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 September 30, 1998.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
for the transition period from ____ to ____
Commission File Number 0-20899
FIRST LANCASTER BANCSHARES, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 61-1297318
- ---------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
208 Lexington Street, Lancaster, Kentucky 40444-1131
----------------------------------------------------
(Address of Principal Executive Offices)
(606) 792-3368
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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
--- ---
As of November 13, 1998, the issuer had 958,812 shares of Common Stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
CONTENTS
PART 1. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and June 30, 1998 2
Consolidated Statements of Income for the Three Months
Ended September 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-13
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 27 16
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
ASSETS September 30, June 30, 1998
1998
Cash $ 1,299,800 $ 516,199
Interest-bearing cash deposits in other depository institutions 1,811,845 2,186,921
Investment securities available-for-sale, at market value (amortized cost
$24,158 at September 30, 1998 and June 30, 1998) 1,224,348 1,161,126
Mortgage-backed securities, held to maturity 400,688 434,635
Investments in nonmarketable equity securities, at cost 725,300 725,300
Loans receivable, net 48,901,968 47,593,855
Real estate acquired by foreclosure 270,200
Accrued interest receivable 444,651 465,527
Office property and equipment, at cost, less accumulated depreciation 382,187 379,490
Other assets 21,196 13,411
---------------- ----------------
Total assets $ 55,211,983 $ 53,746,664
================ ================
LIABILITIES
Savings accounts and certificates $ 26,876,912 $ 25,416,711
Advance payments by borrowers for taxes and insurance 32,302 28,802
Accrued interest payable 69,642 70,974
Federal Home Loan Bank advances 13,453,123 13,461,167
Accounts payable and other liabilities 430,726 365,827
Income tax payable 95,783 997
Deferred income tax payable 279,924 278,821
---------------- ----------------
Total liabilities 41,238,412 39,623,299
---------------- ----------------
Common stock owned by ESOP subject to put option 359,099 485,988
STOCKHOLDERS' EQUITY
Preferred stock, 500,000 shares authorized
Common stock, $.01 par value; 3,000,000 shares authorized;
867,508 and 872,656 shares issued and outstanding at
September 30, 1998 and June 30, 1998, respectively 9,588 9,588
Additional paid-in capital 9,161,775 9,152,891
Treasury Stock (31,334 and 23,534 shares at September 30,
1998 and June 30, 1998, respectively) (463,828) (350,871)
Unearned employee stock ownership plan shares (599,701) (626,221)
Common stock owned by ESOP subject to put option (359,099) (485,988)
Unrealized gain on securities available-for-sale (net of deferred tax liability
of $408,064 and $386,569 at September 30, 1998 and
June 30, 1998, respectively) 792,125 750,399
Retained earnings, substantially restricted 5,073,612 5,187,579
---------------- ----------------
Total stockholders' equity 13,614,472 13,637,377
---------------- ----------------
Total liabilities and stockholders' equity $ 55,211,983 $ 53,746,664
================ ================
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 ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended
1998 1997
Interest on loans and mortgage-backed securities $ 1,061,393 $ 912,574
Interest and dividends on investments and deposits in other
depository institutions 39,783 21,988
--------------- ---------------
Total interest income 1,101,176 934,562
--------------- ---------------
Interest on savings accounts and certificates 346,714 302,446
Interest on other borrowings 197,901 117,542
--------------- ---------------
