FIRST LANCASTER BANCSHARES, INC.
[LOGO]
2000 ANNUAL REPORT
<PAGE>
FIRST LANCASTER BANCSHARES, INC.
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First Lancaster Bancshares, Inc. (the "Company"), a Delaware
corporation, was organized at the direction of the Board of Directors of First
Lancaster Federal Savings Bank, Lancaster, Kentucky (the "Bank"), in February
1996 to acquire all of the capital stock to be issued by the Bank in its
conversion from mutual to stock form (the "Conversion"). The Company does not
have any significant assets other than the outstanding capital stock of the
Bank, a portion of the net proceeds of the Conversion and a note receivable from
the ESOP. The Company's principal business is the business of the Bank.
The Bank is a federal savings bank, which operates one full service
office in Lancaster, Kentucky and one loan production office in Nicholasville,
Kentucky, serving Garrard, Jessamine and surrounding counties in Kentucky. The
Bank was chartered by the Commonwealth of Kentucky in 1873 under the name
Lancaster Building and Loan Association. The Bank adopted a federal charter and
received federal insurance of its deposit accounts in 1966, at which time it
adopted the name First Lancaster Federal Savings and Loan Association. In 1988
the Bank converted from a federally chartered mutual savings and loan
association to a federally chartered mutual savings bank and adopted its present
name. The principal business of the Bank consists of attracting deposits from
the general public and investing these deposits in loans secured by first
mortgages on single-family residences in the Bank's market area. The Bank
derives its income principally from interest earned on loans and, to a lesser
extent, interest earned on mortgage-backed securities and investment securities
and noninterest income. Funds for these activities are provided principally by
operating revenues, deposits and repayments of outstanding loans and investment
securities and mortgage-backed securities.
As a federally chartered savings institution, the Bank is subject to
extensive regulation by the Office of Thrift Supervision (the "OTS"). The
lending activities and other investments of the Bank must comply with various
federal regulatory requirements, and the OTS periodically examines the Bank for
compliance with various regulatory requirements. The Federal Deposit Insurance
Corporation ("FDIC") also has the authority to conduct special examinations. The
Bank must file reports with OTS describing its activities and financial
condition and is also subject to certain reserve requirements promulgated by the
Board of Governors of the Federal Reserve System.
(i)
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MARKET INFORMATION
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The Company's common stock trades under the symbol "FLKY" on the Nasdaq
SmallCap Market. As of June 30, 2000 there were 840,328 shares of the common
stock outstanding and approximately 240 holders of record.
The following table sets forth the reported bid information for, and
the dividends declared on, the common stock for each full quarterly period since
the common stock was issued at the end of fiscal year 1996.
<TABLE>
<CAPTION>
Bid
----------------------- Dividends
High Low Declared
---- --- ---------
<S> <C> <C> <C>
FISCAL YEAR 1999
July - September 1998 $ 14.250 12.375 $ 0.30
October - December 1998 13.688 12.000 --
January - March 1999 13.000 12.063 $ 0.30
April - June 1999 12.500 11.063 --
FISCAL YEAR 2000
July - September 1999 $ 11.688 11.063 $ 0.30
October - December 1999 13.000 10.375 --
January - March 2000 13.500 12.500 $ 0.30
April - June 2000 13.000 10.500 --
</TABLE>
Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
The Board of Directors of the Company established a regular dividend
rate and payment schedule in July 1997, whereby the Company will pay dividends
semi-annually, payable to stockholders of record as of the third Friday of every
January and July following the respective semi-annual period. Any change in the
Company's dividend policy will depend on the Company's debt and equity
structure, earnings, regulatory capital requirements, and other factors,
including economic conditions, regulatory restrictions, and tax considerations.
The Company declared a dividend of $.30 per share in July 2000. See Note 16 of
Notes to Consolidated Financial Statements for restrictions on the payment of
cash dividends by the Bank, which serves as the primary source of liquidity for
the Company.
TABLE OF CONTENTS
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First Lancaster Bancshares, Inc..............................................(i)
Market Information..........................................................(ii)
Letter to Stockholders.........................................................1
Selected Consolidated Financial and Other Data.................................2
Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................4
Consolidated Financial Statements.............................................16
Corporate Information..........................................Inside back cover
(ii)
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LETTER TO STOCKHOLDERS
Dear Stockholders,
As our fiscal year 2000 began on July 1, 1999, we were looking forward
with anticipation and focusing on the new millennium. The last six months of
1999 was devoted to employee training, customer awareness and refining our
contingency plan. On January 1, 2000 we attained our goal. Everything worked and
processed properly and it has continued to be business as usual and for that we
are thankful. Not only was the beginning of a new millennium successful, fiscal
year 2000 was successful and filled with many opportunities and challenges.
First Lancaster Bancshares, Inc. completed its second 5% repurchase of
outstanding common stock which was authorized July 1999 and completed in March
2000. The Corporation's Board of Directors authorized the third 5% repurchase of
stock in March 2000 and is approximately 50% complete. During the year ended
June 30, 2000, the Corporation repurchased 70,544 shares for an aggregate cost
of approximately $885,000. The repurchased stock is being held as treasury stock
to be used for future corporate purposes.
Fiscal year 2000 returned to a more normal year with earnings of
$482,000 compared to 1999 annual earnings of $301,000. With the net income
increase of $181,000, the basic and diluted earnings per share increased to $.60
and $.59, respectively, compared to $.35 for the fiscal year ended June 30,
1999. The increase in net income and earnings per share was primarily due to the
$462,000 decrease in the provision for loan losses. In 1999 a specific provision
for loan losses of $385,000 was recorded to cover a combination of construction
loans which became doubtful for collection. These properties were acquired by
foreclosure and/or sold throughout fiscal year 2000 and related allowances were
utilized and charged off.
Shareholders' equity on June 30, 2000 was $12.2 million, a decrease of
$1.0 million, or 7.9%, from June 30, 1999. The decrease reflects the stock
repurchases completed and dividends of $493,000 paid to shareholders. The
Company's total assets increased by $2.4 million, or 4.7%, from $52.8 million at
June 30, 1999 to $55.2 million at June 30, 2000 which was primarily attributable
to the increase in net loans receivable.
Additional banking services have been implemented during fiscal year
2000. New automated services of the ATM and Direct Teller are being used more
each day. The Board of Directors continue to research other products and
services that can be implemented in the future.
Each new year holds many challenges and opportunities for First
Lancaster Bancshares, Inc. and First Lancaster Federal Savings Bank. The Board
of Directors, officers and employees want to meet those challenges to better
serve our stockholders, customers and community and to give first class service
to our customers. Thank you for your trust and support of our Company and Bank
and please feel free to come to the Bank and visit with us.
Sincerely,
/s/ Virginia R. S. Stump
Virginia R. S. Stump
Chairman of the Board, President
and Chief Executive Officer
1
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
SELECTED CONSOLIDATED FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
At June 30,
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2000 1999
---------- -----------
(In thousands)
<S> <C> <C>
Assets.................................................... $ 55,221 $ 52,752
Loans receivable, net..................................... 49,374 46,192
Cash and cash equivalents................................. 1,945 2,706
Investment securities:
Available for sale.................................... 999 1,431
Real estate acquired by foreclosure....................... 952 456
Mortgage-backed securities................................ 255 318
Savings accounts and certificates......................... 29,079 29,653
FHLB advances............................................. 12,835 8,831
Total equity.............................................. 12,229 13,271
</TABLE>
SELECTED CONSOLIDATED OPERATING DATA:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
2000 1999
----------- ----------
(In thousands)
<S> <C> <C>
Interest income........................................... $ 4,232 $ 4,335
Interest expense.......................................... 2,187 2,216
---------- ---------
Net interest income before provision for
loan losses............................................ 2,045 2,119
Provision for loan losses................................. 39 501
---------- ---------
Net interest income....................................... 2,006 1,618
---------- ---------
Noninterest income........................................ 38 41
Noninterest expense....................................... 1,307 1,197
---------- ---------
Income before income taxes................................ 737 462
Provision for income taxes................................ 255 161
---------- ---------
Net income................................................ $ 482 $ 301
========== =========
</TABLE>
2
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KEY OPERATING RATIOS:
<TABLE>
<CAPTION>
At or for the
Year Ended June 30,
-----------------------------
2000 1999
--------- --------
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided
by average total assets)............................... .89% .55%
Return on average total equity (net income
divided by average total equity)....................... 3.68 2.18
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost)........................... 2.93 2.90
Ratio of average interest-earning assets to
average interest-bearing liabilities.................. 125.79 128.45
Ratio of noninterest expense to average
total assets.......................................... 2.42 2.19
ASSET QUALITY RATIOS:
Nonperforming assets to total assets...................... 4.05 2.55
Nonperforming loans to total loans........................ .64 2.94
Provision for loan losses to total loans.................. .08 1.08
Allowance for loan losses to nonperforming
loans receivable, net................................... 105.50 40.54
Allowance for loan losses to total loans
receivable, net......................................... .67 1.19
Net charge-offs to average loans outstanding.............. .54 .31
CAPITAL RATIOS:
Total equity to total assets.............................. 22.14 25.16
Average total equity to average assets.................... 24.26 25.18
OTHER:
Dividend payout ratio..................................... 102.26 169.14
</TABLE>
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance is subject to risks, uncertainties and
other factors which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements. Potential risks
and uncertainties include, but are not limited to, economic conditions,
competition and other uncertainties detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
GENERAL
First Lancaster Bancshares, Inc. (the "Company") was formed in 1996 and
serves as the savings and loan holding company for First Lancaster Federal
Savings Bank (the "Bank"), a federally chartered stock savings bank
headquartered in Lancaster, Kentucky that conducts the principal business of the
Company. The Bank converted from a mutual savings bank to a stockholder-owned
savings bank in June 1996. At the same time, it became a wholly owned subsidiary
of the Company by selling its shares to the Company. The Company funded its
purchase of the Bank's stock using most of the net proceeds from the Company's
initial public offering of its common stock, which was consummated at the same
time as the Bank's conversion. Prior to its acquisition of the Bank's stock, the
Company had no material operations. Unless otherwise indicated, all references
in this discussion are to the consolidated operations of the Company and the
Bank.
The principal business of the Company consists of accepting deposits
from the general public and investing these funds primarily in loans and, to a
lesser extent, in investment securities and mortgage-backed securities. Loans
are originated by the Company within its primary market of Garrard, Jessamine
and Fayette counties located in central Kentucky and are comprised of
single-family residential first mortgage loans and, to a lesser extent,
single-family residential construction loans, nonresidential loans, loans
secured by multi-family residential property and loans secured by deposits.
The Company's net income is dependent primarily on its net interest
income, which is the difference between the interest income it earns on its
loans, investment securities and mortgage-backed securities and the interest it
pays on the savings accounts and certificates of deposits and on the advances
(i.e., borrowings) from the Federal Home Loan Bank of Cincinnati ("FHLB"). Net
interest income is affected by (i) the rates of interest earned or paid by the
Company and (ii) the volume of interest-earning assets and interest-bearing
liabilities that flow through the Company. Rates of interest earned or paid is
reflected in the Company's "interest rate spread," which is the difference
between the yields earned on interest-earning assets and the rates paid on
interest-bearing liabilities and is an indicator of the Company's profitability
in its core banking business. The Company's interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. The Company's interest rate spread for the fiscal year
ended June 30, 2000 was 2.93% as compared to 2.90% for fiscal year 1999. The
volume of interest-earning assets and interest-bearing liabilities generally
increases profitability of the Company to the extent such assets exceed such
liabilities. The ratio of the Bank's average interest-earning assets to average
interest-bearing liabilities was 125.79% for fiscal year 2000 as compared to
128.45% for fiscal year 1999.
