<PAGE>

                                                                      Exhibit 13

FIRST LANCASTER BANCSHARES, INC.





[LOGO]







                                                              1999 ANNUAL REPORT
<PAGE>

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.

     The Bank is a federal savings bank, which operates one full service office
in  Lancaster, Kentucky and one loan production office in Nicholasville,
Kentucky, serving Garrard, Jessamine and surrounding counties in Kentucky.  The
Bank was chartered by the Commonwealth of Kentucky in 1873 under the name
Lancaster Building and Loan Association.  The Bank adopted a federal charter and
received federal insurance of its deposit accounts in 1966, at which time it
adopted the name First Lancaster Federal Savings and Loan Association.  In 1988
the Bank converted from a federally chartered mutual savings and loan
association to a federally chartered mutual savings bank and adopted its present
name.  The principal business of the Bank consists of attracting deposits from
the general public and investing these deposits in loans secured by first
mortgages on single-family residences in the Bank's market area.  The Bank
derives its income principally from interest earned on loans and, to a lesser
extent, interest earned on mortgage-backed securities and investment securities
and noninterest income.  Funds for these activities are provided principally by
operating revenues, deposits and repayments of outstanding loans and investment
securities and mortgage-backed securities.

     As a federally chartered savings institution, the Bank is subject to
extensive regulation by the Office of Thrift Supervision (the "OTS").  The
lending activities and other investments of the Bank must comply with various
federal regulatory requirements, and the OTS periodically examines the Bank for
compliance with various regulatory requirements.  The Federal Deposit Insurance
Corporation ("FDIC") also has the authority to conduct special examinations.
The Bank must file reports with OTS describing its activities and financial
condition and is also subject to certain reserve requirements promulgated by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board").














                                      (i)
<PAGE>

MARKET INFORMATION
--------------------------------------------------------------------------------

     The Company's common stock trades under the symbol "FLKY" on the Nasdaq
SmallCap Market.  As of June 30, 1999 there were 910,872 shares of the common
stock outstanding and approximately 250 holders of record.

     The following table sets forth the reported bid information for, and the
dividends declared on, the common stock for each full quarterly period since the
common stock was issued at the end of fiscal year 1996.

<TABLE>
<CAPTION>
                                       Bid
                                 ---------------          Dividends
                                  High     Low            Declared
                                 -------  ------          ---------
<S>                              <C>      <C>             <C>
Fiscal Year 1998
July - September 1997            $16.000  15.250            $0.25
October - December 1997           16.375  15.750               --
January - March 1998              16.000  15.125            $0.25
April - June 1998                 16.125  14.000               --

Fiscal Year 1999
July - September 1998            $14.250  12.375            $0.30
October - December 1998           13.688  12.000               --
January - March 1999              13.000  12.063            $0.30
April - June 1999                 12.500  11.063               --
</TABLE>

     Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

     The Board of Directors of the Company established a regular dividend rate
and payment schedule in July 1997, whereby the Company will pay dividends semi-
annually, payable to stockholders of record as of the third Friday of every
January and July following the respective semi-annual period.  Any change in the
Company's dividend policy will depend on the Company's debt and equity
structure, earnings, regulatory capital requirements, and other factors,
including economic conditions, regulatory restrictions, and tax considerations.
The Company declared a dividend of $0.30 per share in July 1999.  See Note 16 of
Notes to Consolidated Financial Statements for restrictions on the payment of
cash dividends by the Bank, which serves as the primary source of liquidity for
the Company.


TABLE OF CONTENTS
--------------------------------------------------------------------------------

<TABLE>
<S>                                                                                                   <C>
First Lancaster Bancshares, Inc. ..................................................................... (i)
Market Information................................................................................... (ii)
Letter to Stockholders.................................................................................. 1
Selected Consolidated Financial and Other Data.......................................................... 2
Management's Discussion and Analysis of Financial Condition and Results of Operations................... 4
Consolidated Financial Statements...................................................................... 17
Corporate Information................................................................... Inside back cover
</TABLE>

                                      (ii)
<PAGE>

                             LETTER TO STOCKHOLDERS
--------------------------------------------------------------------------------


Dear Stockholders,

     Another year has passed and presented us with several opportunities and
challenges.  We began the year announcing a 5% stock repurchase, which was
completed in March 1999 with an aggregate cost of approximately $622,000.  This
stock is being held as treasury stock to be used for future corporate purposes.
On July 9, 1999 First Lancaster Bancshares, Inc. announced that we would be
repurchasing an additional 5% of our outstanding common stock over the next
twelve months and it will also be held as treasury stock for future corporate
purposes.  The Board and management believe that these repurchases are a great
means to utilize capital and enhance shareholder value.  At the current stock
price levels, we feel it is an excellent buying opportunity for the Company and
will consider future stock repurchases.

     Earnings for the fiscal year 1999 were $301,000, which was below our 1998
annual earnings of $512,000.  Basic and diluted earnings per share for the year
ended June 30, 1999 were $0.35 as compared to basic and diluted earnings per
share of $0.57 and $0.56, respectively, for the year ended June 30, 1998.  The
decrease in earnings and earnings per share for the year was primarily due to a
combination of construction loans, granted to a builder in Lexington, KY, which
became doubtful for collection during the quarter ended December 31, 1998.  A
specific provision for loan losses of $385,000 was recorded to cover this
combination of construction loans.  We, along with the numerous other banks
involved, initiated foreclosure proceedings against this builder in January 1999
and properties are still in the process of being sold.  As a result of this
loss, the Board has made several enhancements to our loan underwriting policies,
specifically for construction lending.   We believe these enhancements will help
to deter this type of loss in the future.

      Total shareholders' equity as of June 30, 1999 was $13.3 million, which is
a decrease of $367,000, or 2.7%, from June 30, 1998.  This decrease is due to
dividends of $509,000 being paid to shareholders and the 5% stock repurchase
program mentioned above. The Company's total assets decreased from $53.7 million
at June 30, 1998 to $52.8 million at June 30, 1999 which was primarily
attributable to the decrease in net loans receivable.

     Like other institutions, we have been closely monitoring all Year 2000
issues.  We have a Year 2000 committee to monitor the process of achieving and
certifying overall compliance for Year 2000.  We have completed successful
validation testing with our third party service bureau.  The Company has a
contingency plan in place and is currently focusing on employee training and
customer awareness.

     During fiscal year 1999, the Company has done some remodeling of its
headquarters in Lancaster, and added a new loan officer, customer service
representative and comptroller.  Two new directors were added to the Board of
Directors in July 1999 and plans are being made for additional banking services
to be added in the near future.

      We, at First Lancaster Bancshares, Inc. look forward with great
anticipation and high expectations to the changes and challenges in the last
part of 1999 and the new millennium.  We want the opportunity to serve our
customers, shareholders and community because you are very important to us.  The
Board of Directors, employees and I appreciate your trust and support of First
Lancaster Bancshares, Inc. and First Lancaster Federal Savings Bank.  As always,
I welcome your comments, suggestions and visits.

                                    Sincerely,

                                    /s/ Virginia R. S. Stump
                                    ------------------------
                                    Virginia R. S. Stump
                                    Chairman of the Board, President
                                    and Chief Executive Officer
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------

Selected Consolidated Financial Condition Data:

<TABLE>
<CAPTION>
                                       At June 30,
                                   -------------------
                                     1999       1998
                                   --------   --------
                                      (In thousands)
<S>                                <C>        <C>
Assets..........................    $52,752    $53,747
Loans receivable, net...........     46,192     47,594
Cash and cash equivalents.......      2,706      2,703
Investment securities:
  Available for sale............      1,431      1,161
  Held to maturity..............         --         --
Mortgage-backed securities......        318        435
Savings accounts................     29,653     25,417
FHLB advances...................      8,831     13,461
Total equity....................     13,271     13,638
</TABLE>

--------------------------------------------------------------------------------

Selected Consolidated Operating Data:

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

Interest income...........................     $4,335    $4,035
Interest expense..........................      2,216     1,960
                                               ------    ------
Net interest income before provision for
   loan losses............................      2,119     2,075
Provision for loan losses.................        501       115
                                               ------    ------
Net interest income.......................      1,618     1,960
Noninterest income........................         41        29
Noninterest expense.......................      1,197     1,195
                                               ------    ------
Income before income taxes................        462       794
Provision for income taxes................        161       282
                                               ------    ------
Net income................................     $  301    $  512
                                               ======    ======
</TABLE>

                                       2
<PAGE>

Key Operating Ratios:

<TABLE>
<CAPTION>
                                                        At or for the
                                                     Year Ended June 30,
                                                   -----------------------
                                                      1999         1998
                                                   ----------   ----------
<S>                                                <C>          <C>
Performance Ratios:
Return on average assets (net income divided
   by average total assets)......................       .55%        1.03%
Return on average total equity (net income
   divided by average total equity)..............      2.18         3.63
Interest rate spread (combined weighted average
    interest rate earned less combined weighted
    average interest rate cost)..................      2.90         2.91
Ratio of average interest-earning assets to
    average interest-bearing liabilities.........    128.45       135.54
Ratio of noninterest expense to average
    total assets.................................      2.19         2.34

Asset Quality Ratios:
Nonperforming assets to total assets.............      2.55         1.09
Nonperforming loans to total loans...............      2.94         1.24
Provision for loan losses to total loans.........      1.08          .24
Allowance for loan losses to nonperforming
  loans receivable, net..........................     40.54        34.02
Allowance for loan losses to total loans
  receivable, net................................      1.19          .42
Net charge-offs to average loans outstanding.....       .31          .09

Capital Ratios:
Total equity to total assets.....................     25.16        25.37
Average total equity to average assets...........     25.18        28.33

Other:
Dividend payout ratio............................    169.14        88.60
</TABLE>

                                       3
<PAGE>

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------

     This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance.  However, such performance is subject to risks, uncertainties and
other factors which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements.  Potential
risks and uncertainties include, but are not limited to, economic conditions,
competition and other uncertainties detailed from time to time in the Company's
filings with the Securities and Exchange Commission.

General

     First Lancaster Bancshares, Inc. (the "Company") was formed in 1996 and
serves as the savings and loan holding company for First Lancaster Federal
Savings Bank (the "Bank"), a federally chartered stock savings bank
headquartered in Lancaster, Kentucky that conducts the principal business of the
Company.  The Bank converted from a mutual savings bank to a stockholder-owned
savings bank in June 1996.  At the same time, it became a wholly owned
subsidiary of the Company by selling its shares to the Company.  The Company
funded its purchase of the Bank's stock using most of the net proceeds from the
Company's initial public offering of its common stock, which was consummated at
the same time as the Bank's conversion.  Prior to its acquisition of the Bank's
stock, the Company had no material operations.  Unless otherwise indicated, all
references in this discussion are to the consolidated operations of the Company
and the Bank.

     The principal business of the Company consists of accepting deposits from
the general public and investing these funds primarily in loans and, to a lesser
extent, in investment securities and mortgage-backed securities. Loans are
originated by the Company within its primary market of Garrard, Jessamine and
Fayette counties located in central Kentucky and are comprised of single-family
residential first mortgage loans and, to a lesser extent, single-family
residential construction loans, nonresidential loans, loans secured by multi-
family residential property and loans secured by deposits.

          The Company's net income is dependent primarily on its net interest
income, which is the difference between the interest income it earns on its
loans, investment securities and mortgage-backed securities and the interest it
pays on the savings accounts and certificates of deposits and on the advances
(i.e., borrowings) from the Federal Home Loan Bank of Cincinnati ("FHLB").  Net
interest income is affected by (i) the rates of interest earned or paid by the
Company and (ii) the volume of interest-earning assets and interest-bearing
liabilities that flow through the Company.  Rates of interest earned or paid is
reflected in the Company's "interest rate spread," which is the difference
between the yields earned on interest-earning assets and the rates paid on
interest-bearing liabilities and is an indicator of the Company's profitability
in its core banking business.  The Company's interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows.  The Company's interest rate spread for the fiscal
year ended June 30, 1999 was 2.90% as compared to 2.91% for fiscal year 1998.
The volume of interest-earning assets and interest-bearing liabilities generally
increases profitability of the Company to the extent such assets exceed such
liabilities.  The ratio of the Bank's average interest-earning assets to average
interest-bearing liabilities was 128.45% for fiscal year 1999 as compared to
135.54% for fiscal year 1998.

          The overall operations of the Company are significantly affected by
prevailing economic conditions, competition and the monetary, fiscal and
regulatory policies of governmental agencies. Lending operations are influenced
in particular by the demand for and supply of housing, competition among
lenders, the level of interest rates and the availability of funds.  Deposit
operations such as the amount of deposits and their related costs are influenced
in particular by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.

                                       4
<PAGE>

Liquidity and Capital Resources.

          Liquidity.  Liquidity refers to the ability or the financial
flexibility to manage future cash flows to meet the needs of depositors and
borrowers and fund operations. Maintaining appropriate levels of liquidity
allows the Company to have sufficient funds available for reserve requirements,
customer demand for loans, withdrawal of deposit balances, maturities of
deposits and timely satisfaction of other commitments.

          The Company's primary source of liquidity is dividends from the Bank,
the payment of which is subject to regulatory limitations on capital
distributions (such as dividends) and liquidity.   OTS regulations require that
savings institutions submit notice to the OTS prior to making a capital
distribution if (a) they would not be well-capitalized after the distribution,
(b) the distribution would result in the retirement of any of the institution's
common or preferred stock or debt counted as its regulatory capital, or (c) the
institution is a subsidiary of a holding company.  A savings institution must
make application to the OTS to pay a capital distribution if (x) the institution
would not be adequately capitalized following the distribution, (y) the
institution's total distributions for the calendar year exceeds the
institution's net income for the calendar year to date plus its net income (less
distributions) for the preceding two years, or (z) the distribution would
otherwise violate applicable law or regulation or an agreement with or condition
imposed by the OTS.  The OTS may disapprove or deny a capital distribution if in
the view of the OTS, the capital distribution would constitute an unsafe or
unsound practice.

          The Bank generally is required to maintain average daily balances of
liquid assets (generally, cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to 4% of its net withdrawable accounts plus short-term
borrowings either at the end of the preceding calendar quarter or on an average
daily basis during the preceding quarter.  The Bank also is required to maintain
sufficient liquidity to ensure its safe and sound operation.  Monetary penalties
may be imposed for failure to meet liquidity requirements.  The average daily
balance of liquid assets ratio of the Bank for June 1999 was 6.75%.

