FIRST LANCASTER BANCSHARES, INC.








         [LOGO]












                                                              2000 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.

                                      (i)

<PAGE>



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

         The Company's common stock trades under the symbol "FLKY" on the Nasdaq
SmallCap  Market.  As of June 30, 2000 there were  840,328  shares of the common
stock outstanding and approximately 240 holders of record.

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

                                                              Bid
                                                     -----------------------           Dividends
                                                       High              Low            Declared
                                                       ----              ---           ---------
<S>                                                  <C>                <C>             <C>
FISCAL YEAR 1999
July - September 1998                                $  14.250          12.375          $   0.30
October - December 1998                                 13.688          12.000               --
January - March 1999                                    13.000          12.063          $   0.30
April - June 1999                                       12.500          11.063               --

FISCAL YEAR 2000
July - September 1999                                $  11.688          11.063          $   0.30
October - December 1999                                 13.000          10.375               --
January - March 2000                                    13.500          12.500          $   0.30
April - June 2000                                       13.000          10.500               --
</TABLE>

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

         The Board of Directors of the Company  established  a regular  dividend
rate and payment  schedule in July 1997,  whereby the Company will pay dividends
semi-annually, payable to stockholders of record as of the third Friday of every
January and July following the respective  semi-annual period. Any change in the
Company's  dividend  policy  will  depend  on  the  Company's  debt  and  equity
structure,   earnings,  regulatory  capital  requirements,  and  other  factors,
including economic conditions,  regulatory restrictions, and tax considerations.
The Company  declared a dividend of $.30 per share in July 2000.  See Note 16 of
Notes to Consolidated  Financial  Statements for  restrictions on the payment of
cash dividends by the Bank,  which serves as the primary source of liquidity for
the Company.

TABLE OF CONTENTS
--------------------------------------------------------------------------------
First Lancaster Bancshares, Inc..............................................(i)
Market Information..........................................................(ii)
Letter to Stockholders.........................................................1
Selected Consolidated Financial and Other Data.................................2
Management's Discussion and Analysis of Financial Condition and
  Results of Operations........................................................4
Consolidated Financial Statements.............................................16
Corporate Information..........................................Inside back cover


                                      (ii)
<PAGE>

                             LETTER TO STOCKHOLDERS



Dear Stockholders,

         As our fiscal year 2000 began on July 1, 1999, we were looking  forward
with  anticipation  and focusing on the new  millennium.  The last six months of
1999 was devoted to employee  training,  customer  awareness  and  refining  our
contingency plan. On January 1, 2000 we attained our goal. Everything worked and
processed  properly and it has continued to be business as usual and for that we
are thankful. Not only was the beginning of a new millennium successful,  fiscal
year 2000 was successful and filled with many opportunities and challenges.

         First Lancaster Bancshares,  Inc. completed its second 5% repurchase of
outstanding  common stock which was authorized  July 1999 and completed in March
2000. The Corporation's Board of Directors authorized the third 5% repurchase of
stock in March 2000 and is  approximately  50%  complete.  During the year ended
June 30, 2000, the Corporation  repurchased  70,544 shares for an aggregate cost
of approximately $885,000. The repurchased stock is being held as treasury stock
to be used for future corporate purposes.

         Fiscal  year 2000  returned  to a more  normal  year with  earnings  of
$482,000  compared to 1999  annual  earnings  of  $301,000.  With the net income
increase of $181,000, the basic and diluted earnings per share increased to $.60
and $.59,  respectively,  compared  to $.35 for the  fiscal  year ended June 30,
1999. The increase in net income and earnings per share was primarily due to the
$462,000 decrease in the provision for loan losses. In 1999 a specific provision
for loan losses of $385,000 was recorded to cover a combination of  construction
loans which became  doubtful for collection.  These  properties were acquired by
foreclosure  and/or sold throughout fiscal year 2000 and related allowances were
utilized and charged off.

         Shareholders'  equity on June 30, 2000 was $12.2 million, a decrease of
$1.0  million,  or 7.9%,  from June 30, 1999.  The  decrease  reflects the stock
repurchases  completed  and  dividends  of $493,000  paid to  shareholders.  The
Company's total assets increased by $2.4 million, or 4.7%, from $52.8 million at
June 30, 1999 to $55.2 million at June 30, 2000 which was primarily attributable
to the increase in net loans receivable.

         Additional  banking services have been  implemented  during fiscal year
2000.  New  automated  services of the ATM and Direct Teller are being used more
each day.  The Board of  Directors  continue  to  research  other  products  and
services that can be implemented in the future.

         Each new  year  holds  many  challenges  and  opportunities  for  First
Lancaster  Bancshares,  Inc. and First Lancaster Federal Savings Bank. The Board
of  Directors,  officers and employees  want to meet those  challenges to better
serve our stockholders,  customers and community and to give first class service
to our  customers.  Thank you for your trust and support of our Company and Bank
and please feel free to come to the Bank and visit with us.

                                       Sincerely,

                                       /s/ Virginia R. S. Stump

                                       Virginia R. S. Stump
                                       Chairman of the Board, President
                                       and Chief Executive Officer


                                       1
<PAGE>


                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA


SELECTED CONSOLIDATED FINANCIAL CONDITION DATA:

<TABLE>
<CAPTION>
                                                                     At June 30,
                                                              -----------------------------
                                                                 2000              1999
                                                              ----------        -----------
                                                                        (In thousands)

<S>                                                           <C>               <C>
Assets....................................................    $   55,221        $  52,752
Loans receivable, net.....................................        49,374           46,192
Cash and cash equivalents.................................         1,945            2,706
Investment securities:
    Available for sale....................................           999            1,431
Real estate acquired by foreclosure.......................           952              456
Mortgage-backed securities................................           255              318
Savings accounts and certificates.........................        29,079           29,653
FHLB advances.............................................        12,835            8,831
Total equity..............................................        12,229           13,271
</TABLE>

SELECTED CONSOLIDATED OPERATING DATA:
<TABLE>
<CAPTION>


                                                                   Year Ended June 30,
                                                              -----------------------------
                                                                 2000              1999
                                                              -----------       ----------
                                                                    (In thousands)

<S>                                                           <C>               <C>
Interest income...........................................    $    4,232        $   4,335
Interest expense..........................................         2,187            2,216
                                                              ----------        ---------
Net interest income before provision for
   loan losses............................................         2,045            2,119
Provision for loan losses.................................            39              501
                                                              ----------        ---------
Net interest income.......................................         2,006            1,618
                                                              ----------        ---------
Noninterest income........................................            38               41
Noninterest expense.......................................         1,307            1,197
                                                              ----------        ---------
Income before income taxes................................           737              462
Provision for income taxes................................           255              161
                                                              ----------        ---------
Net income................................................    $      482        $     301
                                                              ==========        =========
</TABLE>