The overall operations of the Company are significantly affected by
prevailing economic conditions, competition and the monetary, fiscal and
regulatory policies of governmental agencies. Lending operations are influenced
in particular by the demand for and supply of housing, competition among
lenders, the level of interest rates and the availability of funds. Deposit
operations such as the amount of deposits and their related costs are
4
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influenced in particular by prevailing market rates of interest, primarily on
competing investments, account maturities and the levels of personal income and
savings in the Company's market area.
LIQUIDITY AND CAPITAL RESOURCES.
LIQUIDITY. Liquidity refers to the ability or the financial flexibility
to manage future cash flows to meet the needs of depositors and borrowers and
fund operations. Maintaining appropriate levels of liquidity allows the Company
to have sufficient funds available for reserve requirements, customer demand for
loans, withdrawal of deposit balances, maturities of deposits and timely
satisfaction of other commitments.
The Company's primary source of liquidity is dividends from the Bank,
the payment of which is subject to regulatory limitations on capital
distributions (such as dividends) and liquidity. OTS regulations require that
savings institutions submit notice to the OTS prior to making a capital
distribution if (a) they would not be well-capitalized after the distribution,
(b) the distribution would result in the retirement of any of the institution's
common or preferred stock or debt counted as its regulatory capital, or (c) the
institution is a subsidiary of a holding company. A savings institution must
make application to the OTS to pay a capital distribution if (x) the institution
would not be adequately capitalized following the distribution, (y) the
institution's total distributions for the calendar year exceeds the
institution's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS. The OTS may disapprove or deny a capital distribution if in
the view of the OTS, the capital distribution would constitute an unsafe or
unsound practice.
The Bank generally is required to maintain average daily balances 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) in each calendar quarter that is equal to or greater than 4% of its
net withdrawable 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 also is 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 ratio of
the Bank for the quarter ended June 2000 was 5.3%.
The Company has a line of credit for $2.5 million, from Community Trust
Bank located in Lexington, Kentucky, to be used for general funding needs. As of
June 30, 2000, there had been no draws on this line of credit.
The source of the Company's liquidity arises from the Bank's operating,
investing and financing activities. Cash generated from operating activities
increased by $20,000, or 2.3%, to $896,000 in fiscal year 2000 from $876,000 in
fiscal year 1999. This increase was attributable to increases in net income of
$181,000, cash generated from other assets of $83,000 and accrued interest on
deposits of $59,000. These increases were offset by decreases of $274,000 in
non-cash operating activities and $76,000 in cash generated from accrued
interest receivables. The decrease in non-cash operating activities was mainly
driven by a $462,000 decrease in the provision for loan losses, which was offset
by a $203,000 increase for deferred income taxes due to loan loss charge offs
and unrealized losses during the fiscal year 2000.
Investing activities of the Company used $3.7 million in the fiscal
year 2000 compared to generating funds of $773,000 in the fiscal year 1999. This
change in investing activities was due primarily to the increase in the loan
portfolio. After several construction loans to one borrower became impaired in
December 1998, the Board of Directors performed a detailed review of the Bank's
loan portfolio. During this review, risk factors as well as loan category
percentages were considered and it was resolved that the construction loan
percentage in the portfolio was higher than policy advised and that two
non-residential loans appeared to contain more risk than the Board desired. At
the Board's discretion, the Bank ceased new construction lending until June 1999
to realign the construction loan percentage in the portfolio and entered into
participations with other local banks for the two non-residential loans in an
effort to minimize risk in the portfolio. These actions caused loans to decrease
at the end of fiscal year 1999. In
5
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fiscal year 2000, growth of the loan portfolio resumed causing investing
activities to significantly fluctuate from year to year.
Financing activities of the Company generated $2.1 million in cash in
fiscal year 2000 compared to using $1.6 million of cash in the fiscal year 1999.
This change was mainly due to an increase in FHLB advances in the fiscal year
2000. As discussed above, the loans receivable balance increased in fiscal year
2000 thereby increasing the need for FHLB advances.
The Company's use of FHLB advances reflects the flexibility in using
advances with repayment terms that approximate the anticipated lifetimes of
loans originated by the Company. As of June 30, 2000, the Company had a
borrowing capacity with the FHLB of $16.4 million, of which $12.8 million was
outstanding. See Note 9 of the Company's Notes to Consolidated Financial
Statements for more information on outstanding advances. This line is
collateralized with non-delinquent single-family residential mortgage loans.
The Company anticipates that it will have sufficient funds available,
either from its operations or from outside funding sources, to satisfy its
funding commitments. At June 30, 2000, the Company had outstanding commitments
to originate loans totaling $878,000. Also at such date, the Company had
certificates of deposit scheduled to mature within one year of June 30, 2000
totaling $17.5 million
CAPITAL RESOURCES. The Company's capital position is reflected in its
stockholders' equity, subject to certain adjustments for regulatory purposes.
Stockholders' equity, or capital, is a measure of the Company's net worth,
soundness and viability. The Company continues to exhibit a strong capital
position, and its capital base allows it to take advantage of business
opportunities while maintaining the level of resources deemed appropriate by
management of the Company to address business risks inherent in the Company's
daily operations.
Stockholders' equity on June 30, 2000 was $12.2 million, a decrease of
$1.0 million, or 7.9%, from June 30, 1999. The decrease in stockholders' equity
reflects net income for fiscal year 2000 of $482,000 ($.60 per share), $885,000
purchase of treasury stock, $493,000 paid out in dividends, $285,000 in net
unrealized loss for the year from the Company's available-for-sale securities
and $56,000 in capital corresponding to the Bank's employee stock ownership
plan, which acquired Common Stock in the Company's initial public offering, and
$82,000 in capital corresponding to the Bank's Management Recognition Plan.
Federal regulations impose minimum capital requirements on the Bank,
but not on savings and loan holding companies such as the Company. Among these
requirements that apply to the Bank are risk-based capital regulations, which
require all banks, including savings banks, to achieve and maintain specified
ratios of capital to risk-weighted assets. The risk-based capital rules are
designed to measure Tier 1 Capital (consisting of stockholders' equity, less
goodwill) and Total Capital in relation to the credit risk of both on- and
off-balance sheet items. Under the guidelines, one of four risk weights is
applied to the different on-balance sheet items. Off-balance sheet items, such
as loan commitments, are also subject to risk-weighting after conversion to
balance sheet equivalent amounts. All banks, including savings banks, must
maintain a minimum total capital to total risk-weighted assets ratio of 8.00%,
at least half of which must be in the form of Tier 1 Capital. For further
information regarding minimum regulatory capital levels, see Note 11 of the
Company's Notes to Consolidated Financial Statements. At June 30, 2000, the Bank
satisfied all minimum regulatory capital requirements and was considered
"well-capitalized" within the meaning of federal regulatory requirements.
ASSET/LIABILITY MANAGEMENT
The Company has sought to reduce its exposure to changes in interest
rates by matching more closely the effective maturities or repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
The matching of the Company's assets and liabilities may be analyzed by
examining the extent to which its assets and liabilities are interest rate
sensitive and by monitoring the expected effects of interest rate changes on the
Company's net interest income.
6
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An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Company's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. As
a result of the interest rate risk inherent in the historical savings
institution business of originating long-term loans funded by short-term
deposits, the Company has pursued certain strategies designed to decrease the
vulnerability of its earnings to material and prolonged changes in interest
rates.
In accordance with the Company's interest rate risk policy, management
has emphasized the origination of adjustable-rate mortgage loans with rate
adjustments indexed to the one-year Treasury bill, adjusted for constant
maturity, and has also used FHLB advances to better match maturities of funding
sources with the terms of fixed-rate mortgage loans originated by the Bank.
Management believes that this approach to loan originations allows the Bank to
respond to customer demand while minimizing interest rate and credit risk and
without any significant increase in operating expenses. At June 30, 2000,
mortgage loans with adjustable rates represented 68.1% of the Company's mortgage
loan portfolio. Approximately 98% of the Company's adjustable-rate mortgage
loans have an annual adjustment limitation of 2% and a lifetime limitation of
5%, and may not decline more than 1% below the initial interest rate (the
"floor"). These limitations on rate adjustments may prevent the interest rates
charged on loans from increasing at the same pace as the Company's cost of
funds. However, some of the rates on adjustable-rate mortgages may already be at
their lifetime floor, which would also restrict future downward adjustments and
thereby eliminate the Company's interest rate risk associated with a declining
interest rate environment.
INTEREST RATE SENSITIVITY ANALYSIS. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity "gap" is the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within the
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities, and
is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would be expected to adversely affect net
interest income while a positive gap would be expected to result in an increase
in net interest income. In contrast, during a period of declining interest
rates, a negative gap would be expected to result in an increase in net interest
income and a positive gap would be expected to adversely affect net interest
income.
At June 30, 2000, the Company's cumulative one-year interest rate gap
position was a positive $5.1 million, or 9.7%, of total interest-earning assets.
A positive gap position indicates that the Company's net interest income would
be expected to increase in a period of increasing interest rates and decrease in
a period of decreasing interest rates. This is a one-day position which is
continually changing and is not necessarily indicative of the Company's position
at any other time. The Company's current one-year gap is within the guidelines
established by management and approved by the Board of Directors. Management
considers numerous factors when establishing these guidelines, including current
interest rate margins, capital levels and any guidelines provided by the OTS.