          On March 5, 1999, the Company obtained a line of credit for $2.5
million, from Community Trust Bank located in Lexington, Kentucky, to be used
for general funding needs.  As of June 30, 1999, there had been no draws on this
line of credit.

          The source of the Company's liquidity arises from the Bank's
operating, investing and financing activities.  Cash generated from operating
activities increased by $244,000, or 38.7%, to $876,000 in fiscal year 1999 from
$632,000 in fiscal year 1998.  This increase is attributable to a decrease in
net income of $211,000, which was offset by increases of $322,000 in non-cash
operating activities and $305,000 in cash generated from accrued interest
receivables.  The increase in non-cash operating activities is mainly driven by
a $386,000 increase in the provision for loan losses.

          Investing activities of the Company generated $773,000 in the fiscal
year 1999 compared to a use of funds of $9.9 million in the fiscal year 1998.
This significant change in investing activities is due to a decrease of $763,000
in  loans receivable in fiscal year 1999 as compared to an increase of $9.9
million in loans receivable for the fiscal year 1998.  After several
construction loans to one borrower became impaired in December 1998, the Board
of Directors performed a detailed review of the Bank's loan portfolio.  During
this review, risk factors as well as loan category percentages were considered
and it was resolved that the construction loan percentage in the portfolio was
higher than policy advised and that two non-residential loans appeared to
contain more risk than the Board desired.  At the Board's discretion, the Bank
ceased new construction lending until June 1999 to realign the construction loan
percentage in the portfolio.  The Bank also entered into participations with
other local banks for the two non-residential loans in an effort to minimize
risk in the portfolio.  These actions caused investing activities to fluctuate
significantly from year to year.

          Financing activities of the Company used $1.6 million in cash in
fiscal year 1999 compared to generating $9.9 million of cash in the fiscal year
1998.  This change is mainly due to a decrease in Federal Home Loan Bank (FHLB)

                                       5
<PAGE>

advances in the fiscal year 1999.  In fiscal year 1998, $12 million of FHLB
advances were used to fund the growing loan portfolio.  As discussed above, the
loans receivable balance decreased in fiscal year 1999 thereby decreasing the
need for FHLB advances.   Also contributing to a use of funds from financing
activities is the increase in repayments of FHLB advances in fiscal year 1999 to
$5.7 million from $4.6 in fiscal year ended 1998.

          The Company's use of FHLB advances reflects the flexibility in using
advances with repayment terms that approximate the anticipated lifetimes of
loans originated by the Company.   As of June 30, 1999, the Company had a
borrowing capacity with the FHLB of $15.2 million, of which $8.8 million was
outstanding.  See Note 9 of the Company's Notes to Consolidated Financial
Statements for more information on outstanding advances.  This line is
collateralized with non-delinquent single-family residential mortgage loans.

          The Company anticipates that it will have sufficient funds available,
either from its operations or from outside funding sources, to satisfy its
funding commitments.  At June 30, 1999, the Company had outstanding commitments
to originate loans totaling $1.25 million.  Also at such date, the Company had
certificates of deposit scheduled to mature within one year of June 30, 1999
totaling $19.1 million

          Capital Resources.  The Company's capital position is reflected in its
stockholders' equity, subject to certain adjustments for regulatory purposes.
Stockholders' equity, or capital, is a measure of the Company's net worth,
soundness and viability.  The Company continues to exhibit a strong capital
position, and its capital base allows it to take advantage of business
opportunities while maintaining the level of resources deemed appropriate by
management of the Company to address business risks inherent in the Company's
daily operations.

          Stockholders' equity on June 30, 1999 was $13.3 million, a decrease of
$367,000, or 2.7%, from June 30, 1998.  The decrease in stockholders' equity
reflects net income for fiscal year 1999 of $301,000 ($0.35 per share), $735,000
purchase of treasury stock, $509,000 paid out in dividends, $178,000 in net
unrealized gain for the year from the Company's available-for-sale securities
and $316,000 in capital corresponding to the Bank's employee stock ownership
plan, which acquired Common Stock in the Company's initial public offering, and
$82,000 in capital corresponding to the Bank's Management Recognition Plan.

          Federal regulations impose minimum capital requirements on the Bank
but not on savings and loan holding companies such as the Company.  Among these
requirements that apply to the Bank are risk-based capital regulations, which
require all banks, including savings banks, to achieve and maintain specified
ratios of capital to risk-weighted assets.  The risk-based capital rules are
designed to measure Tier 1 Capital (consisting of stockholders' equity, less
goodwill) and Total Capital in relation to the credit risk of both on- and off-
balance sheet items.  Under the guidelines, one of four risk weights is applied
to the different on-balance sheet items.  Off-balance sheet items, such as loan
commitments, are also subject to risk-weighting after conversion to balance
sheet equivalent amounts.  All banks, including savings banks, must maintain a
minimum total capital to total risk-weighted assets ratio of 8.00%, at least
half of which must be in the form of Tier 1 Capital.  For further information
regarding minimum regulatory capital levels, see Note 11 of the Company's Notes
to Consolidated Financial Statements.  At June 30, 1999, the Bank satisfied all
minimum regulatory capital requirements and was considered "well-capitalized"
within the meaning of federal regulatory requirements.

Asset/Liability Management

          The Company has sought to reduce its exposure to changes in interest
rates by matching more closely the effective maturities or repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
The matching of the Company's assets and liabilities may be analyzed by
examining the extent to which its assets and liabilities are interest rate
sensitive and by monitoring the expected effects of interest rate changes on the
Company's net interest income.

                                       6
<PAGE>

          An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Company's assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Company's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. As
a result of the interest rate risk inherent in the historical savings
institution business of originating long-term loans funded by short-term
deposits, the Company has pursued certain strategies designed to decrease the
vulnerability of its earnings to material and prolonged changes in interest
rates.

          In accordance with the Company's interest rate risk policy, management
has emphasized the origination of adjustable-rate mortgage loans with rate
adjustments indexed to the one-year Treasury bill, adjusted for constant
maturity, and has also used FHLB advances to better match maturities of funding
sources with the terms of fixed-rate mortgage loans originated by the Bank.
Management believes that this approach to loan originations allows the Bank to
respond to customer demand while minimizing interest rate and credit risk and
without any significant increase in operating expenses.  At June 30, 1999,
mortgage loans with adjustable rates represented 62.5% of the Company's mortgage
loan portfolio. Approximately 98.0% of the Company's adjustable rate mortgage
loans have an annual adjustment limitation of two percent and a lifetime
limitation of five percent, and may not decline more than 1% below the initial
interest rate (the "floor").  These limitations on rate adjustments may prevent
the interest rates charged on loans from increasing at the same pace as the
Company's cost of funds.  However, some of the rates on adjustable-rate
mortgages may already be at their lifetime floor, which would also restrict
future downward adjustments and thereby eliminate the Company's interest rate
risk associated with a declining interest rate environment.

          Interest Rate Sensitivity Analysis.  The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap." An asset or liability is said to be interest
rate sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity "gap" is the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within the
same time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities, and
is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets.  During a period of rising
interest rates, a negative gap would be expected to adversely affect net
interest income while a positive gap would be expected to result in an increase
in net interest income.  In contrast, during a period of declining interest
rates, a negative gap would be expected to result in an increase in net interest
income and a positive gap would be expected to adversely affect net interest
income.

          At June 30, 1999, the Company's cumulative one-year interest rate gap
position was a positive $7.3 million, or 14.5%, of total interest-earning
assets.  A positive gap position indicates that the Company's net interest
income would be expected to increase in a period of increasing interest rates
and decrease in a period of decreasing interest rates.  This is a one-day
position which is continually changing and is not necessarily indicative of the
Company's position at any other time.  The Company's current one-year gap is
within the guidelines established by management and approved by the Board of
Directors.  Management considers numerous factors when establishing these
guidelines, including current interest rate margins, capital levels and any
guidelines provided by the OTS.

          Different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, and thus changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category.  Additionally, the gap analysis does not consider the many
factors accompanying interest rate moves.  While the interest rate sensitivity
gap is a useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the maturity or
repricing characteristics of the balance sheet that occur during changes in
market interest rates.  For instance, while the retention of adjustable-rate
mortgage loans in the Company's portfolio helps reduce the Company's exposure to
changes in interest rates, these types of loans may give rise to unquantifiable
credit risks in a rising interest rate environment.  As

                                       7
<PAGE>

adjustable-rate loans reprice to higher interest rates and therefore require
higher loan payments, they may become subject to a higher risk of default.

          The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1999 which are expected
to mature or reprice in each of the time periods shown.

<TABLE>
<CAPTION>
                                                              Expected to Mature During the Year Ended June 30,
                                            -------------------------------------------------------------------------------------
                                              2000      2001      2002      2003      2004    Thereafter    Total     Fair Value
                                            --------  --------  --------  --------  --------  ----------  ---------  ------------
                                                                           (Dollars In thousands)
<S>                                         <C>       <C>       <C>       <C>       <C>       <C>         <C>        <C>
Interest-earning assets:
 Loans:
    Single-family.........................  $25,397   $ 2,875    $1,044    $  861     $  223    $ 4,018     $34,418     $34,559
    Multi-family residential..............    1,014        --        14        --         26        703       1,757       1,764
    Construction..........................    6,450        --        --        --         --         33       6,483       6,465
    Nonresidential........................    1,313       140       992         9        116        440       3,010       3,012
    Consumer..............................      345        13        42        34         35         55         524         524
 Interest bearing cash deposits in other
  financial institutions..................    2,231        --        --        --         --         --       2,231       2,231
 Investment securities....................    1,431        --        --        --         --         --       1,431       1,431
 Mortgage-backed securities...............       --         2        --         1         --        315         318         317
                                            -------   -------    ------    ------     ------    -------     -------     -------
   Total..................................   38,181     3,030     2,092       905        400      5,564      50,172      50,303
                                            -------   -------    ------    ------     ------    -------     -------     -------

Interest-bearing liabilities:
 Deposits.................................   22,825     5,473       447       379        529         --      29,653      29,826
 Borrowings...............................    8,100        --        --        --         --        731       8,831       8,743
                                            -------   -------    ------    ------     ------    -------     -------     -------
   Total..................................   30,925     5,473       447       379        529        731      38,484      38,569
                                            -------   -------    ------    ------     ------    -------     -------     -------

Interest sensitivity gap..................  $ 7,256   $(2,443)   $1,645    $  526     $ (129)   $ 4,833     $11,688     $11,734
                                            =======   =======    ======    ======     ======    =======     -------     -------
Cumulative interest sensitivity gap.......  $ 7,256   $ 4,813    $6,458    $6,984     $6,855    $11,688     $11,688     $11,734
                                            =======   =======    ======    ======     ======    =======     =======     =======
Ratio of interest-earning assets to
 interest-bearing liabilities.............    123.5%     55.4%    468.0%    238.8%      75.6%     761.2%      130.4%      130.4%
                                            =======   =======    ======    ======     ======    =======     =======     =======
Ratio of cumulative gap to total
 interest-earning assets..................     14.5%      9.6%     12.9%     13.9%      13.7%      23.3%       23.3%       23.3%
                                            =======   =======    ======    ======     ======    =======     =======     =======
</TABLE>

     The preceding table was prepared based upon the assumption that loans will
not be repaid before their respective contractual maturity except for
adjustable-rate loans, which are classified based upon their next repricing
date. Further, it is assumed that fixed-maturity deposits are not withdrawn
prior to maturity and that other deposits are withdrawn or repriced within one
year. Management of the Company does not believe that these assumptions will be
materially different from its actual experience.  However, the actual interest
rate sensitivity of the Company's assets and liabilities could vary
significantly from the information set forth in the table due to market and
other factors.

     Certain shortcomings are inherent in the method of analysis presented
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities.  For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
differently to changes in market interest rates.  The interest rates on certain
types of assets and liabilities may fluctuate in advance of or lag behind
changes in market interest rates.  Additionally, certain assets, such as an
adjustable rate loan, which is the Company's primary loan product, may have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset.  The analysis could also be affected by changes in the
proportion of adjustable rate loans in the Company's portfolio.  Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the tables.

                                       8
<PAGE>

Average Balance, Interest and Average Yields and Rates

     The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods indicated.  Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented.

     The table also presents information for the periods indicated with respect
to the difference between the average yield earned on interest-earning assets
and average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings institutions have traditionally used as an indicator of
profitability.  Another indicator of an institution's net interest income is its
"net yield on interest-earning assets," which is its net interest income divided
by the average balance of interest-earning assets.  Net interest income is
affected by the interest rate spread and by the relative amounts of interest-
earning assets and interest-bearing liabilities.  When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.


















                                       9
<PAGE>

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                                    -------------------------------------------------------
                                                               1999                         1998
                                                    ---------------------------  --------------------------
                                                                        Average                     Average
                                                    Average             Yield/                       Yield/
                                                    Balance  Interest    Cost    Balance  Interest   Cost
                                                    -------  --------  --------  -------  --------  -------
                                                                    (Dollars in thousands)
<S>                                                 <C>      <C>       <C>       <C>      <C>       <C>
Interest-earning assets:
  Loans receivable (1)............................  $48,266    $4,141     8.58%  $44,630    $3,869    8.67%
  Investment securities...........................       24        10    41.67        24         8   33.33
  Non-marketable equity securities................      745        55     7.38       588        41    6.97
  Mortgage-backed securities......................      371        28     7.55       487        37    7.60
  Other interest-bearing cash deposits............    2,043       101     4.94     1,549        80    5.16
                                                    -------    ------            -------    ------
   Total interest-earning assets..................   51,449     4,335     8.43    47,278     4,035    8.53
                                                               ------                       ------
Unrealized gains on securities available
 for sale.........................................    1,324                          961
Non-interest-earning assets.......................    1,940                        1,556
                                                    -------                      -------
   Total assets...................................  $54,713                      $49,795
                                                    =======                      =======

Interest-bearing liabilities:
  Deposits........................................  $28,478    $1,548     5.44   $23,512    $1,279    5.44
  Borrowings......................................   11,576       668     5.77    11,370       681    5.99
                                                    -------    ------            -------    ------
   Total interest-bearing liabilities.............   40,054     2,216     5.53    34,882     1,960    5.62
                                                               ------   ------              ------  ------
Non-interest-bearing liabilities..................      884                          804
                                                    -------                      -------
   Total liabilities..............................   40,938                       35,686
Retained earnings and capital.....................   12,901                       13,475
Unrealized gain on securities available for sale..      874                          634
                                                    -------                      -------
   Total liabilities and stockholders' equity.....  $54,713                      $49,795
                                                    =======                      =======

Net interest income...............................             $2,119                       $2,075
                                                               ======                       ======
Interest rate spread..............................                        2.90%                       2.91%
                                                                        ======                      ======
Net yield on interest-earning assets..............                        4.12%                       4.39%
                                                                        ======                      ======
Ratio of average interest-earning assets
  to average interest-bearing liabilities.........                      128.45%                     135.54%
                                                                        ======                      ======
</TABLE>
-------------------------
(1)  Includes nonaccrual loans.