                                       2
<PAGE>

KEY OPERATING RATIOS:
<TABLE>
<CAPTION>

                                                                      At or for the
                                                                   Year Ended June 30,
                                                              -----------------------------
                                                                2000                1999
                                                              ---------           --------
<S>                                                              <C>               <C>
PERFORMANCE RATIOS:
Return on average assets (net income divided
   by average total assets)...............................       .89%              .55%
Return on average total equity (net income
   divided by average total equity).......................      3.68              2.18
Interest rate spread (combined weighted average
    interest rate earned less combined weighted
    average interest rate cost)...........................      2.93              2.90
Ratio of average interest-earning assets to
    average interest-bearing liabilities..................    125.79            128.45
Ratio of noninterest expense to average
    total assets..........................................      2.42              2.19

ASSET QUALITY RATIOS:
Nonperforming assets to total assets......................      4.05              2.55
Nonperforming loans to total loans........................       .64              2.94
Provision for loan losses to total loans..................       .08              1.08
Allowance for loan losses to nonperforming
  loans receivable, net...................................    105.50             40.54
Allowance for loan losses to total loans
  receivable, net.........................................       .67              1.19
Net charge-offs to average loans outstanding..............       .54               .31

CAPITAL RATIOS:
Total equity to total assets..............................     22.14             25.16
Average total equity to average assets....................     24.26             25.18

OTHER:
Dividend payout ratio.....................................    102.26            169.14

</TABLE>

                                       3
<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, 2000 was 2.93% as  compared  to 2.90% for fiscal  year 1999.  The
volume of interest-earning  assets and  interest-bearing  liabilities  generally
increases  profitability  of the Company to the extent  such assets  exceed such
liabilities.  The ratio of the Bank's average interest-earning assets to average
interest-bearing  liabilities  was  125.79%  for fiscal year 2000 as compared to
128.45% for fiscal year 1999.

         The overall  operations  of the Company are  significantly  affected by
prevailing  economic  conditions,  competition  and  the  monetary,  fiscal  and
regulatory policies of governmental agencies.  Lending operations are influenced
in  particular  by the  demand  for and  supply of  housing,  competition  among
lenders,  the level of interest  rates and the  availability  of funds.  Deposit
operations such as the amount of deposits and their related costs are


                                       4
<PAGE>

influenced in particular  by prevailing  market rates of interest,  primarily on
competing investments,  account maturities and the levels of personal income and
savings in the Company's market area.

LIQUIDITY AND CAPITAL RESOURCES.

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

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

         The Bank  generally is required to maintain  average daily  balances of
liquid assets  (generally,  cash, certain time deposits,  bankers'  acceptances,
highly rated corporate debt and commercial  paper,  securities of certain mutual
funds,  and  specified  United  States  government,   state  or  federal  agency
obligations) in each calendar quarter that is equal to or greater than 4% of its
net withdrawable  accounts plus short-term  borrowings  either at the end of the
preceding  calendar  quarter or on an average  daily basis during the  preceding
quarter.  The Bank also is required to maintain  sufficient  liquidity to ensure
its safe and sound operation.  Monetary  penalties may be imposed for failure to
meet liquidity requirements. The average daily balance of liquid assets ratio of
the Bank for the quarter ended June 2000 was 5.3%.

         The Company has a line of credit for $2.5 million, from Community Trust
Bank located in Lexington, Kentucky, to be used for general funding needs. As of
June 30, 2000, there had been no draws on this line of credit.

         The source of the Company's liquidity arises from the Bank's operating,
investing and financing  activities.  Cash generated  from operating  activities
increased by $20,000,  or 2.3%, to $896,000 in fiscal year 2000 from $876,000 in
fiscal year 1999.  This increase was  attributable to increases in net income of
$181,000,  cash generated  from other assets of $83,000 and accrued  interest on
deposits of $59,000.  These  increases  were offset by  decreases of $274,000 in
non-cash  operating  activities  and  $76,000  in cash  generated  from  accrued
interest  receivables.  The decrease in non-cash operating activities was mainly
driven by a $462,000 decrease in the provision for loan losses, which was offset
by a $203,000  increase for  deferred  income taxes due to loan loss charge offs
and unrealized losses during the fiscal year 2000.

         Investing  activities  of the Company  used $3.7  million in the fiscal
year 2000 compared to generating funds of $773,000 in the fiscal year 1999. This
change in  investing  activities  was due  primarily to the increase in the loan
portfolio.  After several  construction loans to one borrower became impaired in
December 1998, the Board of Directors  performed a detailed review of the Bank's
loan  portfolio.  During  this  review,  risk  factors as well as loan  category
percentages  were  considered  and it was resolved  that the  construction  loan
percentage  in the  portfolio  was  higher  than  policy  advised  and  that two
non-residential  loans appeared to contain more risk than the Board desired.  At
the Board's discretion, the Bank ceased new construction lending until June 1999
to realign the  construction  loan  percentage in the portfolio and entered into
participations  with other local banks for the two  non-residential  loans in an
effort to minimize risk in the portfolio. These actions caused loans to decrease
at the end of  fiscal  year  1999.  In


                                       5
<PAGE>
fiscal  year  2000,  growth  of the loan  portfolio  resumed  causing  investing
activities to significantly fluctuate from year to year.

         Financing  activities of the Company  generated $2.1 million in cash in
fiscal year 2000 compared to using $1.6 million of cash in the fiscal year 1999.
This change was mainly due to an  increase  in FHLB  advances in the fiscal year
2000. As discussed above, the loans receivable  balance increased in fiscal year
2000 thereby increasing the need for FHLB advances.

         The Company's use of FHLB advances  reflects the  flexibility  in using
advances with repayment  terms that  approximate  the  anticipated  lifetimes of
loans  originated  by the  Company.  As of June  30,  2000,  the  Company  had a
borrowing  capacity with the FHLB of $16.4  million,  of which $12.8 million was
outstanding.  See  Note 9 of  the  Company's  Notes  to  Consolidated  Financial
Statements  for  more  information  on  outstanding   advances.   This  line  is
collateralized with non-delinquent single-family residential mortgage loans.

         The Company  anticipates  that it will have sufficient funds available,
either from its  operations  or from  outside  funding  sources,  to satisfy its
funding commitments.  At June 30, 2000, the Company had outstanding  commitments
to  originate  loans  totaling  $878,000.  Also at such date,  the  Company  had
certificates  of deposit  scheduled  to mature  within one year of June 30, 2000
totaling $17.5 million

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

         Stockholders'  equity on June 30, 2000 was $12.2 million, a decrease of
$1.0 million, or 7.9%, from June 30, 1999. The decrease in stockholders'  equity
reflects net income for fiscal year 2000 of $482,000 ($.60 per share),  $885,000
purchase of treasury  stock,  $493,000  paid out in  dividends,  $285,000 in net
unrealized  loss for the year from the Company's  available-for-sale  securities
and $56,000 in capital  corresponding  to the Bank's  employee  stock  ownership
plan, which acquired Common Stock in the Company's initial public offering,  and
$82,000 in capital corresponding to the Bank's Management Recognition Plan.