Different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, and thus changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category. Additionally, the gap analysis does not consider the many
factors accompanying interest rate moves. While the interest rate sensitivity
gap is a useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates. For instance, while the retention of adjustable-rate
mortgage loans in the Company's portfolio helps reduce the Company's exposure to
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changes in interest rates, these types of loans may give rise to unquantifiable
credit risks in a rising interest rate environment. As adjustable-rate loans
reprice to higher interest rates and therefore require higher loan payments,
they may become subject to a higher risk of default.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 2000 which are expected
to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Expected to Mature During the Year June 30,
----------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Single-family................... $ 24,744 $ 1,711 $ 3,120 $ 416 $ 2,375 $ 4,364 $36,730 $36,634
Multi-family residential........ 1,756 161 298 135 1,126 936 4,412 4,400
Construction.................... 3,340 -- -- -- -- -- 3,340 3,331
Nonresidential.................. 2,914 795 497 -- 60 -- 4,266 4,255
Consumer........................ 421 19 50 40 2 94 626 626
Interest bearing cash deposits in
other financial institutions...... 1,450 -- -- -- -- -- 1,450 1,450
Investment securities............... 999 -- -- -- -- -- 999 999
Mortgage-backed securities.......... -- -- -- 3 -- 252 255 251
-------- -------- -------- -------- -------- -------- ------- -------
Total............................ 35,624 2,686 3,965 594 3,563 5,646 52,078 51,946
-------- -------- -------- -------- -------- -------- ------- -------
Interest-bearing liabilities:
Deposits............................ 20,856 4,573 1,330 531 1,789 -- 29,079 29,118
Borrowings.......................... 9,695 -- 787 -- 1,470 883 12,835 12,618
-------- -------- -------- -------- -------- -------- ------- -------
Total............................ 30,551 4,573 2,117 531 3,259 883 41,914 41,736
-------- -------- -------- -------- -------- -------- ------- -------
Interest sensitivity gap............... $ 5,073 $ (1,887) $ 1,848 $ 63 $ 304 $ 4,763 $10,164 $10,210
======== ======== ======== ======== ======== -------- ------- -------
Cumulative interest sensitivity gap.... $ 5,073 $ 3,186 $ 5,034 $ 5,097 $ 5,401 $ 10,164 $10,164 $10,210
======== ======== ======== ======== ======== ======== ======= =======
Ratio of interest-earning assets to
interest-bearing liabilities........ 116.6% 58.7% 187.3% 111.9% 109.3% 639.4% 124.2% 124.5%
======== ========= ========= ========= ========= ========= ======== ========
Ratio of cumulative gap to total
interest-earning assets............. 9.7% 6.1% 9.7% 9.8% 10.4% 19.5% 19.5% 19.7%
======== ========= ========= ========= ========= ========= ======== ========
</TABLE>
The preceding table was prepared based upon the assumption that loans
will not be repaid before their respective contractual maturity except for
adjustable-rate loans, which are classified based upon their next repricing
date. Further, it is assumed that fixed-maturity deposits are not withdrawn
prior to maturity and that other deposits are withdrawn or repriced within one
year. Management of the Company does not believe that these assumptions will be
materially different from its actual experience. However, the actual interest
rate sensitivity of the Company's assets and liabilities could vary
significantly from the information set forth in the table due to market and
other factors.
Certain shortcomings are inherent in the method of analysis presented
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of or lag behind
changes in market interest rates. Additionally, certain assets, such as an
adjustable rate loan, which is the Company's primary loan product, may have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. The analysis could also be affected by changes in the
proportion of adjustable rate loans in the Company's portfolio. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the tables.
8
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented.
The table also presents information for the periods indicated with
respect to the difference between the average yield earned on interest-earning
assets and average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's net interest income is its
"net yield on interest-earning assets," which is its net interest income divided
by the average balance of interest-earning assets. Net interest income is
affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ----- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)...................... $ 47,890 $ 4,052 8.46% $ 48,266 $ 4,141 8.58%
Investment securities..................... 24 15 63.74 24 10 41.67
Non-marketable equity securities.......... 798 55 6.93 745 55 7.38
Mortgage-backed securities................ 283 21 7.44 371 28 7.55
Other interest-bearing cash deposits...... 1,592 89 5.62 2,043 101 4.94
---------- ---------- --------- -------
Total interest-earning assets.......... 50,587 4,232 8.37 51,449 4,335 8.43
---------- -------
Unrealized gains on securities available
for sale................................... 1,216 1,324
Non-interest-earning assets.................. 2,278 1,940
---------- ---------
Total assets........................... $ 54,081 $ 54,713
========== =========
Interest-bearing liabilities:
Deposits.................................. $ 28,838 $ 1,504 5.21 $ 28,478 $ 1,548 5.44
Borrowings................................ 11,376 684 6.01 11,576 668 5.77
---------- ---------- --------- -------
Total interest-bearing liabilities..... 40,214 2,188 5.44 40,054 2,216 5.53
---------- -------
Non-interest-bearing liabilities............. 745 884
---------- ---------
Total liabilities...................... 40,959 40,938
Retained earnings and capital................ 12,319 12,901
Unrealized gain on securities available
for sale.................................. 803 874
---------- ---------
Total liabilities and stockholders'
equity............................... $ 54,081 $ 54,713
========== =========
Net interest income.......................... $ 2,044 $ 2,119
========== =======
Interest rate spread......................... 2.93% 2.90%
====== ======
Net yield on interest-earning assets......... 4.04% 4.12%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 125.79% 128.45%
====== ======
<FN>
____________
(1) Includes nonaccrual loans.
</FN>
</TABLE>
10
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (changes in
rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
2000 vs. 1999
------------------------------------------------
Increase (Decrease)
Due to
------------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable................................. $ (32) $ (57) $ -- $ (89)
Investment securities............................ -- 5 -- 5
Nonmarketable equity securities.................. 4 (4) -- --
Mortgage-backed securities....................... (7) -- -- (7)
Other (1)........................................ (22) 13 (3) (12)
-------- -------- -------- -------
Total interest-earning assets............... (57) (43) (3) (103)
-------- -------- -------- -------
Interest expense:
Deposits......................................... 20 (63) (1) (44)
Borrowings....................................... (12) 28 -- 16
-------- -------- -------- -------
Total interest-bearing liabilities................. 8 (35) (1) (28)
-------- -------- -------- -------
Change in net interest income...................... $ (65) $ (8) $ (2) $ (75)
======== ======== ======== =======
<FN>
_________
(1) Consists of overnight deposits, and cash deposits with the FHLB.
</FN>
</TABLE>
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total assets increased by $2.4 million, or 4.7%,
from $52.8 million at June 30, 1999 to $55.2 million at June 30, 2000. This
increase was primarily attributable to the increase in net loans receivable. The
Company's total liabilities increased by $3.4 million, or 8.8%, from $39.2
million at June 30, 1999 to $42.6 million at June 30, 2000. This increase was
primarily due to an increase in FHLB advances.
SECURITIES. The Company invests to a limited extent in investment
securities, including mortgage-backed securities. The Company's investment
securities available-for-sale consist solely of stock in the Federal Home Loan
Mortgage Corporation ("FHLMC"). The Company's investment in FHLMC stock
decreased by $432,000, or 30.2%, to $999,000 at June 30, 2000 from $1.4 million
at June 30, 1999. The decrease in the Company's investment in FHLMC stock was
due to a decrease in the market value of the stock. The Company did not buy or
sell any shares during the fiscal year 2000.
The Company also holds investments in non-marketable equity securities,
which increased by $56,000, or 7.2%, to $833,000 at June 30, 2000 from $777,000
at June 30, 1999. These securities are comprised of FHLB stock, the ownership of
which is directly related to the amount of advances that may be obtained by the
Company, and stock in the Company's third party data processor, the ownership of
which is required as a condition to receive such service. The increase in
non-marketable equity securities was due solely to stock dividends from FHLB
during the fiscal year 2000.
11
<PAGE>
Mortgage-backed securities of the Company decreased by $63,000, or
19.7%, to $255,000 at June 30, 2000 from $318,000 at June 30, 1999.
Occasionally, the Company invests in mortgage-backed securities to take
advantage of favorable yields at desirable maturities provided that such
characteristics may not be otherwise obtained through loan originations in the
then-current interest rate environment. The Company did not invest in additional
mortgage-backed securities in the current year and the decrease was due solely
to participant payments in the fiscal year 2000.
To minimize its credit risk, the Company limits its purchases to those
mortgage-backed securities that are available through the purchase of
pass-through certificates offered by the FHLMC and by the Government National
Mortgage Association ("GNMA"). For the fiscal year ended June 30, 2000, the
Company's average balance of mortgage-backed securities was $283,000. For more
detailed information on mortgage-backed securities see Note 3 of the Company's
Notes to Consolidated Financial Statements.
LOANS. Loans represent the Company's largest component of
interest-bearing assets, providing 95.7% of interest income for the year ended
June 30, 2000 as compared to 95.5% for the year ended June 30, 1999. Gross loans
receivable increased by $3.2 million, or 6.4%, from $49.0 million at June 30,
1999 to $52.2 million at June 30, 2000. The Company's loans are predominantly to
borrowers residing in or doing business in Garrard, Jessamine and Fayette
counties, Kentucky.
The increase in loans was due to increases in single-family residential
loans, multi-family residential and commercial loans and nonresidential loans.
Single-family residential loans increased by $2.3 million, or 6.7%, from $34.7
million at June 30, 1999 to $37.0 million at June 30, 2000. Multi-family
residential and commercial loans increased by $2.6 million from $1.8 million at
June 30, 1999 to $4.4 million at June 30, 2000. Nonresidential loans increased
by $1.3 million, or 41.7%, from $3.0 million at June 30, 1999 to $4.3 million at
June 30, 2000. These increases were offset slightly by a decrease in
construction loans of $3.2 million, or 35.8%, from $9.0 million at June 30, 1999
to $5.8 million at June 30, 2000.
As discussed in the Liquidity and Capital Resources section of this
report, the Board of Directors reviewed the loan portfolio in fiscal year 1999
and determined that the construction loan percentage of the portfolio was higher
than policy advised and that risk in the nonresidential loans appeared higher
than desired. At the Board's discretion, the Bank temporarily ceased
construction lending through June 1999 and entered into participations with
local banks for two of the nonresidential loans to minimize risk in these areas
and better align the portfolio percentages. These actions caused construction
loans and nonresidential loans to decrease in the prior fiscal year of 1999. In
the current fiscal year of 2000, many of the prior year construction loans
either paid off or the construction was completed and the loans were
reclassified to nonresidential. This has contributed to the decrease in
construction loans and increase in nonresidential loans in the fiscal year 2000.
The Bank expanded its loan operations in Garrard County at the end of
fiscal year 1999 in an effort to continue its focus on loan growth. In the
current fiscal year 2000, the Bank followed through with this growth primarily
in single-family and multi-family residential and commercial loans. The Bank
does continue to originate construction loans to the extent allowable under
Board policy.
ALLOWANCE FOR LOAN LOSSES. In the normal course of business, the
Company must manage the risk that borrowers may default on their obligations to
the Company. The allowance for loan losses is a reserve established and
maintained by the Company to protect it against estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for loan losses
(which is an expense on the income statement) and through recoveries of
previously written-off loans and is decreased by charged-off loans. Management
reviews the allowance each month to determine whether the level is adequate to
absorb estimated losses. During this review, management considers historical
charge-offs, delinquencies, borrower bankruptcies, exception loans (loans with
loan to value ratios exceeding certain percentages) and general knowledge of the
economy in its market area. At June 30, 2000, management feels the allowance is
adequate to absorb any potential loss in the loan portfolio.
12
<PAGE>
The allowance decreased by $220,000 to $331,000 at June 30, 2000 from
$551,000 at June 30, 1999. This decrease reflects charge offs of $259,000 in
fiscal year 2000 offset slightly by the provision for loan losses of $39,000.
The significant charge offs primarily related to the group of construction loans
to one borrower which became uncollectible in December 1998. At June 30, 1999,
there were $235,000 of specific reserves for these properties and as these
properties were acquired by foreclosure and/or sold throughout the fiscal year
2000, the related allowances were utilized and charged off.
DEPOSITS. The Company relies upon its deposit base as the primary
source of funding for its operations. This deposit base, which is comprised of
demand deposit accounts, NOW accounts and money market demand accounts ("MMDA")
and certificates of deposits, decreased by $575,000, or 1.9%, to $29.1 million
at June 30, 2000 from $29.7 million at June 30, 1999. The annual average balance
of deposits increased during fiscal year 2000 to $28.8 million from $28.5
million during fiscal year 1999.