                                       10
<PAGE>

Rate/Volume Analysis

     The following table sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (changes in
rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).

<TABLE>
<CAPTION>
                                          Year Ended June 30,
                                    --------------------------------
                                      1999         vs.        1998
                                    --------------------------------
                                          Increase (Decrease)
                                                Due to
                                    --------------------------------
                                                       Rate/
                                    Volume    Rate    Volume   Total
                                    ------   ------   ------   -----
                                             (In thousands)
<S>                                 <C>      <C>      <C>      <C>
Interest income:
 Loans receivable.................   $315    $ (40)    $(3)     $272
 Investment securities............     --        2      --         2
 Nonmarketable equity securities..     11        2       1        14
 Mortgage-backed securities.......     (9)      --      --        (9)
 Other (1)........................     25       (3)     (1)       21
                                     ----    -----     ---      ----
  Total interest-earning assets...    342      (39)     (3)      300
                                     ----    -----     ---      ----

Interest expense:
 Deposits.........................    270       (1)     --       269
 Borrowings.......................     12      (25)     --       (13)
                                     ----    -----     ---      ----
  Total interest-bearing
    liabilities...................    282      (26)     --       256
                                     ----    -----     ---      ----
Change in net interest income.....   $ 60    $ (13)    $(3)     $ 44
                                     ====    =====     ===      ====
</TABLE>
-------------------------
(1)  Consists of overnight deposits, and cash deposits with the FHLB.


Changes in Financial Condition

     General.  The Company's total assets decreased by $995,000, or 1.9%, from
$53.7 million at June 30, 1998 to $52.8 million at June 30, 1999.  This decrease
was primarily attributable to the decrease in net loans receivable.  The
Company's total liabilities decreased by $453,000, or 1.1%, from $39.6 million
at June 30, 1998 to $39.2 million at June 30, 1999.  This decrease in total
liabilities is primarily due to a decrease in FHLB advances, which offsets an
increase in deposits.

     Securities.    The Company invests to a limited extent in investment
securities, including mortgage-backed securities.  The Company's investment
securities available for sale consist solely of stock in the Federal Home Loan
Mortgage Corporation ("FHLMC").  The Company's investment in FHLMC stock
increased by $270,000, or 23.2%, to $1.4 million at June 30, 1999 from $1.2
million at June 30, 1998.  The increase in the Company's investment in FHLMC
stock was due solely to the increase in the market value of the stock during the
fiscal year 1999.

     The Company also holds investments in non-marketable equity securities,
which increased by $51,000, or 7.1%, to $777,000 at June 30, 1999 from $725,000
at June 30, 1998.  These securities are comprised of FHLB stock, the ownership
of which is directly related to the amount of advances that may be obtained by
the Company, and the

                                       11
<PAGE>

stock in the Company's third party data processor, the ownership of which is
required as a condition to receive such service.  The increase in non-marketable
equity securities is solely due to stock dividends from FHLB during the fiscal
year 1999.

     Mortgage-backed securities of the Company decreased by $116,000, or 26.8%,
to $318,000 at June 30, 1999 from $435,000 at June 30, 1998.  Occasionally, the
Company invests in mortgage-backed securities to take advantage of favorable
yields at desirable maturities provided that such characteristics may not be
otherwise obtained through loan originations in the then-current interest rate
environment.  The Company did not invest in additional mortgage-backed
securities in the current year and the decrease is solely due to participant
payments in fiscal year 1999.

     To minimize its credit risk, the Company limits its purchases to those
mortgage-backed securities that are available through the purchase of pass-
through certificates offered by the FHLMC and by the Government National
Mortgage Association ("GNMA").  For the fiscal year ended June 1999, the
Company's average balance of mortgage-backed securities was $371,000.  For more
detailed information on mortgage-backed securities see Note 3 of the Company's
Notes to Consolidated Financial Statements.

     Loans.   Loans represent the Company's largest component of interest-
earning assets, providing 95.5% of interest income for the year ended June 30,
1999 as compared to 95.9% for the year ended June 30, 1998.  Gross loans
decreased by $4.5 million, or 8.3%, from $53.5 million at June 30, 1998 to $49.0
million at June 30, 1999.  The Company's loans are predominantly to borrowers
residing in or doing business in Garrard, Jessamine and Fayette counties,
Kentucky.

     The decrease in loans is primarily from decreases in construction loans and
nonresidential loans.  Construction loans decreased by $1.9 million, or 17.2%,
from $10.9 million at June 30, 1998 to $9.0 million at June 30, 1999.
Nonresidential loans decreased by $1.7 million, or 36.3%, from $4.7 million at
June 30, 1998 to $3.0 million at June 30, 1999.

     This decrease is mainly attributable to realignment of the portfolio in an
effort by the Board of Directors to minimize risk.  As discussed in the
LIQUIDITY AND CAPITAL RESOURCES section of this report, the Board of Directors
reviewed the loan portfolio in January 1999 and determined that the construction
loan percentage of the portfolio was higher than policy advised and that risk in
the nonresidential loans appeared higher than desired.   At the Board's
discretion, the Bank ceased construction lending until June 1999 to align the
construction loan percentage in the portfolio with policy guidelines.  The Bank
also entered into participations with local banks to minimize risk with the
nonresidential loans.  An additional contributor to the overall decrease in
loans is a decrease of $715,000 in single family residential loans due mainly to
refinancings with other local banks that offered lower interest rates during the
fiscal year 1999.

     The Company expanded its loan operations in Garrard County at the end of
fiscal year 1999 and management plans to move forward focusing mainly on loan
growth in the single-family residential market and construction lending, to the
extent allowable under Board policy.

     Allowance for Loan Losses.  In the normal course of business, the Company
must manage the risk that borrowers may default on their obligations to the
Company.  The allowance for loan losses is a reserve established and maintained
by the Company to protect it against estimated losses inherent in the loan
portfolio.  The allowance is increased by the provision for loan losses (which
is an expense on the income statement) and through recoveries of previously
written-off loans and is decreased by charged-off loans.  Management reviews the
allowance at least quarterly to determine whether the level is adequate to
absorb estimated losses.  At June 30, 1999, management feels the allowance is
adequate to absorb any potential loss in the loan portfolio.

     The allowance increased by $351,000 to $551,000 at June 30, 1999 from
$200,000 at June 30, 1998.  This increase reflects the Company's provision for
loan losses during the fiscal year 1999 of $501,000 offset in part by the

                                       12
<PAGE>

charge offs of $150,000.  The increase is comprised of a specific reserve of
$235,000 for construction loans to one borrower that became impaired in December
1998 and an increase in the general reserve of $116,000.   The initial specific
reserve booked for the impaired construction loans was $385,000; however,
$150,000 was subsequently charged off in June 1999.

     Deposits.  The Company relies upon its deposit base as the primary source
of funding for its operations.  This deposit base, which is comprised of demand
deposit accounts, NOW accounts and money market demand accounts ("MMDA") and
certificates of deposits, increased by $4.2 million, or 16.7%, to $29.6 million
at June 30, 1999 from $25.4 million at June 30, 1998.  The annual average
balance of deposits also increased during fiscal year 1999 to $28.5 million from
$23.5 million during fiscal year 1998.

     The primary source of increase in deposits was the Company's time deposits,
which increased by $4.3 million, or 19.6%, to $26.0 million at June 30, 1999
from $21.7 million at June 30, 1998.  The Company has established rates of
interest for its deposit products that management believes are sufficiently
competitive to attract deposits from new and existing customers.  During part of
the year, the Company's rates were slightly higher than any other bank in the
local area.

     Other Borrowings.  In addition to deposits, the Company utilizes advances
from FHLB to fund its operations.  These advances decreased by $4.6 million, or
34.4%, to $8.8 million at June 30, 1999 from $13.4 million at June 30, 1998.
This decrease was caused by $5.7 million of repayments to FHLB and only $1.1 of
additional advances drawn in fiscal year 1999.

     Advances from the FHLB are usually fixed rate, with terms ranging from six
months to twenty years, and are collateralized by performing loans of the
Company with an aggregate unpaid balance equal to 150% of the outstanding
advances.  The Company decreased its use of advances during the fiscal year 1999
because it had adequate funding for operations during the majority of the year
due to increasing deposits and minimal loan growth.

Comparison of Operating Results for the Years Ended June 30, 1999 and 1998

     Net Income.  Net income for the fiscal year 1999 was $301,000, a decrease
of $211,000, or 41.2%, from fiscal year 1998.  In conjunction with this decrease
is a decrease in basic and diluted earnings per share of $.23 and $.22 per
share, respectively, from fiscal year 1998.  The decrease in net income is
primarily attributable to the specific provision for loan losses the Company
recognized related to construction loans to one borrower that became impaired in
December 1998.  Management does not believe this type of loss is indicative of
their current loan portfolio and views this loss as an unusual event.
Excluding this loss (net of tax benefit) from the statement of income, net
income would have been $555,000 for fiscal year 1999, an increase of $43,000, or
8.4%, from fiscal year 1998.  Basic and diluted earnings per share would have
been $.65 and $.64 per share, an increase of $.07 per share.  This increase is
due primarily to an increase in net interest expense and service fees.

     Net Interest Income.  Net interest income increased by $44,000, or 2.1%, in
fiscal year 1999.  This increase is due to the increase in average interest
earning assets of $4.1 million, or 8.8%, to $51.4 million during fiscal year
1999 from $47.3 million during fiscal year 1998.   This increase is offset by a
$5.2 million increase in average interest bearing liabilities from $34.9 million
for fiscal year 1998 to $40.1 million for fiscal year 1999; however, the
interest expense on average borrowings decreased which allowed the interest
spread to remain approximately the same and net interest income to increase
slightly.  Overall, increased volumes for average interest-earning assets and
interest-bearing liabilities drove the majority of the net interest income
increase as reflected in the RATE/VOLUME ANALYSIS in this report.

     The Company's interest rate spread remained approximately the same from
year to year.  The average rate for interest earning assets decreased .1% along
with a decrease of .09% for average interest-bearing liabilities.  These
decreases reflect an overall decline in the interest rate environment occurring
throughout the year in the Company's market area.

                                       13
<PAGE>

     Provision for Loan Losses.  The Company's provision for loan losses
increased $386,000 in fiscal year 1999 to $501,000. This increase is the result
of a specific construction loan becoming impaired in December 1998 and requiring
a specific reserve of $385,000. Management does not feel that this loss is
indicative of the current loan portfolio and, based on current borrower
information, does not anticipate a similar situation in the upcoming year. This
is the only significant loan loss the Company has incurred since incorporation.

     Noninterest Income.  Noninterest income has increased by $12,000 from
$29,000 in fiscal year 1998 to $41,000 in fiscal year 1999.  This increase is
primarily due to an increase in service fees offset by a decrease in gain on
sale of real estate owned acquired by foreclosure.  Historically, the Bank has
charged minimal fees, if any, to their customers.  In 1999, the Bank reevaluated
its fee structure in comparison with local competitors and actual expenses
incurred.  During this analysis, the Bank determined its expenses were not
adequately covered by the current fee structure and added several service fees
for customers.

     Noninterest Expense.  Noninterest expense has remained approximately the
same from fiscal year 1998 to fiscal year 1999 at $1.2 million.  The Company
experienced increases in the majority of its noninterest expenses.  These
increases are attributable to increased Kentucky state franchise taxes,
increased SAIF deposit premiums related to the increase in deposits, increased
occupancy expense related to increased depreciation from a new teller computer
system, increased data processing fees related also to the new teller system and
Y2K compliance, and increases in "other."  Other expenses increased mainly due
to increased advertising expenses, increased education expenses and costs
related to foreclosure on the properties secured by the impaired construction
loan discussed throughout this report.  These increases were offset by decreases
in employee benefits expense and legal, accounting and filing fees.  Employee
benefits expense decreased due to the Directors' Retirement Plan being fully
accrued the entire year and decreases in legal, accounting and filing fees is
attributable to management becoming more experienced with SEC reporting and
benefit plan issues thereby requiring less outside counsel and accounting
services.

     Provision for Income Taxes.  Income tax expense was $161,000 in fiscal year
1999, a $121,000 decrease from $282,000 in fiscal year 1998.  This decrease is
associated with the $385,000 specific loan loss reserve the Company recognized
in December 1998.

Impact of Inflation and Changing Prices

          The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company  are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.

Forward-Looking Statements

          When used in this Annual Report to Stockholders, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  Such statements are subject to certain risks and
uncertainties including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area, and competition that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected.  The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made.  The Company wishes to advise readers that the factors
listed above could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.

                                       14
<PAGE>

          The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.

Year 2000 Readiness Disclosure

          The following information constitutes "Year 2000 Readiness Disclosure"
under the Year 2000 Readiness and Disclosure Act.

          A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000.  Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency.  Rapid
and accurate data processing is essential to the operations of the Company.
Data processing is also essential to most other financial institutions and many
other companies.

          All of the material data processing of the Company that could be
affected by this problem is provided by a third party service bureau.  The
service bureau of the Company has advised the Company that it expects to resolve
this potential problem before the year 2000.  However, if the service bureau is
unable to resolve this potential problem in time, the Company would likely
experience significant data processing delays, mistakes or failures.  These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operations of the Company.

