<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 December 31, 1999.
[_] 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
----------------------------------------------------
(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 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
----- -----
As of February 11, 2000, the issuer had 867,947 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, 1999 (unaudited)
and June 30, 1999 2
Consolidated Statements of Income and Comprehensive Income for the Three
Months and Six Months Ended December 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1999 and 1998 (unaudited) 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis or Plan of Operation 8-13
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 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
</TABLE>
1
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1999 1999
(Unaudited)
<S> <C> <C>
Cash $ 997,797 $ 474,513
Interest-bearing cash deposits in other depository institutions 1,662,362 2,231,109
Investment securities available-for-sale, at market value (amortized cost
$24,158 at December 31, 1999 and June 30, 1999) 1,161,126 1,430,976
Mortgage-backed securities, held to maturity 282,455 318,160
Income tax receivable 64,395 33,727
Investments in nonmarketable equity securities, at cost 804,100 776,600
Loans receivable, net 49,379,160 46,192,315
Real estate acquired by foreclosure 520,000 456,000
Accrued interest receivable 311,898 365,697
Office property and equipment, at cost, less accumulated depreciation 409,800 383,340
Other assets 78,382 89,397
------------ ------------
Total assets $ 55,671,475 $ 52,751,834
============ ============
LIABILITIES
Savings accounts and certificates $ 28,505,329 $ 29,653,246
Advance payments by borrowers for taxes and insurance 14,040 23,437
Accrued interest payable 64,205 42,007
Federal Home Loan Bank advances 13,389,146 8,831,037
Accounts payable and other liabilities 456,026 379,673
Deferred income tax payable 189,012 241,079
------------ ------------
Total liabilities 42,617,758 39,170,479
------------ ------------
Common stock owned by ESOP subject to put option 516,304 310,614
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized
Common stock, $.01 par value; 3,000,000 shares authorized;
804,304 and 833,755 shares issued and outstanding at
December 31, 1999 and June 30, 1999, respectively 9,588 9,588
Additional paid-in capital 9,189,060 9,181,318
Treasury stock (108,360 and 73,410 shares at December 31, 1999
and June 30, 1999, respectively) (1,412,615) (997,672)
Unearned employee stock ownership plan shares (458,811) (513,801)
Common stock owned by ESOP subject to put option (516,304) (310,614)
Accumulated comprehensive income 750,399 928,500
Retained earnings, substantially restricted 4,976,096 4,973,422
------------ ------------
Total stockholders' equity 12,537,413 13,270,741
------------ ------------
Total liabilities and stockholders' equity $ 55,671,475 $ 52,751,834
============ ============
</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 and Comprehensive Income
for the three months and six months ended December 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest on loans and mortgage-backed securities $ 966,175 $ 1,061,825 $ 1,931,368 $ 2,123,218
Interest and dividends on investments and deposits in
other depository institutions 39,376 41,810 78,273 81,593
----------- ----------- ----------- -----------
Total interest income 1,005,551 1,103,635 2,009,641 2,204,811
----------- ----------- ----------- -----------
Interest on savings accounts and certificates 361,928 409,221 737,485 755,935
Interest on other borrowings 153,888 189,872 275,507 387,773
----------- ----------- ----------- -----------
Total interest expense 515,816 599,093 1,012,992 1,143,708
----------- ----------- ----------- -----------
Net interest income 489,735 504,542 996,649 1,061,103
Provision for loan losses 5,000 435,000 15,000 435,000
----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 484,735 69,542 981,649 626,103
----------- ----------- ----------- -----------
Non-interest income:
Service charges and fees 9,269 2,987 19,219 6,208
Gain on real estate acquired by foreclosure -- 7,116 -- 10,268
Other 661 1,404 1,800 7,748
----------- ----------- ----------- -----------
Total non-interest income 9,930 11,507 21,019 24,224
Non-interest expense:
Compensation 96,883 103,641 193,460 212,293
Employee retirement and other benefits 61,946 66,105 126,745 157,934
State franchise taxes 13,725 6,646 27,450 16,800
SAIF deposit insurance premium 10,217 3,690 20,424 16,575
Loss on real estate acquired by foreclosure 10,595 1,361 18,221 13,914
Occupancy expense 21,157 25,861 39,014 47,517
Data processing 16,976 18,276 33,684 36,553
Other 86,312 70,539 159,650 138,958