         Federal  regulations  impose minimum capital  requirements on the Bank,
but not on savings and loan holding  companies such as the Company.  Among these
requirements that apply to the Bank are risk-based  capital  regulations,  which
require all banks,  including  savings banks, to achieve and maintain  specified
ratios of capital to  risk-weighted  assets.  The  risk-based  capital rules are
designed to measure Tier 1 Capital  (consisting of  stockholders'  equity,  less
goodwill)  and Total  Capital in  relation  to the  credit  risk of both on- and
off-balance  sheet  items.  Under the  guidelines,  one of four risk  weights is
applied to the different  on-balance sheet items.  Off-balance sheet items, such
as loan  commitments,  are also subject to  risk-weighting  after  conversion to
balance sheet  equivalent  amounts.  All banks,  including  savings banks,  must
maintain a minimum total capital to total  risk-weighted  assets ratio of 8.00%,
at  least  half of  which  must be in the form of Tier 1  Capital.  For  further
information  regarding  minimum  regulatory  capital levels,  see Note 11 of the
Company's Notes to Consolidated Financial Statements. At June 30, 2000, the Bank
satisfied  all  minimum  regulatory  capital  requirements  and  was  considered
"well-capitalized" within the meaning of federal regulatory requirements.

ASSET/LIABILITY MANAGEMENT

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

                                       6
<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,  2000,
mortgage loans with adjustable rates represented 68.1% of the Company's mortgage
loan  portfolio.  Approximately  98% of the Company's  adjustable-rate  mortgage
loans have an annual  adjustment  limitation of 2% and a lifetime  limitation of
5%,  and may not  decline  more than 1% below  the  initial  interest  rate (the
"floor").  These  limitations on rate adjustments may prevent the interest rates
charged  on loans  from  increasing  at the same pace as the  Company's  cost of
funds. However, some of the rates on adjustable-rate mortgages may already be at
their lifetime floor, which would also restrict future downward  adjustments and
thereby  eliminate the Company's  interest rate risk associated with a declining
interest rate environment.

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

         At June 30, 2000, the Company's  cumulative  one-year interest rate gap
position was a positive $5.1 million, or 9.7%, of total interest-earning assets.
A positive gap position  indicates that the Company's net interest  income would
be expected to increase in a period of increasing interest rates and decrease in
a period of  decreasing  interest  rates.  This is a one-day  position  which is
continually changing and is not necessarily indicative of the Company's position
at any other time. The Company's  current  one-year gap is within the guidelines
established  by management  and approved by the Board of  Directors.  Management
considers numerous factors when establishing these guidelines, including current
interest rate margins, capital levels and any guidelines provided by the OTS.

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



                                       7
<PAGE>

changes in interest rates,  these types of loans may give rise to unquantifiable
credit risks in a rising interest rate  environment.  As  adjustable-rate  loans
reprice to higher  interest  rates and therefore  require  higher loan payments,
they may become subject to a higher risk of default.

         The following table sets forth the amounts of  interest-earning  assets
and interest-bearing liabilities outstanding at June 30, 2000 which are expected
to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>

                                                                  Expected  to Mature  During the Year June 30,
                                           ----------------------------------------------------------------------------------------
                                           2001       2002       2003       2004       2005    Thereafter      Total     Fair Value
                                           ----       ----       ----       ----       ----    ----------      -----     ----------
                                                                          (Dollars In thousands)
<S>                                      <C>        <C>        <C>        <C>        <C>         <C>          <C>          <C>
Interest-earning assets:
   Loans:
       Single-family...................  $ 24,744   $  1,711   $  3,120   $    416   $  2,375    $  4,364     $36,730     $36,634
       Multi-family residential........     1,756        161        298        135      1,126         936       4,412       4,400
       Construction....................     3,340         --         --         --         --          --       3,340       3,331
       Nonresidential..................     2,914        795        497         --         60          --       4,266       4,255
       Consumer........................       421         19         50         40          2          94         626         626
   Interest bearing cash deposits in
     other financial institutions......     1,450         --         --         --         --          --       1,450       1,450
   Investment securities...............       999         --         --         --         --          --         999         999
   Mortgage-backed securities..........        --         --         --          3         --         252         255         251
                                         --------   --------   --------   --------   --------    --------     -------     -------
      Total............................    35,624      2,686      3,965        594      3,563       5,646      52,078      51,946
                                         --------   --------   --------   --------   --------    --------     -------     -------

Interest-bearing liabilities:
   Deposits............................    20,856      4,573      1,330        531      1,789          --      29,079      29,118
   Borrowings..........................     9,695         --        787         --      1,470         883      12,835      12,618
                                         --------   --------   --------   --------   --------    --------     -------     -------
      Total............................    30,551      4,573      2,117        531      3,259         883      41,914      41,736
                                         --------   --------   --------   --------   --------    --------     -------     -------
Interest sensitivity gap...............  $  5,073   $ (1,887)  $  1,848   $     63   $    304    $  4,763     $10,164     $10,210
                                         ========   ========   ========   ========   ========    --------     -------     -------
Cumulative interest sensitivity gap....  $  5,073   $  3,186   $  5,034   $  5,097   $  5,401    $ 10,164     $10,164     $10,210
                                         ========   ========   ========   ========   ========    ========     =======     =======
Ratio of interest-earning assets to
   interest-bearing liabilities........     116.6%      58.7%     187.3%     111.9%     109.3%      639.4%      124.2%      124.5%
                                         ========  =========  =========  =========  =========   =========    ========    ========
Ratio of cumulative gap to total
   interest-earning assets.............       9.7%       6.1%       9.7%       9.8%      10.4%       19.5%       19.5%       19.7%
                                         ========  =========  =========  =========  =========   =========    ========    ========
</TABLE>


