<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB
(Mark One)

[X]    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
       1934

For the fiscal year ended June 30, 1999
                                       OR
[ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

For the transition period from _____________________ to ________________

                          Commission File No. 0-20899


                        FIRST LANCASTER BANCSHARES, INC.
                        --------------------------------
                 (Name of small business issuer in its charter)


                Delaware                                61-1297318
         ----------------------                   ----------------------
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)


     208 Lexington Street, Lancaster, Kentucky           40444-1131
     -----------------------------------------           ----------
     (Address of principal executive offices)            (Zip Code)


       Registrant's telephone number, including area code: (606) 792-3368

       Securities registered pursuant to Section 12(b) of the Act:  None.

 Securities registered pursuant to Section 12(g) of the Act:

             Common Stock, par value $0.01 per share
             ---------------------------------------
                      (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.  Yes  X   No
                                                               ---     ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

Issuer's revenues for the fiscal year ended June 30, 1999:  $4,335,146

As of September 17, 1999, the aggregate market value of the 697,155 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $8.0 million based on the average bid and asked
price of $11.51 per share of the registrant's Common Stock on September 17,
1999.  For purposes of this calculation, it is assumed that directors, officers
and beneficial owners of more than 5% of the registrant's outstanding voting
stock are affiliates.

Number of shares of Common Stock outstanding as of September 17, 1999: 900,872

Transitional Small Business Disclosure Format   Yes      No   X
                                                    ---      ---

                      DOCUMENTS INCORPORATED BY REFERENCE

     The following lists the documents incorporated by reference and the Part of
this Form 10-KSB into which the document is incorporated:

     1.  Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1999  (Parts I  and II)

     2.  Portions of Proxy Statement for 1999 Annual Meeting of Stockholders
(Part III)
<PAGE>

                                     PART I

Item 1.  Description of Business
--------------------------------

General

     First Lancaster Bancshares, Inc.  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.

     First Lancaster Federal Savings Bank.  The Bank is a federal savings bank
serving Garrard, Jessamine and Fayette Counties, Kentucky and which operates a
full-service office in Lancaster, Kentucky and a loan production office in
Nicholasville, 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, repayments of outstanding loans and Federal Home
Loan Bank ("FHLB") advances, to the extent necessary.

     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 ("Federal Reserve Board").  For
additional information, see " -- Regulation of the Bank."

     The Company's and the Bank's executive offices are located at 208 Lexington
Street, Lancaster, Kentucky 40444-1131, and their telephone number is (606) 792-
3368.

Proposed Regulatory and Legislative Changes

     Legislation has been reintroduced in the U.S. Congress which calls for the
modernization of the banking system and which would significantly affect the
operations and regulatory structure of the financial services industry,
including savings institutions like the Bank.  At this time, management does not
know what form the final legislation might take, or if enacted into law, how the
legislation would affect the Company's and Bank's business and operations and
competitive environment.  For additional information on the provisions of this
legislation, see "Regulation of the Bank --Proposed Legislative and Regulatory
Changes."
<PAGE>

Lending Activities

     General.  The Bank's loan portfolio totaled $46.2 million at June 30,1999,
representing 87.6% of total assets at that date.  It is the Bank's policy to
concentrate its lending within its market area.  At June 30, 1999, $34.7
million, or 70.8% of the Bank's gross loan portfolio, consisted of single-
family, residential mortgage loans.  Other loans secured by real estate include
multi-family residential, commercial, construction and nonresidential loans,
which amounted to $13.8 million, or 28.1% of the Bank's gross loan portfolio at
June 30, 1999.  To a lesser extent, the Bank originates consumer loans, which
consists primarily of loans secured by deposits and vehicles.  At June 30, 1999,
consumer loans totaled $528,000, or 1.1% of the Bank's gross loan portfolio.

     Loan Portfolio Composition.  The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated.  At June 30, 1999, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>


                                                                At June 30,
                                               -------------------------------------------
                                                      1999                       1998
                                               ------------------          ---------------
                                                  Amount      %              Amount     %
                                               -----------  -----          ---------- -----
                                                            (Dollars in thousands)
<S>                                             <C>         <C>             <C>       <C>
Real estate loans:
 Single-family residential................      $34,707     70.8%           $35,422   66.2%
 Multi-family residential and commercial..        1,772      3.6              1,953    3.7
 Construction.............................        9,000     18.3             10,864   20.3
 Nonresidential (1).......................        3,035      6.2              4,768    8.9
                                                -------   ------            -------  -----
  Total real estate loans.................       48,514                      53,007   99.1

Consumer loans............................          528      1.1                490    0.9
                                                -------   ------            -------  -----
                                                 49,042    100.0%            53,497  100.0%
                                                          ======                     =====
Less:
 Loans in process.........................        2,228                       5,657
 Unearned loan origination fees...........           71                          47
 Allowance for loan losses................          551                         200
                                                -------                     -------
  Total...................................      $46,192                     $47,593
                                                =======                     =======

-------------------------
</TABLE>
(1)  Consists of loans secured by first liens on residential lots and loans
     secured by first mortgages on commercial real property.

                                       2
<PAGE>

     Loan Maturity Schedule.  The following table sets forth certain information
at June 30, 1999 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity.  Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.  The table does not include any
estimate of prepayments which significantly shorten the average life of all
mortgage loans and may cause the Bank's repayment experience to differ from that
shown below.

<TABLE>
<CAPTION>

                                                    Due after
                                   Due during       1 through      Due after
                                 the year ending  5 years after  5 years after
                                  June 30, 2000   June 30, 1999  June 30, 1999   Total
                                 ---------------  -------------  -------------  -------
                                                       (In thousands)
<S>                                  <C>             <C>            <C>         <C>
Single-family residential..          $ 1,106         $  821         $32,780     $34,707
Multi-family residential...            1,029             65             678       1,772
Construction...............            8,900             --             100       9,000
Nonresidential.............            1,338          1,257             440       3,035
Consumer...................              349            124              55         528
                                     -------         ------         -------     -------
     Total.................          $12,722         $2,267         $34,053     $49,042
                                     =======         ======         =======     =======
</TABLE>

     The following table sets forth at June 30, 1999, the dollar amount of all
loans which have predetermined interest rates and have floating or adjustable
interest rates.

<TABLE>
<CAPTION>
                                     Predetermined     Floating or
                                          Rate       Adjustable Rates
                                     -------------   ----------------
                                             (In thousands)
     <S>                                <C>             <C>

     Single-family residential..        $ 5,490          $29,217
     Multi-family residential...          1,307              465
     Construction...............          8,900              100
     Nonresidential.............          2,525              510
     Consumer...................            483               45
                                        -------          -------
         Total..................        $18,705          $30,337
                                        =======          =======

</TABLE>

     Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets.  The average life of loans is substantially less
than their contractual terms because of prepayments.  In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid.  The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.

     Originations, Purchases and Sales of Loans.  The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States.  Consistent with its emphasis on being a
community-oriented financial institution, the Bank concentrates its lending
activities in its market area.

                                       3
<PAGE>

     The following table sets forth certain information with respect to the
Bank's loan origination activity for the periods indicated.  The Bank has not
purchased or sold any loans in the periods presented.

<TABLE>
<CAPTION>

                                     Year Ended June 30,
                                     -------------------
                                       1999       1998
                                     ---------  --------
                                        (In thousands)
<S>                                    <C>       <C>

Loans originated:
 Real estate loans:
   Single-family residential (1)..    $ 5,631   $ 8,457
   Construction (2)...............     10,597    13,976
   Nonresidential (3).............      1,531     4,619
 Consumer loans...................        333     1,029
                                      -------   -------
  Total loans originated..........    $18,092   $28,081
                                      =======   =======
-------------------------
</TABLE>

(1)  Includes home equity loans.
(2)  Loans are generally for twelve months.
(3)  Includes loans secured by first liens on residential lots.


     The Bank's loan originations are derived from a number of sources,
including referrals by realtors, depositors and borrowers and advertising, as
well as walk-in customers.  The Bank's solicitation programs consist of
advertisements in local media, in addition to occasional participation in
various community organizations and events. Real estate loans are originated by
the Bank's loan personnel.  All of the Bank's loan personnel are salaried, and
the Bank does not compensate loan personnel on a commission basis for loans
originated.  Loan applications are accepted at the Bank's offices.

     Loan Underwriting Policies.  The Bank's lending activities are subject to
the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management.  Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations.  All loans must be reviewed by the Bank's loan committee, which
is comprised of President Stump, at least two outside directors and loan
personnel.  In addition, the full Board of Directors reviews and approves all
loans on a monthly basis.

     Applications for single-family real estate loans are underwritten and
closed in accordance with the standards of the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") except
that, consistent with banking practice in Kentucky, title opinions rather than
title insurance are obtained. Generally, upon receipt of a loan application from
a prospective borrower, a credit report and verifications are ordered to confirm
specific information relating to the loan applicant's employment, income and
credit standing.   If a proposed loan is to be secured by a mortgage on real
estate, an appraisal of the real estate is usually undertaken by an  appraiser
approved by the Bank's Board of Directors and licensed or certified (as
necessary) by the Commonwealth of Kentucky. In the case of single-family
residential mortgage loans, except when the Bank becomes aware of a particular
risk of environmental contamination, the Bank generally does not obtain a formal
environmental report on the real estate at the time a loan is made.  A formal
environmental report may be required in connection with nonresidential real
estate loans.