Total interest expense 544,615 419,988
--------------- ---------------
Net interest income 556,561 514,574
Provision for loan losses 25,000
--------------- ---------------
Net interest income after provision for loan losses 556,561 489,574
--------------- ---------------
Other expenses:
Compensation 108,652 83,956
Employee retirement and other benefits 91,829 80,968
State franchise taxes 6,646 6,434
SAIF deposit insurance premium 12,885 10,474
Occupancy expense 21,656 19,503
Loss on sale of real estate acquired by foreclosure 9,401
Data processing 18,277 12,959
Other 62,362 104,035
--------------- ---------------
Total other expenses 331,708 318,329
--------------- ---------------
Income before income taxes 224,853 171,245
Provision for income taxes 79,208 60,562
--------------- ---------------
Net income 145,645 110,683
Other comprehensive income, net of income tax:
Unrealized gain on securities available for sale
arising in period 41,726 4,071
--------------- ---------------
Comprehensive income $ 187,371 $ 114,754
=============== ===============
Weighted shares outstanding for basic earnings per share 870,043 888,329
Basic earnings per share $ 0.17 $ 0.12
Weighted shares outstanding for diluted earnings per share 884,990 910,029
Diluted earnings per share $ 0.16 $ 0.12
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 three months ended September 30, 1998 and 1997
(Unaudited)
1998 1997
Cash flows from operating activities:
Net income $ 145,645 $ 110,683
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 7,071 8,039
Provision for loan losses 25,000
Deferred income taxes (20,393)
Net loan origination fees 15,111 10,209
ESOP benefit expense 35,404 24,613
MRP benfit expense 26,307 30,189
Loss on sale of real estate acquired by foreclosure 9,401
Change in assets and liabilities:
Accrued interest receivable 20,876 (101,690)
Other assets (7,785) (107)
Accrued interest payable (1,332) 14,051
Accounts payable and other liabilities 38,592 97,971
Income tax payable 94,786 14,157
---------------- ----------------
Net cash provided by operating activities 363,683 233,115
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of real estate acquired by foreclosure 396,000
Purchase of property & equipment (9,768) (1,457)
Purchase of Federal Home Loan Bank common stock (168,405)
Mortgage-backed securities principal repayments 33,947 25,113
Net increase in loans receivable (1,458,425) (4,417,802)
---------------- ----------------
Net cash used in investing activities (1,038,246) (4,562,551)
---------------- ----------------
Cash flows from financing activities:
Net increase in savings accounts and certificates 1,460,201 329,508
Net increase in advance payments by borrowers for taxes and insurance 3,500 4,811
Purchase of treasury stock (112,957) (118,441)
Dividends paid (259,612) (221,940)
Federal Home Loan Bank advances 2,500,000 4,000,000
Federal Home Loan Bank advance principal repayments (2,508,044) (6,604)
Proceeds received from borrowings 118,443
---------------- ----------------
Net cash provided by financing activities 1,083,088 4,105,777
---------------- ----------------
Net (decrease) increase in cash and cash equivalents 408,525 (223,659)
Cash and cash equivalents at beginning of period 2,703,120 2,108,111
---------------- ----------------
Cash and cash equivalents at end of period $ 3,111,645 $ 1,884,452
================ ================
Supplemental disclosure of non-cash investing activities:
Unrealized gain on securities available for sale, net of deferred tax $ 41,726 $ 4,071
liability of $21,495 and $2,097 at September 30, 1998 and 1997, respectively
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 months ended September 30, 1998 are not
necessarily indicative of the results which may be expected for the
entire year. The consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the
notes thereto for the year ended June 30, 1998.
2. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
SEPTEMBER 30, 1998 COST GAINS LOSSES VALUE
------------ ------------- ------------ -------------
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 24,672 shares $ 24,158 $ 1,200,190 $ $ 1,224,348
============ ============= ============ =============
JUNE 30, 1998
Available-for-Sale Equity Securities:
Federal Home Loan Mortgage Corporation
Common stock - 24,672 shares $ 24,158 $ 1,136,968 $ $ 1,161,126
============ ============= ============ =============
3. ALLOWANCE FOR LOAN LOSSES:
An analysis of the changes in the loan loss allowance for the three
months ended September 30 follows:
THREE MONTHS ENDED
1998 1997
---------------- ----------------
Balance at beginning of period $ 200,000 $ 125,000
Provision charged to operations 25,000
Loans charged off
---------------- ----------------
Balance at end of period $ 200,000 $ 150,000
================ ================
Nonaccrual loans amounted to $510,678 and $1.2 million at September 30,
1998 and 1997, respectively.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. FEDERAL HOME LOAN BANK ADVANCES:
Federal Home Loan Bank advances at September 30, 1998 and June 30, 1998
are as follows:
SEPTEMBER JUNE 30,
30, 1998 1998
--------------- -----------------------------
DATE OF INTEREST
ISSUE YEAR OF MATURITY AMOUNT AMOUNT RATE
-------------- --------------------------------- --------------- --------------- -----------
10/27/94 11/01/04 $ 104,058 $ 107,242 8.45
1/31/95 1/30/15 650,000 650,000 5.75
5/09/95 6/01/05 112,893 116,095 7.35
3/25/97 3/24/00 500,000 500,000 6.75
7/31/97 7/31/98 1,000,000 5.88
8/14/97 8/14/98 500,000 5.95
10/22/97 10/22/98 250,000 250,000 6.05
1/27/98 1/22/99 1,000,000 1,000,000 5.75
1/28/98 2/01/08 86,172 87,830 6.37
2/17/98 8/14/98 500,000 5.61
2/20/98 2/20/99 500,000 500,000 5.67
3/03/98 3/03/99 1,000,000 1,000,000 5.75
3/13/98 3/12/99 1,250,000 1,250,000 5.74
3/20/98 3/19/99 750,000 750,000 5.77
3/25/98 3/25/99 2,000,000 2,000,000 5.81
3/31/98 9/25/98 500,000 5.71
4/24/98 4/23/99 1,750,000 1,750,000 5.84
4/28/98 10/23/98 250,000 250,000 5.74
5/13/98 11/09/98 500,000 500,000 5.72
5/23/98 11/18/98 250,000 250,000 5.72
7/31/98 7/30/99 1,000,000 5.80
8/14/98 8/13/99 500,000 5.73
8/24/98 8/24/99 250,000 5.69
8/25/98 8/24/99 250,000 5.69
9/25/98 3/24/99 500,000 5.27
--------------- ---------------
$ 13,453,123 $ 13,461,167
=============== ===============
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
(EPS). This statement specifies the computation, presentation, and
disclosure requirements for EPS. SFAS No. 128 is designed to improve the
EPS information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements,
and increasing the comparability of EPS data on an international basis.
Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic
EPS, with the principal difference being that common stock equivalents
are not considered in computing basic EPS, (b) eliminating the modified
treasury stock method and three percent materiality provision, and (c)
revising the contingent share provisions and the supplemental EPS data
requirements. SFAS No. 128 requires presentation of basic EPS amounts
from income for continuing operations and net income on the face of the
income statement for entities with simple capital structures and dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures regardless of whether
basic and diluted EPS are the same. The statement also requires a
reconciliation of the numerator and denominator used in computing basic
and diluted EPS and is applicable to all entities with publicly held
common stock or potential common stock. SFAS No. 128 was adopted as of
January 1, 1998. The Company has restated the September 30, 1997 earnings
per share computations in accordance with the provisions of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of reporting
comprehensive income is to present a measure of all changes in equity
that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
If used with related disclosures and other information in the
consolidated financial statements, the FASB believes that the information
provided by reporting comprehensive income should help investors,
creditors, and others in assessing an enterprise's activities and the
timing and magnitude of its future cash flows. The statement requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the statement of
financial condition. This statement is effective for fiscal years
beginning after December 31, 1997 and reclassification of financial
statements for earlier periods provided for comparative purposes is
required. The only transactions that meet the definition of other
comprehensive income for the Company include the unrealized gains on
securities available for sale. The Company adopted the provision of SFAS
No. 130 on July 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards
for the manner in which public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS, CONTINUED:
financial reports issued to stockholders. This statement also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable
operating segments. This statement is effective for financial statements
for fiscal periods beginning after December 15, 1997. This statement need
not be applied to interim financial statements in the initial year of its
application. As a result, the Company will adopt the provision of SFAS
No. 131 with the presentation of the annual financial statements for the
year ended June 30, 1999.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132
standardizes the disclosure requirements for pensions and other
postretirement benefits. This statement is effective for financial
statements for fiscal periods beginning after December 15, 1997. The
Company adopted the provisions of the statement on July 1, 1998. The
adoption of the statement did not materially affect the Company's
financial position or operating results.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 established
a new model for accounting for derivatives and hedging activities and
supersedes and amends a number of existing standards. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, but earlier
applications is permitted as of the beginning of any fiscal quarters
subsequent to June 15, 1998. Upon the statement's initial application,
all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair
value. In addition, all hedging relationships must be designated,
reassessed and documented pursuant to the provisions of SFAS No. 133.