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

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


                                       8
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES

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

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



                                       9
<PAGE>
<TABLE>
<CAPTION>

                                                                                 Year  Ended June 30,
                                                ---------------------------------------------------------------------------
                                                                2000                                     1999
                                                ---------------------------------------------------------------------------
                                                                            Average                                 Average
                                                Average                     Yield/       Average                     Yield/
                                                Balance       Interest       Cost        Balance       Interest       Cost
                                                -------       --------      -----        -------       --------     -------
                                                                            (Dollars  in thousands)
<S>                                            <C>            <C>               <C>      <C>         <C>             <C>
Interest-earning assets:
   Loans receivable (1)......................  $   47,890     $    4,052        8.46%    $  48,266   $  4,141         8.58%
   Investment securities.....................          24             15       63.74            24         10        41.67
   Non-marketable equity securities..........         798             55        6.93           745         55         7.38
   Mortgage-backed securities................         283             21        7.44           371         28         7.55
   Other interest-bearing cash deposits......       1,592             89        5.62         2,043        101         4.94
                                               ----------     ----------                 ---------    -------
      Total interest-earning assets..........      50,587          4,232        8.37        51,449      4,335         8.43
                                                              ----------                              -------
Unrealized gains on securities available
  for sale...................................       1,216                                    1,324
Non-interest-earning assets..................       2,278                                    1,940
                                               ----------                                ---------
      Total assets...........................  $   54,081                                $  54,713
                                               ==========                                =========
Interest-bearing liabilities:
   Deposits..................................  $   28,838     $    1,504        5.21     $  28,478    $ 1,548         5.44
   Borrowings................................      11,376            684        6.01        11,576        668         5.77
                                               ----------     ----------                 ---------    -------
      Total interest-bearing liabilities.....      40,214          2,188        5.44        40,054      2,216         5.53
                                                              ----------                              -------
Non-interest-bearing liabilities.............         745                                      884
                                               ----------                                ---------
      Total liabilities......................      40,959                                   40,938
Retained earnings and capital................      12,319                                   12,901
Unrealized gain on securities available
   for sale..................................         803                                      874
                                               ----------                                ---------
      Total liabilities and stockholders'
        equity...............................  $   54,081                                $  54,713
                                               ==========                                =========
Net interest income..........................                 $    2,044                              $ 2,119
                                                              ==========                              =======
Interest rate spread.........................                                   2.93%                                 2.90%
                                                                              ======                                ======
Net yield on interest-earning assets.........                                   4.04%                                 4.12%
                                                                              ======                                ======
Ratio of average interest-earning assets
   to average interest-bearing liabilities...                                 125.79%                               128.45%
                                                                              ======                                ======
<FN>
____________
(1) Includes nonaccrual loans.
</FN>
</TABLE>


                                       10
<PAGE>

RATE/VOLUME ANALYSIS

         The following table sets forth certain information regarding changes in
interest income and interest  expense of the Company for the periods  indicated.
For each  category of  interest-earning  asset and  interest-bearing  liability,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes in volume  multiplied  by old rate);  (ii) changes in rate  (changes in
rate  multiplied by old volume);  and (iii) changes in  rate/volume  (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                                      ------------------------------------------------
                                                              2000              vs.          1999
                                                      ------------------------------------------------
                                                                   Increase (Decrease)
                                                                            Due to
                                                      ------------------------------------------------
                                                                               Rate/
                                                      Volume       Rate        Volume         Total
                                                      ------       ----        ------         -----
                                                                     (In thousands)
<S>                                                   <C>        <C>          <C>           <C>
Interest income:
  Loans receivable.................................   $    (32)  $    (57)    $     --      $   (89)
  Investment securities............................         --          5           --            5
  Nonmarketable equity securities..................          4         (4)          --           --
  Mortgage-backed securities.......................         (7)        --           --           (7)
  Other (1)........................................        (22)        13           (3)         (12)
                                                      --------   --------     --------      -------
       Total interest-earning assets...............        (57)       (43)          (3)        (103)
                                                      --------   --------     --------      -------

Interest expense:
  Deposits.........................................         20        (63)          (1)         (44)
  Borrowings.......................................        (12)        28           --           16
                                                      --------   --------     --------      -------
Total interest-bearing liabilities.................          8        (35)          (1)         (28)
                                                      --------   --------     --------      -------
Change in net interest income......................   $    (65)  $     (8)    $     (2)     $   (75)
                                                      ========   ========     ========      =======
<FN>
_________
(1)      Consists of overnight deposits, and cash deposits with the FHLB.

</FN>
</TABLE>


CHANGES IN FINANCIAL CONDITION

         GENERAL. The Company's total assets increased by $2.4 million, or 4.7%,
from $52.8  million at June 30,  1999 to $55.2  million at June 30,  2000.  This
increase was primarily attributable to the increase in net loans receivable. The
Company's  total  liabilities  increased by $3.4  million,  or 8.8%,  from $39.2
million at June 30, 1999 to $42.6  million at June 30, 2000.  This  increase was
primarily due to an increase in FHLB advances.

         SECURITIES.  The  Company  invests  to a limited  extent in  investment
securities,  including  mortgage-backed  securities.  The  Company's  investment
securities  available-for-sale  consist solely of stock in the Federal Home Loan
Mortgage  Corporation  ("FHLMC").   The  Company's  investment  in  FHLMC  stock
decreased by $432,000,  or 30.2%, to $999,000 at June 30, 2000 from $1.4 million
at June 30, 1999.  The decrease in the  Company's  investment in FHLMC stock was
due to a decrease in the market  value of the stock.  The Company did not buy or
sell any shares during the fiscal year 2000.

         The Company also holds investments in non-marketable equity securities,
which increased by $56,000,  or 7.2%, to $833,000 at June 30, 2000 from $777,000
at June 30, 1999. These securities are comprised of FHLB stock, the ownership of
which is directly  related to the amount of advances that may be obtained by the
Company, and stock in the Company's third party data processor, the ownership of
which is  required as a  condition  to receive  such  service.  The  increase in
non-marketable  equity  securities  was due solely to stock  dividends from FHLB
during the fiscal year 2000.


                                       11
<PAGE>

         Mortgage-backed  securities  of the Company  decreased  by $63,000,  or
19.7%,   to  $255,000  at  June  30,  2000  from  $318,000  at  June  30,  1999.
Occasionally,   the  Company  invests  in  mortgage-backed  securities  to  take
advantage  of  favorable  yields  at  desirable  maturities  provided  that such
characteristics  may not be otherwise  obtained through loan originations in the
then-current interest rate environment. The Company did not invest in additional
mortgage-backed  securities  in the current year and the decrease was due solely
to participant payments in the fiscal year 2000.

         To minimize its credit risk,  the Company limits its purchases to those
mortgage-backed   securities   that  are  available   through  the  purchase  of
pass-through  certificates  offered by the FHLMC and by the Government  National
Mortgage  Association  ("GNMA").  For the fiscal year ended June 30,  2000,  the
Company's average balance of mortgage-backed  securities was $283,000.  For more
detailed  information on mortgage-backed  securities see Note 3 of the Company's
Notes to Consolidated Financial Statements.

         LOANS.   Loans   represent   the   Company's   largest   component   of
interest-bearing  assets,  providing 95.7% of interest income for the year ended
June 30, 2000 as compared to 95.5% for the year ended June 30, 1999. Gross loans
receivable  increased by $3.2 million,  or 6.4%,  from $49.0 million at June 30,
1999 to $52.2 million at June 30, 2000. The Company's loans are predominantly to
borrowers  residing  in or doing  business  in  Garrard,  Jessamine  and Fayette
counties, Kentucky.

         The increase in loans was due to increases in single-family residential
loans,  multi-family  residential and commercial loans and nonresidential loans.
Single-family  residential loans increased by $2.3 million,  or 6.7%, from $34.7
million  at June  30,  1999 to $37.0  million  at June  30,  2000.  Multi-family
residential and commercial  loans increased by $2.6 million from $1.8 million at
June 30, 1999 to $4.4 million at June 30, 2000.  Nonresidential  loans increased
by $1.3 million, or 41.7%, from $3.0 million at June 30, 1999 to $4.3 million at
June  30,  2000.   These  increases  were  offset  slightly  by  a  decrease  in
construction loans of $3.2 million, or 35.8%, from $9.0 million at June 30, 1999
to $5.8 million at June 30, 2000.

