<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2000.
[_] Transition Report Under 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
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(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 past 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 _____
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As of May 8, 2000, the issuer had 840,328 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 March 31, 2000 (unaudited)
and June 30, 1999 2
Consolidated Statements of Income and Comprehensive Income for the Three
Months and Nine Months Ended March 31, 2000 and 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2000 and 1999 (unaudited) 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis or Plan of Operation 9-14
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 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
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FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS March 31, June 30,
2000 1999
(Unaudited)
<S> <C> <C>
Cash $ 548,492 $ 474,513
Interest-bearing cash deposits in other depository institutions 1,599,815 2,231,109
Investment securities available-for-sale, at market value (amortized cost
$24,158 at March 31, 2000 and June 30, 1999) 1,090,194 1,430,976
Mortgage-backed securities, held to maturity 270,501 318,160
Income tax receivable 126,407 33,727
Investments in nonmarketable equity securities, at cost 817,800 776,600
Loans receivable, net 49,217,583 46,192,315
Real estate acquired by foreclosure 902,333 456,000
Accrued interest receivable 308,940 365,697
Office property and equipment, at cost, less accumulated depreciation 400,658 383,340
Other assets 82,009 89,397
------------- -------------
Total assets $ 55,364,732 $ 52,751,834
============= =============
LIABILITIES
Savings accounts and certificates $ 28,958,365 $ 29,653,246
Advance payments by borrowers for taxes and insurance 22,480 23,437
Accrued interest payable 72,461 42,007
Federal Home Loan Bank advances 13,105,728 8,831,037
Accounts payable and other liabilities 400,497 379,673
Deferred income tax payable 217,764 241,079
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Total liabilities 42,777,295 39,170,479
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Common stock owned by ESOP subject to put option 539,132 310,614
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STOCKHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized
Common stock, $.01 par value; 3,000,000 shares authorized;
782,075 and 833,755 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively 9,588 9,588
Additional paid-in capital 9,197,508 9,181,318
Treasury stock (133,338 and 73,410 shares at March 31, 2000
and June 30, 1999, respectively) (1,728,951) (997,672)
Unearned employee stock ownership plan shares (431,321) (513,801)
Common stock owned by ESOP subject to put option (539,132) (310,614)
Accumulated comprehensive income 703,584 928,500
Retained earnings, substantially restricted 4,837,029 4,973,422
------------- -------------
Total stockholders' equity 12,048,305 13,270,741
------------- -------------
Total liabilities and stockholders' equity $ 55,364,732 $ 52,751,834
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
for the three months and nine months ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest on loans and mortgage-backed securities $1,073,772 $ 1,051,340 $ 3,005,140 $ 3,174,558
Interest and dividends on investments and deposits in
other depository institutions 40,681 41,635 118,953 123,228
---------- ------------ ----------- -----------
Total interest income 1,114,453 1,092,975 3,124,093 3,297,786
---------- ------------ ----------- -----------
Interest on savings accounts and certificates 377,530 401,064 1,115,015 1,156,999
Interest on other borrowings 198,997 160,036 474,504 547,809
---------- ------------ ----------- -----------
Total interest expense 576,527 561,100 1,589,519 1,704,808
---------- ------------ ----------- -----------
Net interest income 537,926 531,875 1,534,574 1,592,978
Provision for loan losses 20,000 66,000 35,000 501,000
---------- ------------ ----------- -----------
Net interest income after provision for loan losses 517,926 465,875 1,499,574 1,091,978
---------- ------------ ----------- -----------
Non-interest income:
Service charges and fees 7,223 3,045 26,443 9,253