Adoption of SFAS No. 133 is not expected to have a material financial
statement impact on the Company.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Banking Enterprise". SFAS No. 134 amends SFAS 65 and
SFAS 115. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. Adoption of SFAS No. 133 is not
expected to have a material financial statement impact on the Company.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. EARNINGS PER SHARE:
For the three months ended September 30, For the three months ended September 30,
1998 1997
-------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic earnings per share
Income available to common
shareholders $ 145,645 870,043 $ 0.17 $ 110,683 888,329 $ 0.12
Effect of dilutive securities
Stock options 3,552
Management recognition plan 14,947 18,148
Diluted earnings per share
Income available to common
shareholders plus assumed
conversions $ 145,645 884,990 $ 0.16 $ 110,683 910,029 $ 0.12
There were no preferred dividend securities that would effect the computation
of earnings per share.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
incurred on interest-bearing liabilities, such as deposits and borrowings. The
Company's operating expenses consist primarily of employee compensation,
occupancy expenses, federal deposit insurance premiums and other general and
administrative expenses. The Company's results of operations are significantly
affected by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory agencies.
When used in this Form 10-QSB, the words or phrases "will likely result," "are
expected to" "will continue," "is anticipated," "estimate," "project" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties including changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Company. Data
processing is also essential to most other financial institutions and many other
companies.
Data processing of the Company is provided by a third party service bureau. The
service bureau of the Company has advised the Company that it expects to resolve
this potential problem before the year 2000. However, if the service bureau is
unable to resolve this potential problem in time, the Company would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Company.
10
In the event that the service bureau is unable to make the Company Year 2000
compliant by December 31, 1998, the Company will seek out other third party data
processing bureaus to prevent interruption of the Company's data processing. The
Company has developed a contingency plan in the event there is an interruption
of its on-line system, whereby transaction processing will be done in a store
and forward mode for short-term interruptions, and for extended interruptions
manual processing or the use of a local database will be used.
The Company has also purchased a new teller computer network system, which is
anticipated to be installed by October of 1998. Based upon preliminary analysis
by the Company, the costs to purchase the computer network and for the services
of the third party service bureau will not exceed $150,000.
The Company has established a Year 2000 committee to monitor progress with
achieving and certifying Year 2000 compliance. The Company's current plan is to
complete the Year 2000 project by March31, 1999. Final validation testing with
the Company's primary data processor is scheduled for November, 1998.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
The Bank's total assets increased by approximately $1.5 million, or 2.7%, from
$53.7 million at June 30, 1998 to $55.2 million at September 30, 1998. The
increase resulted primarily from an increase in net loans receivable of $1.3
million from $47.6 million at June 30, 1998 to $48.9 million at September 30,
1998. During the quarter ended September 30, 1998 the Bank sold all residential
property through foreclosure. The Bank's total liabilities increased by
approximately $1.6 million, or 4.1%, from $39.6 million at June 30, 1998 to
$41.2 million at September 30, 1998. This increase was due to an increase in the
Bank's savings accounts of $1.5 million, or 5.7%, from $25.4 million at June 30,
1998 to $26.9 million at September 30, 1998. During the three month period ended
September 30, 1998 the Company acquired 7,800 of common shares for a purchase
price of $112,957. Such shares will be used to fulfill the obligation under the
Company's management recognition plan.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
NET INCOME: The Bank's net income increased by $35 thousand or 31.6%, from $111
thousand for the quarter ended September 30, 1997 to $146 thousand for the
quarter ended September 30, 1998. Such increase was due primarily to an increase
in net interest income of $42 thousand and a decrease in the provision for loan
loss of $25 thousand, offset by an increase in other expenses of $13 thousand
and an increase in provision for income taxes of $19 thousand.