All types of deposits decreased slightly from year to year. Demand
deposits decreased $71,000, NOW and MMDA deposits decreased $244,000 and
certificates of deposit decreased $260,000 from fiscal year ended June 30, 1999
to fiscal year ended June 30, 2000. The Company has historically established
rates of interest for its deposit products that management believes are
sufficiently competitive to attract deposits from new and existing customers.
During the first half of fiscal year 2000; however, the Bank's rates were
slightly lower than other local banks causing a decrease in deposits during this
half of the fiscal year. In the second half of the fiscal year 2000, management
raised the rates and deposits increased accordingly.
OTHER BORROWINGS. In addition to deposits, the Company utilizes
advances from FHLB to fund its operations. These advances increased by $4.0
million, or 45.3%, to $12.8 million at June 30, 2000 from $8.8 million at June
30, 1999. This increase was caused by additional advances during the fiscal year
2000 of $5.6 million to fund loan growth and treasury stock repurchases offset
slightly by repayments of $1.6 million.
Advances from the FHLB are usually fixed rate, with terms ranging from
three months to twenty years, and are collateralized by performing loans of the
Company with an aggregate unpaid balance equal to 150% of the outstanding
advances.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
NET INCOME. The Company's net income increased $181,000 from $301,000
for the fiscal year ended June 30, 1999 to $482,000 for the fiscal year ended
June 30, 2000. In conjunction with this increase was an increase in basic and
diluted earnings per share to $.60 and $.59, respectively, for the fiscal year
ended 2000 from $.35 for the fiscal year ended 1999. The increase in net income
and earnings per share was primarily due to the $462,000 decrease in the
provision for loan losses from $501,000 for fiscal year 1999 to $39,000 for
fiscal year 2000. This significant decrease in the loan loss provision was
offset by a decrease in net interest income of approximately $74,000 and an
increase in non-interest expenses of $110,000.
NET INTEREST INCOME. Net interest income decreased by approximately
$74,000, or 3.5%, from $2.1 million for the fiscal year ended June 30, 1999 to
$2.0 million for the fiscal year ended June 30, 2000. This decrease was due
primarily to the decrease in average interest-earning assets of approximately
$862,000, or 1.7%, from $51.4 million during the fiscal year June 30, 1999 to
$50.6 million during the fiscal year June 30, 2000. The average interest bearing
liabilities increased slightly from $40.1 million during fiscal year ended June
30, 1999 to $40.2 million during fiscal year ended June 30, 2000; however, the
average cost on these liabilities decreased from 5.53% to 5.44% resulting in a
decrease in interest expense from 1999 to 2000. The interest rate spread did
improve slightly from 2.90% for fiscal year 1999 to 2.93% for fiscal year 2000.
Overall, volume in interest earning assets drove the decrease in
interest income and rates for deposits drove the decrease in interest expense.
See the Rate/Volume Analysis in this report for further details of the
fluctuation in net interest income.
13
<PAGE>
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
decreased from $501,000 for fiscal year 1999 to $39,000 for fiscal year 2000. In
fiscal year 1999 a group of construction loans to one borrower became impaired
resulting in a $385,000 loan loss. In fiscal year 2000, this situation did not
occur and management does not feel the current loan portfolio is indicative of
this type of loss. The fiscal year 1999 loan loss has been the only significant
loan loss incurred by the company since incorporation.
NONINTEREST INCOME. Noninterest income has remained approximately the
same from fiscal year 1999 to fiscal year 2000. This was the result of an
increase in service charges and fees of $16,000 offset by a decrease in gain on
real estate acquired by foreclosure and other noninterest income of $19,000. In
the second half of fiscal year 1999, the bank reevaluated its fee structure in
comparison with local competitors and actual expenses incurred. During this
analysis, the bank determined its expenses were not adequately covered by the
current fee structure and added several service fees for customers which were in
effect the entire fiscal year 2000. There were no sales of real estate acquired
by foreclosure during the fiscal year ended 2000.
NONINTEREST EXPENSE. Noninterest expense increased $110,000, or 9.2%,
from $1.2 million for fiscal year 1999 to $1.3 million for fiscal year 2000. The
Company experienced increases in the majority of its noninterest expenses. These
increases include increases of $28,000 in compensation, $4,000 in state
franchise taxes, $4,000 in SAIF deposit insurance, $5,000 in data processing,
$27,000 in legal and accounting fees, and $51,000 in other expenses.
Compensation increased due to the addition of two employees and the overall
raises for employees from year to year. State franchise taxes increased due to
rising rates and saif deposit insurance increased due to a higher average
balance of deposits. Data processing increased due to higher rates from the
company's third party service provider and the additional services required for
a new ATM machine. Legal and accounting fees increased due to increasing rates
from the firms and some additional services needed in fiscal year 2000. Other
noninterest expense has increased primarily due to increased expenses related to
real estate acquired by foreclosure, new expenses related to the ATM machine
such as debit cards and employee training, and increased office supply expenses
related to the expanded loan office and additional employees.
PROVISION FOR INCOME TAXES. Income tax expense increased $94,000 from
$161,000 for fiscal year 1999 to $255,000 for fiscal year 2000. This increase
was attributable to the increased net income before income taxes. The effective
rates for each year remained fairly consistent at 34.6% for fiscal year 2000 and
34.9% for fiscal year 1999.
OTHER COMPREHENSIVE INCOME (LOSS). During the fiscal year ended June
30, 2000 there was a net unrealized loss on securities of $285,000. This
compares to a net unrealized gain on securities of $178,000 for the fiscal year
ended June 30, 1999. The current year's loss was solely the result of the June
30, 2000 market price on available-for-sale securities declining below the
market price at June 30, 1999.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, substantially all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
14
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this Annual Report to Stockholders, 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.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE.
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 Mortgage Banking Enterprise." SFAS No. 134 amends accounting and reporting
standards for certain activities of mortgage banking enterprises that were
established by SFAS No. 65. This statement was effective for the first fiscal
quarter beginning after December 15, 1998. The Company adopted the provisions of
the statement on January 1, 1999. The adoption of the statement did not
materially affect the Company's financial position or operating results.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. On June
15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (as amended by SFAS No. 137). 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, 2000, but earlier application is permitted as of
the beginning of any fiscal quarter subsequent to June 15, 1998. Upon the
statement's initial application, all derivatives are required to be recognized
in the statement of financial condition 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's financial condition or operating results as
the Company did not hold derivative securities at June 30, 2000.
15
<PAGE>
[This page left intentionally blank]
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
First Lancaster Bancshares, Inc.
Lancaster, Kentucky
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income and comprehensive income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of First Lancaster Bancshares, Inc. and its subsidiary at
June 30, 2000 and 1999, and the results of their operations and their cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
August 11, 2000
17
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------- -------------
<S> <C> <C>
Cash $ 494,317 $ 474,513
Interest-bearing cash deposits in other depository
institutions 1,450,316 2,231,109
Investment securities available-for-sale at market value
(amortized cost $24,158 at June 30, 2000 and 1999) 999,216 1,430,976
Mortgage-backed securities, held to maturity (market
value of $251,000 and $317,000 at June 30, 2000 and
1999, respectively) 255,488 318,160
Income tax receivable 45,633 33,727
Investments in nonmarketable equity securities at cost 832,500 776,600
Loans receivable, net 49,373,865 46,192,315
Real estate acquired by foreclosure 952,333 456,000
Accrued interest receivable 341,453 365,697
Office property and equipment, at cost, less
accumulated depreciation 393,538 383,340
Other assets 82,548 89,397
------------- ------------
Total assets $ 55,221,207 $ 52,751,834
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Saving accounts and certificates $ 29,078,551 $ 29,653,246
Advance payments by borrowers for taxes and insurance 29,976 23,437
Accrued interest on savings accounts and certificates 72,003 42,007
Federal Home Loan Bank advances 12,835,361 8,831,037
Accounts payable and other liabilities 421,557 379,673
Deferred income tax payable 168,160 241,079
------------- ------------
Total liabilities 42,605,608 39,170,479
------------- ------------
Common stock owned by ESOP subject to put option 386,949 310,614
------------- ------------
Preferred stock, 500,000 shares authorized and unissued
Common stock, $.01 par value; 3,000,000 shares
authorized; 780,087 and 834,022 shares issued and
outstanding at June 30, 2000 and 1999, respectively 9,588 9,588
Additional paid-in capital 9,204,136 9,181,318
Treasury stock, at cost; 138,338 and 73,410 shares in
2000 and 1999, respectively (1,793,951) (997,672)
Unearned employee stock ownership plan shares (403,871) (513,801)
Common stock owned by ESOP subject to put option (386,949) (310,614)
Unrealized gain on securities available-for-sale (net of
deferred tax liability of $331,520 and $478,318 at
June 30, 2000 and 1999, respectively) 643,538 928,500
Retained earnings, substantially restricted 4,956,159 4,973,422
------------- ------------
Total stockholders' equity 12,228,650 13,270,741
------------- ------------
Total liabilities and stockholders' equity $ 55,221,207 $ 52,751,834
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Interest on loans and mortgage-backed securities $ 4,071,643 $ 4,173,701
Interest and dividends on investments and
deposits in other depository institutions 160,825 161,445
----------- -----------
Total interest income 4,232,468 4,335,146
----------- -----------
Interest on savings accounts and certificates 1,503,865 1,548,226
Interest on other borrowings 683,788 668,132
----------- -----------
Total interest expenses 2,187,653 2,216,358
----------- -----------
Net interest income 2,044,815 2,118,788
Provision for loan losses 39,000 501,000
----------- -----------
Net interest income after provision
for loan losses 2,005,815 1,617,788
----------- -----------
Non-interest income:
Service charges and fees 35,693 19,724
Gain on real estate acquired by foreclosure - 12,952
Other 2,444 8,518
----------- -----------
Total non-interest income 38,137 41,194
Non-interest expense:
Compensation 446,293 418,295
Employee retirement and other benefits 279,785 280,567
State franchise taxes 57,717 54,121
SAIF deposit insurance premium 38,918 34,542
Occupancy expense 81,801 90,691
Data processing 73,691 69,074
Legal, accounting and filing fees 148,923 121,479
Other 179,395 127,971
----------- -----------
Total non-interest expenses 1,306,523 1,196,740
----------- -----------
Income before income taxes 737,429 462,242
Provision for income taxes 255,157 161,298
----------- -----------
Net income 482,272 300,944
Other comprehensive income net of income tax:
Unrealized (loss) gain on securities available-for-sale arising
in period (284,962) 178,101
----------- -----------
Comprehensive income $ 197,310 $ 479,045
=========== ===========
Basic earnings per share 0.60 0.35
Weighted average shares outstanding for basic
earnings per share 810,251 849,364
Diluted earnings per share 0.59 0.35
Weighted average shares outstanding for
diluted earnings per share 820,857 862,713
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Additional Employee Common Stock
Common Paid In Treasury Stock Owned By
Shares Stock Capital Stock Ownership ESOP
------ ------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 872,923 $ 9,588 $ 9,152,891 $ (350,871) $(626,221) $ (485,988)
Treasury stock issued to
Management Recognition Plan
(MRP) 5,597 88,137
Employee Stock Ownership Plan
(ESOP) 11,242 28,427 112,420 112,420
Market value adjustment 62,954
Net income