Gain on real estate acquired by foreclosure - - - 10,268
Other 1,184 1,002 2,985 8,750
---------- ------------ ----------- -----------
Total non-interest income 8,407 4,047 29,428 28,271
Non-interest expense:
Compensation 131,074 111,135 324,534 323,428
Employee retirement and other benefits 74,818 62,414 201,563 220,348
State franchise taxes 13,333 10,986 40,783 27,786
SAIF deposit insurance premium 14,893 17,967 35,317 34,542
Loss on real estate acquired by foreclosure 9,050 4,150 27,271 18,064
Occupancy expense 22,318 28,017 61,332 75,534
Data processing 22,033 15,292 55,717 51,845
Other 67,856 37,394 227,506 176,352
---------- ------------ ----------- -----------
Total non-interest expense 355,375 287,355 974,023 927,899
---------- ------------ ----------- -----------
Income before income taxes 170,958 182,567 554,979 192,350
Provision for income taxes 61,007 64,511 191,838 73,216
---------- ------------ ----------- -----------
Net income 109,951 118,056 363,141 119,134
Other comprehensive income (loss), net of income tax:
Unrealized gain (loss) on securities available for sale
arising in period (46,815) (116,020) (224,916) 166,906
---------- ------------ ----------- -----------
Comprehensive income $ 63,136 $ 2,036 $ 138,225 $ 286,040
========== ============ =========== ===========
Weighted shares outstanding for basic earnings per share 802,144 833,802 818,195 854,143
Basic earnings per share $ 0.14 $ 0.14 $ 0.44 $ 0.14
Weighted shares outstanding for diluted earnings per share 812,132 846,146 829,541 868,059
Diluted earnings per share $ 0.14 $ 0.14 $ 0.44 $ 0.14
</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 nine months ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 363,141 $ 119,134
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation 29,624 28,642
Provision for loan losses 35,000 501,000
Stock dividend, Federal Home Loan Bank stock (41,200) (25,878)
Deferred income taxes 92,551 (178,608)
Net loan origination fees 3,400 24,418
Employee Stock Ownership Plan benefit expense 98,670 106,575
Management Retirement Plan benefit expense 73,806 68,472
Loss on sale of real estate acquired by foreclosure - 9,401
Loss on disposition of property and equipment - 10,336
Change in assets and liabilities:
Accrued interest receivable 56,757 30,511
Other assets 7,388 5,136
Accrued interest payable 30,454 (17,531)
Accounts payable and other liabilities 34,175 32,576
Income tax receivable/payable (92,680) 6,947
-------------- ---------------
Net cash provided by operating activities 691,086 721,131
-------------- ---------------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure - 396,000
Capital improvements made to real estate acquired by foreclosure (22,332) -
Purchase of property and equipment (46,942) (33,928)
Mortgage-backed securities principal repayments 47,659 92,389
Net increase in loans receivable (3,487,669) (390,374)
-------------- ---------------
Net cash (used in) provided by investing activities (3,509,284) 64,087
-------------- ---------------
Cash flows from financing activities:
Net (decrease) increase in savings accounts and certificates (694,881) 4,729,778
Net decrease in advance payments by borrowers for taxes and insurance (957) (9,518)
Purchase of treasury stock (819,731) (734,938)
Dividends paid (498,239) (514,567)
Federal Home Loan Bank advances 5,563,000 2,500,000
Federal Home Loan Bank advances principal repayments (1,288,309) (6,318,650)
-------------- ---------------
Net cash provided by (used in) financing activities 2,260,883 (347,895)
-------------- ---------------
Net (decrease) increase in cash and cash equivalents (557,315) 437,323
Cash and cash equivalents at beginning of period 2,705,622 2,703,120
-------------- ---------------
Cash and cash equivalents at end of period $ 2,148,307 $ 3,140,443
============== ===============
Supplemental disclosure of non-cash investing and financing activities:
Unrealized (loss) gain on securities available for sale, net of deferred tax
(benefit) liability of ($115,866) and $85,982 at March 31, 2000 and
1999, respectively $ (224,916) $ 166,906
Renewed Federal Home Loan Bank advances $ 8,250,000 $ 4,000,000
Real estate acquired through foreclosure $ 424,000
</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 months and nine months ended March 31,
2000 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, 1999.