          The Company has installed a new teller computer network system which
is Year 2000 compliant and has established a Year 2000 committee to monitor the
progress of achieving and certifying overall Year 2000 compliance.  The Company
has completed final validation testing with the Company's third party service
bureau with favorable results showing that all transactions were executed
successfully in a Year 2000 sequence.  The Company's third party service
provider converted from satellite communication to high speed land line
communication on July 6, 1999.  The Company is registered for Year 2000 testing
on this method of communication in October 1999.  The Company has developed a
contingency plan in the event there is an interruption of its on-line system,
whereby transaction processing will be done in a store and forward mode for
short term interruptions, and for extended interruptions, manual processing or
the use of a local database will be used.  The main focus of the Company at this
point is training employees on the contingency plan and customer awareness.
Based on preliminary analysis by the Company, the total costs of the new
computer network system and the services of the third party service bureau will
not exceed $100,000 and the majority of this cost has been incurred as of
June 30, 1999.

Impact of New Accounting Standards

          Report of Comprehensive Income.  On July 1, 1998, the Corporation
adopted SFAS No. 130, "Reporting Comprehensive Income."  SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components.  Comprehensive income is defined as the change in equity (net
assets) of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources.  For the Corporation, this
includes net income and net unrealized gains and losses on available for sale
investment securities.  This Statement requires only additional disclosures in
the consolidated financial statements; it does not affect the Corporation's
financial position or results of operations.  Prior to the adoption of SFAS No.
130, net unrealized gains and losses were reported as a separate component of
shareholders' equity.  Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.  The implementation of SFAS No. 130
did not have a material impact on the Corporation's consolidated financial
statements.

          Disclosure About Segments of an Enterprise and Related Information.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards

                                       15
<PAGE>

for the manner in which public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This statement requires the reporting of financial and
descriptive information about an enterprise's reportable operating segments. The
Company adopted SFAS No. 131 on June 30, 1999. The adoption of this statement
did not materially affect the Company's financial position or operating results
as management considers all the Company banking operations to be one reportable
operating segment.

          Employer's Disclosures About Pensions and Other Postretirement
Benefits.  In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits."  SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits.  This statement is effective for financial statements for periods
beginning after December 15, 1997.  The Company adopted the provisions of SFAS
No. 132 on July 1, 1998.  The adoption of this statement did not materially
affect the Company's financial position or operating results.

          Accounting for Derivative Instruments and Hedging Activities.  On
June 15, 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. SFAS No. 133 (as revised by SFAS No. 137) is
effective for fiscal years beginning after June 15, 2000, but earlier
applications are permitted as of the beginning of any fiscal quarter subsequent
to June 15, 1998. Upon the statement's initial application, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. Adoption of SFAS No. 133 is not expected to have a
material financial statement impact on the Company.

          Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
In October, 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise."  SFAS No. 134 amends accounting and reporting
standards for certain activities of mortgage banking enterprises that were
established by SFAS No. 65.  This statement was effective for the first fiscal
quarter beginning after December 15, 1998.  The Company adopted the provisions
of the statement on January 1, 1999.  The adoption of the statement did not
materially affect the Company's financial position or operating results.













                                       16
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
First Lancaster Bancshares, Inc.
Lancaster, Kentucky

In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows present fairly, in all material
respects, the financial position of First Lancaster Bancshares, Inc. and its
subsidiary at June 30, 1999 and 1998, and the results of their operations and
their cash flows for each of the years then ended, in conformity with generally
accepted accounting principles.  These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits.  We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ PricewaterhouseCoopers LLP
August 18, 1999

                                       17
<PAGE>

First Lancaster Bancshares, Inc. and Subsidiary
Consolidated Statements of Financial Condition
June 30, 1999 and 1998

<TABLE>
<CAPTION>
                      Assets                                  1999                   1998
                                                        ---------------        ---------------
<S>                                                     <C>                    <C>
Cash                                                        $  474,513             $  516,199
Interest-bearing cash deposits in other depository
 institutions                                                2,231,109              2,186,921
Investment securities available-for-sale at market value
 (amortized cost $24,158 at June 30, 1999 and 1998)          1,430,976              1,161,126
Mortgage-backed securities, held to maturity (market
 value of $317,000 and $446,000 at June 30, 1999 and
 1998, respectively)                                           318,160                434,635
Income tax receivable                                           33,727
Investments in nonmarketable equity securities at cost         776,600                725,300
Loans receivable, net                                       46,192,315             47,593,855
Real estate acquired by foreclosure                            456,000                270,200
Accrued interest receivable                                    365,697                465,527
Office property and equipment, at cost, less
 accumulated depreciation                                      383,340                379,490
Other assets                                                    89,397                 13,411
                                                         --------------         --------------
    Total assets                                           $52,751,834            $53,746,664
                                                         ==============         ==============

         Liabilities and Stockholders' Equity
Saving accounts and certificates                           $29,653,246            $25,416,711
Advance payments by borrowers for taxes and insurance           23,437                 28,802
Accrued interest on savings accounts and certificates           42,007                 70,974
Federal Home Loan Bank advances                              8,831,037             13,461,167
Accounts payable and other liabilities                         379,673                365,827
Income tax payable                                                                        997
Deferred income tax payable                                    241,079                278,821
                                                        ---------------        ---------------
    Total liabilities                                       39,170,479             39,623,299
                                                        ---------------        ---------------
Common stock owned by ESOP subject to put option               310,614                485,988
                                                        ---------------        ---------------
Preferred stock, 500,000 shares authorized and unissued
 Common stock, $.01 par value; 3,000,000 shares
 authorized; 833,755 and 872,656 shares issued and
 outstanding at June 30, 1999 and 1998, respectively             9,588                  9,588
Additional paid-in capital                                   9,181,318              9,152,891
Treasury stock, at cost; 73,410 and 23,267 shares in
 1999 and 1998, respectively                                  (997,672)              (350,871)
Unearned employee stock ownership plan shares                 (513,801)              (626,221)
Common stock owned by ESOP subject to put option              (310,614)              (485,988)
Unrealized gain on securities available-for-sale (net
 of deferred tax liability of $478,318 and $386,569 at
 June 30, 1999 and 1998, respectively)                          928,500                750,399
Retained earnings, substantially restricted                   4,973,422              5,187,579
                                                         --------------         --------------
    Total stockholders' equity                               13,270,741             13,637,377
                                                         --------------         --------------
    Total liabilities and stockholders' equity              $52,751,834            $53,746,664
                                                         ==============         ==============
</TABLE>

              The accompanying notes are an integral part of the
                      consolidated financial statements.

                                      18

<PAGE>

First Lancaster Bancshares, Inc. and Subsidiary
Consolidated Statements of Income and Comprehensive Income
for the years ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                            1999           1998
                                                        ------------   ------------
<S>                                                     <C>            <C>
Interest on loans and mortgage-backed securities          $4,173,701     $3,905,595
Interest and dividends on investments and
 deposits in other depository institutions                   161,445        129,146
                                                        ------------   ------------

    Total interest income                                  4,335,146      4,034,741
                                                        ------------   ------------

Interest on savings accounts and certificates              1,548,226      1,277,281
Interest on other borrowings                                 668,132        682,436
                                                        ------------   ------------

  Total interest expenses                                  2,216,358      1,959,717
                                                        ------------   ------------

  Net interest income                                      2,118,788      2,075,024

Provision for loan losses                                    501,000        114,554
                                                        ------------   ------------
  Net interest income after provision
   for loan losses                                         1,617,788      1,960,470
                                                        ------------   ------------

Non-interest income:
  Service charges and fees                                    19,724          6,356
  Gain on real estate acquired by foreclosure                 12,952         18,917
  Other                                                        8,518          3,671
                                                        ------------   ------------

    Total non-interest income                                 41,194         28,944

Non-interest expense:
  Compensation                                               407,795        406,730
  Employee retirement and other benefits                     291,067        329,253
  State franchise taxes                                       54,121         42,215
  SAIF deposit insurance premium                              34,542         29,220
  Occupancy expense                                           90,691         81,807
  Data processing                                             69,074         45,321
  Legal, accounting and filing fees                          121,479        181,788
  Other                                                      127,971         79,027
                                                        ------------   ------------

    Total non-interest expenses                            1,196,740      1,195,361
                                                        ------------   ------------

    Income before income taxes                               462,242        794,053

Provision for income taxes                                   161,298        282,200
                                                        ------------   ------------

Net income                                                   300,944        511,853

Other comprehensive income net of income tax:
  Unrealized gain on securities available for
   sale arising in period                                    178,101        196,420
                                                        ------------   ------------

  Comprehensive income                                    $  479,045     $  708,273
                                                        ============   ============

Basic earnings per share                                        0.35           0.58
Weighted average shares outstanding for basic
 earnings per share                                          849,097        884,236

Diluted earnings per share                                      0.35           0.57
Weighted average shares outstanding for
 diluted earnings per share                                  862,446        904,144

</TABLE>
              The accompanying notes are an integral part of the
                      consolidated financial statements.

                                      19

<PAGE>

First Lancaster Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                              Additional             Employee   Common Stock  Unrealized                  Total
                                      Common    Paid In    Treasury    Stock      Owned By     Gains on    Retained   Stockholders'
                              Shares  Stock     Capital     Stock    Ownership      ESOP      Securities   Earnings      Equity
                             -------  ------  ----------  ---------  ---------  ------------  ----------  ----------  -------------
<S>                          <C>      <C>     <C>         <C>        <C>        <C>           <C>         <C>         <C>
Balance, June 30, 1997       888,500  $9,588  $9,110,683             $(703,121)    $(466,616)   $553,979  $5,136,958    $13,641,471

Purchase of treasury stock   (30,817)                     $(465,128)                                                       (465,128)

Treasury stock issued to
 Management Recognition Plan
 (MRP)                         7,283                        114,257                                           (7,738)       106,519

Employee Stock Ownership
 Plan (ESOP)                   7,690              42,208                76,900        76,900                                196,008

Market value adjustment                                                              (96,272)                               (96,272)

Net income                                                                                                   511,853        511,853

Dividends paid to
 shareholders ($.50 per
 share)                                                                                                     (453,494)      (453,494)

Change in unrealized gain on
 securities, net of deferred
 tax liability of $101,186                                                                       196,420                    196,420
                             -------  ------  ----------  ---------  ---------  ------------  ----------  ----------  -------------

Balance, June 30, 1998       872,656  $9,588  $9,152,891  $(350,871) $(626,221)    $(485,988)   $750,399  $5,187,579    $13,637,377

Treasury stock issued to
 Management Recognition Plan
 (MRP)                         5,597                         88,137                                           (6,078)        82,059

Employee Stock Ownership
 Plan (ESOP)                  11,242              28,427               112,420       112,420                                253,267

Market value adjustment                                                               62,954                                 62,954

Net income                                                                                                   300,944        300,944

Dividends paid to
 shareholders ($.60 per
 share)                                                                                                     (509,023)      (509,023)

Purchase of treasury stock   (55,740)                      (734,938)                                                       (734,938)

Change in unrealized gain on
 securities, net of deferred
 tax liability of $91,749                                                                        178,101                    178,101
                             -------  ------  ----------  ---------  ---------  ------------  ----------  ----------  -------------

Balance, June 30, 1999       833,755  $9,588  $9,181,318  $(997,672) $(513,801)    $(310,614)   $928,500  $4,973,422    $13,270,741
                             =======  ======  ==========  =========  =========  ============  ==========  ==========  =============
</TABLE>

              The accompanying notes are an integral part of the
                      consolidated financial statements.

                                      20
<PAGE>

First Lancaster Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
for the years ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                          1999         1998
                                                                     ----------------------------
<S>                                                                    <C>           <C>
Cash flows from operating activities:
 Net income                                                             $300,944      $511,853
 Adjustments to reconcile net income to net cash provided by
  operating activities:
   Depreciation                                                           32,915        30,841
   Loss on disposal of equipment                                          10,336
   Provision for loan losses                                             501,000       114,554
   ESOP benefit expense                                                  140,847       119,108
   MRP benefit expense                                                    89,008        89,472
   Stock dividend, FHLB stock                                            (51,300)      (41,200)
   Deferred income taxes                                                (129,491)      (38,781)
   Net loan origination fees                                              24,354        27,787
   Gain on sale of real estate acquired by foreclosure                   (12,952)      (18,917)
 Change in assets and liabilities:
    Accrued interest receivable                                           99,830      (205,300)
    Other assets                                                         (75,986)       (4,848)
    Accrued interest on savings accounts and certificates                (28,967)       35,391
    Accounts payable and other liabilities                                10,174        81,617
    Income tax receivable/payable                                        (34,724)      (69,852)
                                                                     ----------------------------
     Net cash provided by operating activities                           875,988       631,725
                                                                     ----------------------------
Cash flows from investing activities:
 Proceeds from sale of real estate acquired by foreclosure               396,000       187,500
 Mortgage-backed securities principal repayments                         116,475       105,774
 Purchase of security interest in real estate acquired by foreclosure   (456,000)
 Net (increase) decrease in loans receivable                             763,338    (9,891,548)
 Purchase of office property and equipment                               (47,101)       (9,808)
 Purchase of Federal Home Loan Bank stock                                             (341,400)
                                                                     ----------------------------
   Net cash provided by (used in) investing activities                   772,712    (9,949,482)
                                                                     ----------------------------
Cash flows from financing activities:
 Net increase in savings accounts and certificates                     4,236,535     3,289,024
 Net increase (decrease) in advance payments by borrowers for
  taxes and insurance                                                     (5,365)          381
 Federal Home Loan Bank advances                                       1,100,000    12,087,830
 Federal Home Loan Bank advances principal repayments                 (5,730,130)   (4,553,591)
 Purchase of treasury stock                                             (734,938)     (465,128)
 Dividends paid                                                         (512,300)     (445,750)
                                                                     ----------------------------
   Net cash provided by (used in) financing activities                (1,646,198)    9,912,766
                                                                     ----------------------------
   Net increase in cash and cash equivalents                               2,502       595,009

Cash and cash equivalents at beginning of year                         2,703,120     2,108,111
                                                                     ----------------------------
Cash and cash equivalents at end of year                              $2,705,622    $2,703,120
                                                                     ============================

Supplemental disclosure of cash flow information:
 Interest paid                                                         2,245,210     1,924,326
 Income taxes paid                                                       319,464       320,618
Supplemental disclosure of non-cash investing and financing activities:
 Unrealized gain on securities available for sale, net of deferred tax
  liability of $91,749 and $101,186                                      178,101       196,420
 Real estate acquired by foreclosure                                     112,848       485,327
 Renewed Federal Home Loan Bank advances                               6,500,000
</TABLE>

              The accompanying notes are an integral part of the
                      consolidated financial statements.

