U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
for the transition period from to
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Commission File Number 0-20899
FIRST LANCASTER BANCSHARES, INC.
---------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 61-1297318
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
208 LEXINGTON STREET, LANCASTER, KENTUCKY 40444-1131
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(Address of Principal Executive Offices)
(606) 792-3368
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Registrant's Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of May 13, 1997, the issuer had 958,812 shares of Common Stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
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CONTENTS
PART 1. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and June 30, 1996 (unaudited) 2
Consolidated Statement of Income for the Three Months and
Nine Months Ended March 31, 1997 and 1996 (unaudited) 3
Consolidated Statement of Cash Flows for the Nine Months
Ended March 31, 1997 and 1996 (unaudited) 4
Notes to Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-13
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT 11 16
EXHIBIT 27 17
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS MARCH 31, JUNE 30,
1997 1996
----------- -----------
Cash $ 368,573 $ 339,445
Interest-bearing cash deposits in other depository institutions 3,060,822 7,285,412
Investment securities available-for-sale, at market value (amortized cost
$24,158 at March 31, 1997 and June 30, 1996) 672,312 527,364
Mortgage-backed securities, held to maturity 561,272 114,979
Investments in nonmarketable equity securities, at cost 331,500 315,600
Loans receivable, net 34,840,623 31,385,400
Real estate acquired by foreclosure 168,965
Accrued interest receivable 201,859 138,213
Office property and equipment, at cost, less accumulated depreciation 399,652 427,390
Other assets 11,546 23,870
----------- -----------
Total assets $40,448,159 $40,726,638
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings accounts and certificates $21,963,772 $23,482,589
Advance payments by borrowers for taxes and insurance 19,725 24,840
Accrued interest payable 3,586 45,961
Federal Home Loan Bank advances 4,183,404 3,480,410
Accounts payable and other liabilities 187,288 113,958
Income tax payable 27,449 2,230
Deferred income tax payable 212,745 163,463
----------- -----------
Total liabilities 26,597,969 27,313,451
----------- -----------
Preferred stock, 500,000 shares authorized
Common stock, $.01 par value; 3,000,000 shares authorized;
886,905 and 882,108 shares issued and outstanding at
March 31, 1997 and June 30, 1996, respectively 9,588 9,588
Additional paid-in capital 9,102,380 9,149,403
Employee stock ownership plan (719,100) (767,040)
Unrealized gain on securities available-for-sale (net of deferred tax
liability of $220,372 and $171,090, respectively) 427,782 332,116
Retained earnings, substantially restricted 5,029,540 4,689,120
----------- -----------
Total stockholders' equity 13,850,190 13,413,187
----------- -----------
Total liabilities and stockholders' equity $40,448,159 $40,726,638
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the three months and nine months ended March 31, 1997 and 1996
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
1997 1996 1997 1996
--------- --------- ---------- ----------
Interest on loans and mortgage-backed securities $ 749,037 $ 671,698 $2,202,653 $2,018,175
Interest and dividends on investments and deposits in other
depository institutions 31,688 50,838 151,392 145,207
--------- --------- ---------- ----------
Total interst income 780,725 722,536 2,354,045 2,163,382
--------- --------- ---------- ----------
Interest on savings accounts and certificates 282,623 366,142 859,601 1,084,733
Interest on other borrowings 22,719 65,469 86,615 219,152
--------- --------- ---------- ----------
Total interest expense 305,342 431,611 946,216 1,303,885
--------- --------- ---------- ----------
Net interest income 475,383 290,925 1,407,829 859,497
Provision for loan losses 13,560 39,985
--------- --------- ---------- ----------
Net interest income after provision for loan losses 475,383 290,925 1,394,269 819,512
--------- --------- ---------- ----------
Other expenses:
Compensation 68,527 70,179 208,606 222,558
Employee retirement and other benefits 71,779 10,423 165,973 24,853
State franchise taxes 7,630 7,677 21,922 20,907
SAIF deposit insurance premium 6,503 20,468 196,540 53,287
Depreciation 7,387 10,176 27,738 27,111
Data processing 11,782 11,134 32,402 31,265
Loss on disposal of other real estate owned 16,150 16,150
Other 81,178 36,447 213,649 105,149
--------- --------- ---------- ----------
Total other expenses 254,786 182,654 866,830 501,280
--------- --------- ---------- ----------
Income before income taxes 220,597 108,271 527,439 318,232
Provision for income taxes 77,845 36,812 186,997 108,199
--------- --------- ---------- ----------
Net income $ 142,752 $ 71,459 $ 340,442 $ 210,033
========= ========= ========== ==========
Weighted shares outstanding 906,940 891,541
Earnings per share net of tax 0.16 0.38
The accompanying notes are an integral part of the consolidated financial
statements.