2. Investment Securities:
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 2000 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 $ 1,582,606 $ (516,570) $ 1,090,194
=========== ============ =========== ============
June 30, 1999
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 24,672 shares $ 24,158 $ 1,582,606 $ (175,788) $ 1,430,976
=========== ============ =========== ============
</TABLE>
3. Allowance for Loan Losses:
An analysis of the changes in the loan loss allowance for the three and
nine months ended March 31 follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
2000 1999 2000 1999
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 435,432 $ 635,000 $ 551,000 200,000
Provision charged to operations 20,000 66,000 35,000 501,000
Loans charged off (117,987) - (248,555) -
------------ ------------ ------------- ------------
Balance at end of period $ 337,445 $ 701,000 $ 337,445 $ 701,000
============ ============ ============= ============
</TABLE>
Nonaccrual loans amounted to $436,521 and $1,359,133 at March 31, 2000
and June 30, 1999, respectively.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
4. Federal Home Loan Bank Advances:
Federal Home Loan Bank advances at March 31, 2000 and June 30, 1999 are as
follows:
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------------------------------------
Date of Interest
Issue Year of Maturity Amount Amount Rate
<S> <C> <C> <C>
1/31/95 1/30/15 650,000 650,000 6.87
3/25/97 3/24/00 - 500,000 6.75
1/28/98 2/01/08 75,651 81,037 6.37
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
3/12/99 3/10/00 - 750,000 5.32
3/19/99 3/17/00 - 750,000 5.23
3/24/99 9/20/99 - 500,000 5.07
3/25/99 3/24/00 - 2,000,000 5.33
4/23/99 4/21/00 1,000,000 1,000,000 5.29
6/24/99 10/22/99 - 600,000 5.37
7/02/99 8/01/19 160,156 - 6.55
7/30/99 7/28/00 500,000 - 5.96
8/13/99 8/11/00 500,000 - 6.18
8/24/99 8/24/00 500,000 - 6.06
9/20/99 9/20/00 750,000 - 6.12
11/08/99 12/01/04 982,089 - 6.50
11/19/99 5/17/00 350,000 - 5.93
12/20/99 1/01/03 801,566 - 6.93
12/20/99 1/01/05 511,266 - 7.08
12/20/99 12/20/00 1,175,000 - 6.59
12/21/99 6/16/00 1,150,000 - 6.25
3/17/00 9/13/00 750,000 - 6.43
3/24/00 9/20/00 2,500,000 - 6.48
3/30/00 4/19/00 750,000 - 6.27
------------ ----------------
$ 13,105,728 $ 8,831,037
============ ================
</TABLE>
5. Line of Credit:
On March 5, 1999, First Lancaster Bancshares, Inc. entered into a line of
credit for $2.5 million with an interest rate of prime less 1/2 percent.
Any outstanding balance on this line of credit is collateralized by 100%
of the Bank's stock. As of March 31, 2000, there is no outstanding
balance.
6. Reclassifications:
Certain presentation of accounts previously reported have been
reclassified in these consolidated financial statements. Such
reclassification had no effect on net income or stockholders' equity as
previously reported.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
7. Effect of Implementing New Accounting Standards:
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 (as
revised by SFAS No. 137) is effective for fiscal years beginning after
June 15, 2000, but earlier application is permitted as of the beginning
of any fiscal quarters subsequent to June 15, 1998. Upon the statement's
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 in SFAS
No. 133. Adoption of SFAS No. 133 is not expected to have a material
financial statement impact on the Company.