     It is the Bank's policy to record a lien on the real estate securing a loan
and to obtain a title opinion from Kentucky counsel which provides that the
property is free of prior encumbrances and other possible title defects.
Borrowers must also obtain hazard insurance policies prior to closing and, when
the property is in a flood plain as designated by the Department of Housing and
Urban Development, pay flood insurance policy premiums.

                                       4
<PAGE>

     The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a mortgage loan. The Bank is required by federal regulations
to obtain private mortgage insurance on that portion of the principal amount of
any loan that is greater than 90% of the appraised value of the property.  The
Bank will make a single-family residential mortgage loan for owner-occupied
property with a loan-to-value ratio of up to 85% on such loans.  For residential
properties that are not owner-occupied, the Bank generally does not lend more
than 80% of the appraised value.   For construction loans, the Bank limits the
loan-to-value ratio to 85% if owner occupied.  The Bank generally limits the
loan-to-value ratio on multi-family residential or commercial real estate
mortgage loans to 80%.

     Under applicable law, with certain limited exceptions, loans and extensions
of credit by a savings institution to a person outstanding at one time shall not
exceed 15% of the institution's unimpaired capital and surplus, including the
loan loss allowance of the Bank.  Under this general law, the Bank's loans to
one borrower were limited to $2.0 million at June 30, 1999.  Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of unimpaired capital and surplus.  Applicable law
additionally authorizes savings institutions to make loans to one borrower, for
any purpose, in an amount not to exceed $500,000 or in an amount not to exceed
the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop
residential housing, provided: (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the savings
institution is and continues to be in compliance with its fully phased-in
regulatory capital requirements; (iii) the loans comply with applicable loan-to-
value requirements; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus; and (v) the Director of
OTS, by order, permits the savings institution to avail itself of this higher
limit.  Under these limits, the Bank's loans to one borrower to develop
residential housing were limited to $4.0 million at June 30, 1999.  At that
date, the Bank had no lending relationships in excess of the loans-to-one-
borrower limit.  At June 30, 1999, the Bank's largest lending relationship was a
$1.4 million loan to develop property for single-family residences.  The loan
was current and performing in accordance with its terms at June 30, 1999.

     Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes.  These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.

     Single-Family Residential Real Estate Lending.  The Bank historically has
been and continues to be an originator of single-family, residential real estate
loans in its market area.  At June 30, 1999, single-family residential mortgage
loans, totaled approximately $34.7 million, or 70.8% of the Bank's gross loan
portfolio.  All loans originated by the Bank are maintained in its portfolio
rather than sold in the secondary market.

     The Bank primarily originates residential mortgage loans with adjustable
rates ("ARM's").  As of June 30, 1999, 84.2% of single-family mortgage loans in
the Bank's loan portfolio carried adjustable rates.  Such loans are primarily
for terms of 30 years, although the Bank does occasionally originate ARM's for
20 year and 25 year terms, in each case amortized on a monthly basis with
principal and interest due each month.  The interest rates on these mortgages
are adjusted once a year, with a maximum adjustment of 2% per adjustment period
and a maximum aggregate adjustment of 5% over the life of the loan.   Further,
the interest rates on such loans may not be decreased by more than 1% below the
interest rate at which the loan was originated.  Rate adjustments on the Bank's
adjustable-rate loans are indexed to a rate which adjusts annually based upon
changes in an index based on the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity of one year, as made
available by the Federal Reserve Board, and the adjusted interest rate is equal
to such Treasury rate plus 2.75% for owner occupied real estate and 3.75% for
non-owner occupied real estate.  The adjustable-rate mortgage loans offered by
the Bank do not provide for initial rates of interest below the rates that would
prevail when the index used for repricing is applied.

                                       5
<PAGE>

     The retention of adjustable-rate loans in the Bank's portfolio helps reduce
the Bank's exposure to increases in prevailing market interest  rates.  However,
there are unquantifiable credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable-rate loans.
It is possible that during periods of rising interest rates, the risk of default
on adjustable-rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable-rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed-rate period
before the first adjustment and the lifetime interest rate adjustment
limitations.  Accordingly, there can be no assurance that yields on the Bank's
adjustable-rate loans will fully adjust to compensate for increases in the
Bank's cost of funds.  Finally, adjustable-rate loans increase the Bank's
exposure to decreases in prevailing market interest rates, although  decreases
in the Bank's cost of funds and the limitations on decreases in the ARM's
interest rate tend to offset this effect.

     The Bank also originates, to a limited extent, fixed-rate loans for terms
of 15 years to 30 years.  In each case, such loans are secured by first
mortgages on single-family, owner-occupied residential real property located in
the Bank's market area.  Because of the Bank's policy to mitigate its exposure
to interest rate risk through the use of adjustable-rate rather than fixed-rate
products, the Bank does not emphasize fixed-rate mortgage loans.  At June 30,
1999, $18.7 million, or 38.1%, of the Bank's loan portfolio consisted of fixed-
rate mortgage loans.  To further reduce its  interest rate risk associated with
such loans, the Bank relies upon Federal Home Loan Bank ("FHLB") advances with
similar maturities to fund such loans.  See "-- Deposit  Activity and Other
Sources of Funds -- Borrowings."

     At June 30, 1999, the Bank's loan portfolio included $9.0 million of loans
secured by properties under construction, the majority of which are loans to
qualified builders for the construction of one- to four-family residential
housing located in established subdivisions in Garrard, Jessamine and Fayette
Counties, Kentucky.  Because such homes are intended for resale, such loans are
generally not converted to permanent financing at the Bank.  The Bank also
engages in construction lending involving loans to individuals for construction
of one- to four-family residential housing located within the Bank's market
area, with such loans converting to permanent financing upon completion of
construction.  Such loans are generally made to individuals for construction
primarily in established subdivisions within Garrard, Jessamine and Fayette
Counties, Kentucky.  All construction loans are secured by a first lien on the
property under construction.  Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Construction/permanent loans
may have adjustable or fixed interest rates and are underwritten in accordance
with the same terms and requirements as the Bank's permanent mortgages, except
the loans generally provide for disbursement in stages during a construction
period of up to twelve months, during which period the borrower is required to
make interest-only monthly payments.  The permanent loans are typically 30-year
ARM's, with the same terms and conditions otherwise offered by the Bank.
Monthly payments of  principal and interest commence one month from the date the
loan is converted to permanent financing.  Borrowers must satisfy all credit
requirements that would apply to the Bank's permanent mortgage loan financing
prior to receiving construction financing for the subject property and must
execute a Construction Loan Agreement with the Bank.

     Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.  During
the construction phase, a number of factors could result in delays and cost
overruns.  If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development.  If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting construction lending to qualified borrowers in the Bank's market area
and by requiring the involvement of qualified builders.

                                       6
<PAGE>

     Multi-Family Residential and Commercial and Nonresidential Real Estate
Lending.  The Bank's multi-family residential loan portfolio generally consists
of both fixed-rate and ARM loans secured by small (i.e., fewer than sixteen
units) apartment buildings.  Such loans currently range in size from $25,000 to
$142,000.  The Bank's real estate portfolio generally consists of fixed-rate or
adjustable-rate loans secured by first mortgages on residential lots upon which
single-family homes will be constructed or upon a business's building and real
property.  In each case, such property is located in Garrard, Jessamine and
Fayette Counties, Kentucky.  At June 30, 1999, the Bank had $1.8 million of
multi-family residential and commercial real estate loans, which amounted to
3.6% of the Bank's gross loan portfolio at such date.  The Bank's nonresidential
loan portfolio consists of loans secured by first liens on residential lots and
loans secured by first mortgages on commercial real property.  At June 30, 1999,
the Bank had approximately $3.0 million of such loans, which comprised 6.2% of
its loan portfolio.  Multi-family residential, commercial and nonresidential
real estate loans are originated either on an adjustable-rate basis with terms
of up to 20 years or on a fixed rate for a fifteen-year term and are
underwritten with loan-to-value ratios of up to 80% of the lesser of the
appraised value or the purchase price of the property.

     Multi-family residential, commercial and nonresidential real estate lending
entails significant additional risks as compared with single-family residential
property lending.  Multi-family residential, commercial and nonresidential real
estate loans typically involve larger loan balances to single borrowers or
groups of related borrowers.  The payment experience on such loans typically is
dependent on the successful operation of the real estate project, retail
establishment or business.  These risks can be significantly impacted by supply
and demand conditions in the market for office, retail and residential space,
and, as such, may generally be subject to a greater extent to adverse conditions
in the economy. To minimize these risks, the Bank generally limits itself to its
market area or to borrowers with which it has prior experience or who are
otherwise known to the Bank.  It has been the Bank's policy to obtain annual
financial statements of the business of the borrower or the project for which
multi-family residential, commercial or nonresidential real estate loans are
made.

     Consumer Lending.  The majority of consumer loans currently in the Bank's
loan portfolio consist of loans secured by savings deposits and vehicles.  Such
savings account loans may be made for up to 100% of the depositor's savings
account balance.  The interest rate is normally 2.0% above the rate paid on such
deposit account serving as collateral, and the account must be  pledged as
collateral to secure the loan.  Interest generally is billed on a semi-annual
basis.  At June 30, 1999, loans on deposit accounts totaled $179,000, or 0.4% of
the Bank's gross loan portfolio.  The remaining $349,000 in consumer loans
includes loans secured mainly by vehicles.