----------- ----------- ----------- -----------
Total non-interest expense 317,811 296,119 618,648 640,544
----------- ----------- ----------- -----------
Income (loss) before income taxes 176,854 (215,070) 384,020 9,783
Provision for income taxes 60,738 (70,503) 130,830 8,705
----------- ----------- ----------- -----------
Net income (loss) 116,116 (144,567) 253,190 1,078
Other comprehensive income (loss), net of income tax:
Unrealized gain (loss) on securities available for sale
arising in period (80,400) 241,200 (178,101) 282,926
----------- ----------- ----------- -----------
Comprehensive income $ 35,716 $ 96,633 $ 75,089 $ 284,004
=========== =========== =========== ===========
Weighted shares outstanding for basic earnings (loss)
per share 820,271 858,211 826,259 863,698
Basic earnings (loss) per share $ 0.14 $ (0.17) $ 0.31 $ --
Weighted shares outstanding for diluted earnings (loss)
per share 832,679 873,250 838,522 878,668
Diluted earnings (loss) per share
$ 0.14 $ (0.17) $ 0.30 $ --
</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, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 253,190 $ 1,078
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 18,882 20,927
Provision for loan losses 15,000 435,000
Stock dividend, Federal Home Loan Bank stock (27,500) (13,000)
Deferred income taxes 39,682 (163,846)
Net loan origination fees (425) 19,997
Employee Stock Ownership Plan benefit expense 62,732 70,801
Management Retirement Plan benefit expense 48,438 50,417
Loss on sale of real estate acquired by foreclosure -- 9,401
Change in assets and liabilities:
Accrued interest receivable 53,799 6,146
Other assets 11,015 (2,551)
Accrued interest payable 22,198 (4,013)
Accounts payable and other liabilities 31,767 48,800
Income tax payable (30,668) (997)
----------- -----------
Net cash provided by operating activities 498,110 478,160
----------- -----------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure -- 396,000
Purchase of property and equipment (45,342) (33,928)
Mortgage-backed securities principal repayments 35,705 64,609
Net increase in loans receivable (3,265,421) (1,988,518)
----------- -----------
Net cash used in investing activities (3,275,058) (1,561,837)
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in savings accounts and certificates (1,147,917) 3,648,728
Net decrease in advance payments by borrowers for taxes and insurance (9,397) (17,288)
Purchase of treasury stock (418,880) (627,288)
Dividends paid (250,430) (259,612)
Federal Home Loan Bank advances 5,563,000 2,500,000
Federal Home Loan Bank advances principal repayments (1,004,891) (3,311,062)
----------- -----------
Net cash provided by financing activities 2,731,485 1,933,478
----------- -----------
Net (decrease) increase in cash and cash equivalents (45,463) 849,801
Cash and cash equivalents at beginning of period 2,705,622 2,703,120
----------- -----------
Cash and cash equivalents at end of period $ 2,660,159 $ 3,552,921
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
Unrealized (loss) gain on securities available for sale, net of deferred tax
(benefit) liability of ($91,749) and $145,749 at December 31, 1999 and
1998, respectively $ (178,101) $ 282,926
Renewed Federal Home Loan Bank advances $ 4,250,000 $ --
Real estate acquired through foreclosure $ 64,000
</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 six months ended December 31,
1999 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
December 31, 1999 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 $ (445,638) $1,161,126
========== ========== ========== ==========
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
six months ended December 31 follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 441,000 $ 200,000 $ 551,000 $ 200,000
Provision charged to operations 5,000 435,000 15,000 435,000
Loans charged off (10,568) -- (130,568) --
--------- --------- --------- ---------
Balance at end of period $ 435,432 $ 635,000 $ 435,432 $ 635,000
========= ========= ========= =========
</TABLE>
Nonaccrual loans amounted to $1,293,632 and $1,359,133 at December 31,
1999 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 December 31, 1999 and June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
-----------------------------
Date of Interest
Issue Year of Maturity Amount Amount Rate
<S> <C> <C> <C> <C>
1/31/95 1/30/15 650,000 650,000 5.01
3/25/97 3/24/00 500,000 500,000 6.75
1/28/98 2/01/08 77,474 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 3/10/00 750,000 750,000 5.32
3/19/99 3/17/00 750,000 750,000 5.23
3/24/99 9/20/99 - 500,000 5.07
3/25/99 3/24/00 2,000,000 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 8/01/19 161,172 - 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
10/08/99 1/10/00 250,000 - 6.00
11/08/99 12/01/04 1,000,000 - 6.50