8. Earnings Per Share:
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 For the three months ended March 31, 1999
------------------------------------------- -------------------------------------------
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 $ 109,951 802,144 $ 0.14 $ 118,056 833,802 $ 0.14
Effect of dilutive securities
Stock options 338 -
Management recognition plan 9,650 12,344
Diluted earnings per share
Income available to common
Shareholders plus assumed
Conversions $ 109,951 812,132 $ 0.14 $ 118,056 846,146 $ 0.14
For the nine months ended March 31, 2000 For the nine months ended March 31, 1999
------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic earnings per share
Income available to common
Shareholders $ 363,141 818,195 $ 0.44 $ 119,134 854,143 $ 0.14
Effect of dilutive securities
Stock options 187 -
Management recognition plan 11,159 13,916
Diluted earnings per share
Income available to common
Shareholders plus assumed
Conversions $ 363,141 829,541 $ 0.44 $ 119,134 868,059 $ 0.14
</TABLE>
There were no preferred dividends that would effect the computation of earnings
per share.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
9. Subsequent Events:
On March 31, 2000, the Company committed to purchase 5,000 shares of its
common stock for $65,000. This purchase did not settle and the stock was
not in the Company's name until April 5, 2000; therefore, the purchase is
not reflected as treasury stock in these financial statements.
8
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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.
Forward-Looking Statements
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.
The Company's operations, like those of most financial institutions, are
substantially dependent upon computer systems for day to day lending and deposit
activities. The Company installed a new teller computer network system which is
Year 2000 compliant and established a Year 2000 committee to monitor the
progress of achieving and certifying overall Year 2000 compliance. The year 2000
committee successfully completed all phases of testing on October 24, 1999. The
Company developed a contingency plan in the event there was an interruption of
its on-line system, whereby transaction processing would have been done in a
store and forward mode for short term interruptions, and for extended
interruptions, manual processing or the use of a local database would have been
used. The total costs of the new computer network system and year 2000 testing
did not exceed $50,000 and the Company does not anticipate future costs of Year
2000 compliance in excess of $10,000. The Company believes that its policies,
plans and actions are in compliance with the
9
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regulatory guidelines and milestone dates.
The Company did not experience any Year 2000 problems that adversely affected
its ability to comply with customer obligations. Management believes the Company
has had a very successful transition to the Year 2000. All estimates and
benchmark dates were achieved with little or no deviations.
Comparison of Financial Condition at March 31, 2000 and June 30, 1999
The Company's total assets increased approximately $2.6 million, or 5.0%, from
$52.8 million at June 30, 1999 to $55.4 million at March 31, 2000. This increase
resulted primarily from an increase of $3.0 million, or 6.5%, in net loans
receivable, which is due to an increase of approximately $5.2 million in single
family residential mortgages offset by a decrease of approximately $2.5 million
in construction lending. The overall increase in loans is the result of the
Company's continued focus on growth through loans and the decrease in
construction lending is in accordance with the realignment of the loan portfolio
which began in January 1999. Real estate acquired by foreclosure increased
$446,000 due to the foreclosure proceedings being finalized on several of the
properties involved in the construction loans to one borrower that became
uncollectible in December of 1998. Investment securities decreased $341,000 due
to lower market values. The Company's total liabilities increased approximately
$3.6 million, or 9.2%, from $39.2 million at June 30, 1999 to $42.8 million at
March 31, 2000. This increase was primarily due to an increase in Federal Home
Loan Bank ("FHLB") advances of $4.3 million, or 48.4%, from $8.8 million at June
30, 1999 to $13.1 million at March 30, 2000, offset by a decrease in savings
accounts and certificates of $695,000, or 2.3%, from $29.7 million at June 30,
1999 to $29.0 million at March 31, 2000. FHLB advances increased due to the
increased need for cash to fund loan growth, customer deposit repayments and
treasury stock repurchases. Certificates of deposit decreased primarily due to
slightly higher interest rates being offered by local competitors from June
through October. During the nine-month period ended March 31, 2000, the Company
acquired 65,544 common shares for a purchase price of approximately $820,000.
These purchases were part of the Company's stock repurchase programs. A 5% stock
repurchase was announced July 9, 1999, and completed in March 2000. Upon
completion of this repurchase, another 5% stock repurchase was announced.