                                      21
<PAGE>

First Lancaster Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies:

   The following is a description of the more significant accounting policies
   which First Lancaster Bancshares, Inc. (the Corporation) and its wholly-owned
   subsidiary, First Lancaster Federal Savings Bank (the Bank), follow in
   preparing and presenting the consolidated financial statements.

   Basis of Presentation

   The consolidated financial statements include the accounts of the
   Corporation, the Bank and the Bank's wholly-owned subsidiary, First Lancaster
   Corporation. All significant intercompany accounts and transactions have been
   eliminated.

   In preparing the consolidated financial statements, management is required to
   make estimates and assumptions that affect the reported amounts of assets and
   liabilities as of the date of the statements of financial condition and
   income and expenses for the period.  Actual results could differ
   significantly from those estimates. Estimates used in the preparation of the
   consolidated financial statements are based on various factors including the
   current interest rate environment and the general strength of the local
   economy.  Changes in the overall interest rate environment can significantly
   affect the Bank's net interest income and the value of its recorded assets
   and liabilities.  Material estimates that are particularly susceptible to
   significant change in the near-term relate to the determination of the
   allowance for loan losses.  In connection with this determination, management
   obtains independent appraisals for significant properties and prepares fair
   value analyses as appropriate.

   Management believes that the allowance for loan losses is adequate.  While
   management uses available information to recognize such losses, future
   additions to the allowance may be necessary based on changes in economic
   conditions, particularly in Lancaster and the State of Kentucky.  In
   addition, various regulatory agencies, as an integral part of their
   examination process, periodically review the Bank's allowance for loan
   losses.  Such agencies may require the Bank to recognize additions to the
   allowance based on their judgments about information available to them at the
   time of their examination.

   Organization

   The Bank is a federally chartered savings bank and a member of the Federal
   Home Loan Bank System.  As a member of this system, the Bank is required to
   maintain an investment in capital stock of the Federal Home Loan Bank of
   Cincinnati.

   The Corporation's purpose is to act as a holding company with the Bank as its
   sole subsidiary.  The Corporation's principal business is the business of the
   Bank, and the Bank is predominately engaged in the business of receiving
   deposits from and making first mortgage loans to borrowers on one to four
   family residential properties domiciled in Central Kentucky. Lending
   activities are carried out from the main office in Lancaster, Kentucky and
   the loan production office in Nicholasville, Kentucky.

                                       22
<PAGE>

1. Summary of Significant Accounting Policies, (Continued):

   Organization, continued

   Savings deposits of the Bank are insured by the Federal Deposit Insurance
   Corporation (FDIC) up to certain limitations.  The Bank pays a premium to the
   FDIC for the insurance of such savings deposits.

   Cash and Cash Equivalents

   For purposes of reporting consolidated cash flows, the Corporation considers
   cash, balances with banks and interest-bearing cash deposits in other
   depository institutions with maturities of three months or less to be cash
   equivalents.

   Investment Securities and Mortgage-Backed Securities

   All investments in debt securities and all investments in equity securities
   that have readily determinable fair values are classified into three
   categories. Debt securities that management has the positive intent and
   ability to hold until maturity are classified as held to maturity.
   Securities that are bought and held specifically for the purpose of selling
   in the near future are classified as trading securities.  All other
   securities are classified as available for sale.  Securities classified as
   trading and available for sale are carried at market value.  Unrealized
   holding gains and losses for trading securities are included in current
   income.  Unrealized holding gains and losses for available for sale
   securities are reported as a net amount in a separate component of
   stockholders' equity until realized.  Investments classified as held to
   maturity are carried at amortized cost.

   The Bank has analyzed its debt securities portfolio, and based on this
   analysis, the Bank has determined to classify all debt securities as held to
   maturity due to management's intent and ability to hold all debt securities
   so classified until maturity.  Equity securities are classified as available
   for sale. Premiums and discounts on investment and mortgage-backed securities
   are amortized over the term of the security using the interest method.  Gain
   or loss on sale of investments available-for-sale is reflected in income at
   the time of sale using the specific identification method.

   No active market exists for Federal Home Loan Bank capital stock.  The
   carrying value is estimated to be fair value since, if the Bank withdraws
   membership in the Federal Home Loan Bank, the stock must be redeemed for face
   value.  As a member of the Federal Home Loan Bank System, the Bank is
   required to maintain an investment in FHLB capital stock in an amount equal
   to at least 1% of outstanding residential mortgages, or 5% of outstanding
   FHLB advances, whichever is greater.  The Bank met this requirement at June
   30, 1999 and 1998.

   Regulations require the Bank to maintain in each calendar quarter an average
   daily balance of cash and U.S. government and other approved securities equal
   to a prescribed percentage (4% at June 30, 1999 and 1998) of its liquidity
   base at the end of the preceding quarter.  The Bank's liquidity base is
   comprised of its deposits accounts (net of loans on deposits) plus short-term
   borrowings. At June 30, 1999 and 1998, the Bank met these requirements.

                                       23
<PAGE>

1. Summary of Significant Accounting Policies (Continued):

   Depreciation

   Depreciation of office property and equipment is calculated using the
   straight-line and accelerated methods over the estimated useful lives of such
   property.  The gain or loss on the sale of office property and equipment is
   recorded in the year of disposition.

   Loans

   Loans are stated at the principal amount outstanding.  Interest income on
   loans is recognized based on loan principal amounts outstanding during the
   period. Interest earned on loans receivable is recorded in the period earned.

   Loan Fees

   Loan fees are accounted for in accordance with Statement of Financial
   Accounting Standard (SFAS) No. 91.  SFAS No. 91 requires that loan
   origination fees and certain related direct loan origination costs be offset
   and the resulting net amount be deferred and amortized over the contractual
   life of the related loans as an adjustment to the yield of such loans.

   Provision for Loan Losses

   The Bank has established an allowance for loan losses for the purpose of
   absorbing losses associated with the Bank's loan portfolio. All actual loan
   losses are charged to the related allowance and all recoveries are credited
   to it. Additions to the allowance for loan losses are provided by charges to
   operations based on various factors, including the market value of the
   underlying collateral, growth and composition of the loan portfolios, the
   relationship of the allowance for loan losses to outstanding loans,
   historical loss experience, delinquency trends and prevailing and projected
   economic conditions.  Management evaluates the carrying value of loans
   periodically in order to evaluate the adequacy of the allowance.  While
   management uses the best information available to make these evaluations,
   future adjustments to the allowance may be necessary if the assumptions used
   in making the evaluations require material revision.

   When a loan or portion of a loan is determined to be uncollectible, the
   portion deemed uncollectible is charged against the allowance and subsequent
   recoveries, if any, are credited to the allowance.

   Real Estate Acquired by Foreclosure

   Real estate properties acquired through, or in lieu of, loan foreclosure are
   initially recorded at fair value at the date of foreclosure establishing a
   new cost basis.  After foreclosure, valuations are periodically performed by
   management and the real estate is carried at the lower of cost or fair value
   minus estimated cost to sell.  Any reduction to fair value from the new cost
   basis recorded at the time of acquisition is accounted for as a valuation
   reserve.  Revenue and expenses from operations and additions to the valuation
   allowance are included in noninterest expense.

                                       24
<PAGE>

1. Summary of Significant Accounting Policies (Continued):

   Income Recognition on Impaired and Nonaccrual Loans

   Loans, including impaired loans, are generally classified as non-accrual if
   they are past due as to maturity or payment of principal or interest for a
   period of more than 90 days, unless such loans are well-secured and in the
   process of collection.  Loans that are on a current payment status or past
   due less than 90 days may also be classified as non-accrual if repayment in
   full of principal and/or interest is in doubt.

   Loans may be returned to accrual status when all principal and interest
   amounts contractually due (including arrearages) are reasonably assured of
   repayment within an acceptable period of time, and there is a sustained
   period of repayment performance by the borrower, in accordance with the
   contractual terms of interest and principal.

   Payments received on a non-accrual loan are either applied to the outstanding
   principal balance or recorded as interest income, depending on management's
   assessment of the collectibility of the loan.

   Income Taxes

   Deferred income taxes are recognized for certain income and expenses that are
   recognized in different periods for tax and financial statement purposes.

   Effect of Implementing New Accounting Standards

   On July 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
   Comprehensive Income".  SFAS No. 130 establishes standards for reporting and
   display of comprehensive income and its components.  Comprehensive income is
   defined as the change in equity (net assets) of a business enterprise during
   a period from transactions and other events and circumstances from nonowner
   sources.  For the Corporation, this includes net income and net unrealized
   gains and losses on available for sale investment securities.  This Statement
   requires only additional disclosures in the consolidated financial
   statements; it does not affect the Corporation's financial position or
   results of operations.  Prior to the adoption of SFAS No. 130, net unrealized
   gains and losses were reported as a separate component of shareholders'
   equity.  Prior year financial statements have been reclassified to conform to
   the requirements of SFAS No. 130.  The implementation of SFAS No. 130 did not
   have a material impact on the Corporation's consolidated financial
   statements.

                                       25
<PAGE>

1. Summary of Significant Accounting Policies (Continued):

   Effect of Implementing New Accounting Standards, continued

   In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
   Enterprise and Related Information," which establishes standards for the
   manner in which public business enterprises report information about
   operating segments in annual financial statements and requires that those
   enterprises report selected information about operating segments in interim
   financial reports issued to stockholders.  This statement also establishes
   standards for related disclosures about products and services, geographic
   areas, and major customers.  This statement requires the reporting of
   financial and descriptive information about an enterprise's reportable
   operating segments.  The Corporation adopted SFAS No. 131 on June 30, 1999.
   The adoption of this statement did not materially affect the Corporation's
   financial position or operating results as management considers all the
   Corporation banking operations to be one reportable operating segment.

   In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
   about Pensions and Other Postretirement Benefits."  SFAS No. 132 standardizes
   the disclosure requirements for pensions and other post-retirement benefits.
   This statement is effective for financial statements for periods beginning
   after December 15, 1997.  The Corporation adopted the provisions of SFAS No.
   132 on July 1, 1998 with no material affect on the Corporation's financial
   position or operating results.

   On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
   Instruments and Hedging Activities".  SFAS No. 133 established a new model
   for accounting for derivatives and hedging activities and supersedes and
   amends a number of existing standards.  SFAS No. 133 (as revised by SFAS No.
   137) is effective for fiscal years beginning after June 15, 2000, but earlier
   applications are permitted as of the beginning of any fiscal quarter
   subsequent to June 15, 1998.  Upon the statement's initial application, all
   derivatives are required to be recognized in the statement of financial
   position as either assets or liabilities and measured at fair value.  In
   addition, all hedging relationships must be designated, reassessed and
   documented pursuant to the provisions of SFAS No. 133.  Adoption of SFAS No.
   133 is not expected to have a material financial statement impact on the
   Corporation.

                                       26
<PAGE>

1. Summary of Significant Accounting Policies (Continued):

   In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
   Backed Securities Retained after the Securitization of Mortgage Loans Held
   for Sale by a Mortgage Banking Enterprise."  SFAS No. 134 amends accounting
   and reporting standards for certain activities of mortgage banking
   enterprises that were established by SFAS No. 65. This statement is effective
   for the first fiscal quarter beginning after December 15, 1998.  The
   Corporation adopted SFAS No. 134 on January 1, 1999 with no material affect
   on the Corporation's financial position or operating results.

   Reclassifications

   Certain presentations of accounts previously reported have been reclassified
   in these consolidated financial statements. Such reclassification had no
   material effect on net income or stockholders' equity as previously reported.

2. Investment Securities:

   Investment securities are summarized as follows:

<TABLE>
<CAPTION>
                                                        Gross      Gross     Estimated
                                          Amortized   Unrealized Unrealized    Market
            June 30, 1999                   Cost        Gains      Losses      Value
                                         ---------- ------------- -------- --------------
<S>                                      <C>        <C>           <C>      <C>
Available for Sale Equity Securities:
 Federal Home Loan
  Mortgage Corporation
  Common Stock - 24,672 shares             $24,158    $1,406,818             $1,430,976
                                         ========== ============= ======== ============

            June 30, 1998

Available for Sale Equity Securities:
 Federal Home Loan
  Mortgage Corporation
  Common Stock - 24,672 shares             $24,158    $1,136,968             $1,161,126
                                         ========== ============= ======== ============
</TABLE>

                                       27
<PAGE>

3. Mortgaged-Backed Securities:

   Mortgage-backed securities are summarized as follows:

<TABLE>
<CAPTION>

                                     Gross      Gross     Estimated
                       Amortized   Unrealized Unrealized   Market
   June 30, 1999          Cost       Gains      Losses      Value
                      ------------ ---------- ---------- -------------
<S>                   <C>          <C>        <C>        <C>
FHLMC certificates       $317,545                $1,195     $316,350
GNMA certificates             615                     2          613
                      ------------ ---------- ---------- -------------
                         $318,160                $1,197     $316,963
                      ============ ========== ========== =============

   June 30, 1998
FHLMC certificates       $433,362    $11,038                $444,400
GNMA certificate            1,273         27                   1,300
                      ------------ ---------- ---------- -------------
                         $434,635    $11,065                $445,700
                      ============ ========== ========== =============
</TABLE>

   There were no purchases or sales of mortgage-backed securities during 1999
   or 1998.

   Accrued interest receivable on held to maturity mortgage-backed securities
   totaled $2,399 and $3,430 at June 30, 1999 and 1998, respectively.

   Expected maturities will differ from contractual maturities because borrowers
   may prepay obligations without prepayment penalties.