     Loan Fees and Servicing.  The Bank receives fees in connection with loan
applications, late payments and for miscellaneous services related to its loans.
The Bank also charges a fee on loan originations ranging from 0.5% to 1.0% of
the principal balance.  The Bank does not service loans for others.

     Nonperforming Loans and Other Problem Assets.  It is management's policy
to continually monitor its loan portfolio to anticipate and address potential
and actual delinquencies.  When a borrower fails to make a payment on a loan,
the Bank takes immediate steps to have the delinquency cured and the loan
restored to a current status.  Loans which are delinquent 45 days incur a late
fee of 5.0% of principal and interest due.  As a matter of policy, the Bank will
contact the borrower after the loan has been delinquent 30 days.  If payment is
not promptly received, the borrower is contacted again, and efforts are made to
formulate an affirmative plan to cure the delinquency.  Generally, after any
loan is delinquent 90 days or more, formal legal proceedings are commenced to
collect amounts owed.  Loans are placed on nonaccrual status if the loan becomes
past due more than 90 days unless such loans are well-secured and in the process
of collection.  Loans are charged off when management concludes that they are
uncollectible.  See Note 1 of Notes to Consolidated Financial Statements.

     Real estate acquired by the Bank as a result of foreclosure is classified
as real estate acquired through foreclosure until such time as it is sold.  When
such property is acquired, it is initially recorded at estimated fair value and
subsequently at the lower of book value or fair value, less estimated costs to
sell.  Costs relating to holding such real estate are charged against income in
the current period, while costs relating to improving such real estate are

                                       7
<PAGE>

capitalized until a salable condition is reached.  Any required write-down of
the loan to its fair value less estimated selling costs upon foreclosure is
charged against the allowance for loan losses.  See Note 1 of Notes to
Consolidated Financial Statements.

     The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated.  Further, no loans were recorded as
restructured loans within the meaning of Statement of Financial Accounting
Standards ("SFAS") No. 15 at the dates indicated.

<TABLE>
<CAPTION>
                                                                    At June 30,
                                                             -----------------------
                                                               1999           1998
                                                            ---------       --------
                                                             (Dollars in thousands)
<S>                                                          <C>            <C>
Loans accounted for on a non-accrual basis: (1)
   Real estate:
      Single-family residential..........................    $  686          $ 480
      Construction (2)...................................       665             --
  Consumer...............................................         8             20
  Accruing loans which are contractually past due 90 days
   or as to which repayment is in doubt..................        --             88
                                                             ------          -----
      Total nonperforming loans..........................    $1,359          $ 588
                                                             ======          =====

  Percentage of real estate loans........................      2.80%          1.11%
                                                             ======          =====
  Other non-performing assets (3)........................    $  456          $ 270
                                                             ======          =====
-------------------------
</TABLE>
(1)  Loans, including impaired loans, are generally classified as nonaccrual 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 nonaccrual if repayment in
     full of principal and/or interest is in doubt.
(2)  The entire amount is for the construction loans to one borrower that became
     uncollectible in December 1998.
(3)  Other nonperforming assets represent property acquired by the Bank through
     foreclosure or repossession.  This property is carried at lower of book
     value or fair market value, less estimated costs to sell.

     For the year ended June 30, 1999, gross interest accrued but not recognized
of approximately $74,000, would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current.

     At June 30, 1999, nonaccrual loans consisted of 12 single-family
residential real estate loans aggregating $686,000, three construction loans
equalling $665,000 and one consumer loan totaling $8,000 and represented an
increase of $771,000, or 131.0% from nonaccrual loans of $588,000 at June 30,
1998.  At June 30, 1999, $456,000 of real estate acquired through foreclosure,
consisting of one single-family residence, was held by the Bank.

     Federal regulations require savings institutions to classify their assets
on the basis of quality on a regular basis. An asset meeting one of the
classification definitions set forth below may be classified and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any.  An asset is classified as
doubtful if full collection is highly questionable or improbable.  An asset is
classified as loss if it is considered uncollectible, even if a partial recovery
could be expected in the future.  The regulations also provide for a special
mention designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention.  Such assets designated as special mention may include nonperforming
loans consistent with the above definition.  Assets classified as substandard or
doubtful require a savings institution to establish general allowances for loan
losses.  If an asset or portion thereof is classified loss, a savings
institution must either establish a specific allowance for loss in the amount of
the portion of the asset classified loss, or charge off such amount.  Federal
examiners may disagree with a savings institution's

                                       8
<PAGE>

classifications. If a savings institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the OTS Regional
Director. The Bank regularly reviews its assets to determine whether any assets
require classification or re-classification. At June 30, 1999, the Bank had
$489,000 in assets classified as special mention, $1.1 million in assets
classified as substandard, no assets classified as doubtful and $235,000 in
assets classified as loss. Special mention assets consist primarily of
residential real estate loans secured by first mortgages. This classification is
primarily used by management as a "watch list" to monitor loans that exhibit any
potential deviation in performance from the contractual terms of the loan.
Substandard assets are primarily residential real estate loans, the highest
balance to a single borrower of which was $153,000 at June 30, 1999 and was
secured by a single-family residence.

     Allowance for Loan Losses.  In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan, general economic conditions and, in the case
of a secured loan, the quality of the security for the loan.  It is management's
policy to maintain an adequate allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions, regular reviews of delinquencies and loan
portfolio quality and evolving standards imposed by federal bank examiners.  The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.

     Management will continue to actively monitor the Bank's asset quality and
allowance for loan losses. Management will charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and will provide specific loss allowances
when necessary.  Although management believes it uses the best information
available to make determinations with respect to the allowances for loan losses
and believes such allowances are adequate, future adjustments may be necessary
if economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.

     The Bank's methodology for establishing the allowance for loan losses takes
into consideration probable losses that have been identified in connection with
specific assets as well as losses that have not been identified but can be
expected to occur.  Management conducts regular reviews of the Bank's assets and
evaluates the need to establish allowances on the basis of this review.
Allowances are established by the Board of Directors on a quarterly basis based
on an assessment of risk in the Bank's assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, loan concentrations, the state of the real estate market,
regulatory reviews conducted in the regulatory examination process and general
economic conditions.  Specific reserves will be provided for individual assets,
or  portions of assets, when ultimate collection is considered improbable by
management based on the current payment status of the assets and the fair value
of the security.  At the date of foreclosure or other repossession, the bank
would transfer the property to real estate acquired in settlement of loans
initially at estimated fair value and subsequently at the lower of book value or
fair value less estimated selling costs. Any portion of the outstanding loan
balance in excess of fair value less estimated selling costs would be charged
off against the allowance for loan losses.  If, upon ultimate disposition of the
property, net sales proceeds exceed the net carrying value of the property, a
gain on sale of real estate would be recorded.

     Banking regulatory agencies, including the OTS, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system.  This policy includes an arithmetic
formula for determining the reasonableness of an institution's allowance for
loan loss estimate compared to the average loss experience of the industry as a
whole.  Examiners will review an institution's allowance for loan losses and
compare it against the sum of:  (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as the evaluation date.  This amount
is considered neither a "floor" nor a "safe harbor" of the level of allowance
for loan losses an institution should maintain, but examiners will view a
shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.

                                       9
<PAGE>

     The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.

<TABLE>
<CAPTION>

                                               Year Ended June 30,
                                            ------------------------
                                                1999         1998
                                            ------------  ----------
                                             (Dollars in Thousands)
<S>                                         <C>           <C>

Balance at beginning of period..........        $ 200       $ 125
                                                -----       -----

Loans charged off:
   Real estate mortgage:
      Construction......................          150          40
                                                -----       -----
Total charge-offs.......................          150          40
                                                -----       -----

Recoveries..............................           --          --
Net loans charged off...................         (150)        (40)
Provision for loan losses...............          501         115
                                                -----       -----
Balance at end of period................        $ 551       $ 200
                                                =====       =====

Ratio of net charge-offs to average
   loans outstanding during the period..          .31%        .09%
                                                =====       =====
</TABLE>

     The following table allocates the allowance for loan losses by loan
category at the dates indicated.  The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.

<TABLE>
<CAPTION>

                                                             At June 30,
                                       --------------------------------------------------------
                                                   1999                         1998
                                       ---------------------------  ---------------------------
                                                      Percent of                   Percent of
                                                    Loans in Each                 Loans in Each
                                                     Category to                   Category to
                                         Amount      Total Loans       Amount      Total Loans
                                       -----------  --------------  -------------  ------------
                                                         (Dollars in thousands)
<S>                                       <C>             <C>           <C>            <C>
Real estate - mortgage:
   Single-family residential.........     $ 236           70.8%         $  150         66.2%
   Multi-family residential..........        12            3.6              --          3.7
   Construction......................       279           18.3              50         20.3
   Nonresidential....................        21            6.2              --          8.9
   Consumer..........................         3            1.1              --          0.9
                                          -----                         ------
    Total allowance for loan losses..     $ 551                         $  200
                                          =====                         ======
</TABLE>

Investment Activities

     General.  The Bank is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of
Cincinnati, certificates of deposit in federally insured institutions, certain
bankers' acceptances and federal funds.  It may also invest, subject to certain
limitations, in commercial paper rated in one of the two highest investment
rating categories of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds.  Federal regulations
require the Bank to maintain an investment in FHLB stock and a minimum amount of
liquid assets which

                                       10
<PAGE>

may be invested in cash and specified securities. From time to time, the OTS
adjusts the percentage of liquid assets which savings banks are required to
maintain. See " -- Regulation of the Bank -- Liquidity Requirements."