         As discussed in the  Liquidity  and Capital  Resources  section of this
report,  the Board of Directors  reviewed the loan portfolio in fiscal year 1999
and determined that the construction loan percentage of the portfolio was higher
than policy advised and that risk in the  nonresidential  loans appeared  higher
than  desired.   At  the  Board's   discretion,   the  Bank  temporarily  ceased
construction  lending  through  June 1999 and entered into  participations  with
local banks for two of the nonresidential  loans to minimize risk in these areas
and better align the portfolio  percentages.  These actions caused  construction
loans and nonresidential  loans to decrease in the prior fiscal year of 1999. In
the  current  fiscal  year of 2000,  many of the prior year  construction  loans
either  paid  off  or  the   construction  was  completed  and  the  loans  were
reclassified  to  nonresidential.  This  has  contributed  to  the  decrease  in
construction loans and increase in nonresidential loans in the fiscal year 2000.

         The Bank expanded its loan  operations in Garrard  County at the end of
fiscal  year 1999 in an  effort to  continue  its focus on loan  growth.  In the
current fiscal year 2000, the Bank followed  through with this growth  primarily
in  single-family  and multi-family  residential and commercial  loans. The Bank
does  continue to originate  construction  loans to the extent  allowable  under
Board policy.

         ALLOWANCE  FOR LOAN  LOSSES.  In the  normal  course of  business,  the
Company must manage the risk that borrowers may default on their  obligations to
the  Company.  The  allowance  for loan  losses  is a  reserve  established  and
maintained by the Company to protect it against estimated losses inherent in the
loan  portfolio.  The  allowance is increased by the  provision  for loan losses
(which  is an  expense  on the  income  statement)  and  through  recoveries  of
previously  written-off loans and is decreased by charged-off loans.  Management
reviews the allowance  each month to determine  whether the level is adequate to
absorb estimated losses.  During this review,  management  considers  historical
charge-offs,  delinquencies,  borrower bankruptcies, exception loans (loans with
loan to value ratios exceeding certain percentages) and general knowledge of the
economy in its market area. At June 30, 2000,  management feels the allowance is
adequate to absorb any potential loss in the loan portfolio.


                                       12
<PAGE>
         The  allowance  decreased by $220,000 to $331,000 at June 30, 2000 from
$551,000 at June 30, 1999.  This  decrease  reflects  charge offs of $259,000 in
fiscal year 2000 offset  slightly by the  provision  for loan losses of $39,000.
The significant charge offs primarily related to the group of construction loans
to one borrower which became  uncollectible  in December 1998. At June 30, 1999,
there were  $235,000  of specific  reserves  for these  properties  and as these
properties  were acquired by foreclosure  and/or sold throughout the fiscal year
2000, the related allowances were utilized and charged off.

         DEPOSITS.  The  Company  relies  upon its  deposit  base as the primary
source of funding for its operations.  This deposit base,  which is comprised of
demand deposit accounts,  NOW accounts and money market demand accounts ("MMDA")
and certificates of deposits,  decreased by $575,000,  or 1.9%, to $29.1 million
at June 30, 2000 from $29.7 million at June 30, 1999. The annual average balance
of  deposits  increased  during  fiscal  year 2000 to $28.8  million  from $28.5
million during fiscal year 1999.

         All types of  deposits  decreased  slightly  from year to year.  Demand
deposits  decreased  $71,000,  NOW and  MMDA  deposits  decreased  $244,000  and
certificates of deposit decreased  $260,000 from fiscal year ended June 30, 1999
to fiscal year ended June 30,  2000.  The Company has  historically  established
rates  of  interest  for its  deposit  products  that  management  believes  are
sufficiently  competitive to attract  deposits from new and existing  customers.
During  the first  half of fiscal  year 2000;  however,  the  Bank's  rates were
slightly lower than other local banks causing a decrease in deposits during this
half of the fiscal year. In the second half of the fiscal year 2000,  management
raised the rates and deposits increased accordingly.

         OTHER  BORROWINGS.  In  addition  to  deposits,  the  Company  utilizes
advances  from FHLB to fund its  operations.  These  advances  increased by $4.0
million,  or 45.3%,  to $12.8 million at June 30, 2000 from $8.8 million at June
30, 1999. This increase was caused by additional advances during the fiscal year
2000 of $5.6 million to fund loan growth and treasury stock  repurchases  offset
slightly by repayments of $1.6 million.

         Advances from the FHLB are usually fixed rate,  with terms ranging from
three months to twenty years, and are  collateralized by performing loans of the
Company  with an  aggregate  unpaid  balance  equal  to 150% of the  outstanding
advances.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

         NET INCOME.  The Company's net income increased  $181,000 from $301,000
for the fiscal year ended June 30,  1999 to  $482,000  for the fiscal year ended
June 30, 2000.  In  conjunction  with this increase was an increase in basic and
diluted earnings per share to $.60 and $.59,  respectively,  for the fiscal year
ended 2000 from $.35 for the fiscal year ended 1999.  The increase in net income
and  earnings  per share  was  primarily  due to the  $462,000  decrease  in the
provision  for loan  losses  from  $501,000  for fiscal year 1999 to $39,000 for
fiscal  year 2000.  This  significant  decrease in the loan loss  provision  was
offset by a decrease  in net  interest  income of  approximately  $74,000 and an
increase in non-interest expenses of $110,000.

         NET INTEREST  INCOME.  Net interest income  decreased by  approximately
$74,000,  or 3.5%,  from $2.1 million for the fiscal year ended June 30, 1999 to
$2.0  million for the fiscal year ended June 30,  2000.  This  decrease  was due
primarily to the decrease in average  interest-earning  assets of  approximately
$862,000,  or 1.7%,  from $51.4 million  during the fiscal year June 30, 1999 to
$50.6 million during the fiscal year June 30, 2000. The average interest bearing
liabilities  increased slightly from $40.1 million during fiscal year ended June
30, 1999 to $40.2 million during fiscal year ended June 30, 2000;  however,  the
average cost on these  liabilities  decreased from 5.53% to 5.44% resulting in a
decrease in interest  expense from 1999 to 2000.  The  interest  rate spread did
improve slightly from 2.90% for fiscal year 1999 to 2.93% for fiscal year 2000.

         Overall,  volume in  interest  earning  assets  drove the  decrease  in
interest  income and rates for deposits drove the decrease in interest  expense.
See  the  Rate/Volume  Analysis  in  this  report  for  further  details  of the
fluctuation in net interest income.

                                       13
<PAGE>

         PROVISION  FOR LOAN LOSSES.  The  Company's  provision  for loan losses
decreased from $501,000 for fiscal year 1999 to $39,000 for fiscal year 2000. In
fiscal year 1999 a group of  construction  loans to one borrower became impaired
resulting in a $385,000 loan loss. In fiscal year 2000,  this  situation did not
occur and  management  does not feel the current loan portfolio is indicative of
this type of loss. The fiscal year 1999 loan loss has been the only  significant
loan loss incurred by the company since incorporation.