Dividends paid to shareholders
($.60 per share)
Purchase of treasury stock (55,740) (734,938)
Change in unrealized gain on
securities, net of deferred tax
liability of $91,749
------- ------- ---------- ----------- ---------- ----------
Balance, June 30, 1999 834,022 $ 9,588 $ 9,181,318 $ (997,672) $(513,801) $ (310,614)
Treasury stock issued to
Management Recognition Plan
(MRP) 5,616 88,452
Employee Stock Ownership Plan
(ESOP) 10,993 22,818 109,930 109,930
Market value adjustment (186,265)
Net income
Dividends paid to shareholders
($.60 per share)
Purchase of treasury stock (70,544) (884,731)
Change in unrealized gain on
securities, net of deferred tax
liability of $146,798
------- ------- ---------- ----------- ---------- ----------
Balance, June 30, 2000 780,087 $ 9,588 $9,204,136 $(1,793,951) $ (403,871) $ (386,949)
======= ======= ========== =========== ========== ==========
<CAPTION>
Unrealized Total
Gains on Retained Stockholders'
Securities Earnings Equity
---------- -------- ------------
<S> <C> <C> <C>
Balance, June 30, 1998 $ 750,399 $ 5,187,579 $ 13,637,377
Treasury stock issued to
Management Recognition Plan
(MRP) (6,078) 82,059
Employee Stock Ownership Plan
(ESOP) 253,267
Market value adjustment 62,954
Net income 300,944 300,944
Dividends paid to shareholders
($.60 per share) (509,023) (509,023)
Purchase of treasury stock (734,938)
Change in unrealized gain on
securities, net of deferred tax
liability of $91,749 178,101 178,101
-------- ---------- -----------
Balance, June 30, 1999 $ 928,500 $ 4,973,422 $ 13,270,741
Treasury stock issued to
Management Recognition Plan
(MRP) (6,350) 82,102
Employee Stock Ownership Plan
(ESOP) 242,678
Market value adjustment (186,265)
Net income 482,272 482,272
Dividends paid to shareholders
($.60 per share) (493,185) (493,185)
Purchase of treasury stock (884,731)
Change in unrealized gain on
securities, net of deferred tax
liability of $146,798 (284,962) (284,962)
-------- ---------- -----------
Balance, June 30, 2000 $643,538 $4,956,159 $12,228,650
======== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 482,272 $ 300,944
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 40,371 32,915
Loss on disposal of equipment - 10,336
Provision for loan losses 39,000 501,000
ESOP benefit expense 132,749 140,847
MRP benefit expense 95,191 89,008
Stock dividend, FHLB stock (55,900) (51,300)
Deferred income taxes 73,879 (129,491)
Net loan origination fees 5,531 24,354
Gain on sale of real estate acquired by foreclosure - (12,952)
Change in assets and liabilities:
Accrued interest receivable 24,244 99,830
Other assets 6,849 (75,986)
Accrued interest on savings accounts and certificates 29,996 (28,967)
Accounts payable and other liabilities 33,850 10,174
Income tax receivable/payable (11,906) (34,724)
----------- -----------
Net cash provided by operating activities 896,126 875,988
----------- -----------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure - 396,000
Mortgage-backed securities principal repayments 62,672 116,475
Real estate acquired by foreclosure and improvements (72,333) (456,000)
Net (increase) decrease in loans receivable (3,650,083) 763,338
Purchase of office property and equipment (50,569) (47,101)
----------- -----------
Net cash (used in) provided by investing activities (3,710,313) 772,712
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in savings accounts and certificates (574,695) 4,236,535
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 6,539 (5,365)
Federal Home Loan Bank advances 5,583,000 1,100,000
Federal Home Loan Bank advances principal repayments (1,578,676) (5,730,130)
Purchase of treasury stock (884,731) (734,938)
Dividends paid (498,239) (512,300)
----------- -----------
Net cash provided by (used in) financing activities 2,053,198 (1,646,198)
----------- -----------
Net (decrease) increase in cash and cash equivalents (760,989) 2,502
Cash and cash equivalents at beginning of year 2,705,622 2,703,120
----------- -----------
Cash and cash equivalents at end of year $ 1,944,633 $ 2,705,622
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid 2,157,657 2,245,210
Income taxes paid 193,182 319,464
Supplemental disclosure of non-cash investing and financing activities:
Unrealized gain on securities available-for-sale, net of deferred tax
liability of $146,798 and $91,749 284,961 178,101
Real estate acquired by foreclosure 424,000 112,848
Renewed Federal Home Loan Bank advances 11,350,000 6,500,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a description of the more significant accounting
policies which First Lancaster Bancshares, Inc. (the Corporation) and its
wholly-owned subsidiary, First Lancaster Federal Savings Bank (the Bank),
follow in preparing and presenting the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Corporation, the Bank and the Bank's wholly-owned subsidiary, First
Lancaster Corporation. All significant intercompany accounts and
transactions have been eliminated.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the statements of
financial condition and income and expenses for the period. Actual
results could differ significantly from those estimates. Estimates used
in the preparation of the consolidated financial statements are based on
various factors including the current interest rate environment and the
general strength of the local economy. Changes in the overall interest
rate environment can significantly affect the Bank's net interest income
and the value of its recorded assets and liabilities. Material estimates
that are particularly susceptible to significant change in the near-term
relate to the determination of the allowance for loan losses. In
connection with this determination, management obtains independent
appraisals for significant properties and prepares fair value analyses as
appropriate.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize such losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in Lancaster and the State of Kentucky. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examination.
ORGANIZATION
The Bank is a federally chartered savings bank and a member of the
Federal Home Loan Bank System. As a member of this system, the Bank is
required to maintain an investment in capital stock of the Federal Home
Loan Bank of Cincinnati.
The Corporation's purpose is to act as a holding company with the Bank as
its sole subsidiary. The Corporation's principal business is the business
of the Bank, and the Bank is predominately engaged in the business of
receiving deposits from and making first mortgage loans to borrowers on
one to four family residential properties domiciled in Central Kentucky.
Lending activities are carried out from the main office in Lancaster,
Kentucky and the loan production office in Nicholasville, Kentucky.
22
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
ORGANIZATION, (CONTINUED)
Savings deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) up to certain limitations. The Bank pays a premium to
the FDIC for the insurance of such savings deposits.
CASH AND CASH EQUIVALENTS
For purposes of reporting consolidated cash flows, the Corporation
considers cash, balances with banks and interest-bearing cash deposits in
other depository institutions with maturities of three months or less to
be cash equivalents.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
All investments in debt securities and all investments in equity
securities that have readily determinable fair values are classified into
three categories. Debt securities that management has the positive intent
and ability to hold until maturity are classified as held to maturity.
Securities that are bought and held specifically for the purpose of
selling in the near future are classified as trading securities. All
other securities are classified as available-for-sale. Securities
classified as trading and available-for-sale are carried at market value.
Unrealized holding gains and losses for trading securities are included
in current income. Unrealized holding gains and losses for
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized. Investments classified
as held to maturity are carried at amortized cost.
The Bank has analyzed its debt securities portfolio, and based on this
analysis, the Bank has determined to classify all debt securities as held
to maturity due to management's intent and ability to hold all debt
securities so classified until maturity. Equity securities are classified
as available-for-sale. Premiums and discounts on investment and
mortgage-backed securities are amortized over the term of the security
using the interest method. Gain or loss on sale of investments
available-for-sale is reflected in income at the time of sale using the
specific identification method.
No active market exists for Federal Home Loan Bank (FHLB) capital stock.
The carrying value is estimated to be fair value since, if the Bank
withdraws membership in the Federal Home Loan Bank, the stock must be
redeemed for face value. As a member of the Federal Home Loan Bank
System, the Bank is required to maintain an investment in FHLB capital
stock in an amount equal to at least 1% of outstanding residential
mortgages, or 5% of outstanding FHLB advances, whichever is greater. The
Bank met this requirement at June 30, 2000 and 1999.
Regulations require the Bank to maintain in each calendar quarter an
average daily balance of cash and U.S. government and other approved
securities equal to a prescribed percentage (4% at June 30, 1999 and
1998) of its liquidity base at the end of the preceding quarter. The
Bank's liquidity base is comprised of its deposits accounts (net of loans
on deposits) plus short-term borrowings. At June 30, 2000 and 1999, the
Bank met these requirements.
23
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DEPRECIATION
Depreciation of office property and equipment is calculated using the
straight-line and accelerated methods over the estimated useful lives of
such property. Estimated useful lives of office buildings and
improvements range from 32 to 39 years and useful lives of furniture and
equipment range from 5 to 7 years. The gain or loss on the sale of office
property and equipment is recorded in the year of disposition.
LOANS
Loans are stated at the principal amount outstanding. Interest income on
loans is recognized based on loan principal amounts outstanding during
the period. Interest earned on loans receivable is recorded in the period
earned.
LOAN FEES
Loan fees are accounted for in accordance with Statement of Financial
Accounting Standard (SFAS) No. 91. SFAS No. 91 requires that loan
origination fees and certain related direct loan origination costs be
offset and the resulting net amount be deferred and amortized over the
contractual life of the related loans as an adjustment to the yield of
such loans.
PROVISION FOR LOAN LOSSES
The Bank has established an allowance for loan losses for the purpose of
absorbing losses associated with the Bank's loan portfolio. All actual
loan losses are charged to the related allowance and all recoveries are
credited to it. Additions to the allowance for loan losses are provided
by charges to operations based on various factors, including the market
value of the underlying collateral, growth and composition of the loan
portfolios, the relationship of the allowance for loan losses to
outstanding loans, historical loss experience, delinquency trends and
prevailing and projected economic conditions. Management evaluates the
carrying value of loans periodically in order to evaluate the adequacy of
the allowance. While management uses the best information available to
make these evaluations, future adjustments to the allowance may be
necessary if the assumptions used in making the evaluations require
material revision.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and
subsequent recoveries, if any, are credited to the allowance.
REAL ESTATE ACQUIRED BY FORECLOSURE
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at
the lower of cost or fair value minus estimated cost to sell. Any
reduction to fair value from the new cost basis recorded at the time of
acquisition is accounted for as a valuation reserve. Revenue and expenses
from operations and additions to the valuation allowance are included in
noninterest expense.
24
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past
due less than 90 days may also be classified as non-accrual if repayment in
full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on
management's assessment of the collectibility of the loan.
INCOME TAXES
Deferred income taxes are recognized for certain income and expenses that
are recognized in different periods for tax and financial statement
purposes.
EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS
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 Mortgage Banking Enterprise." SFAS No. 134 amends
accounting and reporting standards for certain activities of mortgage
banking enterprises that were established by SFAS No. 65. This statement is
effective for the first fiscal quarter beginning after December 15, 1998.
The Corporation adopted SFAS No. 134 on January 1, 1999 with no material
affect on the Corporation'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 (as amended by SFAS No.