     The Bank makes investments in order to maintain the levels of liquid assets
required by regulatory authorities and manage cash flow, diversify its assets,
obtain yield and to satisfy certain requirements for favorable tax treatment.
The investment activities of the Bank consist primarily of investments in
mortgage-backed securities and other investment securities, consisting primarily
of securities issued or guaranteed by the U.S. government or agencies thereof.
Typical investments include federally sponsored agency mortgage pass-through and
federally sponsored agency and mortgage-related securities.  Investment and
aggregate investment limitations and credit quality parameters of each class of
investment are prescribed in the Bank's investment policy.  The Bank performs
analyses of mortgage-related securities prior to purchase and on an ongoing
basis to determine the impact on earnings and market value under various
interest rate and prepayment conditions.  Under the Bank's current investment
policy, securities purchases must be approved by the Bank's President and
Executive Vice President, both of whom also serve as directors of the Bank.  The
Board of Directors review all securities transactions on a monthly basis.

     The Bank adopted SFAS No. 115 as of July 1, 1994.  Pursuant to SFAS No.
115, the Bank has classified securities with an aggregate cost of $24,000 and an
approximate market value of $1.4 million at June 30, 1999 as available for sale.
Management of the Bank presently does not intend to sell such securities and,
based on the Bank's current liquidity level and the Bank's access to borrowings
through the FHLB of Cincinnati, management currently does not anticipate that
the Bank will be placed in a position of having to sell securities with material
unrealized losses.

     Securities designated as "held to maturity" are those assets which the Bank
has the ability and intent to hold to maturity.  Upon acquisition, securities
are classified as to the Bank's intent, and a sale would only be effected due to
deteriorating investment quality.  The "held to maturity" investment portfolio
is not used for speculative purposes and is carried at amortized cost.  In the
event the Bank sells securities from this portfolio for other than credit
quality reasons, all securities within the investment portfolio with matching
characteristics will be reclassified as assets available for sale. Securities
designated as "available for sale" are those assets which the Bank may not hold
to maturity and thus are carried at market value with unrealized gains or
losses, net of tax effect, recognized in retained earnings.

     Mortgage-Backed and Related Securities.  Mortgage-backed securities
represent a participation interest in a pool of single-family or multi-family
mortgages, the principal and interest payments on which are passed from the
mortgage originators through intermediaries that pool and repackage the
participation interest in the form of securities to investors such as the Bank.
Such intermediaries may include quasi-governmental agencies such as FHLMC, FNMA
and the Government National Mortgage Association ("GNMA"), which guarantee or
insure the payment of principal and interest to investors.  Mortgage-backed
securities generally increase the quality of the Bank's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Bank.

     Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities.  The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans.  Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates.  As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder.  The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.

     The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages.  Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security.  The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security.  Premiums and discounts on mortgage-backed securities
are amortized or accredited over the estimated

                                       11
<PAGE>

term of the securities using a level yield method. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect the actual prepayment. The
actual prepayments of the underlying mortgages depend on many factors, including
the type of mortgage, the coupon rate, the age of the mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels of market interest rates. The difference between
the interest rates on the underlying mortgages and the prevailing mortgage
interest rates is an important determinant in the rate of prepayments. During
periods of falling mortgage interest rates, prepayments generally increase, and,
conversely, during periods of rising mortgage interest rates, prepayments
generally decrease. If the coupon rate of the underlying mortgage significantly
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages. Prepayment experience is more difficult to estimate for adjustable-
rate mortgage-backed securities.

     The Bank's mortgage-backed and related securities portfolio consists
primarily of seasoned fixed-rate and adjustable-rate, mortgage-backed and
related securities.  The Bank makes such investments in order to manage cash
flow, diversify assets, obtain yield, to satisfy certain requirements for
favorable tax treatment and to satisfy the qualified thrift lender test.  See "
-- Regulation of the Bank -- Qualified Thrift Lender Test."

     The following table sets forth the carrying value of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>

                                                  At June 30,
                                            ----------------------
                                              1999         1998
                                            --------     ---------
                                            (Dollars in thousands)
<S>                                         <C>       <C>
Securities available for sale:
   U.S. government and agency securities..    $1,431      $1,161
Securities held to maturity:
   Mortgage-backed securities.............       318         435
                                              ------      ------
      Total investment securities.........    $1,749      $1,596
                                              ======      ======

</TABLE>

                                       12
<PAGE>

     The following table sets forth information in the scheduled maturities,
amortized cost, market values and average yields for the Bank's investment
portfolio at June 30, 1999.

<TABLE>
<CAPTION>


                              One Year or Less        One to Five Years      Five to Ten Years
                             -------------------     ------------------     -------------------
                              Carrying   Average     Carrying   Average     Carrying    Average
                               Value      Yield       Value     Yield        Value       Yield
                             -------   ---------     --------  --------     --------   --------
                                                  (Dollars in thousands)

<S>                          <C>       <C>            <C>      <C>            <C>       <C>
Securities available for
 sale:
   U.S. government and
    agency securities......  $ 1,431  (1) 41.7%       $  --      --  %        $  --         -- %
Securities held to
 maturity:
   Mortgage-backed
    securities.............       --        --            3     8.5              11        8.5
                             -------                  -----                   -----
        Total..............  $ 1,431      41.7        $   3     8.5             $11        8.5
                             =======                  =====                   =====

<CAPTION>


                              More than Ten Years     Total Investment Portfolio
                             -------------------     ---------------------------
                              Carrying   Average     Carrying   Market   Average
                               Value      Yield       Value     Value     Yield
                             -------   ---------     --------  -------   -------
                                            (Dollars in thousands)
<S>                            <C>       <C>         <C>      <C>        <C>
Securities available for
 sale:
   U.S. government and
    agency securities......    $  --       -- %       $1,431    $1,431    41.7% (1)
Securities held to
 maturity:
   Mortgage-backed
    securities.............      304      7.5            318       317     7.6
                             -------                  ------    ------
        Total..............     $304      7.5         $1,749    $1,748     9.9
                             =======                  ======    ======
</TABLE>
__________
(1) Amortized cost of $24,000 and average yield is based on amortized cost.

                                       13
<PAGE>

Deposit Activity and Other Sources of Funds

     General.  Deposits are the primary source of the Bank's funds for lending,
investment activities and general operational purposes.  In addition to
deposits, the Bank derives funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed securities and interest
payments thereon.  Although loan repayments are a relatively stable source of
funds, deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions.  Borrowings may be used on a short-
term basis to compensate for reductions in the availability of funds, or on a
longer term basis for general operational purposes.  The Bank has access to
borrow from the FHLB of Cincinnati.  See " -- Borrowings."

     Deposits.  The Bank attracts deposits principally from within its market
area by offering competitive rates on its deposit instruments, including money
market accounts, passbook savings accounts, Individual Retirement Accounts, and
certificates of deposit which range in maturity from 91 days to five years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit and the interest rate.  Maturities, terms,
service fees and withdrawal penalties for its deposit accounts are established
by the Bank on a  periodic basis.  The Bank reviews its deposit mix and pricing
on a weekly basis. In determining the characteristics of its deposit accounts,
the Bank considers the rates offered by competing institutions, lending and
liquidity requirements, growth goals and federal regulations.  The Bank does not
accept brokered deposits.

     The Bank attempts to compete for deposits with other institutions in its
market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers.  Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service.  Substantially all of the
Bank's depositors are Kentucky residents who reside in the Bank's market area.

     The following table sets forth the average balances and average interest
rates based on daily balances for deposits for the periods indicated.

<TABLE>
<CAPTION>

                                                  Year Ended June 30,
                                        --------------------------------------
                                               1999               1998
                                        ------------------  ------------------
                                        Average   Average   Average   Average
                                        Deposits    Rate    Deposits    Rate
                                        --------  --------  --------  --------
                                                (Dollars in thousands)
<S>                                        <C>        <C>      <C>        <C>
Non-interest bearing demand deposits..   $   356       --%   $   290      -- %
Savings deposits......................     3,260     3.23      3,127     3.27
Time deposits.........................    24,862     5.80     20,095     5.85
                                         -------             -------
     Total deposits...................   $28,478             $23,512
                                         =======             =======
</TABLE>

                                       14
<PAGE>

     The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1999.
<TABLE>
<CAPTION>

                                                  Certificates
          Maturity Period                         of Deposits
          ---------------                        --------------
                                                 (In thousands)
          <S>                                     <C>

          Three months or less...........            $  912
          Over three through six months..               826
          Over six through 12 months.....             1,645
          Over 12 months.................             1,834
                                                     ------
             Total.......................            $5,217
                                                     ======

</TABLE>

     Borrowings.  Savings deposits historically have been the source of funds
for the Bank's lending, investments and general activities.  The Bank is
authorized, however, to use advances from the FHLB of Cincinnati to supplement
its supply of lendable funds and to deposit withdrawal requirements.  The FHLB
of Cincinnati functions as a central reserve bank providing credit for savings
institutions and certain other member financial institutions.  As a member of
the FHLB System, the Bank is required to own stock in the FHLB of Cincinnati and
is authorized to apply for advances. Advances are pursuant to several different
programs, each of which has its own interest rate and range of maturities. The
Bank has a Blanket Agreement for advances with the FHLB. The Bank must perform
certain calculations, which are based on capital stock, mortgage assets,
collateral, and total assets, to determine the amount the Bank may borrow. At
June 30, 1999 the Bank may borrow approximately $15.2 million.  Advances from
the FHLB of Cincinnati are secured by the Bank's stock in the FHLB of Cincinnati
and first mortgage loans.