4. Loans Receivable, Net:

   The Bank's loan portfolio consists principally of long-term conventional
   loans collateralized by first mortgages on single-family residences. Loans
   receivable, net at June 30, 1999 and 1998 consist of the following:

<TABLE>
<CAPTION>
                                                     1999            1998
                                               ---------------- ---------------
<S>                                            <C>              <C>
Single-family residential                          $34,707,075     $35,421,772
Multi-family residential and commercial              1,771,968       1,953,114
Construction                                         8,999,631      10,864,305
Nonresidential                                       3,035,500       4,768,199
Consumer loans                                         528,104         489,928
                                               ---------------- ---------------
                                                    49,042,278      53,497,318

Less:  Unearned loan origination fees                   71,031          46,677
       Undisbursed portion of construction loans     2,227,932       5,656,786
       Allowance for loan losses                       551,000         200,000
                                               ---------------- ---------------

                                                   $46,192,315     $47,593,855
                                                ===============  ==============
</TABLE>

                                       28
<PAGE>

4. Loans Receivable, Net (Continued):

   Accrued interest receivable on loans totaled $363,234 and $462,097 at June
   30, 1999 and 1998, respectively.

   The following is a reconciliation of the allowance for loan losses:

<TABLE>
<CAPTION>
<S>                                             <C>          <C>
                                                    1999         1998
                                                 ----------  ----------
    Balance at beginning of year                   $200,000     $125,000
    Provision charged to operations                 501,000      114,554
    Loans charged off                              (150,000)     (39,554)
                                                 ----------   ----------
    Balance at end of year                         $551,000     $200,000
                                                 ==========   ==========

</TABLE>
   The following is a summary of non-performing loans:
<TABLE>
<CAPTION>
<S>                                                <C>            <C>
                                                       1999          1998
                                                   ------------  -----------
    Accruing loan 90 days past due                  $         -   $   87,627
    Nonaccrual loans                                  1,359,133      500,268
                                                   ------------  -----------
    Total non-performing loans at year end            1,359,133      587,895
                                                   ============  ===========

    Non-performing loans as a percentage of
    total loans                                            2.94%        1.24%

</TABLE>

   At June 30, 1999 and 1998, the amount of interest income that would have been
   recorded on loans in non-accrual status, had such loans performed in
   accordance with their terms, would have been approximately $74,000 and
   $18,000, respectively.

   At June 30, 1999 and 1998, the Bank did not have any loans outstanding to
   directors or executive officers.

   At June 30, 1999 the Bank had $665,295 in impaired loans with related
   allowances for loan losses of $235,000.  There are no impaired loans for
   which there is no related allowance for loan losses.  There were no impaired
   loans at June 30, 1998.

5. Investments in Non-Marketable Equity Securities:

<TABLE>
<CAPTION>
<S>                                              <C>         <C>
                                                         June 30,
                                                 ------------------------
                                                     1999         1998
                                                 -----------  -----------
Federal Home Loan Bank of Cincinnati capital
 stock, 7,616 and 7,103 shares in 1999 and
 1998, respectively                                 $761,600     $710,300
Intrieve, Inc. capital stock, 10 shares               15,000       15,000
                                                 -----------  -----------
                                                    $776,600     $725,300
                                                 ===========  ===========
</TABLE>

                                       29
<PAGE>

6. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
   Credit Risk:

   The Bank is party to financial instruments with off-balance sheet risk in the
   normal course of business to meet the financing needs of its customers.
   These financial instruments include mortgage commitments which amounted to
   $1,253,500 and $1,200,500 at June 30, 1999 and 1998, respectively.  These
   instruments involve, to varying degrees, elements of credit and interest rate
   risk in excess of the amount recognized in the consolidated statements of
   financial condition.

   The Bank's exposure to credit loss in the event of nonperformance by the
   other party to the financial instrument for loan commitments is represented
   by the contractual amount of those commitments.  The Bank uses the same
   credit policies in making commitments and conditional obligations as it does
   for on-balance sheet instruments.  The Bank evaluates each customer's credit
   worthiness on a case-by-case basis.  The amount of collateral obtained upon
   extension of credit is based on management's credit evaluation of the
   counterparty.  Collateral held varies but primarily includes residential real
   estate.

   The Bank has no significant concentrations of credit risk with any individual
   counterparty to originate loans. The Bank's lending is concentrated in
   residential real estate mortgages in the local Garrard, Jessamine and Fayette
   County, Kentucky market.

   The Bank has $2,231,109 and $2,186,921 of cash on deposit with one financial
   institution at June 30, 1999 and 1998, respectively.

7. Office Property and Equipment, at cost:

<TABLE>
<CAPTION>
<S>                                           <C>          <C>
                                                 1999         1998
                                              ----------   ----------
Land                                            $ 30,000     $ 30,000
Office building and improvements                 388,067      379,522
Furniture and equipment                          165,489      191,747
                                              ----------   ----------

                                                 583,556      601,269
Less accumulated depreciation                    200,216      221,779
                                              ----------   ----------
                                                $383,340     $379,490
                                              ==========   ==========
</TABLE>

                                       30
<PAGE>

8. Deposits:

   Deposit accounts are summarized as follows:

<TABLE>
<CAPTION>
                                                  1999            1998
                                             --------------- ---------------
<S>                                           <C>               <C>
Demand deposit accounts                          $1,553,723      $1,515,796
NOW and MMDA deposits with a weighted
 average rate of 2.76% and 2.74% at June 30,
 1999 and 1998, respectively                      2,140,479       2,192,282
                                             --------------- ---------------

        Savings deposits                          3,694,202       3,708,078

Certificates of deposits with a weighted
 average rate of 5.55% and 5.96% at June 30,
 1999 and 1998, respectively                     25,959,044      21,708,633
                                             --------------- ---------------

        Total deposits                          $29,653,246     $25,416,711
                                              ==============  ==============
</TABLE>

   Certificates of deposit by maturity at June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
<S>                                         <C>             <C>
                                                 1999            1998
                                            --------------- ---------------
1 year or less                                 $19,130,650     $13,928,382
1 year - 3 years                                 5,920,123       7,290,588
Maturing in years thereafter                       908,271         489,663
                                            --------------- ---------------

                                               $25,959,044     $21,708,633
                                             ==============  ==============
</TABLE>

                                       31
<PAGE>

8. Deposits (Continued):

   Certificates of deposit by maturity and interest rate category at June 30,
   1999 and 1998 are as follows:

<TABLE>
<CAPTION>

                               Amount due June 30, 1999
                                    (In Thousands)
               Less than                           After
                one year   1-2 Years  2-3 Years   3 Years      Total
              ------------ ---------- ---------- ---------- ------------
<S>           <C>          <C>        <C>        <C>        <C>
2.00-3.99%        $   405     $    -       $ 16     $    -      $   421
4.00-5.99%         13,693      2,063        324        195       16,275
6.00-7.99%          5,033      3,410        107        713        9,263
              ------------ ---------- ---------- ---------- ------------

                  $19,131     $5,473       $447     $  908      $25,959
              ============ ========== ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
                               Amount due June 30, 1998
                                   (In Thousands)
               Less than                           After
                one year   1-2 Years  2-3 Years   3 Years      Total
              ------------ ---------- ---------- ---------- ------------
<S>           <C>          <C>        <C>        <C>        <C>
2.00-3.99%        $     1     $   20     $    -       $  -      $    22
4.00-5.99%         11,520        999         94         71       12,684
6.00-7.99%          2,407      4,341      1,837        419        9,003
              ------------ ---------- ---------- ---------- ------------

                  $13,928     $5,360     $1,931       $490      $21,709
              ============ ========== ========== ========== ============
</TABLE>

                                       32
<PAGE>

9. Federal Home Loan Bank Advances:

   Federal Home Loan Bank advances at June 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                               June 30,        June 30,
                 Date of         1999           1998         Interest
Date of Issue    Maturity       Amount         Amount          Rate
--------------------------- -------------- --------------- ------------
<S>            <C>          <C>            <C>             <C>
   10/27/94      11/1/04                       $  107,242      8.45
   1/31/95       1/30/15        $ 650,000         650,000      5.75
    5/9/95        6/1/05                          116,095      7.35
   3/25/97       3/24/00          500,000         500,000      6.75
   7/31/97       7/31/98                        1,000,000      5.88
   8/14/97       8/14/98                          500,000      5.95
   10/22/97      10/22/98                         250,000      6.05
   1/27/98       1/22/99                        1,000,000      5.75
   1/28/98        2/1/08           81,037          87,830      6.37
   2/17/98       8/14/98                          500,000      5.61
   2/20/98       2/20/99                          500,000      5.67
    3/3/98        3/3/99                        1,000,000      5.75
   3/13/98       3/12/99                        1,250,000      5.74
   3/20/98       3/19/99                          750,000      5.77
   3/25/98       3/25/99                        2,000,000      5.81
   3/31/98       9/25/98                          500,000      5.71
   4/24/98       4/23/99                        1,750,000      5.84
   4/28/98       10/23/98                         250,000      5.74
   5/13/98       11/9/98                          500,000      5.72
   5/22/98       11/18/98                         250,000      5.72
   7/31/98       7/30/99        1,000,000                      5.80
   8/14/98       8/13/99          500,000                      5.73
   8/24/98       8/24/99          250,000                      5.69
   8/25/98       8/24/99          250,000                      5.69
   3/12/99       3/10/00          750,000                      5.32
   3/19/99       3/17/00          750,000                      5.23
   3/24/99       9/20/99          500,000                      5.07
   3/25/99       3/24/00        2,000,000                      5.33
   4/23/99       4/21/00        1,000,000                      5.29
   6/24/99       10/22/99         600,000                      5.37
                            -------------- ---------------

                              $ 8,831,037    $ 13,461,167
                            ============== ===============
</TABLE>


                                       33
<PAGE>

9. Federal Home Loan Bank Advances (Continued):

   The scheduled maturities of Federal Home Loan Bank advances for the five
   years subsequent to June 30, 1999 are as follows:

<TABLE>
          <S>                           <C>
                2000                    $8,100,000
          After 2004                       731,037
                                        ----------
                                        $8,831,037
                                        ==========
</TABLE>

   As collateral for the advance, the Bank has pledged $13,246,556 of one to
   four family residential mortgages, which represents 150% of the amount of the
   advance.

   As of June 30, 1999 the Corporation had a borrowing capacity with the FHLB of
   $15,232,000.

10. Line of Credit:

   On March 5, 1999, the Corporation entered into a line of credit with
   Community Trust Bank N.A. for $2.5 million with an interest rate of prime
   less .5%.  Any outstanding balance on this line of credit is collateralized
   by 100% of the Bank's stock.  As of June 30, 1999, there is no outstanding
   balance.

11. Regulatory Matters:

   The Bank is subject to various regulatory capital requirements administered
   by the OTS. Failure to meet minimum capital requirements can initiate certain
   mandatory, and possibly additional discretionary, actions by the OTS that, if
   undertaken, could have a direct material effect on the Bank's financial
   statements. Under capital adequacy guidelines and the regulatory framework
   for prompt corrective action, the Bank must meet specific capital guidelines
   that involve quantitative measures of the Bank's assets, liabilities, and
   certain off-balance-sheet items as calculated under regulatory accounting
   practices. The Bank's capital amounts and classification are also subject to
   qualitative judgements by the OTS about components, risk weightings, and
   other factors.

   Quantitative measures established by regulation to ensure capital adequacy
   require the Bank to maintain minimum amounts and ratios (set forth in the
   table on the following page) of total and Tier I capital (as defined in the
   regulations) to risk-weighted assets (as defined), core/leverage capital (as
   defined) to adjusted total assets, and tangible capital to adjusted total
   assets. Management believes, as of June 30, 1999, that the Bank meets all
   capital adequacy requirements to which it is subject.

   As of March 1999, the most recent notification from the OTS categorized the
   Bank as well capitalized under the regulatory framework for prompt corrective
   action. To be categorized as well capitalized the Bank must maintain minimum
   total risk-based, Tier I risk-based, and core/leverage ratios as set forth in
   the table below. There have been no conditions or events since that
   notification that management believes have changed the institution's
   category.

                                       34
<PAGE>

11. Regulatory Matters (Continued):

   Amounts are in the thousands.

<TABLE>
<CAPTION>
                                                                         To Be Well
                                                       For Capital    Capitalized Under
                                                        Adequacy      Prompt Corrective
                                      Actual            Purposes      Action Provisions
                                -----------------  -----------------  -----------------
                                 Amount    Ratio    Amount    Ratio    Amount    Ratio
                                --------  -------  --------  -------  --------  -------
<S>                             <C>       <C>      <C>       <C>      <C>       <C>
As of June 30, 1999:
  Total Capital (to Risk
   Weighted Assets)              $12,579    38%      $2,669     8%      $3,337    10%
  Tier I Capital (to Risk
   Weighted Assets)              $12,263    37%        N/A              $2,002     6%
  Core/Leverage Capital (to
    Adjusted Total Assets)       $12,263    24%      $2,086     4%      $2,607     5%
  Tangible Capital Equity (to
   Tangible Assets)              $12,263    24%      $  782   1.5%      $1,043     2%(A)
As of June 30, 1998:
  Total Capital (to Risk
   Weighted Assets)              $13,026    38%      $2,759     8%      $3,499    10%
  Tier I Capital (to Risk
   Weighted Assets)              $12,826    37%        N/A              $2,070     6%
  Core/Leverage Capital
   (to Adjusted Total Assets)    $12,826    24%      $2,133     4%      $2,667     5%
  Tangible Capital Equity (to
   Tangible Assets)              $12,826    24%      $  800   1.5%      $1,067     2%(A)
</TABLE>

(A) To be "other than critically undercapitalized" under prompt corrective
    action provisions




12. Income Taxes:

   Under the asset and liability method, deferred income taxes are recognized
   for the tax consequences of temporary differences by applying future
   statutory tax rates to differences between the financial statements carrying
   amounts and the tax basis of existing assets and liabilities.