Comparison of Operating Results for the Three Months Ended March 31, 2000 and
1999
Net Income: The Company's net income decreased $8,000, or 6.9%, from $118,000
for the quarter ended March 31, 1999 to $110,000 for the quarter ended March 31,
2000. This decrease was primarily due to an increase in non-interest expense of
$68,000, or 23.7%, offset by increased net interest income and a decrease of
$46,000 in the provision for loan losses.
Net Interest Income: Net interest income increased by $6,000, or 1.1%, from
$532,000 for the quarter ended March 31, 1999 to $538,000 for the quarter ended
March 31, 2000. This increase was attributed to an increase in interest income
of $21,000, or 2.0% offset by an increase in interest expense of $15,000, or
2.7%. These increases in interest income and expense were primarily caused by
higher average loan volumes and higher average FHLB advances. Effective rates
from quarter to quarter remained fairly consistent.
Interest Income: Total interest income increased by $21,000, or 2.0%, for the
quarter ended March 31, 2000 from the quarter ended March 31, 1999. This
increase was primarily attributable to interest income on loans. Interest income
on loans increased approximately $22,000, or 2.1%, from
10
<PAGE>
the quarter ended March 31, 1999 to the quarter ended March 31, 2000. Average
interest bearing loans increased from $49.1 million for the quarter ended March
31, 1999 to $49.9 million for the quarter ended March 31, 2000.
Interest Expense: Total interest expense increased by $15,000, or 2.7%, to
$576,000 for the quarter ended March 31, 2000 from $561,000 for the quarter
ended March 31, 1999. Interest expense on other borrowings increased $39,000, or
24.3% and this increase was offset by a decrease of $24,000, or 5.9%, on
interest expense on savings accounts and certificates. Interest expense on other
borrowings increased due to the higher average balance of FHLB advances from
$11.2 million to $13.1 million for the quarters ended March 31, 1999 and 2000,
respectively. The decrease in interest expense on savings accounts and
certificates is due primarily to a decrease in the average balance of
certificates of deposit from $26.4 million to $25.2 million for the quarters
ended March 31, 1999 and 2000, respectively.
Provision for Loan Losses: The Bank recognized loan loss provisions of $20,000
in the quarter ended March 31, 2000, as compared to $66,000 recognized in the
quarter ended March 31, 1999. 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 and decreases in the overall loan balance, historical write offs, and
the amount of nonaccrual loans. Management believes the allowance for loan
losses as of March 31, 2000 was adequate to absorb any potential losses in the
loan portfolio.
Non-Interest Income: Total non-interest income increased approximately $4,000
from $4,000 for the quarter ended March 31, 1999 to $8,000 for the quarter ended
March 31, 2000. This slight increase was primarily due to an increase in service
charges and fees. In the second half of fiscal year June 30, 1999, management
re-evaluated the Bank's fee structure in comparison with competitors and actual
expenses incurred and added several service fees.
Non-Interest Expense: Total non-interest expenses increased by approximately
$68,000, or 23.7%, from $287,000 for the quarter ended March 31, 1999 to
$355,000 for the quarter ended March 31, 2000. This increase was primarily
attributable to increases in compensation and benefits, expenses for real estate
acquired by foreclosure, data processing fees and other expenses. Compensation
and benefits expenses increased primarily due to there being three additional
employees from quarter to quarter, normal salary increases for the year 2000 and
additional family health care coverage provided to employees effective January
1, 2000. Expenses for real estate acquire by foreclosure increased primarily due
to the increased properties held by the Bank during the quarter ended March 31,
2000. Data processing fees have increased related to additional services
required from the Bank's third party service provider related to an ATM machine
that was put into service in December 1999. Other expenses increased
approximately $30,000 due to an increase in professional fees, increased
expenses related to the new ATM machine such as training and debit cards for the
customers, and increased travel expenses for several out of state seminars
attended by the officers.
Income Tax: The provision for income taxes was $61,000 for the quarter ended
March 31, 2000 as compared to $65,000 for the quarter ended March 31, 1999. The
effective tax rate for the quarter ended March 31, 2000 was 35.7% as compared to
the effective rate of 35.3% for the quarter ended March 31, 1999.