     As of June 30, 1999, the Bank had $8.8 million in advances outstanding.
For further information, see Note 9 of Notes to Consolidated Financial
Statements.  Further asset growth may be funded through additional advances.

Subsidiary Activities

     As a federally chartered savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in subsidiaries, with an additional investment
of 1% of assets where such investment serves primarily community, inner-city and
community development purposes.  Under such limitations, as of June 30, 1999,
the Bank was authorized to invest up to approximately $1.6 million in the stock
of or loans to subsidiaries, including the additional 1% investment for
community inner-city and community development purposes.  Institutions meeting
their applicable minimum regulatory capital requirements may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock.

     The Bank has one subsidiary service corporation, First Lancaster
Corporation, which it formed in 1978 to hold stock in Intrieve, Inc., a data
processing service.

Market Area

     The Bank's market area for gathering deposits and making loans consists of
Garrard, Fayette and Jessamine Counties, Kentucky, which are located around
Lexington, Kentucky.  The economy in the Bank's market area is based upon a
variety of manufacturing and service industries within a one-hour drive from its
office in Lancaster, Kentucky rather than a single large employer or a single
industry.  Such industries include an automobile and truck manufacturer, a
computer printer manufacturer, an electrical equipment manufacturer, a printing
company and a heating and air conditioning equipment manufacturer.  Other
significant employers include the Garrard County school system and the Christian
Appalachian Project, a nonprofit organization with over 300 employees.

                                       15
<PAGE>

Competition

     The Bank faces strong competition both in originating real estate and
consumer loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates, the types of loans it
originates, the deposit products it offers and the quality of services it
provides to borrowers.  The Bank also competes by offering products which are
tailored to the local community.  Its competition in originating real estate
loans comes primarily from other savings institutions, commercial banks and
mortgage bankers making loans secured by real estate located in the Bank's
market area.  Commercial banks, credit unions and finance companies provide
vigorous competition in  consumer lending.  Competition may increase as a result
of the continuing reduction of restrictions on the interstate operations of
financial  institutions.

     The Bank attracts its deposits through its sole office primarily from the
local community. Consequently, competition for deposits is principally from
other savings institutions, commercial banks and brokers in the local community
as well as from the corporate credit unions sponsored by the large private
employers in the Bank's market area. The Bank competes for deposits and loans by
offering what it believes to be a variety of deposit accounts at competitive
rates, convenient business hours, a commitment to outstanding customer service
and a well-trained staff. The Bank believes it has developed strong
relationships with local realtors and the community in  general.

     Management considers its market area for gathering deposits to be Garrard
and Jessamine Counties in Kentucky.  The Bank estimates that it competes with
two banks for deposits and loans.  Based on data provided by the FHLB, the Bank
estimates that at June 30, 1998, the latest date for which information was
available, it had 6.6% of deposits held by all banks and thrifts in its market
area, and 19.8% of deposits held by all banks and thrifts in Garrard County.

Employees

     As of June 30, 1999, the Bank had 12 full-time and 2 part-time employees.

Regulation of the Company

     General.  The Company is a savings and loan holding company as defined by
the Home Owners' Loan Act (the "HOLA") and, as such, is subject to OTS
regulation, supervision and examination.  In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries and may
restrict or prohibit activities that are determined to represent a serious risk
to the safety, soundness or stability of the Bank or any other subsidiary
savings institution.  As a subsidiary of a savings and loan holding company, the
Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof.

     Activities Restrictions.  The Board of Directors of the Company presently
operates the Company as a unitary savings and loan holding company.  There are
generally no restrictions on the activities of a unitary savings and loan
holding company.  However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings institution, the Director of
OTS may impose such restrictions as deemed necessary to address such risk
including limiting: (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") Test, then within one year after the institution ceased to
be a QTL, such unitary savings and loan holding company shall register as and be
deemed to be a bank holding company and will become subject to the activities
restrictions applicable to a bank holding company.  See "Regulation of the Bank
-- Qualified Thrift Lender Test."

                                       16
<PAGE>

     Legislation currently pending in the United States Congress would, if
enacted, restrict the business activities of unitary savings and loan holding
companies; however, the legislation in its present form would grandfather the
current absence of restriction on business activities for unitary savings and
loan holding companies in existence on the bill's date of enactment.  Since the
Company currently is a unitary savings and loan holding company, it would
qualify for such grandfathered treatment under the current form of the
legislation.  See " -- Proposed Regulatory and Legislative Changes."

     If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions.  The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof which is not a savings
institution may commence or continue for a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof, any business
activity, upon prior notice to, and no objection by the OTS, other than (i)
furnishing or performing management services for a subsidiary savings
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, (iv) holding or managing properties used or occupied by a
subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously authorized by regulation as of March 5, 1987 to be
directly engaged in by multiple savings and loan holding companies or (vii)
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the Director of OTS by regulation prohibits or limits
such activities for savings and loan holding companies.  Those activities
described in (vii) above must also be approved by the Director of OTS prior to
being engaged in by a multiple savings and loan holding company.

     Transactions with Affiliates.  Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act.  An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution.  In a holding company context, the parent holding company of a
savings institution (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable, to the institution or subsidiary as those provided to a non-
affiliate.  The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions.  In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution.  Section 106 of the Bank
Holding Company Act of 1956, as amended ("BHCA") which also applies to the Bank,
prohibits the Bank from extending credit to or offering any other services, or
fixing or varying the consideration for such extension of credit or service, on
condition that the customer obtain some additional services from the institution
or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain exceptions.

     Savings institutions are also subject to the restrictions contained in
Section 22(h) and Section 22(g) of the Federal Reserve Act on loans to executive
officers, directors and principal stockholders.  Under Section 22(h), loans to a
director, executive officer or to a greater than 10% stockholder of a savings
institution, and certain affiliated entities of the foregoing, may not exceed,
together with all other outstanding loans to such person and affiliated entities
the institution's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral).  Section 22(h) also prohibits loans, above amounts prescribed by
the appropriate federal banking agency, to directors, executive officers and
greater than 10% stockholders of a savings institution, and their respective
affiliates, unless such loan is

                                       17
<PAGE>

approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting. The Federal
Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.

     Section 22(g) of the Federal Reserve Act requires that loans to executive
officers of depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such extensions of
credit by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers.  In addition, Section 106 of the BHCA extensions of
credit to executive officers, directors, and greater than 10% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.

     Restrictions on Acquisitions.  The HOLA generally prohibits savings and
loan holding companies, without prior approval of the Director of OTS, from
acquiring (i) control of any other savings institution or savings and loan
holding company or substantially all the assets thereof, or (ii) more than 5% of
the voting shares of a savings institution or holding company thereof which is
not a subsidiary.  Under certain circumstances, a registered savings and loan
holding company is permitted to acquire, with the approval of the Director of
OTS, up to 15% of the voting shares of an under-capitalized savings institution
pursuant to a "qualified stock issuance" without that savings institution being
deemed controlled by the holding company.  In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6 1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act.  Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.

     The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if:  (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the laws of the state in which the institution
to be acquired is located specifically permit institutions to be acquired by
state-chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).

     OTS regulations permit federal savings institutions to branch in any state
or states of the United States and its territories.  Except in supervisory cases
or when interstate branching is otherwise permitted by state law or other
statutory provision, a federal savings institution may not establish an out-of-
state branch unless (i) the institution qualifies as a QTL or as a "domestic
building and loan association" under (S)7701(a)(19) of the Code and the total
assets attributable to all branches of the institution in the state would
qualify such branches taken as a whole for treatment as a QTL or as a domestic
building and loan association and (ii) such branch would not result in (a)
formation of a prohibited multi-state multiple savings and loan holding company
or (b) a violation of certain statutory restrictions on branching by savings
institution subsidiaries of bank holding companies.  Federal savings
institutions generally may not establish new branches unless the institution
meets or exceeds minimum regulatory capital requirements.  The OTS

                                       18
<PAGE>

will also consider the institution's record of compliance with the Community
Reinvestment Act of 1977 in connection with any branch application.

Regulation of the Bank

     General.  The Bank is a federally chartered savings institution, is a
member of the FHLB of Cincinnati and its deposits are insured by the FDIC
through the Savings Association Insurance Fund (the "SAIF").  As a federal
savings institution, the Bank is subject to regulation and supervision by the
OTS and the FDIC and to OTS regulations governing such matters as capital
standards, mergers, establishment of branch offices, subsidiary investments and
activities and general investment authority.  The OTS periodically examines the
Bank for compliance with various regulatory requirements and for safe and sound
operations.  The FDIC also has the authority to conduct special examinations of
the Bank because its deposits are insured by the SAIF.  The Bank must file
reports with the OTS describing its activities and financial condition and must
obtain the approval of the OTS prior to entering into certain transactions, such
as mergers with or acquisitions of other depository institutions.