3
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended March 31, 1997 and 1996
(Unaudited)
1997 1996
------------ -----------
Cash flows from operating activities:
Net income $ 340,442 $ 210,033
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 27,738 27,111
Provision for loan losses 13,560 39,985
Stock dividend, FHLB stock (15,900) (11,100)
Net loan origination fees deferred 21,095 23,544
Amortization of deferred loans fees (20,433) (12,930)
Noncash compensation related to ESOP 70,493
Loss on sale of real estate acquired by foreclosure 2,633 16,150
Change in assets and liabilities:
Accrued interest receivable (63,646) (28,519)
Other assets 12,324 (100,083)
Income tax receivable (23,082)
Accrued interest payable (42,375) 3,758
Accounts payable and other liabilities 73,330 13,327
Income tax payable 25,219
------------ -----------
Net cash provided by operating activities 444,480 158,194
------------ -----------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure 166,332 (108,000)
Purchase mortgage backed securities (499,932)
Mortgage-backed securities principal repayments 53,639 22,185
Net increase in loans receivable (3,469,468) (883,021)
------------ -----------
Net cash used in investing activities (3,749,429) (968,836)
------------ -----------
Cash flows from financing activities:
Net (decrease) increase in savings accounts and certificates (1,518,817) 2,332,000
Advance payments by borrowers for taxes and insurance (5,115) (6,461)
Federal Home Loan Bank advances 3,250,000
Federal Home Loan Bank advance principal repayments (2,547,006) (1,188,349)
Stock conversion costs (69,575)
------------ -----------
Net cash (used in) provided by financing activities (890,513) 1,137,190
------------ -----------
Net (decrease) increase in cash and cash equivalents (4,195,462) 326,548
Cash and cash equivalents at beginning of period 7,624,857 2,351,894
------------ -----------
Cash and cash equivalents at end of period $ 3,429,395 $ 2,678,442
============ ===========
Supplemental disclosure of non-cash investing activities:
Unrealized gain on securities available for sale, $ 95,666 $ 67,169
Loan transferred to real estate acquired by foreclosure $ 118,000
The accompanying notes are an integral part of the consolidated financial
statements.
4
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The accompanying unaudited consolidated financial statements of First
Lancaster Bancshares, Inc. and Subsidiary (the Company) have been prepared
in accordance with the instructions for Form 10-QSB and therefore do not
include certain information or footnotes necessary for the presentation of
complete consolidated financial statements in accordance with generally
accepted accounting principles. However, in the opinion of management, the
consolidated financial statements reflect all adjustments (which consist of
normal recurring accruals) necessary for a fair presentation of the results
for the unaudited periods. The results of the operations for the three and
nine months ended March 31, 1997 are not necessarily indicative of the
results which may be expected for the entire year. The consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto for the year ended
June 30, 1996.
2. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
MARCH 31, 1997 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 24,672 shares $ 24,158 $ 648,154 $ $ 672,312
========= ========= ========= =========
JUNE 30, 1996
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 6,168 shares $ 24,158 $ 503,206 $ $ 527,364
========= ========= ========= =========
3. MORTGAGED-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
MARCH 31, 1997 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
FHLMC certificates $ 558,559 $ $ 558,559
GNMA certificate 2,713 2,713
--------- ---------- ---------- ---------
$ 561,272 $ $ 561,272
========= ========== ========== =========
JUNE 30, 1996
FHLMC certificates $ 111,228 $ 9,699 $ 120,927
GNMA certificate 3,751 322 4,073
--------- ---------- ---------- ---------
$ 114,979 $ 10,021 $ 125,000
========= ========== ========== =========
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. ALLOWANCE FOR LOAN LOSSES:
An analysis of the changes in the loan loss allowance for the three months
and nine months ended March 31 follows:
THREE MONTHS ENDED NINE MONTHS ENDED
1997 1996 1997 1996
-------- -------- -------- --------
Beginning balance $100,000 $100,000 $100,000 $ 70,000
Provision 13,560 39,985
Charge offs (13,560) 9,985
-------- -------- -------- --------
Ending Balance $100,000 $100,000 $100,000 $100,000
======== ======== ======== ========
Nonaccrual loans amounted to $184,019 and $451,711 at March 31, 1997 and 1996,
respectively.
5. FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances at March 31, 1997 and June 30, 1996 are as
follows:
MARCH 31, JUNE 30,
1997 1996
----------- ------------------------
DATE OF INTEREST
ISSUE YEAR OF MATURITY AMOUNT AMOUNT RATE
--------- ------------------------- ----------- ----------- -----------
8/11/94 8/11/94 $ 1,500,000 6.23%
10/27/94 11/01/04 $ 139,425 177,160 8.45
11/18/94 11/18/94 1,000,000 5.89
1/31/95 1/30/15 650,000 650,000 6.09
5/09/95 6/01/05 143,979 153,250 7.35
3/14/97 3/13/98 750,000 6.05
3/25/97 3/25/98 500,000 6.75
3/25/97 3/25/98 2,000,000 6.20
----------- -----------
$ 4,183,404 $ 3,480,410
=========== ===========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INCENTIVE AND RECOGNITION PLANS:
On January 9, 1997 the shareholders of the Corporation approved the First
Lancaster Bancshares Inc. 1996 Stock Option and Incentive Plan and the First
Lancaster Federal Savings Bank Management Recognition Plan.
Under the 1996 Stock Option and Incentive Plan, the Company may grant either
incentive (ISO) or non-qualified stock options to key employees and
directors for an aggregate of 95,881 shares of the Company's common stock.
On January 9, 1997 options covering 71,910 shares were granted under the
plan and are exercisable at an exercise price of $14.625 per share which
equaled 100% of the fair market on the date such options were granted. The
option price is equal to 110% of the fair market value on the grant date in
the case of ISO granted to persons owning more than 10% of the outstanding
common shares. Each option will become exercisable with respect to twenty
percent of the optioned shares upon an optionee's completion of each of five
years of future service as an employee, director or advisory or emeritus
director, provided that an option shall become 100% exercisable immediately
if an optionee's continuous service terminates due to death or disability.
The options expire ten years after the date of grant.
Under the First Lancaster Federal Savings Bank Management Recognition Plan
(MRP), the MRP trust may purchase, in the aggregate, up to a maximum of
38,352 shares of common stock. Those eligible to receive shares (at no
exercise price) under the MRP include certain directors, advisory directors,
directors emeritus and executive officers of the Company as determined by
members of a committee appointed by the Board of Directors. On January 9,
1997 awards covering 28,761 shares of common stock had been granted. Awards
to directors and eligible employees vest 20% on each anniversary date of the
award. Vesting, however, accelerates to 100% if the participants service
terminates due to death or disability. Shares are held by the trustee and
are voted by the MRP trustee in the same proportion as the trustee of the
Company's ESOP plan votes shares held therein. Assets of the trust are
subject to the general creditors of the Company.
7. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS:
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-based Compensation". This Statement encourages entities to adopt the
fair value based method of accounting for employee stock options or other
stock compensation plans. However, it allows an entity to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principal Board (APB) Opinion No 25,
"Accounting for Stock Issued to Employees". Under the fair value based
method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period. Under the intrinsic value based method, compensation cost is
the excess of the quoted market price of the stock at grant date over the
amount an employee must pay to acquire the stock. This statement is
effective for transactions entered into in fiscal years that begin after
December 15, 1995. The Company adopted the Statement on January 9, 1997, the
date the shareholders approved the 1996 Stock Option and
7
Incentive Plan and the First Lancaster Federal Savings Bank Management
Recognition Plan. The Company has determined it will use the accounting
prescribed by APB Opinion No. 25.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS, CONTINUED:
In June 1996, the FASB issued Statement of Financial Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under this standard, accounting for
transfers and servicing of financial assets and extinguishments of
liabilities is based on control. After a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered and derecognizes liabilities when extinguished. This
statement applies prospectively in fiscal years beginning after December 31,
1996. The Corporation does not expect the implementation of this statement
to have a material affect on the financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (EPS).
This statement specifies the computation, presentation, and disclosure
requirements for EPS and is substantially similar to the standard recently
issued by the International Accounting Standards Committee entitled
International Accounting Standards, "Earnings Per Share" (IAS 33).
SFAS No. 128 is designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of
EPS data on an international basis. Some of the changes made to simplify the
EPS computations include: (a) eliminating the presentation of primary EPS
and replacing it with basic EPS, with the principal difference being that
common stock equivalents (CSEs) are not considered in computing basic EPS,
(b) eliminating the modified treasury stock method and three percent
materiality provision, and (c) revising the contingent share provisions and
the supplemental EPS data requirements. SFAS No. 128 requires presentation
of basic EPS amounts from income for continuing operations and net income on
the face of the income statement for entities with simple capital structures
and dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures regardless of
whether basic and diluted EPS are the same. The statement also requires a
reconciliation of the numerator and denominator used on computing basic and
diluted EPS and is applicable to all entities with publicly held common
stock or potential common stock.
SFAS No. 128 is effective for fiscal year ending June 30, 1998 and interim
period after December 15, 1997. Earlier application is not permitted. EPS
calculated under SFAS No. 128 are not expected to be materially different
from EPS calculated under the current method.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
incurred on interest-bearing liabilities, such as deposits and borrowings. The
Company's operating expenses consist primarily of employee compensation,
occupancy expenses, federal deposit insurance premiums and other general and
administrative expenses. The Company's results of operations are significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory agencies.
Any forward-looking statements included in this report or in any report included
by reference, which reflect management's best judgement based on factors known,
involve risks and uncertainties, including but not limited to those discussed
above. Actual results could differ materially from those expressed or implied.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND JUNE 30, 1996
The Bank's total assets decreased by approximately $278 thousand, or 0.7%, from
$40.7 million at June 30, 1996 to $40.4 million at March 31, 1997. The decrease
resulted primarily from a decrease in interest-bearing deposits in other
depository institutions of $4.2 million from $7.3 million at June 30, 1996 to
$3.1 million at March 31, 1997 offset by an increase in net loans receivable of
$3.4 million, or 11.0%, from $31.4 million at June 30, 1996 to $34.8 million at
March 31, 1997 and an increase in mortgage backed securities, held to maturity
of $446 thousand from $115 thousand at June 30, 1996, to $561 thousand at March
31, 1997. The Bank's savings accounts decreased by $1.5 million, or 6.5%, from
$23.5 million at June 30, 1996 to $22.0 million at March 31, 1997. The Bank's
FHLB advances increased by $703 thousand, or 20.2%, from $3.5 million at June
30, 1996 to $4.2 million at March 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND
1996
NET INCOME: The Bank's net income increased by $72 thousand or 99.8%, from $71
thousand for the quarter ended March 31, 1996 to $143 thousand for the quarter
ended March 31, 1997. Such increase was due primarily to an increase in net
interest income of $184 thousand or 63.4%, offset by an increase in employee
retirement and other benefits of $61 thousand, an increase in other expense of
$45 thousand and an increase in provision for income taxes of $41 thousand.