137) 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, 2000, but
earlier application is permitted as of the beginning of any fiscal quarter
subsequent to June 15, 1998. Upon the statement's initial application, all
derivatives are required to be recognized in the statement of financial
condition 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 SFAF No.
133 is not expected to have a material financial statement impact on the
Corporation's financial condition or operating results as the Corporation
did not hold derivative securities at June 30, 2000.
25
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECLASSIFICATIONS
Certain presentations of accounts previously reported have been
reclassified in these consolidated financial statements. Such
reclassification had no material effect on net income or stockholders'
equity as previously reported.
2. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
JUNE 30, 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 $ 607,548 $ 999,216
======== =========== ========= =========
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. MORTGAGED-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
JUNE 30, 2000 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
FHLMC certificates $ 255,386 $ 4,086 $ 251,300
GNMA certificates 102 2 100
--------- ---------- ------- ---------
$ 255,488 $ 4,088 $ 251,400
========= ========== ======= =========
JUNE 30, 1999
FHLMC certificates $ 317,545 $ 1,195 $ 316,350
GNMA certificate 615 2 613
--------- ---------- ------- ---------
$ 318,160 $ 1,197 $ 316,963
========= ========== ======= =========
</TABLE>
26
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGED-BACKED SECURITIES, CONTINUED:
There were no purchases or sales of mortgage-backed securities during 2000
or 1999.
Accrued interest receivable on held to maturity mortgage-backed securities
totaled $1,917 and $2,399 at June 30, 2000 and 1999, respectively.
Expected maturities will differ from contractual maturities because
borrowers may prepay obligations without prepayment penalties.
4. INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Federal Home Loan Bank of Cincinnati capital
stock, 8,175 and 7,616 shares in 2000 and
1999, respectively $817,500 $761,600
Intrieve, Inc. capital stock, 10 shares 15,000 15,000
-------- --------
$832,500 $776,000
======== ========
</TABLE>
5. LOANS RECEIVABLE, NET:
The Bank's loan portfolio consists principally of long-term conventional
loans collateralized by first mortgages on single-family residences. Loans
receivable, net at June 30, 2000 and 1999 consist of the following:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Single-family residential $37,023,083 $34,707,075
Multi-family residential and commercial 4,446,741 1,771,968
Construction 5,774,985 8,999,631
Nonresidential 4,300,053 3,035,500
Consumer loans 631,217 528,104
----------- -----------
52,176,079 49,042,278
Less: Unearned loan origination fees 76,562 71,031
Undisbursed portion of construction loans 2,394,207 2,227,932
Allowance for loan losses 331,445 551,000
----------- -----------
$49,373,865 $46,192,315
=========== ===========
</TABLE>
27
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE, NET, CONTINUED:
Accrued interest receivable on loans totaled $339,536 and $363,234 at June
30, 2000 and 1999, respectively.
The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 551,000 $ 200,000
Provision charged to operations 39,000 501,000
Loans charged off (258,555) (150,000)
--------- ---------
Balance at end of year $ 331,445 $ 551,000
========= =========
</TABLE>
The following is a summary of non-performing loans:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Accruing loan 90 days past due $ -- $ --
Nonaccrual loans 314,167 1,359,133
---------- ----------
Total non-performing loans at year end 314,167 1,359,133
========== ==========
Non-performing loans as a percentage of total loans, net 0.64% 2.94%
</TABLE>
At June 30, 2000 and 1999, the amount of interest income that would have
been recorded on loans in non-accrual status, had such loans performed in
accordance with their terms, would have been approximately $14,662 and
$74,000, respectively.
At June 30, 2000 and 1999, the Bank had loans outstanding to directors or
executive officers of $69,116 and $0, respectively.
At June 30, 2000 the Bank had $128,666 in impaired loans with related
allowances for loan losses of $22,700. At June 30, 1999 the Bank had
$665,295 in impaired loans with related allowances for loan losses of
$235,000. There are no impaired loans for which there is no related
allowance for loan losses.
28
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK:
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include mortgage commitments which amounted to
$878,200 and $1,253,500 at June 30, 2000 and 1999, respectively. These
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated statements
of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented
by the contractual amount of those commitments. The Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies but primarily
includes residential real estate.
The Bank has no significant concentrations of credit risk with any
individual counterparty to originate loans. The Bank's lending is
concentrated in residential real estate mortgages in the local Garrard,
Jessamine and Fayette County, Kentucky market.
The Bank has $1,450,316 and $2,231,109 of cash on deposit with one
financial institution at June 30, 2000 and 1999, respectively.
7. OFFICE PROPERTY AND EQUIPMENT, AT COST:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Land $ 30,000 $ 30,000
Office building and improvements 393,002 388,067
Furniture and equipment 211,123 165,489
-------- --------
634,125 583,556
Less accumulated depreciation 240,587 200,216
-------- --------
$393,538 $383,340
======== ========
</TABLE>
29
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS:
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Demand deposit accounts $ 1,482,700 $ 1,553,723
NOW and MMDA deposits with a weighted average
rate of 2.70% and 2.86% at June 30, 2000 and
1999, respectively 1,896,616 2,140,479
----------- -----------
Savings deposits 3,379,316 3,694,202
Certificates of deposits with a weighted average
rate of 5.91% and 5.55% at June 30, 2000
and 1999, respectively 25,699,235 25,959,044
----------- -----------
Total deposits $29,078,551 $29,653,246
=========== ===========
</TABLE>
Certificates of deposit by maturity at June 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
1 year or less $17,476,213 $19,130,650
1 year - 3 years 6,434,315 5,920,123
Maturing in years thereafter 1,788,707 908,271
----------- -----------
$25,699,235 $25,959,044
=========== ===========
</TABLE>
30
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS (CONTINUED):
Certificates of deposit by maturity and interest rate category at June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT DUE JUNE 30, 2000
(In Thousands)
LESS THAN AFTER
ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
--------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
2.00-3.99% $ -- $ -- $ -- $ 14 $ 14
4.00-5.99% 11,308 1,307 -- 178 12,793
6.00-7.99% 6,168 3,266 1,330 2,128 12,892
------- ------- ------- ------- -------
$17,476 $ 4,573 $ 1,330 $ 2,320 $25,699
======= ======= ======= ======= =======
<CAPTION>
AMOUNT DUE JUNE 30, 1999
(In Thousands)
LESS THAN AFTER
ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
--------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
2.00-3.99% $ 405 $ -- $ 16 $ -- $ 421
4.00-5.99% 13,693 2,063 324 195 16,275
6.00-7.99% 5,033 3,410 107 713 9,263
------- ------- ------ ----- -------
$19,131 $ 5,473 $ 447 $ 908 $25,959
======= ======= ====== ===== =======
</TABLE>
31
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances at June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
DATE OF 2000 1999 INTEREST
DATE OF ISSUE MATURITY AMOUNT AMOUNT RATE
------------- -------- -------- --------- --------
<S> <C> <C> <C> <C>
1/31/95 1/30/15 650,000 650,000 5.75
3/25/97 3/24/00 -- 500,000 6.75
1/28/98 2/1/08 73,798 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 5.29
6/24/99 10/22/99 -- 600,000 5.37
7/2/99 8/1/19 159,124 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
11/8/99 12/1/04 963,885 6.50
12/20/99 1/1/03 787,209 6.93
12/20/99 1/1/05 506,345 7.08
12/20/99 12/20/00 1,175,000 6.59
3/17/00 9/13/00 750,000 6.43
3/24/00 9/20/00 2,500,000 6.48
4/21/00 10/18/00 1,000,000 6.57
5/17/00 11/13/00 350,000 7.06
6/15/00 7/5/00 250,000 6.73
6/16/00 9/14/00 270,000 7.35
6/16/00 9/14/00 1,150,000 6.78
----------- -----------
$12,835,361 $ 8,831,037
=========== ===========
</TABLE>
32
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. FEDERAL HOME LOAN BANK ADVANCES (CONTINUED):
The scheduled maturities of Federal Home Loan Bank advances for the five
fiscal years subsequent to June 30, 2000 are as follows:
2001 $ 9,695,000
2003 787,209
2005 1,470,230
After 2005 882,922
-----------
$12,835,361
===========
As collateral for the advances, the Bank has pledged $19,253,041 of one to
four family residential mortgages, which represents 150% of the amount of
the advances.
As of June 30, 2000 the Corporation had a borrowing capacity with the FHLB
of $16,350,000.
10. LINE OF CREDIT:
On March 5, 1999, the Corporation entered into a line of credit with
Community Trust Bank N.A. for $2.5 million with an interest rate of prime
less .5%. Any outstanding balance on this line of credit is collateralized
by 100% of the Bank's stock. As of June 30, 2000 and 1999, there was no
outstanding balance.
11. REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered
by the OTS. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by the
OTS that, if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the OTS about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table on the following page) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), core/leverage capital
(as defined) to adjusted total assets, and tangible capital to adjusted
total assets. Management believes, as of June 30, 2000 that the Bank meets
all capital adequacy requirements to which it is subject.
33
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REGULATORY MATTERS (CONTINUED):
As of April 2000, the most recent notification from the OTS categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and core/leverage
ratios as set forth in the table below. There have been no conditions or
events since that notification that management believes have changed the
institution's category.
Amounts are in the thousands.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total Capital (to Risk
Weighted Assets) $ 11,941 32% $ 2,986 8% $3,732 10%
Tier I Capital (to Risk
Weighted Assets) $ 11,624 31% N/A $2,239 6%
Core/Leverage Capital (to
Adjusted Total Assets) $ 11,624 21% $ 2,192 4% $2,740 5%
Tangible Capital Equity (to
Tangible Assets) $ 11,624 21% $ 822 1.5% $1,096 2% (A)
As of June 30, 1999:
Total Capital (to Risk
Weighted Assets) $ 12,579 38% $ 2,669 8% $3,337 10%
Tier I Capital (to Risk
Weighted Assets) $ 12,263 37% N/A $2,002 6%
Core/Leverage Capital
(to Adjusted Total Assets) $ 12,263 24% $ 2,086 4% $2,607 5%
Tangible Capital Equity (to
Tangible Assets) $ 12,263 24% $ 782 1.5% $1,043 2% (A)
<FN>
(A) To be "other than critically undercapitalized" under prompt corrective
action provisions
</FN>
</TABLE>
34
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES:
Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying
future statutory tax rates to differences between the financial
statements carrying amounts and the tax basis of existing assets and
liabilities.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
Current $ 181,278 $ 290,789
Deferred 73,879 (129,491)
--------- ---------
$ 255,157 $ 161,298
========= =========
</TABLE>
Deferred income taxes result from temporary differences in the
recognition of income and expenses for tax and financial statement
purposes. The source of these temporary differences and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
Stock dividends on FHLB stock $ 19,006 $ 17,442
Provision for loan losses 74,649 (119,340)
Provision for uncollected interest 1,689 (674)
Depreciation 2,822 (316)
Deferred fees (1,881) (8,280)
Directors retirement expense (1,700) 2,890
Supplemental executive retirement expense (11,424) (11,359)
Management recognition plan expense (2,732) (1,248)
ESOP expense (5,870) (7,756)
Bonus expense (680) (850)
--------- ---------
$ 73,879 $(129,491)
========= =========
</TABLE>
35
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED):
The following tabulation reconciles the federal statutory tax rate to the
effective rate of taxes provided for income before taxes:
<TABLE>
<CAPTION>
JUNE 30,
--------
2000 1999
--------------------- -----------------------
<S> <C> <C> <C> <C>
Tax at statutory rate $250,726 34.0% $157,162 34.0%
Increases (decreases) in
taxes resulting from:
ESOP adjustments 7,758 1.0% 9,665 2.1%
Other, net (3,327) (0.4%) (5,529) (1.2%)
-------- ----- -------- -----
Effective rate $255,157 34.6% $161,298 34.9%
======== ===== ======== =====
</TABLE>
The tax effect of temporary differences giving rise to the Corporation's
consolidated deferred income tax asset (liability) at June 30, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 112,691 $ 187,340
Uncollected interest 4,985 6,674
Deferred loan fees 26,031 24,150
Directors retirement expense 45,317 43,617
Supplemental executive retirement expense 45,298 33,874
Management recognition plan expense 21,724 18,992
ESOP expense 15,693 9,823
Bonus expense 15,130 14,450
--------- ---------
286,869 338,920
Deferred tax liabilities:
FHLB stock dividends (109,853) (90,847)
Depreciation on office property and
equipment (13,656) (10,834)
Unrealized gain on available-for-sale
securities (331,520) (478,318)
--------- ---------
Deferred income tax liability $(168,160) $(241,079)
========= =========
</TABLE>
As of June 30, 2000, the Bank's bad debt reserve for federal tax purposes
was approximately $816,000 which represents the base year amount. A
deferred tax liability has not been recognized for the base year amount.