     As a federally insured depository institution, the Bank is subject to
various regulations promulgated by the Federal Reserve Board, including
Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements),
Regulations E (Electronic Fund Transfers), Regulation Z (Truth in Lending),
Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD
(Truth in Savings).

     The system of regulation and supervision applicable to the Bank establishes
a comprehensive framework for the operations of the Bank and is intended
primarily for the protection of the depositors of the Bank.  Changes in the
regulatory framework could have a material effect on the Bank and its operations
that in turn, could have a material adverse effect on the Company.

     Proposed Legislative and Regulatory Changes.  The U.S. Congress is in the
process of drafting legislation which may have a profound effect on the
financial services industry.  In January 1999 legislation restructuring the
activities and regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress.  The stated purposes of the
legislation are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition and would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain limitations, other
commercial enterprises allowing holding companies to offer new services and
products.  In particular, the legislation repeals the Glass-Steagall Act which
prohibits banks from affiliating with securities firms and thereby allowing
holding companies to engage in securities underwriting and dealing without
limits and to sponsor and act as a distributor for mutual funds. The legislation
also removes the Bank Holding Company Act's prohibitions on insurance
underwriting allowing holding companies to underwrite and broker any type of
insurance product, calls for a new regulatory framework for financial
institutions and their holding companies and preserves the thrift charter and
all existing thrift powers.  In May 1999, the Senate passed a version of
financial services modernization which differs from H.R. 10.  In July 1999, the
House passed H.R. 10, which will now go to the Senate to be reconciled with its
version.  At this time, it is unknown how the legislation will be modified, or
if enacted, what form the final version of the legislation might take and how it
will affect the Company's and the Bank's business and operations and competitive
environment.

     Capital Requirements. OTS capital adequacy regulations require savings
institutions such as the Bank to meet three minimum capital standards: a "core"
capital equal to 4.0% (or 3% if the institution is rated composite 1 CAMELS
under the OTS examination rating system) of adjusted total assets, a "tangible"
capital requirement of 1.5% of adjusted total assets, and a "risk-based" capital
requirement of 8% of  total risk-based capital to total risk-weighted assets.
In addition, the OTS has adopted regulations imposing certain restrictions on
savings institutions that have a total risk-based capital ratio of less than 8%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of
Tier 1 capital to total assets of less than 4% (or 3% if the institution is
rated Composite 1 CAMELS under the OTS examination rating system).  See "--
Prompt Corrective Regulatory Action."

                                       19
<PAGE>

     The core capital, or "leverage ratio," requirement mandates that a savings
institution maintain core capital equal to at least 4% of its adjusted total
assets.  "Core capital" includes common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill."  Core capital is generally reduced by the amount of the savings
institution's intangible assets for which no market exists.  Limited exceptions
to the reduction of intangible assets include permissible mortgage servicing
rights, purchased credit card relationships, qualifying supervisory goodwill and
certain intangible assets arising from prior regulatory accounting practices.
Tangible capital is given the same definition as core capital but does not
include an exception for qualifying supervisory goodwill and is reduced by the
amount of all the savings association's intangible assets with only a limited
exception for purchased mortgage servicing rights.  Both core and tangible
capital are further reduced by an amount equal to the savings institution's debt
and equity investments in subsidiaries engaged in activities not permissible to
national banks (other than subsidiaries engaged in activities undertaken as
agent for customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies).  At June 30, 1999, the Bank had no
such investments.

     Adjusted total assets are a savings institution's total assets as
determined under generally accepted accounting principles, adjusted for certain
goodwill amounts and increased by a pro rated portion of the assets of
unconsolidated includable subsidiaries in which the savings institution holds a
minority interest.  Adjusted total assets are reduced by the amount of assets
that have been deducted from capital, the portion of the savings institution's
investments in unconsolidated includable subsidiaries and, for purposes of the
core capital requirement, qualifying supervisory goodwill.

     In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital in its total capital provided the amount of supplementary capital
included does not exceed the savings institution's core capital.  Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loss allowances and up to 45% of unrealized
gains in equity securities.  Total core and supplementary capital are reduced by
the amount of capital instruments held by other depository institutions pursuant
to reciprocal arrangements and by that portion of the savings institution's land
loans and non-residential construction loans in excess of 80% loan-to-value
ratio and all equity investments, other than those deducted from core and
tangible capital.  At June 30, 1999, the Bank had no high ratio land or
nonresidential construction loans and had no equity investments for which OTS
regulations require a deduction from total capital.

     The risk-based capital requirement is measured against risk-weighted assets
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%.  Consumer and residential construction loans are assigned a risk weight of
100%.  Mortgage-backed securities issued, or fully guaranteed as to principal
and interest, by the FNMA or FHLMC are assigned a 20% risk weight.  Cash and
U.S. Government securities backed by the full faith and credit of the U.S.
Government are given a 0% risk weight.

                                       20
<PAGE>

          The table below provides information with respect to the Bank's
compliance with its regulatory capital requirements at June 30, 1999.
<TABLE>
<CAPTION>
                                                        Percent of
                                           Amount        Assets (1)
                                          ---------     ------------
                                           (Dollars in thousands)
        <S>                                   <C>            <C>
        Tangible capital................    $12,263         24.0%
        Tangible capital requirement....        782          1.5
                                            -------         ----
           Excess (deficit).............    $11,481         22.5%
                                            =======         ====

        Core capital (2)................    $12,263         24.0%
        Core capital requirement........      2,086          4.0
                                            -------         ----
           Excess (deficit).............    $10,177         20.0%
                                            =======         ====

        Risk-based capital..............    $12,579         38.0%
        Risk-based capital requirement..      2,669          8.0
                                            -------         ----
           Excess (deficit).............    $ 9,910         30.0%
                                            =======         ====
</TABLE>
-------------------------
(1)  Based on adjusted total assets for purposes of the tangible capital and
     core capital requirements and risk-weighted assets for purpose of the risk-
     based capital requirement.
(2)  Reflects the capital requirement which the Bank must satisfy to avoid
     regulatory restrictions that may be imposed pursuant to prompt corrective
     action regulations.  The core requirement applicable to the Bank may
     increase to 5.0% if the OTS amends its capital regulations, as it has
     proposed, to conform to the more stringent leverage ratio adopted by the
     Office of the Comptroller of the Currency for national banks.


     The OTS' risk-based capital requirements require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital.  A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates.  Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities.  A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets.  A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS.  The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier.  Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports.  However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis.  The Bank has
determined that, on the basis of current financial data, it will not be deemed
to have more than normal level of interest rate risk under the rule and believes
that it will not be required to increase its total capital as a result of the
rule.

     In addition to requiring generally applicable capital standards for savings
institutions, the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the OTS determines to be necessary or appropriate for such institution in
light of the particular circumstances of the institution.  Such circumstances
would include a high degree of exposure of interest rate risk, prepayment risk,
credit

                                       21
<PAGE>

risk and concentration of credit risk and certain risks arising from non-
traditional activities. The OTS may treat the failure of any savings institution
to maintain capital at or above such level as an unsafe or unsound practice and
may issue a directive requiring any savings institution which fails to maintain
capital at or above the minimum level required by the OTS to submit and adhere
to a plan for increasing capital. Such an order may be enforced in the same
manner as an order issued by the FDIC.

     Prompt Corrective Regulatory Action.  Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators,
including the OTS, are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements.  An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan.  A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution.  Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries.  The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt.  In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions.  If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund.  Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.

     Under regulations jointly adopted by the federal banking regulators,
including the OTS, a depository institution's capital adequacy for purposes of
the prompt corrective action rules is determined on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets).  Under the regulations, a savings institution
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6% or greater; and (iii) a leverage ratio of 5% or greater.  An
"adequately capitalized" savings institution is a savings institution that does
not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8% or greater; (ii) a Tier 1 capital risk-based ratio of 4% or
greater; and (iii) a leverage ratio of 4% or greater (or 3% or greater if the
savings institution has a composite 1 CAMELS rating).  An "undercapitalized
institution" is a savings institution that has (i) a total risk-based capital
ratio less than 8%; or (ii) a Tier 1 risk-based capital ratio of less than 4%;
or (iii) a leverage ratio of less than 4% (or 3% if the institution has a
composite 1 CAMELS rating).  A "significantly undercapitalized" institution is
defined as a savings institution that has: (i) a total risk-based capital ratio
of less than 6%; or (ii) a Tier 1 risk-based capital ratio of less than 3%; or
(iii) a leverage ratio of less than 3%.  A "critically undercapitalized" savings
institution  is defined as a savings institution that has a ratio of "tangible
equity" to total assets of less than 2%.  Tangible equity is defined as core
capital plus cumulative perpetual

                                       22
<PAGE>

preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately capitalized
and may require an adequately capitalized or undercapitalized institution to
comply with the supervisory actions applicable to institutions in the next lower
capital category (but may not reclassify a significantly undercapitalized
institution as critically under-capitalized) if the OTS determines, after notice
and an opportunity for a hearing, that the savings institution is in an unsafe
or unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category. The Bank is
classified as "well capitalized" under these regulations.