NET INTEREST INCOME: Net interest income increased by $184 thousand, or 63.4%,
from $291 thousand for the quarter ended March 31, 1996 to $475 thousand for the
quarter ended March 31, 1997. The increase is attributed to an increase in
interest income of $58 thousand and a reduction of interest expense of $126
thousand.
INTEREST INCOME: Total interest and dividend income increased by $58 thousand
or 8.1%, to $781 thousand for the quarter ended March 31, 1997 from $723
thousand for the quarter ended March 31, 1996. The increase primarily reflects
an increase in interest income on loans. Interest on loans
9
increased by $77 thousand, or 11.5%, during the quarter ended March 31, 1997, as
compared to the quarter ended March 31, 1996, as the Bank continued its policy
of loan growth through originations. Interest and dividends on investments and
deposits in other depository institutions decreased by $19 thousand or 37.7%,
during the quarter ended March 31, 1997, as compared to the quarter ended March
31, 1996. The decrease in dividends on investments and deposits in other
depository institutions is attributed to the use of these short term investments
to fund loan growth.
INTEREST EXPENSE: Total interest expense decreased by $126 thousand, or 29.3%,
to $306 thousand for the quarter ended March 31, 1997 from $432 thousand for the
quarter ended March 31, 1996. Most of such decreases were due to decreases in
interest on savings accounts and certificates of deposit, as these deposits were
converted to equity as a result of the conversion to a stock bank. Interest on
other borrowings decreased by $43 thousand, or 65.3%, to $23 thousand for the
quarter ended March 31, 1997 from $66 thousand for the quarter ended March 31,
1996 due to repayments of debt funded by proceeds from the conversion.
PROVISION FOR LOAN LOSSES: The Bank established no provisions for loan losses
in the quarters ended March 31, 1997 and 1996, respectively. The Bank's
provision for loan losses is based on management's assessment of the general
risk inherent in the loan portfolio based on all relevant factors and
conditions.
OTHER EXPENSE: Total other expense increased by $72 thousand, or 39.5%, from
$183 thousand for the quarter ended March 31, 1996 to $255 thousand for the
quarter ended March 31, 1997. The increase was caused primarily by increases of
$61 thousand and $45 thousand, respectively, in employee retirement and other
benefits expense and other expenses. The increase in other expense is related
to costs associated with becoming a public company during 1996. Employee
retirement and other benefits increased as a result of the new employee ESOP
plan, management recognition plan (MRP) and the directors retirement program.
These increases were offset by a reduction in compensation cost, a reduction in
SAIF deposit insurance premium and no loss on disposal of other real estate
occurred for the three months ended March 31, 1997.
INCOME TAX: The effective tax rates for the quarters ended March 31, 1997 and
1996 were 35.3% and 34.0%, respectively. The increase in the effective rate was
caused by nondeductible expenses related to the ESOP. Income tax expense
increased by $44 thousand , or 111.5%, from $37 thousand for the quarter ended
March 31, 1996 to $78 thousand for the quarter ended March 31, 1997. Income tax
expense increased as a result of the increase in income before income taxes.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND
1996
NET INCOME: The Bank's net income increased by $130 thousand or 62.1% from $210
thousand for the nine months ended March 31, 1996 to $340 thousand for the nine
months ended March 31, 1997. Such increase was due primarily to an increase in
net interest income of $548 thousand or 63.8%, a decrease in the provision for
loan loss of $26 thousand, offset by an increase in employee retirement and
other benefits of $141 thousand, an increase in SAIF deposit insurance premium
of $143 thousand, an increase in other expense of $109 thousand and an increase
in income taxes of $79 thousand.
NET INTEREST INCOME: Net interest income increased by $548 thousand, or 63.8%
from $859 thousand for the nine months ended March 31, 1996 to $1.4 million for
the nine months ended March 31, 1997, due primarily to an increase in loans and
investments which was funded by the
10
conversion to a stock bank and a reduction in interest expense which was also
attributed to the conversion to a stock bank.