   The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                      June 30,
                                    1999      1998
                                 ---------  --------
     <S>                         <C>        <C>
     Current                     $ 290,789  $320,981
     Deferred                     (129,491)  (38,781)
                                 ---------  --------
                                 $ 161,298  $282,200
                                 =========  ========
</TABLE>
                                       35
<PAGE>

12. Income Taxes (Continued):

   Deferred income taxes result from temporary differences in the recognition of
   income and expenses for tax and financial statement purposes.  The source of
   these temporary differences and the tax effect of each are as follows:

<TABLE>
<CAPTION>
                                                  June 30,
                                             1999         1998
                                          ---------     --------
<S>                                       <C>           <C>
Stock dividends on FHLB stock             $  17,442     $ 14,008
Provision for loan losses                  (119,340)     (25,500)
Provision for uncollected interest             (674)        (632)
Depreciation                                   (316)        (317)
Deferred fees                                (8,280)      (9,447)
Directors retirement expense                  2,890       (7,016)
Supplemental executive retirement expense   (11,359)     (10,204)
Management recognition plan expense          (1,248)       5,141
ESOP expense                                 (7,756)         286
Bonus expense                                  (850)      (5,100)
                                          ---------     --------

                                          $(129,491)    $(38,781)
                                          =========     ========
</TABLE>

   The following tabulation reconciles the federal statutory tax rate to the
   effective rate of taxes provided for income before taxes:

<TABLE>
<CAPTION>
                                               June 30,
                                     1999                    1998
                             --------------------   --------------------
<S>                          <C>          <C>       <C>         <C>
Tax at statutory rate        $157,162      34.0%    $269,978      34.0%
Increases (decreases) in
 taxes resulting from:
ESOP adjustments                9,665       2.1%      14,351       1.8%
Other, net                     (5,529)     (1.2%)     (2,129)     (0.3%)
                             --------     -----     --------      ----

Effective rate               $161,298      34.9%    $282,200      35.5%
                             ========     =====     ========      ====
</TABLE>


                                       36
<PAGE>

12.  Income Taxes (Continued):

   The tax effect of temporary differences giving rise to the Corporation's
   consolidated deferred income tax asset (liability) at June 30, 1999 and 1998
   are as follows:

<TABLE>
<CAPTION>
                                             1999         1998
                                           --------     --------
<S>                                        <C>          <C>
Deferred tax assets
 Allowance for loan losses                 $187,340     $68,000
 Uncollected interest                         6,674       6,000
 Deferred loan fees                          24,150      15,870
 Directors retirement expense                43,617      46,507
 Supplemental executive retirement expense   33,874      22,515
 Management recognition plan expense         18,992      17,744
 ESOP expense                                 9,823       2,067
 Bonus expense                               14,450      13,600
                                          ---------   ---------

                                            338,920     192,303

Deferred tax liabilities:
 FHLB stock dividends                       (90,847)    (73,405)
 Depreciation on office property and
  equipment                                 (10,834)    (11,150)
 Unrealized gain on available for sale
  securities                               (478,318)   (386,569)
                                          ---------   ---------

Deferred income tax liability             $(241,079)  $(278,821)
                                          =========   =========
</TABLE>

   As of June 30, 1999, the Bank's bad debt reserve for federal tax purposes was
   approximately $816,000 which represents the base year amount. A deferred tax
   liability has not been recognized for the base year amount. If the Bank uses
   the base year reserve for any reason other than to absorb loan losses, a tax
   liability could be incurred. It is not anticipated that the reserve will be
   used for any other purpose.

13.  Treasury Stock:

   During the year ended June 30, 1998 the Corporation repurchased 30,550 shares
   in conjunction with the Management Recognition Plan at prices ranging from
   $14.19 to $15.75 per share for an aggregate cost of $465,128.  During the
   year ended June 30, 1999 the Corporation repurchased 7,800 shares in
   conjunction with the Management Recognition Plan at $14.48 per share for an
   aggregate cost of approximately $113,000.  After distributions, treasury
   stock owned in conjunction with the MRP plan was 23,267 and 25,470 shares at
   June 30, 1999 and 1998, respectively.

                                       37
<PAGE>

13.  Treasury Stock (Continued):

   In November 1998, the Corporation's Board of Directors authorized the
   repurchase of 5% of its Common Stock.  The repurchase authority allows the
   Corporation at management's discretion to selectively repurchase its stock
   from time to time in the open market or in privately negotiated transactions
   depending upon market price and other factors.  During the year ended June
   30, 1999, the Corporation repurchased 47,940 shares at prices ranging from
   $12.56 to $13.13 per share for an aggregate cost of approximately $622,000.
   These repurchases completed the 5% repurchase program.

14. Employee Benefit Plans:

   Retirement Plan

   The Bank is a participant in the Financial Institution's Retirement Fund, a
   multi-employer defined benefit retirement plan.  The plan is noncontributory
   and covers all employees who meet certain requirements as to age and length
   of service.  The Bank's policy is to fund retirement costs accrued.  No
   contributions were made to the plan for the years ended June 30, 1999 and
   1998; however, administrative expenses were paid to the plan in the amounts
   of $992 and $756 for the years ended June 30, 1999 and 1998, respectively.

   Because the Bank participates in a multi-employer plan, the actuarial present
   value of accumulated plan benefits and plan net assets available for benefits
   are not determinable and therefore not disclosed.

   Profit-Sharing Plan

   The Bank is a participant in the profit-sharing feature of the Financial
   Institutions Thrift Plan.  The plan is contributory and covers all salaried
   employees who meet certain requirements as to age and length of service.
   Employees become vested upon completion of five years of service.
   Contributions are at the discretion of the Board of Directors and are
   computed as a percentage of eligible employees' compensation.  The Board of
   Directors authorized contributions equal to 4% of eligible employees'
   compensation for 1999 and 1998, which amounted to $12,937 and $10,636 for
   1999 and 1998, respectively.

   Employee Stock Ownership Plan

   The Corporation sponsors an employee stock ownership plan (ESOP) that covers
   all employees.  During 1996 the Corporation loaned $767,040 to the ESOP for
   the purchase of 76,704 shares of the Corporation's stock.  The Corporation
   makes annual contributions to the ESOP equal to total debt service less
   dividends received by the ESOP.  All dividends on unallocated shares are used
   to pay debt service.  As the debt is repaid, First Lancaster Bancshares, Inc.
   common shares are allocated to employees.  The Corporation accounts for its
   ESOP in accordance with Statement of Position 93-6.  Accordingly, the shares
   represented by outstanding debt are reported as unearned ESOP shares in the
   statement of financial condition.  As shares are earned, the Corporation
   reports compensation expense equal to the current market price of the shares,
   and the shares become outstanding for earnings per share computations.
   Dividends on allocated ESOP shares are recorded as a reduction of retained
   earnings; dividends on unallocated ESOP shares are recorded as a reduction of
   debt and accrued interest.

                                       38
<PAGE>

14. Employee Benefit Plans (Continued):

   Employee Stock Ownership Plan, continued

   Compensation expense for the ESOP was $140,847 and $119,108 for the years
   ended June 30, 1999 and 1998, respectively.  Interest on the debt is not
   considered compensation expense by the Corporation.  The ESOP shares were as
   follows as of June 30:

<TABLE>
<CAPTION>
<S>                                        <C>              <C>
                                              1999              1998
                                           -----------      ------------
Allocated Shares                              25,320             14,078
Unearned Shares                               51,384             62,626
                                           -----------      ------------

Total ESOP Shares                             76,704             76,704
                                           ===========      ============

Fair Value of Unearned Shares at June 30    $571,647          $ 908,077

Market Price per share                      $ 11.125            $ 14.50
</TABLE>



   In the case of a distribution of ESOP shares which are not readily tradable
   on an established securities market, the plan provides the participant with a
   put option that complies with the requirements of Section 490(h) of the
   Internal Revenue Code.  The Corporation has classified outside of permanent
   equity the fair value of earned and unearned ESOP shares (net of the debit
   balance representing unearned ESOP shares) subject to the put option in
   accordance with the Securities and Exchange Commission Accounting Series
   Release #268.

   Stock Award Plans

      Management Recognition Plan (MRP)

      In connection with the conversion, the Corporation adopted the First
      Lancaster Bancshares, Inc. Management Recognition Plan, the objective of
      which is to enable the Corporation to retain personnel of experience and
      ability in key positions of responsibility. Those eligible to receive
      benefits under the MRP include certain directors and executive officers of
      the Corporation and Lancaster Federal Savings Bank as determined by
      members of a committee appointed by the Board of Directors. On January 9,
      1997, 28,761 shares were awarded. The fair market value of the common
      stock at that date was $14.625 and there is no exercise price for the
      stock. Awards to directors and eligible employees will vest 20% on each
      anniversary date of the award. On July 3, 1997 and July 6, 1998 additional
      shares of 231 and 1,251 were granted, respectively.  Shares are held by
      the trustee and are voted by the MRP trustee in the same proportion as the
      trustee of the Corporation's ESOP plan vote shares held therein. Assets of
      the trust are subject to the general creditors of the Corporation. All
      shares vest immediately if there is a change in control or in the case of
      a participant's death or disability. The Corporation applied APB Opinion
      25 and related Interpretations in accounting for the MRP. Compensation
      cost charged to operations for the MRP totaled $89,008 and $89,472 for the
      years ended June 30, 1999 and 1998, respectively.

                                       39
<PAGE>

14.  Employee Benefit Plans (Continued):

   Stock Award Plans, continued

      Stock Option Plan

      The Corporation granted stock options under the 1996 Stock Option and
      Incentive Plan.  Under the plan the Corporation is authorized to issue
      shares of common stock pursuant to "Awards" granted in various forms,
      including incentive stock options (intended to qualify under Section 422
      of the Internal Revenue Code of 1986, as amended), non-qualified stock
      options, and other similar stock-based awards. The Corporation granted
      stock options to employees and directors in 1997 under the plan in the
      form of incentive and non-qualified stock options. The stock options
      granted in 1997 have contractual terms of 10 years. All options granted to
      the employees and directors have an exercise price no less than the fair
      market value of the stock at grant date. The option price is equal to 110%
      of the fair market value on the grant date in the case of Incentive Stock
      Options (ISO) granted to persons owning more than 10% of the outstanding
      common shares. Each option will become exercisable with respect to 20% of
      the optioned shares upon an optionee's completion of each of five years of
      future service as an employee, director or advisory or emeritus director,
      provided that an option shall become 100% exercisable immediately if an
      optionee's continuous service terminates due to death or disability. The
      options expire ten years after the date of grant. The Corporation granted
      71,910 options in 1997.

      A summary of the status of the Corporation's stock options as of June 30,
      1999 and the changes during the year ended on that date is presented
      below.

<TABLE>
<CAPTION>
                                                       Weighted
                                      # Shares of       Average
                                      Underlying       Exercise
                                       Options           Price
                                      ---------       -----------
<S>                                   <C>             <C>
Outstanding, July 1, 1998               71,910          $14.625
Granted during the year                      0
Expired during the year                  4,794
Exercised during the year                    0
                                      ---------

Outstanding, June 30, 1999              67,116          $14.625
                                      =========

Eligible for exercise at year-end       26,840
                                      =========

Weighted average fair value of options
 granted at a discount                   $3.55

</TABLE>


                                       40
<PAGE>

14. Employee Benefit Plans (Continued):

   Stock Award Plans, continued

      Stock Option Plan, continued

      The Corporation applies APB Opinion 25 and related Interpretations in
      accounting for the Plan.  In 1995, the FASB issued FASB Statement No. 123,
      "Accounting for Stock-Based Compensation" (SFAS 123) which, if fully
      adopted by the Corporation, would change the methods the Corporation
      applies in recognizing the cost of the plan.  Adoption of the cost
      recognition provisions of SFAS 123 is optional and the Corporation has
      decided not to elect these provisions of SFAS 123.  However, pro forma
      disclosures as if the Corporation adopted the cost recognition provisions
      of SFAS 123 in 1996 are required by SFAS 123 and are presented below.

      The fair value of each stock option granted is estimated on the date of
      grant using the Black-Scholes option-pricing model with the following
      weighted-average assumptions for grants in 1997: dividend yield of 3.42%;
      risk-free interest rate of 6.25%; expected life of options of 6 years; and
      a volatility of 21.69% for all grants.

      As of June 30, 1999, 71,910 options are outstanding with a weighted-
      average remaining contractual life of all stock options being 7.5 years.

      Had the compensation cost for the Corporation's stock-based compensation
      plan been determined consistent with SFAS 123, the Corporation's net
      income and net income per common share for 1999 and 1998 would approximate
      the pro forma amounts below:

<TABLE>
<CAPTION>
                                     As Reported      Pro Forma
                                      06/30/1999      06/30/1999
                                    --------------   ------------
<S>                                 <C>              <C>
Net Income                              $300,944       $278,288

Earnings per share                      $   0.35       $   0.32

<CAPTION>
                                     As Reported      Pro Forma
                                      06/30/1998      06/30/1998
                                    --------------   ------------
<S>                                 <C>              <C>
Net Income                              $511,853       $489,197

Earnings per share                      $   0.57       $   0.54
</TABLE>

      The effects of applying SFAS 123 in this pro forma disclosure are not
      indicative of future amounts.

                                       41
<PAGE>

14. Employee Benefit Plans (Continued):

   Retirement Plan for Non-Employee Directors

   Effective December 7, 1995, the Board of Directors of the Bank adopted the
   First Lancaster Federal Savings Bank Directors' Retirement Plan for Non-
   Employee Directors. A participant in the Plan will receive, on each of the
   ten annual anniversary dates of leaving the Board, an amount equal to the
   product of his "Benefit Percentage," "Vested Percentage," (as defined) and
   75% of the total fee he received for service on the Board during the calendar
   year preceding his retirement.  The amount charged to operations under the
   plan totaled $0 and $54,714 for the years ended June 30, 1999 and 1998,
   respectively.

   Supplemental Executive Retirement Plan (SERP)

   Effective December 7, 1995 the Bank entered into supplemental retirement
   agreements with two key executives of the Bank.  Upon the executive's
   termination of employment with the Bank, the executive will be entitled to
   receive annual payments equal to the product of the executive's "Vested
   Percentage" and "Average Annual Compensation," less the "Annual Offset
   Amount," as defined in the plan.  Vesting occurs at 10% per full year of
   service with the Bank following December 31, 1995.

   The Bank has established an irrevocable grantor trust to hold assets in order
   to provide itself with a source of funds to assist the Bank in the meeting of
   the SERP liability.  The amount charged to operations under the plan totaled
   $33,408 and $30,011 for the years ended June 30, 1999 and 1998, respectively.

15. Disclosures About Fair Value of Financial Instruments:

   In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair Value
   of Financial Instruments."  This statement extends the existing fair value
   disclosure practices for some instruments by requiring all entities to
   disclose the fair value of financial instruments (as defined), both assets
   and liabilities recognized and not recognized in the statements of financial
   condition, for which it is practicable to estimate fair value.