         NONINTEREST INCOME.  Noninterest income has remained  approximately the
same from  fiscal  year  1999 to fiscal  year  2000.  This was the  result of an
increase in service  charges and fees of $16,000 offset by a decrease in gain on
real estate acquired by foreclosure and other noninterest income of $19,000.  In
the second half of fiscal year 1999, the bank  reevaluated  its fee structure in
comparison  with local  competitors and actual  expenses  incurred.  During this
analysis,  the bank  determined its expenses were not adequately  covered by the
current fee structure and added several service fees for customers which were in
effect the entire fiscal year 2000.  There were no sales of real estate acquired
by foreclosure during the fiscal year ended 2000.

         NONINTEREST EXPENSE.  Noninterest expense increased $110,000,  or 9.2%,
from $1.2 million for fiscal year 1999 to $1.3 million for fiscal year 2000. The
Company experienced increases in the majority of its noninterest expenses. These
increases  include  increases  of  $28,000  in  compensation,  $4,000  in  state
franchise taxes,  $4,000 in SAIF deposit  insurance,  $5,000 in data processing,
$27,000  in  legal  and  accounting   fees,  and  $51,000  in  other   expenses.
Compensation  increased  due to the  addition of two  employees  and the overall
raises for employees from year to year.  State  franchise taxes increased due to
rising  rates  and saif  deposit  insurance  increased  due to a higher  average
balance of  deposits.  Data  processing  increased  due to higher rates from the
company's third party service provider and the additional  services required for
a new ATM machine.  Legal and accounting fees increased due to increasing  rates
from the firms and some additional  services  needed in fiscal year 2000.  Other
noninterest expense has increased primarily due to increased expenses related to
real estate  acquired by  foreclosure,  new expenses  related to the ATM machine
such as debit cards and employee training,  and increased office supply expenses
related to the expanded loan office and additional employees.

         PROVISION FOR INCOME TAXES.  Income tax expense  increased $94,000 from
$161,000  for fiscal year 1999 to $255,000 for fiscal year 2000.  This  increase
was  attributable to the increased net income before income taxes. The effective
rates for each year remained fairly consistent at 34.6% for fiscal year 2000 and
34.9% for fiscal year 1999.

         OTHER  COMPREHENSIVE  INCOME (LOSS).  During the fiscal year ended June
30,  2000  there was a net  unrealized  loss on  securities  of  $285,000.  This
compares to a net unrealized  gain on securities of $178,000 for the fiscal year
ended June 30, 1999.  The current  year's loss was solely the result of the June
30, 2000  market  price on  available-for-sale  securities  declining  below the
market price at June 30, 1999.

IMPACT OF INFLATION AND CHANGING PRICES

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


                                       14
<PAGE>


FORWARD-LOOKING STATEMENTS

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

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

IMPACT OF NEW ACCOUNTING STANDARDS

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

         ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES.  On June
15, 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative  Instruments
and Hedging Activities" (as amended by SFAS No. 137). SFAS No. 133 established a
new model for accounting for derivatives  and hedging  activities and supersedes
and amends a number of existing standards.  SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000, but earlier  application is permitted as of
the  beginning  of any fiscal  quarter  subsequent  to June 15,  1998.  Upon the
statement's initial  application,  all derivatives are required to be recognized
in the  statement of financial  condition as either  assets or  liabilities  and
measured  at  fair  value.  In  addition,  all  hedging  relationships  must  be
designated,  reassessed,  and documented  pursuant to the provisions of SFAS No.
133.  Adoption  of SFAS No. 133 is not  expected  to have a  material  financial
statement impact on the Company's  financial  condition or operating  results as
the Company did not hold derivative securities at June 30, 2000.


                                       15

<PAGE>





                      [This page left intentionally blank]

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


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

In our opinion, the accompanying  consolidated statements of financial condition
and the related consolidated  statements of income and comprehensive  income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of First Lancaster Bancshares, Inc. and its subsidiary at
June 30, 2000 and 1999, and the results of their operations and their cash flows
for the years then ended,  in conformity with  accounting  principles  generally
accepted in the United States of America.  These  financial  statements  are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial  statements based on our audits.  We conducted our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.



/s/ PricewaterhouseCoopers LLP


August 11, 2000






                                       17
<PAGE>

FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
<TABLE>
<CAPTION>

                       ASSETS                                                    2000                 1999
                                                                           -------------         -------------

<S>                                                                        <C>                   <C>
Cash                                                                       $     494,317          $    474,513
Interest-bearing cash deposits in other depository
     institutions                                                              1,450,316             2,231,109
Investment securities available-for-sale at market value
     (amortized cost $24,158 at June 30, 2000 and 1999)                          999,216             1,430,976
Mortgage-backed securities, held to maturity (market
     value of $251,000 and $317,000 at June 30, 2000 and
     1999, respectively)                                                         255,488               318,160
Income tax receivable                                                             45,633                33,727
Investments in nonmarketable equity securities at cost                           832,500               776,600
Loans receivable, net                                                         49,373,865            46,192,315
Real estate acquired by foreclosure                                              952,333               456,000
Accrued interest receivable                                                      341,453               365,697
Office property and equipment, at cost, less
      accumulated depreciation                                                   393,538               383,340
Other assets                                                                      82,548                89,397
                                                                           -------------          ------------
        Total assets                                                        $ 55,221,207          $ 52,751,834
                                                                           =============          ============
                LIABILITIES AND STOCKHOLDERS' EQUITY

Saving accounts and certificates                                            $ 29,078,551          $ 29,653,246
Advance payments by borrowers for taxes and insurance                             29,976                23,437
Accrued interest on savings accounts and certificates                             72,003                42,007
Federal Home Loan Bank advances                                               12,835,361             8,831,037
Accounts payable and other liabilities                                           421,557               379,673
Deferred income tax payable                                                      168,160               241,079
                                                                           -------------          ------------
           Total liabilities                                                  42,605,608            39,170,479
                                                                           -------------          ------------
Common stock owned by ESOP subject to put option                                 386,949               310,614
                                                                           -------------          ------------
Preferred stock, 500,000 shares authorized and unissued
     Common stock, $.01 par value; 3,000,000 shares
     authorized; 780,087 and 834,022 shares issued and
     outstanding at June 30, 2000 and 1999, respectively                           9,588                 9,588
Additional paid-in capital                                                     9,204,136             9,181,318
Treasury stock, at cost; 138,338 and 73,410 shares in
     2000 and 1999, respectively                                              (1,793,951)             (997,672)
Unearned employee stock ownership plan shares                                   (403,871)             (513,801)
Common stock owned by ESOP subject to put option                                (386,949)             (310,614)
Unrealized gain on securities available-for-sale (net of
     deferred tax liability of $331,520 and $478,318 at
     June 30, 2000 and 1999, respectively)                                       643,538               928,500
Retained earnings, substantially restricted                                    4,956,159             4,973,422
                                                                           -------------          ------------
           Total stockholders' equity                                         12,228,650            13,270,741
                                                                           -------------          ------------
           Total liabilities and stockholders' equity                       $ 55,221,207          $ 52,751,834
                                                                           =============          ============