INTEREST INCOME: Total interest and dividend income increased by $200 thousand
or 8.8% from $2.2 million for the nine months ended March 31, 1996 to $2.4
million for the nine months ended March 31, 1997. The increase primarily
reflects an increase in interest income on loans and an increase in interest and
dividends on investments and deposits in other depository institutions.
Interest on loans increased by $184 thousand or 9.1%, during the nine months
ended March 31, 1997, as compared to the nine months ended March 31, 1996, as
the Bank continued its policy of loan growth through originations. Interest and
dividends on investments and deposits in other depository institutions increased
by $6 thousand or 4.3%, during the nine months ended March 31, 1997, as compared
to the nine months ended March 31, 1996. Such increase reflects increases in
the average balance of such deposits as the Bank increased its liquidity through
its conversion to a stock bank.
INTEREST EXPENSE: Total interest expense decreased by $358 thousand, or 27.4%
for the nine months ended March 31, 1997 from $1.3 million at March 31, 1996 to
$946 thousand at March 31, 1997. Most of such decreases were due to decreases
in interest on savings accounts and certificates of deposit, as these deposits
were converted to equity as a result of the conversion to a stock bank.
Interest on other borrowings decreased by $132 thousand, or 60.5% to $87
thousand for the nine months ended March 31, 1997 from $219 thousand for the
nine months ended March 31, 1996 due to repayments of debt funded by proceeds
from the conversion.
OTHER EXPENSE: Total other expense increased by $366 thousand or 72.9% from
$501 thousand for the nine months ended March 31, 1996 to $867 thousand at the
nine months ended March 31, 1997. Employee retirement and other benefits
increased $141 thousand primarily as a result of the new employee ESOP plan, the
management recognition plan and the directors retirement program. SAIF deposit
premium increased $143 thousand as a result of the one time special SAIF
assessment as more fully described below and other expenses increased $109
thousand and are related to costs associated with becoming a public company.
These increases were offset by a reduction in compensation cost. In 1995
employee bonuses totaling $35 thousand declared by the board of directors were
accrued as expense prorata in the first and second quarter of fiscal year 1996.
Effective January 1, 1996 an 1997, the board adopted a new bonus arrangement
which would pay a maximum bonus of $40 and $50 thousand, respectively, assuming
certain target goals were attained. Such bonuses were accrued prorata over the
entire calendar years of 1996 and 1997, respectively.
INCOME TAX: The effective tax rates for the nine months ended March 31, 1997
and 1996 were 35.5% and 34.0%, respectively. The increase in the effective rate
was caused by nondeductible expenses related to the ESOP and MRP. Income tax
expense increased by $79 thousand or 72.8%, from $108 thousand for the nine
months ended March 31, 1996 to $187 thousand for the nine months ended March 31,
1997. Income tax expense increased as a result of the increase in income before
income taxes.
IMPACT OF DEPOSIT INSURANCE FUNDS ACT OF 1996
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which included provisions recapitalizing the SAIF, provides
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocates payment of the annual Financing Corp. ("FICO") bond obligation.
As part of the package, the Federal Deposit Insurance Corp. ("FDIC") imposed a
special one-time assessment of 65.7 basis points to be applied against all SAIF-
assessable
11
deposits as of March 31, 1995, to bring the SAIF up to the statutorily
prescribed 1.25 percent designated reserve ratio. The special assessment which
was paid in November 1996, was included as a $153 thousand pretax charge to the
Bank operations in September 1996.
Effective January 1, 1997, SAIF members have the same risk-based assessment
schedule as BIF members. The Bank, as a healthy bank, effectively pays no
assessment for deposit insurance coverage as of January 1, 1997. However, all
SAIF and BIF institutions including the Bank are responsible for sharing the
cost of interest payments of the FICO bonds. The cost is an annualized charge
of 1.3 basis points for BIF deposits and 6.4 basis points for SAIF deposits.
