relevant factors and conditions including the
general increases in the overall loan balance outstanding at December 31, 1998.
OTHER EXPENSE: Total other expense increased by $10 thousand, or 1.7%, from $606
thousand for the six months ended December 31, 1997 to $616 thousand for the six
months ended December 31, 1998. The increase was caused primarily by increases
of $46 thousand in compensation, $7 thousand in occupancy expense and $13
thousand in data processing fees. These increases were a result of general pay
increases, the addition of employees, and the purchase and installation of a new
teller computer network. The Company also incurred a $9 thousand loss on sale of
real estate owned in the six months ended December 31, 1998. These increases
were offset by reductions in benefit expense of $5 thousand and other expenses
of $63 thousand. Benefit expense decreased due to the Directors' Retirement Plan
being fully accrued for the six months ended December 31, 1998 and other expense
decreased primarily due to a decrease in professional fees.
INCOME TAX: The effective tax rates for the six months ended December 31, 1998
and 1997 were 89% and 34.8%, respectively. The effective rate increased as a
result of nondeductability of the market value portion of certain ESOP expenses.
Income tax expense decreased by $128 thousand from $137 thousand for the six
months ended December 31, 1997 to $9 thousand for the six months ended December
31, 1998. This decrease was a result of the decrease in income before taxes
caused primarily by the increase in the provision for loan losses.
13
<PAGE>
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
(generally cash, certain time deposits, bankers' acceptances, highly rated
corporate debt and commercial paper, securities of certain mutual funds, and
specified United States government, state or federal agency obligations) equal
to 4% of its net withdrawal accounts plus short term borrowings either at the
end of the preceding calendar quarter or on an average daily basis during the
preceding quarter. The Bank is also required to maintain sufficient liquidity to
ensure its safe and sound operation. Monetary penalties may be imposed for
failure to meet liquidity requirements. The average daily balance of liquid
assets for the quarter ended December 31, 1998 was 7.5%.
At December 31, 1998, the Company had outstanding commitments to originate first
mortgage loans totaling $2.0 million. The Company anticipates that it will have
significant funds 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, 1998, the
Bank had tangible capital of 23.6% of tangible assets, core capital of 21.7% of
adjusted tangible assets, and risk-based capital of 33% of risk-weighted assets.
14
<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
The Company's Annual Meeting of Stockholders was held on
October 26, 1998. 801,670 shares of the Company's common
stock were represented at the Annual Meeting in person or by
proxy.
Stockholders voted in favor of the election of two nominees
for director. The voting results for each nominee were as
follows:
<TABLE>
<CAPTION>
Votes in Favor
Nominee of Election Votes Withheld
------- -------------- --------------
<S> <C> <C>
David W. Gay 744,401 57,269
Jane G. Simpson 737,441 64,229
</TABLE>
There were 1,000 broker nonvotes on the matter.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended December 31, 1998
15
<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, 1999 /s/ Virginia R.S. Stump
----------------------------------------
Virginia R.S. Stump
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 1999 /s/ Tony A. Merida
----------------------------------------
Tony A. Merida
Executive Vice President
(Principal Financial Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,207,738
<INT-BEARING-DEPOSITS> 2,345,183
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,589,802
<INVESTMENTS-CARRYING> 370,026
<INVESTMENTS-MARKET> 370,026
<LOANS> 49,377,173
<ALLOWANCE> 635,000
<TOTAL-ASSETS> 56,110,656
<DEPOSITS> 29,065,439
<SHORT-TERM> 0
<LIABILITIES-OTHER> 800,259
<LONG-TERM> 12,650,105
0
0
<COMMON> 9,588
<OTHER-SE> 13,107,390
<TOTAL-LIABILITIES-AND-EQUITY> 56,110,656
<INTEREST-LOAN> 1,061,825
<INTEREST-INVEST> 41,810
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,103,635
<INTEREST-DEPOSIT> 409,221
<INTEREST-EXPENSE> 189,872
<INTEREST-INCOME-NET> 599,093
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 284,612
<INCOME-PRETAX> (215,070)
<INCOME-PRE-EXTRAORDINARY> (215,070)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (144,567)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
<YIELD-ACTUAL> 2.55
<LOANS-NON> 0
<LOANS-PAST> 599,822
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 200,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 635,000
<ALLOWANCE-DOMESTIC> 635,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