</TABLE>

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


                                      18
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>

                                                                                  2000                1999
                                                                               -----------         -----------

<S>                                                                            <C>                 <C>
Interest on loans and mortgage-backed securities                               $ 4,071,643         $ 4,173,701
Interest and dividends on investments and
     deposits in other depository institutions                                     160,825             161,445
                                                                               -----------         -----------
           Total interest income                                                 4,232,468           4,335,146
                                                                               -----------         -----------
Interest on savings accounts and certificates                                    1,503,865           1,548,226
Interest on other borrowings                                                       683,788             668,132
                                                                               -----------         -----------
     Total interest expenses                                                     2,187,653           2,216,358
                                                                               -----------         -----------
     Net interest income                                                         2,044,815           2,118,788

Provision for loan losses                                                           39,000             501,000
                                                                               -----------         -----------
     Net interest income after provision
        for loan losses                                                          2,005,815           1,617,788
                                                                               -----------         -----------
Non-interest income:
     Service charges and fees                                                       35,693              19,724
     Gain on real estate acquired by foreclosure                                         -              12,952
     Other                                                                           2,444               8,518
                                                                               -----------         -----------
        Total non-interest income                                                   38,137              41,194

Non-interest expense:
     Compensation                                                                  446,293             418,295
     Employee retirement and other benefits                                        279,785             280,567
     State franchise taxes                                                          57,717              54,121
     SAIF deposit insurance premium                                                 38,918              34,542
     Occupancy expense                                                              81,801              90,691
     Data processing                                                                73,691              69,074
     Legal, accounting and filing fees                                             148,923             121,479
     Other                                                                         179,395             127,971
                                                                               -----------         -----------
        Total non-interest expenses                                              1,306,523           1,196,740
                                                                               -----------         -----------
        Income before income taxes                                                 737,429             462,242

Provision for income taxes                                                         255,157             161,298
                                                                               -----------         -----------
Net income                                                                         482,272             300,944

Other comprehensive income net of income tax:
     Unrealized (loss) gain on securities available-for-sale arising
           in period                                                              (284,962)            178,101
                                                                               -----------         -----------
        Comprehensive income                                                     $ 197,310         $   479,045
                                                                               ===========         ===========
Basic earnings per share                                                              0.60                0.35
Weighted average shares outstanding for basic
     earnings per share                                                            810,251             849,364

Diluted earnings per share                                                            0.59                0.35
Weighted average shares outstanding for
     diluted earnings per share                                                    820,857             862,713

</TABLE>


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


                                       19
<PAGE>

FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>

                                                                   Additional                    Employee      Common Stock
                                                       Common       Paid In        Treasury        Stock        Owned By
                                           Shares       Stock       Capital          Stock       Ownership        ESOP
                                           ------      -------     ----------      --------      ---------     ------------

<S>                                        <C>         <C>        <C>              <C>           <C>            <C>
Balance, June 30, 1998                     872,923     $ 9,588    $ 9,152,891      $ (350,871)   $(626,221)     $ (485,988)

Treasury stock issued to
   Management Recognition Plan
   (MRP)                                     5,597                                     88,137

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

Market value adjustment                                                                                             62,954

Net income

Dividends paid to shareholders
   ($.60 per share)

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

Change in unrealized gain on
   securities, net of deferred tax
   liability of $91,749
                                           -------     -------     ----------     -----------   ----------      ----------
Balance, June 30, 1999                     834,022     $ 9,588    $ 9,181,318      $ (997,672)   $(513,801)     $ (310,614)

Treasury stock issued to
   Management Recognition Plan
   (MRP)                                     5,616                                     88,452

Employee Stock Ownership Plan
   (ESOP)                                   10,993                     22,818                      109,930         109,930

Market value adjustment                                                                                           (186,265)

Net income

Dividends paid to shareholders
   ($.60 per share)

Purchase of treasury stock                 (70,544)                                  (884,731)

Change in unrealized gain on
   securities, net of deferred tax
   liability of $146,798
                                           -------     -------     ----------     -----------   ----------      ----------
Balance, June 30, 2000                     780,087     $ 9,588     $9,204,136     $(1,793,951)  $ (403,871)     $ (386,949)
                                           =======     =======     ==========     ===========   ==========      ==========

<CAPTION>

                                                Unrealized                      Total
                                                 Gains on      Retained     Stockholders'
                                                Securities     Earnings        Equity
                                                ----------     --------     ------------

<S>                                              <C>          <C>           <C>
Balance, June 30, 1998                           $ 750,399    $ 5,187,579   $ 13,637,377

Treasury stock issued to
   Management Recognition Plan
   (MRP)                                                           (6,078)        82,059

Employee Stock Ownership Plan
   (ESOP)                                                                        253,267

Market value adjustment                                                           62,954

Net income                                                        300,944        300,944

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

Purchase of treasury stock                                                      (734,938)

Change in unrealized gain on
   securities, net of deferred tax
   liability of $91,749                            178,101                       178,101
                                                  --------     ----------    -----------
Balance, June 30, 1999                           $ 928,500    $ 4,973,422   $ 13,270,741

Treasury stock issued to
   Management Recognition Plan
   (MRP)                                                           (6,350)        82,102

Employee Stock Ownership Plan
   (ESOP)                                                                        242,678

Market value adjustment                                                         (186,265)

Net income                                                        482,272        482,272

Dividends paid to shareholders
   ($.60 per share)                                              (493,185)      (493,185)

Purchase of treasury stock                                                      (884,731)

Change in unrealized gain on
   securities, net of deferred tax
   liability of $146,798                          (284,962)                     (284,962)
                                                  --------     ----------    -----------
Balance, June 30, 2000                            $643,538     $4,956,159    $12,228,650
                                                  ========     ==========    ===========
</TABLE>