11/19/99 5/17/00 350,000 - 5.93
12/20/99 1/01/03 811,000 - 6.93
12/20/99 1/01/05 514,500 - 7.08
12/20/99 12/20/00 1,175,000 - 6.59
12/21/99 6/16/00 1,150,000 - 6.25
----------- -----------
$13,389,146 $ 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 December 31, 1999, 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 December 31, 1999 For the three months ended December 31, 1998
--------------------------------------------- --------------------------------------------
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 $ 116,116 820,271 $ 0.14 $(144,567) 858,211 $ (0.17)
Effect of dilutive securities
Stock options 101 -
Management recognition plan 12,307 15,039
Diluted earnings per share
Income available to common
shareholders plus assumed
conversions $ 116,116 832,679 $ 0.14 $(144,567) 873,250 $ (0.17)
<CAPTION>
For the six months ended December 31, 1999 For the six months ended December 31, 1998
------------------------------------------ ------------------------------------------
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
$ 253,190 826,259 $ 0.31 $ 1,078 863,698 $ --
Effect of dilutive securities
Stock options 77 --
Management recognition plan 12,186 14,970
Diluted earnings per share
Income available to common
shareholders plus assumed
conversions
$ 253,190 838,522 $ 0.30 $ 1,078 878,668 $ --
</TABLE>
There were no preferred dividends that would effect the computation of earnings
per share.
7
<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.
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
8
<PAGE>
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 December 31, 1999 and June 30, 1999
The Company's total assets increased approximately $2.9 million, or 5.5%, from
$52.8 million at June 30, 1999 to $55.7 million at December 31, 1999. This
increase resulted from an increase of $3.2 million, or 6.9%, in net loans
receivable offset slightly by a decrease of approximately $300,000, or 18.9%, in
investment securities. The increase in net loans receivable is due to an
increase of approximately $4.2 million in single family residential mortgages
offset by a decrease of approximately $1.9 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.
Investment securities decreased due to lower market values. The Company's total
liabilities increased approximately $3.4 million, or 8.7%, from $39.2 million at
June 30, 1999 to $42.6 million at December 31, 1999. This increase was primarily
due to an increase in Federal Home Loan Bank ("FHLB") advances of $4.6 million,
or 51.6%, from $8.8 million at June 30, 1999 to $13.4 million at December 31,
1999, offset by a decrease in savings accounts and certificates of $1.2 million,
or 3.9%, from 29.7 million at June 30, 1999 to $28.5 million at December 31,
1999. 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 six-month
period ended December 31, 1999 the Company acquired 35,200 common shares for a
purchase price of $418,880. These purchases were part of the Company's 5% stock
repurchase program that was announced July 9, 1999.
Comparison of Operating Results for the three months ended December 31, 1999 and
1998
Net Income/Loss: The Company's net income increased from a net loss of $145,000
for the quarter ended December 31, 1998 to net income of $116,000 for the
quarter ended December 31, 1999. This increase was primarily due to the $430,000
decrease in the provision for loan losses from $435,000 for the quarter ended
December 31, 1998 to $5,000 for the quarter ended December 31, 1999. This
significant decrease in the loan loss provision was offset by a decrease in net
interest income of $15,000, or 2.9%, and an increase in non-interest expenses of
$22,000, or 7.3%.
Net Interest Income: Net interest income decreased by $15,000, or 2.9%, from
$505,000 for the quarter ended December 31, 1998 to $490,000 for the quarter
ended December 31, 1999. This decrease was attributed to a decrease in interest
income of $98,000 offset by a decrease in interest expense of $83,000. 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 certificates of deposits.
Interest Income: Total interest income decreased by $98,000, or 8.9%, to $1.0
million for the quarter ended December 31, 1999 from $1.1 million for the
quarter ended December 31, 1998. This decrease was primarily attributable to
interest on loans. Interest on loans decreased approximately
9
<PAGE>
$93,000, or 8.8%, from the quarter ended December 31, 1998 to the quarter ended
December 31, 1999. Average interest bearing loans decreased from $48.8 million
for the quarter ended December 31, 1998 to $46.2 million for the quarter ended
December 31, 1999, and the average effective interest rate earned on these loans
decreased approximately 22 basis points from the quarter ended December 31, 1998
to the quarter ended December 31, 1999.