     Safety and Soundness Standards.  Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994, each federal bank
regulatory agency is required to establish safety and soundness standards, by
regulation or guideline.  The OTS and the other federal bank regulatory agencies
have adopted a set of guidelines prescribing safety and soundness standards
pursuant to the statute.  The final rule and guidelines became effective August
9, 1995.   The safety and soundness guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure and asset
growth.  The guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions.  If the OTS determines that a savings institution is
not in compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines.  A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan.  Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions.  Management believes that the Bank already meets substantially all
the standards adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards has materially
affected the Bank's operations.

     Additionally under FDICIA, as amended by the CDRI Act, the Federal banking
agencies were required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate.  On July 10, 1995, the
Federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.

     The federal banking agencies have also established Year 2000 readiness
safety and soundness guidelines requiring all insured depository institutions to
implement procedures by specified key dates to ensure the institution can
continue business operations after January 1, 2000.  Every institution must
identify its  internal and external "mission-critical" systems (i.e., those
systems vital to the continuance of a core business activity) and develop a
written plan establishing priorities, oversight and reasonable deadlines to
complete the testing and renovation of mission-critical systems.  In addition,
an institution must prepare a written business resumption contingency plan that
(i) defines scenarios where mission-critical systems might fail, (ii) evaluates
contingency options to keep business operations going, and (iii) provides for
testing of the contingency plan by an independent party.  Every depository
institution must also identify among its customers those persons that represent
a material risk to the institution in the event the customer is not Year 2000
compliant and implement appropriate risks controls to manage and mitigate the
customer's Year 2000 risk to the institution.  The federal banking agencies will
examine the institution's overall progress in meeting the Year 2000 readiness
guidelines.  In the event an institution has failed to renovate its mission-
critical systems or is not on schedule with key dates, the institution must
draft a remediation contingency plan outlining alternative strategies to comply
with the guidelines and locate available third party providers.  The agencies,
in their sole discretion, may take actions under the FDICIA, the safety and
soundness guidelines or any other action available to them, including
enforcement action, to ensure an institution's Year 2000 readiness.  For
additional information, see "Year 2000 Readiness Disclosure" in the Annual
Report.

                                       23
<PAGE>

     Federal Home Loan Bank System.  The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB").  The FHLBs provide a central credit facility primarily for member
institutions.  As a member of the FHLB of Cincinnati, the Bank is required to
acquire and hold shares of capital stock in the FHLB of Cincinnati in an amount
at least equal to 1% of the aggregate unpaid principal of its home mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB of Cincinnati,
whichever is greater.  The Bank was in compliance with this requirement with
investment in FHLB of Cincinnati stock at June 30, 1999 of $777,000.  The FHLB
of Cincinnati serves as a reserve or central bank for its member institutions
within its assigned district.  It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System.  It offers advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Cincinnati.  Long-term advances may only
be made for the purpose of providing funds for residential housing finance.  At
June 30, 1999, the Bank had $731,000 in long-term advances and $8.1 million in
short-term advances outstanding from the FHLB of Cincinnati.

     Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% on
transactions accounts of between $4.9 million and $46.5 million, plus 10% on the
amount over $46.5 million.  This percentage is subject to adjustment by the
Federal Reserve Board.  Because required reserves must be maintained in the form
of vault cash or in a non-interest bearing account at a Federal Reserve Bank,
the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets.  As of June 30, 1999, the Bank met its
reserve requirements.

     Federal Deposit Insurance. The Bank is required to pay assessments based on
a percentage of its insured deposits to the FDIC for insurance of its deposits
by the FDIC through the SAIF.  Under the Federal Deposit Insurance Act, the FDIC
is required to set semi-annual assessments for SAIF-insured institutions at a
level necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

     Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations.  Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations.  See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor weaknesses.  Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.

     Historically, institutions with SAIF-assessable deposits, like the Bank,
were required to pay higher deposit insurance premiums than institutions with
deposits insured by the Bank Insurance Fund ("BIF") also administered by the
FDIC.  In order to recapitalize the SAIF and address the premium disparity, in
November 1996 the FDIC imposed a one-time special assessment on institutions
with SAIF-assessable deposits based on the amount determined by the FDIC to be
necessary to increase the reserve levels of the SAIF to the designated reserve
ratio of 1.25% of insured deposits.  Institutions were assessed at the rate of
65.7 basis points per $100 of each institution's SAIF-assessable deposits as of
March 31, 1995.  Based on the foregoing, the Bank recorded an accrual for the
special assessment of $153,000 for the quarter ended September 30, 1996.  Net of
related tax effects, this reduced reported earnings by $101,000 for the year
ended June 30, 1997.

                                       24
<PAGE>

     The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates to zero for well capitalized
institutions with the highest supervisory ratings and 0.31% of insured deposits
for institutions in the highest risk-based premium category.   Since the BIF is
above its designated reserve ratio of 1.25% of insured deposits, "well-
capitalized" institutions in Subgroup A, numbering 95% of BIF-insured
institutions, pay no federal deposit insurance premiums, with the remaining 5%
of institutions paying a graduated range of rates up to 0.27% of insured
deposits for the highest risk-based premium category.  Until December 31, 1999,
SAIF-insured institutions will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO"), an agency of the federal government
established to finance takeovers of insolvent thrifts.  During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.

     Liquidity Requirements. 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 or
greater than 4% of its net withdrawable accounts plus short-term borrowings
either at the end of the preceding calendar quarter or on the average daily
balance 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 June 30, 1999 was 6.75%.

     Qualified Thrift Lender Test.  The HOLA and OTS regulations require that
all savings institutions satisfy one of two Qualified Thrift Lender ("QTL")
tests or suffer a number of sanctions, including restrictions on activities. To
qualify as a QTL, a savings institution must either qualify as a "domestic
building and loan association" under the Internal Revenue Code or maintain at
least 65% of its "portfolio" assets in Qualified Thrift Investments.  Portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets.  All of the following may be included as Qualified Thrift
Investments: investments in mortgage-backed securities, residential mortgages,
home equity loans, loans made for educational purposes, small business loans,
credit card loans and shares of stock issued by a Federal Home Loan Bank.
Subject to a 20% of portfolio assets limit, savings institutions are also able
to treat the following as Qualified Thrift Investments: (i) 50% of the dollar
amount of residential mortgage loans subject to sale under certain conditions,
(ii) investments, both debt and equity, in the capital stock or obligations of
and any other security issued by a service corporation or operating subsidiary,
provided that such subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing, constructing,
improving or repairing domestic residential housing or manufactured housing,
(iii) 200% of their investments in loans to finance "starter homes" and loans
for construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas, (iv) loans
for the purchase, construction, development or improvement of community service
facilities, and (v) loans for personal, family, household or educational
purposes, provided that the dollar amount treated as Qualified Thrift
Investments may not exceed 10% of the savings institution's portfolio assets.

     A savings institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months.  An initial failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its Federal
Home Loan Bank.  If a savings institution does not requalify under the QTL test
within the three-year period after it fails the QTL test, it would be required
to terminate any activity not permissible for a national bank and repay as
promptly as possible any outstanding advances from its Federal Home Loan Bank.
In addition, the holding company of such an institution, such as the Company,
would similarly be required to register as a bank holding company with the
Federal Reserve Board.  At June 30, 1999, the Bank qualified as a QTL.

                                       25
<PAGE>

     Restrictions on Capital Distributions.  Under OTS regulations, the Bank is
not permitted to pay dividends on its capital stock if its regulatory capital
would thereby be reduced below the amount then required for the liquidation
account established for the benefit of certain depositors of the Bank at the
time of its conversion to stock form.

     Under the OTS' prompt corrective action regulations, the Bank is also
prohibited from making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8%; (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a
leverage ratio of less than 4%.  The OTS, after consultation with the FDIC,
however, may permit an otherwise prohibited stock repurchase if made in
connection with the issuance of additional shares in an equivalent amount and
the repurchase will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.

     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.  If neither the savings
institution nor the proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed with the OTS
before making a capital distribution.  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.

     Loans to Directors, Executive Officers and Principal Stockholders.  The
Bank's ability to extend credit to its directors, executive officers, and 10%
stockholders, as well as to entities controlled by such persons, is governed by
the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve Board thereunder. Among other things, these
provisions require that an institution's extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the institution's capital.  In addition, extensions of credit in
excess of certain limits must be approved by the Bank's Board of Directors.

Taxation

     General.  The Company and the Bank, together with the Bank's subsidiary,
file a consolidated federal income tax return based on a fiscal year ending June
30.  Consolidated returns have the effect of eliminating gain or loss  on inter-
company transactions and allowing companies included within the consolidated
return to offset income against losses under certain circumstances.