Other Comprehensive Income (Loss): During the quarter ended March 31, 2000,
there was an unrealized loss on securities of $47,000, net of tax benefit, as
compared to an unrealized loss on
11
<PAGE>
securities of $116,000, net of tax liability, for the quarter ended March 31,
1999. The current quarter's loss was due to the March 31, 2000 market price of
available-for-sale securities declining below the market price at December 31,
1999.
Comparison of Operating Results for the Nine Months Ended March 31, 2000 and
1999
Net Income: The Company's net income increased $244,000 from $119,000 for the
nine months ended March 31, 1999 to $363,000 for the nine months ended March 31,
2000. This increase was primarily due to the $466,000 decrease in the provision
for loan losses from $501,000 for the nine months ended March 31, 1999 to
$35,000 for the nine months ended March 31, 2000. This significant decrease in
the loan loss provision was offset by a decrease in net interest income of
approximately $59,000 and an increase in non-interest expenses of $46,000.
Net Interest Income: Net interest income decreased by approximately $59,000, or
3.7%, from $1.6 million for the nine months ended March 31, 1999 to $1.5 million
for the nine months ended March 31, 2000. This decrease was attributed to a
decrease in interest income of $174,000 offset by a decrease in interest expense
of $115,000. These decreases in interest income and expense were primarily
caused by lower average loan volumes, lower average FHLB advances and a decrease
in the effective interest rates on loans and certificates of deposits for the
nine month periods compared.
Interest Income: Total interest income decreased by $174,000, or 5.3%, to $3.1
million for the nine months ended March 31, 2000 from $3.3 million for the nine
months ended March 31, 1999. This decrease was primarily attributable to
interest on loans. Interest on loans decreased approximately $169,000, or 5.3%,
from the nine months ended March 31, 1999 to the nine months ended March 31,
2000. Average interest bearing loans decreased from $49.3 million for the nine
months ended March 31, 1999 to $47.8 million for the nine months ended March 31,
2000, and the average effective interest rate earned on these loans decreased
approximately 19 basis points from the nine months ended March 31, 1999 to the
nine months ended March 31, 2000.
Interest Expense: Total interest expense decreased by $115,000, or 6.8%, to $1.6
million for the nine months ended March 31, 2000 from $1.7 million for the nine
months ended March 31, 1999. Interest expense on savings accounts and
certificates decreased $42,000, or 3.6%, and interest expense on other
borrowings decreased $73,000, or 13.4%. The decrease in interest expense on
savings accounts and certificates is primarily due to a decrease in the
effective rate of interest paid on certificates of deposit. The average balance
of certificates of deposit increased from $24.4 million for the nine months
ended March 31, 1999 to $25.2 million for the nine months ended March 31, 2000;
however, the effective rate decreased from approximately 5.9% for the nine
months ended March 31, 1999 to 5.5% for the nine months ended March 31, 2000.
Interest expense on other borrowings decreased due to a lower average balance of
FHLB advances from $12.5 million to $10.9 million for the nine months ended
March 31, 1999 and 2000, respectively.
Provision for Loan Losses: The Bank recognized loan loss provisions of $35,000
in the nine months ended March 31, 2000, as compared to $501,000 in the nine
months ended March 31, 1999. There was a significant provision recognized in
December 1998 related primarily to a group of construction loans to one borrower
which became doubtful for collection. 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 and decreases in the overall loan balance, historical write
offs and the amount of nonaccrual loans. Management believes the allowance for
loan losses as of March 31, 2000 was adequate to absorb
12
<PAGE>
any potential losses in the loan portfolio.
Non-Interest Income: Total non-interest income increased approximately $1,000
from $28,000 for the nine months ended March 31, 1999 to $29,000 for the nine
months ended March 31, 2000. This slight increase was due to the offset of an
increase in service fees and decreases in gain on real estate acquired by
foreclosure and other income. In the second half of fiscal year ending June 30,
1999, management re-evaluated the Bank's fee structure in comparison with
competitors and actual expenses incurred and added several service fees, which
has caused an increase in service fees. There has been no sale of real estate in
the nine months ended March 31, 2000.