Interest Expense: Total interest expense decreased by $83,000, or 8.7%, to
$516,000 for the quarter ended December 31, 1999 from $599,000 for the quarter
ended December 31, 1998. Interest expense on savings accounts and certificates
decreased $47,000, or 11.6%, and interest expense on other borrowings decreased
$36,000, or 19.0%. 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
actually increased from $24.5 million for the quarter ended December 31, 1998 to
$24.8 million for the quarter ended December 31, 1999; however, the effective
rate decreased from approximately 6.0% for the quarter ended December 31, 1998
to 5.4% for the quarter ended December 31, 1999. Interest expense on other
borrowings decreased due to the lower average balance of FHLB advances from
$12.9 million to $11.3 million for the quarters ended December 31, 1998 and
1999, respectively.
Provision for Loan Losses: The Bank recognized loan loss provisions of $5,000 in
the quarter ended December 31, 1999, as compared to $435,000 recognized in the
quarter ended December 31, 1998. The 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. Management believes
the allowance for loan losses as of December 31, 1999 was adequate to absorb any
potential losses in the loan portfolio.
Non-Interest Income: Total non-interest income decreased approximately $2,000
from $12,000 for the quarter ended December 31, 1998 to $10,000 for the quarter
ended December 31, 1999. This slight decrease was primarily due to decreases in
gain on real estate acquired by foreclosure offset by 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
$22,000, or 7.3%, from $296,000 for the quarter ended December 31, 1998 to
$318,000 for the quarter ended December 31, 1999. This increase was primarily
attributable to increases in expenses for real estate acquired by foreclosure
and other expenses. Expenses for real estate acquire by foreclosure increased
approximately $9,000 and was due to there being no real estate held in the
quarter ended December 31, 1998 compared to $520,000 held for most of the
quarter ended December 31, 1999. Property taxes on these properties were the
bulk of these expenses. Other expenses increased approximately $16,000 due to an
increase in professional fees.
Income Tax: The provision for income taxes increased $130,000 from a tax benefit
of $71,000 for the quarter ended December 31, 1998 to a tax expense of $61,000
for the quarter ended December 31, 1999. The provision for income taxes
increased as a result of the increase in income before taxes. The effective tax
rate for the quarter ended December 31, 1999 was 34.3%.
10
<PAGE>
Other Comprehensive Income (Loss): During the quarter ended December 31, 1999,
there was an unrealized loss on securities of $80,000, net of tax benefit. This
loss compares to an unrealized gain on securities of $241,000, net of tax
liability, for the quarter ended December 31, 1998. The current quarter's loss
was due to the December 31, 1999 market price of available-for-sale securities
declining below the market price at September 30, 1999.
Comparison of Operating Results for the six months ended December 31, 1999 and
1998
Net Income: The Company's net income increased $252,000 from $1,000 for the six
months ended December 31, 1998 to $253,000 for the six months ended December 31,
1999. On a pre-tax basis, this increase was $374,000 and was primarily due to
the $420,000 decrease in the provision for loan losses from $435,000 for the six
months ended December 31, 1998 to $15,000 for the six months ended December 31,
1999. Non-interest expenses also decreased approximately $22,000, or 3.4%. These
decreases in expenses were offset by a decrease in net interest income of
approximately $64,000, or 6.1%.
Net Interest Income: Net interest income decreased by $64,000, or 6.1%, from
$1.1 million for the six months ended December 31, 1998 to $997,000 for the six
months ended December 31, 1999. This decrease was attributed to a decrease in
interest income of $195,000 offset by a decrease in interest expense of
$131,000. 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 certificates of deposits.
Interest Income: Total interest income decreased by $195,000, or 8.9%, to $2.0
million for six months ended December 31, 1999 from $2.2 million for the six
months ended December 31, 1998. This decrease was primarily attributable to
interest on loans. Interest on loans decreased approximately $180,000, or 8.6%,
from the six months ended December 31, 1998 to the six months ended December 31,
1999. Average interest bearing loans decreased from $48.4 million for the six
months ended December 31, 1998 to $46.0 million for the six months ended
December 31, 1999, and the average effective interest rate earned on these loans
decreased approximately 24 basis points from the six months ended December 31,
1998 to the six months ended December 31, 1999.
Interest Expense: Total interest expense decreased by $131,000, or 11.4%, to
$1.0 million for the six months ended December 31, 1999 from $1.1 million for
the six months ended December 31, 1998. Interest expense on savings accounts and
certificates decreased $18,000, or 2.4%, and interest expense on other
borrowings decreased $112,000, or 29.0%. 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 actually increased from $27.2 million for the six
months ended December 31, 1998 to $29.0 million for the six months ended
December 31, 1999; however, the effective rate decreased from approximately 6.0%
for the six months ended December 31, 1998 to 5.4% for the six months ended
December 31, 1999. Interest expense on other borrowings decreased due to a lower
average balance of FHLB advances from $13.2 million to $9.7 million for the six
months ended December 31, 1998 and 1999, respectively.