As a result of the Deposit Insurance Funds Act of 1996, the Secretary of the
Treasury is to review recommendations in 1997 for the establishment of a common
charter for banks and savings associations. Accordingly, the Bank may be
required to convert its federal savings bank charter to either a national bank
charter, a state depository institution charter, or a newly designed charter.
The Bank may also become regulated at the holding company level by the Board of
Governors of the Federal Reserve System ("Federal Reserve") rather than by the
Office of Thrift Supervision ("OTS"). Regulation by the Federal Reserve could
subject the Bank to capital requirements that are not currently applicable to
the Company as a holding company under OTS regulation and may result in
statutory limitations on the type of business activities in which the Company
may engage at the holding company level, which business activities currently are
not restricted. The Bank is unable to predict whether such initiatives will
result in enacted legislation requiring a charter and if so whether the charter
change would significantly impact the Company's operations.
REPEAL OF SPECIAL THRIFT BAD DEBT DEDUCTION
On August 20, 1996, President Clinton signed into law the Small Business Job
Protection act of 1996 which included the repeal of the special thrift bad debt
provision. Although the percentage of taxable income method bad debt deduction
will no longer be available to the Bank, the tax requirement to invest in
certain qualifying types of investments and loans has been eliminated, thus
providing greater freedom to the Company in structuring its balance sheet to
maximize returns These tax related changes had no impact on the Company's
financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits; principal and interest
payments on loans and mortgage-backed securities; proceeds from the sale of
available-for-sale securities; proceeds from maturing debt securities; advances
from the FHLB; and other borrowed funds. While scheduled maturities of
securities and amortization of loans are predictable sources of funds, deposit
flows and prepayments on mortgage loans and mortgage-backed securities are
greatly influenced by the general level of interest rates, economic conditions
and competition.
The Bank is required to maintain an average daily balance of liquid assets and
short-term liquid assets as a percentage of net withdrawable deposit accounts
plus short-term borrowings as defined by OTS regulations. The minimum required
liquidity and short-term liquidity ratios are currently 5% and 1%, respectively.
For March 31, 1997, the Bank had liquidity and short-term liquidity ratios of
15.9% and 10.5%, respectively.
12
At March 31, 1997, the Company had outstanding commitments to originate
commercial loans totaling $2.0 million and first mortgage loans totaling $1.6
million. The Company anticipates that it will have significant funds available
to meet its current origination commitments.
The Bank is required by federal regulations to maintain minimum amounts of
capital. Currently, the minimum required levels are tangible capital of 1.5% of
tangible assets, core capital of 3.0% of adjusted tangible assets, and risk-
based capital of 8.0% of risk-weighted assets. At March 31, 1997, the Bank had
tangible capital of 31.06% of tangible assets, core capital of 31.06% of
adjusted tangible assets, and risk-based capital of 58.13% of risk-weighted
assets.
13
PART 11 OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the Company's Annual Meeting of Stockholders on January 9, 1997,
the Company's stockholders elected two directors for three-year terms
and approved the First Lancaster Bancshares, Inc. 1996 Stock Option
and Incentive Plan ("Option Plan") and the First Lancaster Federal
Savings Bank Management Recognition Plan ("MRP") by the following
votes:
i) the election of Virginia R.S. Stump and Ronald L. Sutton as
directors (Stump: 768,614 votes for, 16,749 votes withheld, 0 broker
non-votes; Sutton 779,576 votes for, 5,787 votes withheld, and 0
broker non-votes);
ii) approval of the Option Plan (597,882 votes for, 48,960 votes
against, 39,282 votes abstain, and 99,239 broker non-votes); and
iii) approval of the MRP (600,760 votes for, 46,360 against, 40,522
votes abstain, and 97,721 broker non-votes).
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
EXHIBITS
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST LANCASTER BANCSHARES, INC.
Date: May 14, 1997 /s/ Virginia R.S. Stump
--------------------------------------
Virginia R.S. Stump
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1997 /s/ Tony A. Merida
--------------------------------------
Tony A. Merida
Executive Vice President
(Principal Financial Officer)
15