If the Bank uses the base year reserve for any reason other than to
absorb loan losses, a tax liability could be incurred. It is not
anticipated that the reserve will be used for any other purpose.
36
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. TREASURY STOCK:
During the year ended June 30, 1999 the Corporation repurchased 7,800
shares in conjunction with the Management Recognition Plan at $14.48 per
share for an aggregate cost of approximately $113,000. No additional
shares were purchased during the year ended June 30, 2000. After
distributions, treasury stock owned in conjunction with the MRP plan was
19,854 and 25,470 shares at June 30, 2000 and 1999, respectively.
In November 1998, the Corporation began a series of 5% stock repurchases
of its Common Stock. The Corporation's Board of Directors authorized a 5%
repurchase in November 1998 which was completed March 1999, authorized a
5% repurchase in July 1999 which was completed in March 2000 and
authorized a 5% repurchase in March 2000 which is approximately 50%
complete at June 30, 2000. The repurchase authority allows the
Corporation at management's discretion to selectively repurchase its
stock from time to time in the open market or in privately negotiated
transactions depending upon market price and other factors. During the
year ended June 30, 1999, the Corporation repurchased 47,940 shares at
prices ranging from $12.56 to $13.13 per share for an aggregate cost of
approximately $622,000. During the year ended June 30, 2000, the
Corporation repurchased 70,544 shares at prices ranging from $11.50 to
$13.38 for an aggregate cost of approximately $885,000.
14. EMPLOYEE BENEFIT PLANS:
RETIREMENT PLAN
The Bank is a participant in the Financial Institution's Retirement Fund,
a multi-employer defined benefit retirement plan. The plan is
noncontributory and covers all employees who meet certain requirements as
to age and length of service. The Bank's policy is to fund retirement
costs accrued. No contributions were made to the plan for the years ended
June 30, 2000 and 1999; however, administrative expenses were paid to the
plan in the amounts of $1,176 and $992 for the years ended June 30, 2000
and 1999, respectively.
Because the Bank participates in a multi-employer plan, the actuarial
present value of accumulated plan benefits and plan net assets available
for benefits are not determinable and therefore not disclosed.
PROFIT-SHARING PLAN
The Bank is a participant in the profit-sharing feature of the Financial
Institutions Thrift Plan. The plan is contributory and covers all
salaried employees who meet certain requirements as to age and length of
service. Employees become vested upon completion of five years of
service. Contributions are at the discretion of the Board of Directors
and are computed as a percentage of eligible employees' compensation. The
Board of Directors authorized contributions equal to 4% of eligible
employees' compensation for 2000 and 1999, which amounted to $14,024 and
$12,937 for 2000 and 1999, respectively.
37
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONTINUED):
EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation sponsors an employee stock ownership plan (ESOP) that
covers all employees. During 1996 the Corporation loaned $767,040 to the
ESOP for the purchase of 76,704 shares of the Corporation's stock. The
Corporation makes annual contributions to the ESOP equal to total debt
service less dividends received by the ESOP. All dividends on unallocated
shares are used to pay debt service. As the debt is repaid, First
Lancaster Bancshares, Inc. common shares are allocated to employees. The
Corporation accounts for its ESOP in accordance with Statement of
Position 93-6. Accordingly, the shares represented by outstanding debt
are reported as unearned ESOP shares in the statement of financial
condition. As shares are earned, the Corporation reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt
and accrued interest.
Compensation expense for the ESOP was $110,240 and $140,847 for the years
ended June 30, 2000 and 1999, respectively. Interest on the debt is not
considered compensation expense by the Corporation. The ESOP shares were
as follows as of June 30:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Allocated Shares 35,700 25,320
Unearned Shares 40,391 51,384
-------- --------
Total ESOP Shares 76,091 76,704
======== ========
Fair Value of Unearned Shares at June 30 $444,301 $571,647
Market Price per share $ 11.000 $ 11.125
</TABLE>
In the case of a distribution of ESOP shares which are not readily
tradable on an established securities market, the plan provides the
participant with a put option that complies with the requirements of
Section 490(h) of the Internal Revenue Code. The Corporation has
classified outside of permanent equity the fair value of earned and
unearned ESOP shares (net of the debit balance representing unearned ESOP
shares) subject to the put option in accordance with the Securities and
Exchange Commission Accounting Series Release #268.
38
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONTINUED):
STOCK AWARD PLANS
MANAGEMENT RECOGNITION PLAN (MRP)
In connection with the conversion, the Corporation adopted the First
Lancaster Bancshares, Inc. Management Recognition Plan, the objective
of which is to enable the Corporation to retain personnel of
experience and ability in key positions of responsibility. Those
eligible to receive benefits under the MRP include certain directors
and executive officers of the Corporation and First Lancaster Federal
Savings Bank as determined by members of a committee appointed by the
Board of Directors. On January 9, 1997, 28,761 shares were awarded.
The fair market value of the common stock at that date was $14.625
and there is no exercise price for the stock. Awards to directors and
eligible employees will vest 20% on each anniversary date of the
award. On July 3, 1997, July 6, 1998 and July 8, 1999 additional
shares of 231, 1,251 and 1,534 were granted, respectively. Shares are
held by the trustee and are voted by the MRP trustee in the same
proportion as the trustee of the Corporation's ESOP plan vote shares
held therein. Assets of the trust are subject to the general
creditors of the Corporation. All shares vest immediately in the case
of a participant's death or disability. The Corporation applied APB
Opinion 25 and related Interpretations in accounting for the MRP.
Compensation cost charged to operations for the MRP totaled $95,191
and $89,008 for the years ended June 30, 2000 and 1999, respectively.
STOCK OPTION PLAN
The Corporation granted stock options under the 1996 Stock Option and
Incentive Plan. Under the plan the Corporation is authorized to issue
shares of common stock pursuant to "Awards" granted in various forms,
including incentive stock options (intended to qualify under Section
422 of the Internal Revenue Code of 1986, as amended), non-qualified
stock options, and other similar stock-based awards. The Corporation
granted stock options to employees and directors in 1997 under the
plan in the form of incentive and non-qualified stock options. The
stock options granted in 1997 have contractual terms of 10 years. All
options granted to the employees and directors have an exercise price
no less than the fair market value of the stock at grant date. The
option price is equal to 110% of the fair market value on the grant
date in the case of Incentive Stock Options (ISO) granted to persons
owning more than 10% of the outstanding common shares. Each option
will become exercisable with respect to 20% of the optioned shares
upon an optionee's completion of each of five years of future service
as an employee, director or advisory or emeritus director, provided
that an option shall become 100% exercisable immediately if an
optionee's continuous service terminates due to death or disability.
The options expire ten years after the date of grant. The Corporation
granted 71,910 options in 1997 and 3,834 options in 2000.
39
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONTINUED):
STOCK AWARD PLANS, (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
A summary of the status of the Corporation's stock options as of June
30, 2000 and the changes during the year ended on that date is
presented below.
<TABLE>
<CAPTION>
WEIGHTED
# SHARES OF AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
----------- --------
<S> <C> <C>
Outstanding, July 1, 1999 67,116 $ 14.625
Granted during the year 3,834 11.063
Expired during the year 0
Exercised during the year 0
-------
Outstanding, June 30, 2000 70,950 $ 14.433
=======
Eligible for exercise at year-end 40,260
=======
Weighted average fair value of options
granted at a discount $3.10
</TABLE>
The Corporation applies APB Opinion 25 and related Interpretations in
accounting for the Plan. In 1995, the FASB issued FASB Statement No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) which, if
fully adopted by the Corporation, would change the methods the
Corporation applies in recognizing the cost of the plan. Adoption of
the cost recognition provisions of SFAS 123 is optional and the
Corporation has decided not to elect these provisions of SFAS 123.
However, pro forma disclosures as if the Corporation adopted the cost
recognition provisions of SFAS 123 in 1996 are required by SFAS 123
and are presented below.
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
GRANT DIVIDEND RISK-FREE EXPECTED LIFE
DATE YIELD INTEREST RATE OF OPTIONS VOLATILITY
--------- -------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
January 1997 4.10% 6.25% 6 years 21.69%
July 1999 5.42% 5.60% 6 years 15.20%
</TABLE>
40
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONTINUED):
STOCK AWARD PLANS, (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
As of June 30, 2000, 70,950 options are outstanding with a weighted-average
remaining contractual life of all stock options being 6.6 years.
Had the compensation cost for the Corporation's stock-based compensation
plan been determined consistent with SFAS 123, the Corporation's net income
and net income per common share for 2000 and 1999 would approximate the pro
forma amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
6/30/00 6/30/00
----------- ----------
<S> <C> <C>
Net Income $ 482,272 $ 435,407
Basic Earnings per Share $ 0.60 $ 0.54
Diluted Earnings per Share $ 0.59 $ 0.53
<CAPTION>
AS REPORTED PRO FORMA
6/30/99 6/30/99
----------- ----------
<S> <C> <C>
Net Income $ 300,944 $ 278,288
Basic and Diluted Earnings per Share $ 0.35 $ 0.32
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS
Effective December 7, 1995, the Board of Directors of the Bank adopted the
First Lancaster Federal Savings Bank Directors' Retirement Plan for
Non-Employee Directors. A participant in the Plan will receive, on each of
the ten annual anniversary dates of leaving the Board, an amount equal to
the product of his "Benefit Percentage," "Vested Percentage," (as defined)
and 75% of the total fee he received for service on the Board during the
calendar year preceding his retirement. The amount charged to operations
under the plan totaled $5,000 and $0 for the years ended June 30, 2000 and
1999, respectively.