   There are inherent limitations in determining fair value estimates as they
   relate only to specific data based on relevant information at that time.  As
   a significant percentage of the Bank's financial instruments do not have an
   active trading market, fair value estimates are necessarily based on future
   expected cash flows, credit losses and other related factors.  Such estimates
   are, accordingly, subjective in nature, judgmental and involve imprecision.
   Future events will occur at levels different from that in the assumptions,
   and such differences may significantly affect the estimates.

                                       42
<PAGE>

15. Disclosures About Fair Value of Financial Instruments (Continued):

   The statement excludes certain financial instruments and all non-financial
   instruments from its disclosure requirements.  Accordingly, the aggregate
   fair value amounts presented do not represent the underlying value of the
   Corporation.

   Additionally, the tax impact of the unrealized gains or losses has not been
   presented or included in the estimates of fair value.

   The following methods and assumptions were used by the Corporation in
   estimating its fair value disclosures for financial instruments:

   Cash and Cash Equivalents

   The carrying amounts reported in the statements of financial condition for
   cash and short-term instruments approximate those assets' fair values.

   Investment Securities and Mortgage-Backed Securities

   Fair values for investment securities are based on quoted market prices,
   where available.  If quoted market prices are not available, fair values are
   based on quoted market prices of comparable instruments.  No active market
   exists for the Federal Home Loan Bank capital stock.  The carrying value is
   estimated to be fair value since, if the Bank withdraws membership in the
   Federal Home Loan Bank, the stock must be redeemed for face value.

   Loans Receivable

   For certain homogeneous categories of loans, such as residential mortgages
   and other consumer loans, fair value is estimated using the quoted market
   prices for securities backed by similar loans, adjusted for differences in
   loan characteristics.  The fair value of other types of loans is estimated by
   discounting the future cash flows using the current rates at which similar
   loans would be made to borrowers with similar credit ratings and for the same
   remaining maturities.

   Deposits

   The fair value of savings deposits and certain money market deposits is the
   amount payable on demand at the reporting date.  The fair value of fixed-
   maturity certificates of deposit is estimated using the rates currently
   offered for deposits of similar remaining maturities.

   Advances from the Federal Home Loan Bank

   Advances from the Federal Home Loan Bank bear interest at fixed rates.  The
   carrying value of these borrowings is estimated using the current rates at
   which similar loans would be made to borrowers for the same maturities.

                                       43
<PAGE>

15. Disclosures About Fair Value of Financial Instruments (Continued):

   Loan Commitments

   The fair value of loan commitments is estimated to approximate the contract
   values, as the related loan will have a current market rate, the
   creditworthiness of the counterparties is presently considered in the
   commitments, and the original fees charged do not vary significantly from the
   fee structure at June 30, 1999.

   The estimated fair values of the Corporation's financial instruments are as
   follows:

<TABLE>
<CAPTION>
                                                      June 30,                     June 30,
                                                        1999                         1998
                                               -----------------------      -----------------------
                                               Carrying         Fair         Carrying        Fair
                                                Amount          Value         Amount         Value
                                               ---------      --------       ---------      --------
                                                                  (in thousands)
<S>                                            <C>            <C>            <C>            <C>
Financial Assets:
  Cash                                          $   475        $   475        $   516        $   516
  Interest-bearing deposits in other
   depository institutions                        2,231          2,231          2,187          2,187
  Investment securities                           1,431          1,431          1,161          1,161
  Investment in non-marketable
   equity securities                                777            777            725            725
  Mortgage-backed securities                        318            317            435            446
  Loans receivable, net allowance for
   loan losses of $551 for 1999 and
   $200 for 1998                                 46,192         46,324         47,594         47,532

Financial Liabilities:
  Savings accounts and certificates              29,653         29,826         25,417         25,643
  Federal Home Loan Bank advances                 8,831          8,743         13,461         13,390
</TABLE>

16. Dividend Restrictions:

   On June 28, 1996, the Bank converted from a mutual savings bank to a capital
   stock savings bank.  On that date, the Bank established a liquidation account
   in an amount of the Bank's net worth as of the latest practicable date prior
   to conversion.  The liquidation account is maintained for the benefit of
   eligible deposit account holders who maintain their deposit accounts in the
   Bank after conversion.

   In the event of a complete liquidation (and only in such an event), each
   eligible deposit account holder will be entitled to receive a liquidation
   distribution from the liquidation account, in the proportionate amount of the
   then current adjusted balance for deposit accounts held, before any
   liquidation may be made with respect to capital stock.  The Bank may not
   declare or pay a cash dividend on or repurchase any of its common stock if
   the effect thereof would cause its regulatory capital to be reduced below the
   amount required for the liquidation account.

                                       44
<PAGE>

16. Dividend Restrictions (Continued):

   The OTS regulates payment of dividends and other capital distributions by the
   Bank.  The Bank may not make distributions to the Corporation for dividends
   on or repurchase of any of its stock if the effect would be to reduce
   retained earnings of the Bank below the capital requirements set forth by the
   OTS.  OTS regulations utilize certain criteria that require notification of
   or application for distributions based primarily upon an institution's net
   income and retained capital.  Based upon current OTS regulations, the bank
   must either (i) file notification with the OTS because it is a subsidiary of
   a savings and loan holding company or (ii) apply for distributions if the
   total amount of capital distributions for the applicable calendar year
   exceeds net income for that year to date plus retained net income for the
   preceding two years.  The amount of distributions cannot reduce the Bank's
   capital below the liquidation account discussed above.  At June 30, 1999, the
   Bank applied to the OTS for a capital distribution of $1,350,000 to fund
   regular dividends and a 5% stock repurchase program over the upcoming year.
   On July 12, 1999, the OTS provided a "non objection" letter approving this
   distribution.

17. Preferred Stock:

   The Corporation's Certificate of Incorporation authorizes 500,000 shares of
   preferred stock of the Corporation, of $.01 par value.  The consideration for
   the issuance of the shares shall be paid in full before their issuance and
   shall not be less than the par value.  Neither promissory notes nor future
   services shall constitute payment or part payment for the issuance of shares
   of the Corporation.  The consideration for the shares shall be cash, tangible
   or intangible property (to the extent direct investment in such property
   would be permitted), labor or services actually performed for the
   Corporation, or any combination of the foregoing.  The preferred stock, and
   any series of preferred stock, as established by the Board of Directors, the
   Corporation shall file articles of amendment to the Corporate Certificate of
   Incorporation with the Delaware Secretary of State establishing and
   designating the series and fixing and determining the relative rights and
   preferences thereof.  The Corporation's Certificate of Incorporation
   expressly vests in the Board of Directors of the Corporation the authority to
   issue the preferred stock in one or more series and to determine, to the
   extent permitted by law prior to the issuance of the preferred stock (or any
   series of the preferred stock), the relative rights, limitations and
   preferences of the preferred stock or any such series.

                                       45
<PAGE>

18. Earnings Per Share:

<TABLE>
<CAPTION>
                                    For the year ended June 30, 1999        For the year ended June 30, 1998
                                 ---------------------------------------  -------------------------------------
                                   Income         Shares      Per Share     Income        Shares      Per Share
                                 (Numerator)   (Denominator)    Amount    (Numerator)  (Denominator)    Amount
                                 -----------   -------------  ----------  -----------  -------------  ---------
<S>                              <C>           <C>            <C>         <C>          <C>            <C>
BASIC EARNINGS PER SHARE
Income available to
 common shareholders               $300,944       849,097       $0.35       $511,853       884,236      $0.58

EFFECT OF DILUTIVE SECURITIES
Stock Options                                                                                3,588
Management recognition plan                        13,349                                   16,320

DILUTED EARNINGS PER SHARE
Income available to common
 shareholders plus
 assumed conversions               $300,944       862,446       $0.35       $511,853       904,144      $0.57
</TABLE>

There were no preferred dividends or antidilutive securities that would affect
the computation of earnings per share.

                                       46
<PAGE>

19. Condensed Financial Information (Parent Company Only):

   The following condensed statements summarize the financial position,
   operating results and cash flows of First Lancaster Bancshares, Inc. (Parent
   Company only).

<TABLE>
<CAPTION>
   Condensed Statement of Financial Condition                            June 30,
                                                               1999                     1998
                                                         ----------------         ----------------
<S>                                                      <C>                      <C>
   ASSETS
   Cash and balances with bank                                  $127,396                 $192,914
   Investment in subsidiary                                   13,707,241               14,206,703
   Income tax receivable                                          70,273                   43,807
   Accrued interest receivable                                    23,913                   31,705
   Due from subsidiary                                             7,346
                                                         ----------------         ----------------

                                                             $13,936,169              $14,475,129
                                                         ================         ================

   LIABILITIES AND STOCKHOLDERS' EQUITY
   Accounts payable                                                 $297                   $3,444
   Common stock owned by ESOP subject to put option              310,614                  485,988
   Stockholders' equity                                       13,625,258               13,985,697
                                                         ----------------         ----------------

                                                             $13,936,169              $14,475,129
                                                         ================         ================
</TABLE>

<TABLE>
<CAPTION>
   CONDENSED STATEMENT OF INCOME                                         June 30,
                                                               1999                     1998
                                                         ----------------         ----------------
<S>                                                      <C>                      <C>
   Dividend from bank subsidiary                              $1,088,263                 $564,829
   Interest income                                                57,496                   64,473
   Legal, accounting and filing fees                            (121,261)                (125,350)
   State franchise taxes                                         (14,077)                 (15,490)
                                                         ----------------         ----------------

   Net income before income taxes                              1,010,421                  488,462
   Income tax benefit                                             26,466                   26,513
                                                         ----------------         ----------------

   Net income before equity in undistributed net income of
    subsidiary                                                 1,036,887                  514,975

   Dividends in excess of earnings of subsidiary                (735,943)                  (3,122)
                                                         ----------------         ----------------

   Net income                                                    300,944                  511,853

   Other comprehensive income                                    178,101                  196,420
                                                         ----------------         ----------------

   Comprehensive income                                         $479,045                 $708,273
                                                         ================         ================
</TABLE>


                                       47
<PAGE>

19. Condensed Financial Information (Parent Company Only) (Continued):

<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
                                                                               June 30,
                                                                 ------------------------------------
                                                                    1999                     1998
                                                                 -----------              -----------
<S>                                                               <C>                     <C>
   Operating activities:
    Net income                                                   $   300,944              $   511,853
    Adjustment to reconcile net income to cash provided
      by operating activities:
     Dividends in excess of earnings of subsidiary                   735,943                    3,122
     Increase in income tax receivable                               (26,466)                 (26,513)
     Decrease in accrued interest receivable                           7,792                    2,562
     Decrease in accounts payable                                     (3,147)                 (36,475)
                                                                 -----------              -----------
    Net cash provided by operating activities                      1,015,066                  454,549

   Investing activities:
    Payment on ESOP loan                                              53,698                   32,120
                                                                 -----------              -----------
    Net cash provided by investing activities                         53,698                   32,120
                                                                 -----------              -----------
   Financing activities:
    Purchase of treasury stock                                      (621,982)                (118,440)
    Dividends paid                                                  (512,300)                (445,750)
    Cash received for treasury stock                                                           28,515
                                                                 -----------              -----------
    Net cash used in financing activities                         (1,134,282)                (535,675)
                                                                 -----------              -----------
   Net decrease in cash                                              (65,518)                 (49,006)

   Cash, beginning of year                                           192,914                  241,920
                                                                 -----------              -----------
   Cash, end of year                                             $   127,396              $   192,914
                                                                 ===========              ===========
</TABLE>

20. Subsequent Event:

   On July 8, 1999 the Corporation declared a dividend of $0.30 per share or
   $273,262, to shareholders of record as of July 16, 1999.

                                       48
<PAGE>

<TABLE>
<S>                                    <C>                          <C>
                                 CORPORATE INFORMATION

                                   BOARD OF DIRECTORS

VIRGINIA R. S. STUMP                   DAVID W. GAY                 RONALD L. SUTTON
Chairman of the Board, President       Retired                      Pharmacist
and Chief Executive Officer of the
Company and the Bank                   JANE G. SIMPSON              JACK C. ZANONE
                                       Retired                      Retired
TONY A. MERIDA
Vice Chairman of the Board and         PHYLLIS G. SWAFFAR           JERRY PURCELL
Executive Vice President of the        Self-Employed Income         Owner
Company and the Bank                   Tax Preparer                 Convenient Food Mart/ Dairy Mart


                                   EXECUTIVE OFFICERS

VIRGINIA R. S. STUMP                   TONY A. MERIDA               KATHY G. JOHNICA
President and Chief Executive          Executive Vice President     Secretary and Treasurer
Officer

                                    OFFICE LOCATIONS

           208 Lexington Street                     713 Edgewood Drive
           Lancaster, Kentucky  40444-1131          Nicholasville, Kentucky
                                                    (Loan Production Office)


                                   OTHER INFORMATION

           INDEPENDENT CERTIFIED ACCOUNTANTS        SPECIAL COUNSEL
           PricewaterhouseCoopers LLP               Housley Kantarian & Bronstein, P.C.
           201 East Main Street, Suite 1400         1220 19th Street, N.W., Suite 700
           Lexington, Kentucky  40507               Washington, D.C.  20036

           TRANSFER AGENT                           ANNUAL MEETING
           Illinois Stock Transfer Company          The 1999 Annual Meeting of Stockholders
           209 W. Jackson Boulevard, Suite 903      will be held on October 25, 1999 at 4:00
           Chicago, Illinois  60606                 p.m. at the Bank's office located at 208
                                                    Lexington Street, Lancaster, Kentucky.

                   ------------------------------------------------------
                              ANNUAL REPORT ON FORM 10-KSB

                      A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
                      10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1999
                      AS FILED WITH THE SECURITIES AND EXCHANGE
                      COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO
                      STOCKHOLDERS AS OF THE RECORD DATE FOR THE 1999
                      ANNUAL MEETING UPON WRITTEN REQUEST TO THE
                      CORPORATE SECRETARY, FIRST LANCASTER BANCSHARES,
                      INC., 208 LEXINGTON STREET, LANCASTER, KENTUCKY
                      40444-1131.
                   ------------------------------------------------------
</TABLE>