NET INTEREST INCOME: Net interest income increased by $42 thousand, or 8.1%,
from $515 thousand for the quarter ended September 30, 1997 to $557 thousand for
the quarter ended September 30, 1998. The increase is attributed to an increase
in interest income of $167 thousand and an increase in interest expense of $125
thousand.
INTEREST INCOME: Total interest and dividend income increased by $167 thousand
or 17.9%, to $1.1 million for the quarter ended September 30, 1998 from $934
thousand for the quarter ended September 30, 1997. The increase primarily
reflects an increase in interest income on loans. Interest on loans and mortgage
backed securities increased by $149 thousand, or 16.3%, during the quarter ended
September 30, 1998, as compared to the quarter ended September 30, 1997, as the
Bank continued its policy of loan growth through originations. Interest and
dividends on investments and
11
deposits in other depository institutions increased by $17 thousand or 77.3%,
during the quarter ended September 30, 1998, as compared to the quarter ended
September 30, 1997.
INTEREST EXPENSE: Total interest expense increased by $125 thousand, or 29.7%,
to $545 thousand for the quarter ended September 30, 1998 from $420 thousand for
the quarter ended September 30, 1997. Interest on other borrowings increased by
$80 thousand, or 68.4%, to $198 thousand for the quarter ended September 30,
1998 from $118 thousand for the quarter ended September 30, 1997 due to the
increase in FHLB advances from $9.9 million at September 30, 1997 to $13.5
million at September 30, 1998. Due to competition for deposits in its market
area, the Company has primarily utilized FHLB advances to fund loan growth.
PROVISION FOR LOAN LOSSES: The Bank did not establish an additional provision
for loan loss in the quarter ended September 30, 1998, however, a $25 thousand
provision for loan loss was established in the quarter ended September 30, 1997.
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 including general increases in the overall loan balance outstanding
and the level of nonaccrual loans.
OTHER EXPENSES: Total other expenses increased by $13 thousand, or 4.2%, from
$318 thousand for the quarter ended September 30, 1997 to $332 thousand for the
quarter ended September 30, 1998. The increase was caused primarily by an
increase of $25 thousand in compensation and an increase of $11 thousand in
benefit expense. These increases were the result of general pay increases and
the addition of two employees. The Company also incurred a $9 thousand loss on
sales of real estate owned. These increases were offset by a reduction in other
expense of $42 thousand which is mainly a decrease in professional fees.
INCOME TAX: The effective tax rates for the quarters ended September 30, 1998
and 1997 were 34.8% and 35.4%, respectively. Income tax expense increased by $19
thousand , or 30.8%, from $60 thousand for the quarter ended September 30, 1997
to $79 thousand for the quarter ended September 30, 1998. Income tax expense
increased as a result of the increase in income before income taxes.
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 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)
equal to 4% of its net withdrawal accounts plus short-term borrowings either at
the end of the preceding calendar quarter or on an average daily basis during
the preceding quarter. The Bank 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 long term and short term
liquid asset ratios of the Bank at September 30, 1998 were 8.9% and 7.9%
respectively.
12
At September 30, 1998, the Company had outstanding commitments to originate
first mortgage loans totaling $602 thousand. 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 September 30, 1998, the Bank
had tangible capital of 24.93% of tangible assets, core capital of 23.48% of
adjusted tangible assets, and risk-based capital of 36.06% 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
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended
September 30, 1998
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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: November 13, 1998 /s/ Virginia R.S. Stump
-----------------------
Virginia R.S. Stump
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 /s/ Tony A. Merida
------------------
Tony A. Merida
Executive Vice President
(Principal Financial Officer)
15