41
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. EMPLOYEE BENEFIT PLANS (CONTINUED):
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP)
Effective December 7, 1995 the Bank entered into supplemental retirement
agreements with two key executives of the Bank. Upon the executive's
termination of employment with the Bank, the executive will be entitled
to receive annual payments equal to the product of the executive's
"Vested Percentage" and "Average Annual Compensation," less the "Annual
Offset Amount," as defined in the plan. Vesting occurs at 10% per full
year of service with the Bank following December 31, 1995.
The Bank has established an irrevocable grantor trust to hold assets in
order to provide itself with a source of funds to assist the Bank in the
meeting of the SERP liability. The amount charged to operations under the
plan totaled $33,600 and $33,408 for the years ended June 30, 2000 and
1999, respectively.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." This statement extends the existing fair
value disclosure practices for some instruments by requiring all entities
to disclose the fair value of financial instruments (as defined), both
assets and liabilities recognized and not recognized in the statements of
financial condition, for which it is practicable to estimate fair value.
There are inherent limitations in determining fair value estimates as
they relate only to specific data based on relevant information at that
time. As a significant percentage of the Bank's financial instruments do
not have an active trading market, fair value estimates are necessarily
based on future expected cash flows, credit losses and other related
factors. Such estimates are, accordingly, subjective in nature,
judgmental and involve imprecision. Future events will occur at levels
different from that in the assumptions, and such differences may
significantly affect the estimates.
The statement excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
Additionally, the tax impact of the unrealized gains or losses has not
been presented or included in the estimates of fair value.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the statements of financial condition
for cash and short-term instruments approximate those assets' fair
values.
42
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments. No active
market exists for the Federal Home Loan Bank capital stock. The carrying
value is estimated to be fair value since, if the Bank withdraws
membership in the Federal Home Loan Bank, the stock must be redeemed for
face value.
LOANS RECEIVABLE
For certain homogeneous categories of loans, such as residential
mortgages and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of
loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
REAL ESTATE ACQUIRED BY FORECLOSURE
Fair values for real estate acquired by foreclosure are based on
independent appraisals of fair market value, where available. If current
independent appraisals are not available, fair values are based on market
values for comparable properties.
DEPOSITS
The fair value of savings deposits and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank bear interest at fixed rates.
The carrying value of these borrowings is estimated using the current
rates at which similar loans would be made to borrowers for the same
maturities.
LOAN COMMITMENTS
The fair value of loan commitments is estimated to approximate the
contract values. The contract for each loan commitment has a current
market rate, the creditworthiness of the counterparties is presently
considered in the commitments, and the original fees charged do not vary
significantly from the fee structure at June 30, 2000.
43
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------ -------- -----
(in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash $ 494 $ 494 $ 475 $ 475
Interest-bearing deposits in other
depository institutions 1,450 1,450 2,231 2,231
Investment securities 999 999 1,431 1,431
Investment in nonmarketable
equity securities 833 833 777 777
Mortgage-backed securities 255 251 318 317
Loans receivable, net allowance for
loan losses of $331 for 2000
and $551 for 1999 49,374 49,246 46,192 46,324
Real estate acquired by foreclosure 952 982 456 456
Financial Liabilities:
Savings accounts and certificates 29,079 29,118 29,653 29,826
Federal Home Loan Bank advances 12,835 12,618 8,831 8,743
</TABLE>
16. DIVIDEND RESTRICTIONS:
On June 28, 1996, the Bank converted from a mutual savings bank to a
capital stock savings bank. On that date, the Bank established a
liquidation account in an amount of the Bank's net worth as of the latest
practicable date prior to conversion. The liquidation account is
maintained for the benefit of eligible deposit account holders who
maintain their deposit accounts in the Bank after conversion.
In the event of a complete liquidation (and only in such an event), each
eligible deposit account holder will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate amount of
the then current adjusted balance for deposit accounts held, before any
liquidation may be made with respect to capital stock. The Bank may not
declare or pay a cash dividend on or repurchase any of its common stock
if the effect thereof would cause its regulatory capital to be reduced
below the amount required for the liquidation account.
44
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. DIVIDEND RESTRICTIONS (CONTINUED):
The OTS regulates payment of dividends and other capital distributions by
the Bank. The Bank may not make distributions to the Corporation for
dividends on or repurchase of any of its stock if the effect would be to
reduce retained earnings of the Bank below the capital requirements set
forth by the OTS. OTS regulations utilize certain criteria that require
notification of or application for distributions based primarily upon an
institution's net income and retained capital. Based upon current OTS
regulations, the bank must either (i) file notification with the OTS
because it is a subsidiary of a savings and loan holding company or (ii)
apply for distributions if the total amount of capital distributions for
the applicable calendar year exceeds net income for that year to date
plus retained net income for the preceding two years. The amount of
distributions cannot reduce the Bank's capital below the liquidation
account discussed above. As of June 30, 2000 the Bank is approved by the
OTS to make capital distributions to the Corporation in the amount of
$1.6 million through May 30, 2001.
17. PREFERRED STOCK:
The Corporation's Certificate of Incorporation authorizes 500,000 shares
of preferred stock of the Corporation, of $.01 par value. The
consideration for the issuance of the shares shall be paid in full before
their issuance and shall not be less than the par value. Neither
promissory notes nor future services shall constitute payment or part
payment for the issuance of shares of the Corporation. The consideration
for the shares shall be cash, tangible or intangible property (to the
extent direct investment in such property would be permitted), labor or
services actually performed for the Corporation, or any combination of
the foregoing. Upon issuance of preferred stock or any series of
preferred stock, as established by the Board of Directors, the
Corporation shall file articles of amendment to the Corporate Certificate
of Incorporation with the Delaware Secretary of State establishing and
designating the series and fixing and determining the relative rights and
preferences thereof. The Corporation's Certificate of Incorporation
expressly vests in the Board of Directors of the Corporation the
authority to issue the preferred stock in one or more series and to
determine, to the extent permitted by law prior to the issuance of the
preferred stock (or any series of the preferred stock), the relative
rights, limitations and preferences of the preferred stock or any such
series.
45
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. EARNINGS PER SHARE:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 2000 FOR THE YEAR ENDED JUNE 30, 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 $482,272 810,251 $0.60 $300,944 849,364 $0.35
Effect of dilutive securities
Management recognition
plan 10,606 13,349
Diluted earnings per share
Income available to common
shareholders plus
assumed conversions $482,272 820,857 $0.59 $300,944 862,713 $0.35
</TABLE>
There were no preferred dividends or antidilutive securities that would affect
the computation of earnings per share.
46
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY):
The following condensed statements summarize the financial position,
operating results and cash flows of First Lancaster Bancshares, Inc.
(Parent Company only).
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and balances with bank $ 44,923 $ 127,396
Investment in subsidiary 12,676,289 13,707,241
Income tax receivable 109,490 70,273
Accrued interest receivable 21,559 23,913
Due from subsidiary 12,438 7,346
----------- -----------
$12,864,699 $13,936,169
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 297 $ 297
Common stock owned by ESOP subject to put option 386,949 310,614
Stockholders' equity 12,477,453 13,625,258
----------- -----------
$12,864,699 $13,936,169
=========== ===========
CONDENSED STATEMENTS OF INCOME JUNE 30,
2000 1999
----------- -----------
Dividend from bank subsidiary $ 1,350,000 $ 1,088,263
Interest income 46,577 57,496
Legal, accounting and filing fees (144,197) (121,261)
State franchise taxes (17,720) (14,077)
----------- -----------
Net income before income taxes 1,234,660 1,010,421
Income tax benefit 39,217 26,466
Net income before equity in undistributed net income of
subsidiary 1,273,877 1,036,887
Dividends in excess of earnings of subsidiary (791,605) (735,943)
----------- -----------
Net income 482,272 300,944
Other comprehensive (loss) income (284,961) 178,101
----------- -----------
Comprehensive income $ 197,311 $ 479,045
=========== ============
</TABLE>
47
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED):
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 482,272 $ 300,944
Adjustment to reconcile net income to cash provided
by operating activities:
Dividends in excess of earnings of subsidiary 791,605 735,943
Increase in income tax receivable (39,217) (26,466)
Decrease in accrued interest receivable 2,354 7,792
Decrease in accounts payable - (3,147)
----------- -----------
Net cash provided by operating activities 1,237,014 1,015,066
INVESTING ACTIVITIES:
Payment on ESOP loan 63,483 53,698
----------- -----------
Net cash provided by investing activities 63,483 53,698
----------- -----------
FINANCING ACTIVITIES:
Purchase of treasury stock (884,731) (621,982)
Dividends paid (498,239) (512,300)
----------- -----------
Net cash used in financing activities (1,382,970) (1,134,282)
----------- -----------
Net decrease in cash (82,473) (65,518)
Cash, beginning of year 127,396 192,914
----------- -----------
Cash, end of year $ 44,923 $ 127,396
=========== ===========
</TABLE>
20. SUBSEQUENT EVENT:
On July 6, 2000 the Corporation declared a dividend of $0.30 per share or
$252,098, to shareholders of record as of July 21, 2000. The dividends
were paid on July 31, 2000.
48
<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
BOARD OF DIRECTORS
<S> <C> <C>
VIRGINIA R. S. STUMP DAVID W. GAY JACK C. ZANONE
Chairman of the Board, President Retired Retired
and Chief Executive Officer of the
Company and the Bank PHYLLIS G. SWAFFAR JERRY PURCELL
Self-Employed Income Owner
Tax Preparer Convenient Food Mart/ Dairy Mart
TONY A. MERIDA
Vice Chairman of the Board and RONALD L. SUTTON JANE G. SIMPSON, DIRECTOR EMERITUS
Executive Vice President of the Pharmacist Retired
Company and the Bank
<CAPTION>
EXECUTIVE OFFICERS
VIRGINIA R. S. STUMP TONY A. MERIDA KATHY G. JOHNICA
President and Chief Executive Executive Vice Secretary and Treasurer
Officer President
<CAPTION>
OFFICE LOCATIONS
208 Lexington Street 713 Edgewood Drive
Lancaster, Kentucky 40444-1131 Nicholasville, Kentucky
(Loan Production Office)
<CAPTION>
OTHER INFORMATION
INDEPENDENT CERTIFIED ACCOUNTANTS SPECIAL COUNSEL
PricewaterhouseCoopers LLP Stradley Ronon Housley Kantarian & Bronstein, LLP
201 East Main Street, Suite 1400 1220 19th Street, N.W., Suite 700
Lexington, Kentucky 40507 Washington, D.C. 20036
TRANSFER AGENT ANNUAL MEETING
Illinois Stock Transfer Company The 2000 Annual Meeting of Stockholders
209 W. Jackson Boulevard, Suite 903 will be held on October 30, 2000 at 4:00
Chicago, Illinois 60606 p.m. at the Bank's office located at 208
Lexington Street, Lancaster, Kentucky.
</TABLE>
-------------------------------------------------------------
Annual Report on Form 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 2000 as filed with the
Securities and Exchange Commission will be furnished
without charge to stockholders as of the record date for
the 2000 Annual Meeting upon written request to the
Corporate Secretary, First Lancaster Bancshares, Inc.,
208 Lexington Street, Lancaster, Kentucky 40444- 1131.
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