Non-Interest Expense: Total non-interest expenses increased by approximately
$46,000, or 5.0%, from $928,000 for the nine months ended March 31, 1999 to
$974,000 for the nine months ended March 31, 2000. This increase was primarily
attributable to increases in expenses on real estate acquired through
foreclosure, state franchise taxes and other expenses offset by decreases in
benefits expense and occupancy expense. Compensation actually increased from
period to period due to additional employees and raises from year to year;
however, appears consistent due to increased deferred loan costs which offset
this expense. Expenses on real estate acquired through foreclosure increased due
to the increased properties owned by the Bank during the nine month period ended
March 31, 2000. Other expenses increased due mainly to increased professional
fees, increased travel expenses for officers, expenses related to the Bank's new
ATM machine such as debit cards and training and office supplies have increased
due to the expanded loan office. Benefit expenses have decreased due to lower
expenses for the Employee Stock Ownership Plan and increased deferred loan
costs, and occupancy expenses decreased due to the write off of replaced teller
terminals in November 1998.
Income Tax: The effective tax rates for the nine months ended March 31, 2000 and
1999 were 34.6% and 38.1%, respectively. The provision for income taxes
increased $119,000 from $73,000 for the nine months ended March 31, 1999 to
$192,000 for the nine months ended March 31, 2000. The provision for income
taxes increased as a result of the increase in income before taxes. The
effective rate was high for the nine months ended March 31, 1999 due to the
nondeductibility of the market value portion of certain ESOP expenses.
Other Comprehensive Income (Loss): During the nine months ended March 31, 2000,
there was an unrealized loss on securities of $225,000, net of tax benefit. This
loss compares to an unrealized gain on securities of $167,000, net of tax
liability, for the nine months ended March 31, 1999. The current period's loss
was due to the March 31, 2000 market price of available-for-sale securities
declining below the market price at June 30, 1999.
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.
On March 5, 1999, First Lancaster Bancshares, Inc. entered into a line of credit
for $2.5 million to be
13
<PAGE>
used for general funding needs. As of March 31, 2000 there had been no draws on
this line of credit.
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 percentage of liquid
assets for the quarter ended March 31, 2000 was 6.2%.
At March 31, 2000, the Company had outstanding commitments to originate first
mortgage loans totalling $163,000. The Company anticipates that it will have
sufficient funds to meet its current origination commitments.
The Bank is required by federal regulations to maintain minimum amounts and
ratios of capital. At March 31, 2000, the Bank met all capital adequacy
requirements to which it is subject.
14
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
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 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 March 31, 2000.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST LANCASTER BANCSHARES, INC.
Date: May 8, 2000 /s/ Virginia R.S. Stump
-----------------------
Virginia R.S. Stump
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 2000 /s/ Julia G. Taylor
-------------------
Julia G. Taylor, CPA
Chief Financial Officer
(Principal Financial Officer)
16
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<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 548,492
<INT-BEARING-DEPOSITS> 1,599,815
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,090,194
<INVESTMENTS-CARRYING> 270,501
<INVESTMENTS-MARKET> 270,501
<LOANS> 49,217,583
<ALLOWANCE> 337,445
<TOTAL-ASSETS> 55,364,732
<DEPOSITS> 28,958,365
<SHORT-TERM> 9,925,000
<LIABILITIES-OTHER> 713,202
<LONG-TERM> 3,180,728
0
0
<COMMON> 9,588
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<INTEREST-DEPOSIT> 1,115,015
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<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 974,023
<INCOME-PRETAX> 554,979
<INCOME-PRE-EXTRAORDINARY> 554,979
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363,141
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 2.88
<LOANS-NON> 436,522
<LOANS-PAST> 436,522
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 551,000
<CHARGE-OFFS> 248,555
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