Provision for Loan Losses: The Bank recognized loan loss provisions of $15,000
in the six months ended December 31, 1999, as compared to $435,000 in the six
months ended December 31, 1998. The 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
11
<PAGE>
based on all relevant factors and conditions including the general increases and
decreases in the overall loan balance. Management believes the allowance for
loan losses as of December 31, 1999 was adequate to absorb any potential losses
in the loan portfolio.
Non-Interest Income: Total non-interest income decreased approximately $3,000
from $24,000 for the six months ended December 31, 1998 to $21,000 for the six
months ended December 31, 1999. This slight decrease was primarily due to
decreases in gain on real estate acquired by foreclosure and other income offset
by an increase in service charges and fees. 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.
Non-Interest Expense: Total non-interest expenses decreased by approximately
$22,000, or 3.2%, from $641,000 for the six months ended December 31, 1998 to
$619,000 for the six months ended December 31, 1999. This decrease was primarily
attributable to decreases in compensation, employee benefits and occupancy
offset by increases in state franchise taxes, expenses for real estate acquired
through foreclosure and other expenses. Compensation has decreased due to
increased deferred loan costs, benefit expenses have decreased due to lower
expenses for the Management Recognition Plan and the Employee Stock Ownership
Plan, and occupancy expenses decreased due to the write off of replaced teller
terminals in November 1998. The increase in other expenses was primarily due to
an increase in professional fees.
Income Tax: The effective tax rates for the six months ended December 31, 1999
and 1998 were 34.1% and 89%, respectively. The provision for income taxes
increased $122,000 from $9,000 for the six months ended December 31, 1998 to
$131,000 for the six months ended December 31, 1999. The provision for income
taxes increased as a result of the increase in income before taxes. The
effective rate was high for the six months ended December 31, 1998 due to the
nondeductibility of the market value portion of certain ESOP expenses.
Other Comprehensive Income (Loss): During the six months ended December 31,
1999, there was an unrealized loss on securities of $178,000, net of tax
benefit. This loss compares to an unrealized gain on securities of $283,000, net
of tax liability, for the six months ended December 31, 1998. The current
period's loss was due to the December 31, 1999 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 used for general funding needs. As of December 31, 1999
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
12
<PAGE>
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 December 31, 1999 was 6.5%.
At December 31, 1999, the Company had no outstanding commitments to originate
first mortgage loans. With the possibility of Year 2000 complications, the
Company made efforts to complete originations on all loans before the calendar
year end.
The Bank is required by federal regulations to maintain minimum amounts and
ratios of capital. At December 31, 1999, the Bank met all capital adequacy
requirements to which it is subject.
13
<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
The Company's Annual Meeting of Stockholders was held on October 25,
1999. 741,144 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:
Votes in Favor
Nominee of Election Votes Withheld
------- -------------- --------------
Ronald L. Sutton 702,261 38,883
Virginia R. S. Stump 702,261 38,883
There were no 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, 1999.
14
<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: February 11, 2000 /s/ Virginia R.S. Stump
-----------------------------------------
Virginia R.S. Stump
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 11, 2000 /s/ Julia G. Taylor
-----------------------------------------
Julia G. Taylor, CPA
Chief Financial Officer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 997,797
<INT-BEARING-DEPOSITS> 1,662,362
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,161,126
<INVESTMENTS-CARRYING> 282,455
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<ALLOWANCE> 435,432
<TOTAL-ASSETS> 55,671,475
<DEPOSITS> 28,505,329
<SHORT-TERM> 10,175,000
<LIABILITIES-OTHER> 723,283
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0
0
<COMMON> 9,588
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<EXPENSE-OTHER> 618,648
<INCOME-PRETAX> 384,020
<INCOME-PRE-EXTRAORDINARY> 384,020
<EXTRAORDINARY> 0
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<NET-INCOME> 253,190
<EPS-BASIC> 0.31
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<YIELD-ACTUAL> 2.84
<LOANS-NON> 1,293,632
<LOANS-PAST> 1,293,632
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<ALLOWANCE-OPEN> 551,000
<CHARGE-OFFS> 130,568
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