     Federal Income Taxation.  Savings institutions such as the Bank are subject
to the provisions of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code") in the same general manner as other corporations.
However, institutions such as the Bank which meet certain definitional tests and
other conditions prescribed by the Internal Revenue Code may benefit from
certain favorable provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve.  For purposes of the bad debt
reserve deduction, loans are separated into "qualifying real property loans,"
which generally are loans secured by interests in certain real property, and
"nonqualifying loans", which are all other loans.  The bad debt reserve
deduction with respect to nonqualifying loans must be based on actual loss
experience.  The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method").  Under the
experience

                                       26
<PAGE>

method, the bad debt deduction for an addition to the reserve for qualifying
real property loans is an amount determined under a formula based generally on
the bad debts actually sustained by a savings institution over a period of
years. Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans is computed as 8% of a savings
institution's taxable income, with certain adjustments. The Bank generally has
elected to use the method which has resulted in the greatest deductions for
federal income tax purposes in any given year.

     Recapture of the Bad Debt Reserve.  To the extent (i) a savings
institution's reserve for losses on qualifying real property loans under the
percentage of income method exceeds the amount that would have been allowed
under the experience method and (ii) a savings institution makes distributions
to stockholders (including distributions in redemption, dissolution or
liquidation) that are considered to result in withdrawals from that excess bad
debt reserve, then the amounts considered withdrawn will be included in the
savings institution's taxable income.  The amount that would be deemed withdrawn
from such reserves upon such distribution and which would be subject to taxation
at the savings institution level at the normal corporate tax rate would be an
amount that, when reduced by taxes on such amount, would equal the amount
actually distributed.  Dividends paid out of a savings institution's current or
accumulated earnings and profits as calculated for federal income tax purposes,
however, will not be considered to result in withdrawals from its bad debt
reserves to the extent of such earnings and profits.  Dividends in excess of a
savings institution's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation of a savings institution will be considered to come from its bad
debt reserve.

     Legislation that is effective for tax years beginning after December 31,
1995 requires savings associations to recapture into taxable income the portion
of the tax loan reserve that exceeds the 1987 tax loan loss reserve.  All of the
Bank's tax loan loss reserves at June 30, 1997 were pre-1987 loan loss reserves
and therefore this provision should not affect future operations.  The Bank is
no longer allowed to use the reserve method for tax loan loss provisions, but is
allowed to use either the experience method or the specific charge-off method of
accounting for bad debts.

     The Bank's federal income tax returns have not been audited for the last
five years.

     State Income Taxation.  The State of Delaware imposes no income or
franchise taxes on savings institutions. The Bank is subject to an annual
Kentucky ad valorem tax based on a calendar year and due before the following
July 1. This tax is 0.1% of the Bank's money in hand, shares of stock, notes,
bonds, accounts, credits, and other intangible assets with certain deductions
allowed for amounts borrowed by depositors and for securities guaranteed by the
U.S. Government or certain of its agencies.

     Kentucky has replaced its bank shares tax with a franchise-based tax on
financial institutions.  A tax of 1.1% is imposed annually on the average value
of net capital over the last five years.  This franchise-based tax is in lieu of
all city, county and local taxes except transfer taxes, real and tangible
property taxes and utility-user taxes.  Therefore, local taxing jurisdictions
still have the authority to impose a tax based on deposits.


Item 2.  Description of Property
--------------------------------

         The Company's principal executive offices are located at 208 Lexington
Street, Lancaster, Kentucky in facilities owned by the Bank.  At June 30, 1999,
the Company maintained a main office in Lancaster, Kentucky (located in Garrard
County) and a loan production office in Nicholasville, Kentucky (located in
Jessamine County).  The Company owns its premises in Lancaster and leases the
premises in Nicholasville.  This expiration date on the lease was May 31, 1999.
To date, the Company has not renewed the lease and is currently a month to month
tenant, thereby giving them the opportunity to explore other office facilities
in the area.

                                       27
<PAGE>

Item 3.  Legal Proceedings.
---------------------------

         From time to time, the Company and its subsidiary are parties to
various legal proceedings incident to its business. At June 30, 1999, there were
no legal proceedings that management anticipates would have a material adverse
effect on the Company.


Item 4.  Submission of Matters to a Vote of Security
----------------------------------------------------

         No matters were submitted to a vote of security holders of the Company
through a solicitation of proxies or otherwise during the fourth quarter of the
fiscal year covered by this report.


                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

         The information contained under the section captioned "Market and
Dividend Information" in the Company's 1999 Annual Report to Stockholders (the
"Annual Report") filed as Exhibit 13 hereto is incorporated herein by reference.


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------

         The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.


Item 7   Financial Statements
------------------------------

         The consolidated financial statements of the Company in the Annual
Report are incorporated herein by reference.


Item 8.  Changes in and Disagreements With Accountants on Accounting and
-------  ---------------------------------------------------------------
Financial Disclosure
--------------------

         None.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
-------  -------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------

         For information concerning the Board of Directors of the Company, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Company's definitive proxy statement for the Company's 1998
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.

         Information regarding the executive officers of the Company is set
forth under "Proposal I -- Election of Directors" in the Proxy Statement.

                                       28
<PAGE>

         Information regarding delinquent Form 3, 4 or 5 filers is incorporated
herein by reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.


Item 10.  Executive Compensation
--------------------------------

     The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation and Other Benefits" in the Proxy
Statement is incorporated herein by reference.


Item 11.  Security Ownership of Certain Beneficial Owners
----------------------------------------------------------

          (a)  Security Ownership of Certain Beneficial Owners

          Information regarding this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

          (b)  Security Ownership of Management

          Information required by this item is incorporated herein by reference
to the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Proposal I -- "Election of Directors" in the Proxy Statement.

          (c)  Changes in Control

          Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.


Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

          The information required by this item is incorporated herein by
reference to the section captioned "Proposal I --Election of Directors --
Transactions with Management" in the Proxy Statement.


Item 13.  Exhibits, Lists and Reports on Form 8-K
-------------------------------------------------

          (a)(1) The following consolidated financial statements of the Company
included in the Annual Report are incorporated herein by reference from Item 7
of this Report.  The remaining information appearing in the Annual Report to
Stockholders is not deemed to be filed as part of this Report, except as
expressly provided herein.

          1.   Report of Independent Auditors.

          2.   Consolidated Statements of Financial Condition as of
               June 30, 1999 and 1998.

          3.   Consolidated Statements of Income for the Years Ended
               June 30, 1999 and 1998.

          4.   Consolidated Statements of Changes in Stockholders' Equity for
               the Years Ended June 30, 1999 and 1998.

          5.  Consolidated Statements of Cash Flows for the Years Ended June 30,
              1999 and 1998.

                                       29
<PAGE>

          6.  Notes to Consolidated Financial Statements

          (a)(2) Exhibits
                 --------

          The following is a list of exhibits filed as part of this Annual
Report on Form 10-KSB and is also the Exhibit Index.

<TABLE>
<CAPTION>

  No.          Description
  ---          -----------
<S>         <C>                                                                       <C>
  3.1       Certificate of Incorporation of First Lancaster Bancshares, Inc.          *
  3.2       Bylaws of First Lancaster Bancshares, Inc.                                *
  4         Form of Common Stock Certificate of First Lancaster Bancshares, Inc.      *
 10.1       First Lancaster Bancshares, Inc. 1996 Stock Option and Incentive Plan     *
 10.2       First Lancaster Federal Savings Bank Management Recognition Plan          *
 10.3(a)    Employment Agreements by and between First Lancaster Federal Savings
              Bank and Virginia R. S. Stump                                           **
 10.3(b)    Employment Agreements by and between First Lancaster Bancshares, Inc.
              and Virginia R. S. Stump                                                **
 10.4       First Lancaster Federal Savings Bank Directors' Retirement Plan           *
 10.5       First Lancaster Federal Savings Bank Incentive Compensation Plan          *
 10.6       Supplemental Executive Retirement Agreements between First Lancaster
              Federal Savings Bank and Virginia R. S. Stump                           *
 13         Annual Report to Stockholders
 21         Subsidiaries of the Registrant
 23         Consent of Independent Auditors
 27         Financial Data Schedule
-------------------------
*    Incorporated herein by reference from the Company's Registration Statement
     on Form SB-2 (Registration No. 333-2468).
**   Incorporated herein by reference from the Company's Annual Report on Form
     10-KSB for the fiscal year ended June 30, 1997.


     (b)  Reports on Form 8-K.  None.
          -------------------


                                       30
<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                     FIRST LANCASTER BANCSHARES, INC.


September 24, 1999                   By: /s/ Virginia R. S. Stump
                                         ------------------------------------
                                         Virginia R. S. Stump
                                         Chairman of the Board, President and
                                         Chief Executive Officer
                                         (Duly Authorized Representative)

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.



/s/ Virginia R. S. Stump                        September 24, 1999
------------------------------------
Virginia R. S. Stump
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer)


/s/ Tony A. Merida                             September 24, 1999
------------------------------------
Tony A. Merida
Vice Chairman of the Board and Executive
Vice President


/s/ David W. Gay                               September 24, 1999
------------------------------------
David W. Gay
Director


/s/ Jane G. Simpson                            September 24, 1999
------------------------------------
Jane G. Simpson
Director


/s/ Ronald L. Sutton                           September 24, 1999
------------------------------------
Ronald L. Sutton
Director


/s/ Jack C. Zanone                             September 24, 1999
------------------------------------
Jack C. Zanone
Director


/s/ Phyllis Swaffar                            September 24, 1999
------------------------------------
Phyllis Swaffar
Director

/s/ Jerry Purcell                              September 24, 1999
------------------------------------
Jerry Purcell
Director




</TABLE>