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

                                       20
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>

                                                                                           2000               1999
                                                                                         ---------          ---------
<S>                                                                                      <C>                <C>
Cash flows from operating activities:
   Net income                                                                            $ 482,272          $ 300,944
   Adjustments to reconcile net income to net cash provided by
     operating activities:
      Depreciation                                                                          40,371             32,915
      Loss on disposal of equipment                                                              -             10,336
      Provision for loan losses                                                             39,000            501,000
      ESOP benefit expense                                                                 132,749            140,847
      MRP benefit expense                                                                   95,191             89,008
      Stock dividend, FHLB stock                                                           (55,900)           (51,300)
      Deferred income taxes                                                                 73,879           (129,491)
      Net loan origination fees                                                              5,531             24,354
      Gain on sale of real estate acquired by foreclosure                                        -            (12,952)
   Change in assets and liabilities:
        Accrued interest receivable                                                         24,244             99,830
        Other assets                                                                         6,849            (75,986)
        Accrued interest on savings accounts and certificates                               29,996            (28,967)
        Accounts payable and other liabilities                                              33,850             10,174
        Income tax receivable/payable                                                      (11,906)           (34,724)
                                                                                       -----------        -----------
         Net cash provided by operating activities                                         896,126            875,988
                                                                                       -----------        -----------
Cash flows from investing activities:
   Proceeds from sale of real estate acquired by foreclosure                                     -            396,000
   Mortgage-backed securities principal repayments                                          62,672            116,475
   Real estate acquired by foreclosure and improvements                                    (72,333)          (456,000)
   Net (increase) decrease in loans receivable                                          (3,650,083)           763,338
   Purchase of office property and equipment                                               (50,569)           (47,101)
                                                                                       -----------        -----------
      Net cash (used in) provided by investing activities                               (3,710,313)           772,712
                                                                                       -----------        -----------
Cash flows from financing activities:
   Net (decrease) increase in savings accounts and certificates                           (574,695)         4,236,535
   Net increase (decrease) in advance payments by borrowers for
     taxes and insurance                                                                     6,539             (5,365)
   Federal Home Loan Bank advances                                                       5,583,000          1,100,000
   Federal Home Loan Bank advances principal repayments                                 (1,578,676)        (5,730,130)
   Purchase of treasury stock                                                             (884,731)          (734,938)
   Dividends paid                                                                         (498,239)          (512,300)
                                                                                       -----------        -----------
      Net cash provided by (used in) financing activities                                2,053,198         (1,646,198)
                                                                                       -----------        -----------
      Net (decrease) increase in cash and cash equivalents                                (760,989)             2,502
Cash and cash equivalents at beginning of year                                           2,705,622          2,703,120
                                                                                       -----------        -----------
Cash and cash equivalents at end of year                                               $ 1,944,633        $ 2,705,622
                                                                                       ===========        ===========
Supplemental disclosure of cash flow information:
   Interest paid                                                                         2,157,657          2,245,210
   Income taxes paid                                                                       193,182            319,464
Supplemental disclosure of non-cash investing and financing activities:
   Unrealized gain on securities available-for-sale, net of deferred tax
     liability of $146,798 and $91,749                                                     284,961            178,101
   Real estate acquired by foreclosure                                                     424,000            112,848
   Renewed Federal Home Loan Bank advances                                              11,350,000          6,500,000

</TABLE>

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


                                       21
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

       BASIS OF PRESENTATION

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

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

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

       ORGANIZATION

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

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


                                       22
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):

       ORGANIZATION, (CONTINUED)

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

       CASH AND CASH EQUIVALENTS

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

       INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

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

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

       No active market exists for Federal Home Loan Bank (FHLB)  capital stock.
       The  carrying  value is  estimated  to be fair value  since,  if the Bank
       withdraws  membership  in the Federal  Home Loan Bank,  the stock must be
       redeemed  for face  value.  As a member  of the  Federal  Home  Loan Bank
       System,  the Bank is required to maintain an  investment  in FHLB capital
       stock  in an  amount  equal to at  least  1% of  outstanding  residential
       mortgages, or 5% of outstanding FHLB advances,  whichever is greater. The
       Bank met this requirement at June 30, 2000 and 1999.

       Regulations  require  the Bank to maintain  in each  calendar  quarter an
       average  daily  balance of cash and U.S.  government  and other  approved
       securities  equal to a  prescribed  percentage  (4% at June 30,  1999 and
       1998) of its  liquidity  base at the end of the  preceding  quarter.  The
       Bank's liquidity base is comprised of its deposits accounts (net of loans
       on deposits) plus short-term  borrowings.  At June 30, 2000 and 1999, the
       Bank met these requirements.



                                       23
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

       DEPRECIATION

       Depreciation  of office  property and equipment is  calculated  using the
       straight-line and accelerated  methods over the estimated useful lives of
       such   property.   Estimated   useful  lives  of  office   buildings  and
       improvements  range from 32 to 39 years and useful lives of furniture and
       equipment range from 5 to 7 years. The gain or loss on the sale of office
       property and equipment is recorded in the year of disposition.

       LOANS

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

       LOAN FEES

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

       PROVISION FOR LOAN LOSSES

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

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

       REAL ESTATE ACQUIRED BY FORECLOSURE

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


                                       24
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

     INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS

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

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

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

     INCOME TAXES

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

     EFFECT OF IMPLEMENTING NEW ACCOUNTING STANDARDS

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

     On June 15, 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
     Instruments and Hedging  Activities".  SFAS No. 133 (as amended by SFAS No.
     137)  established a new model for  accounting for  derivatives  and hedging
     activities and supersedes and amends a number of existing  standards.  SFAS
     No. 133 is effective for fiscal years  beginning  after June 15, 2000,  but
     earlier  application is permitted as of the beginning of any fiscal quarter
     subsequent to June 15, 1998. Upon the statement's initial application,  all
     derivatives  are required to be  recognized  in the  statement of financial
     condition as either assets or  liabilities  and measured at fair value.  In
     addition,  all hedging  relationships must be designated,  reassessed,  and
     documented pursuant to the provisions of SFAS No. 133. Adoption of SFAF No.
     133 is not expected to have a material  financial  statement  impact on the
     Corporation's  financial  condition or operating results as the Corporation
     did not hold derivative securities at June 30, 2000.


                                       25
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

       RECLASSIFICATIONS

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

2.       INVESTMENT SECURITIES:

       Investment securities are summarized as follows:
<TABLE>
<CAPTION>

                                                                GROSS             GROSS          ESTIMATED
                                               AMORTIZED      UNREALIZED        UNREALIZED         MARKET
       JUNE 30, 2000                             COST           GAINS             LOSSES           VALUE
                                               ---------      ----------        ----------       ---------
<S>                                             <C>           <C>                <C>              <C>
Available for Sale Equity Securities:
   Federal Home Loan
     Mortgage Corporation
     Common Stock - 24,672 shares               $ 24,158      $ 1,582,606        $ 607,548        $ 999,216
                                                ========      ===========        =========        =========
       JUNE 30, 1999

Available for Sale Equity Securities:
   Federal Home Loan
     Mortgage Corporation
     Common Stock - 24,672 shares               $ 24,158      $ 1,582,606        $ 175,788       $1,430,976
                                                ========      ===========        =========        =========
</TABLE>

3.     MORTGAGED-BACKED SECURITIES:

       Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>

                                                                GROSS             GROSS          ESTIMATED
                                               AMORTIZED      UNREALIZED        UNREALIZED         MARKET
       JUNE 30, 2000                             COST           GAINS             LOSSES           VALUE
                                               ---------      ----------        ----------       ---------
<S>                                             <C>           <C>                <C>              <C>
FHLMC certificates                            $ 255,386                           $ 4,086        $ 251,300
GNMA certificates                                   102                                 2              100
                                              ---------        ----------         -------        ---------
                                              $ 255,488                           $ 4,088        $ 251,400
                                              =========        ==========         =======        =========

       JUNE 30, 1999
FHLMC certificates                            $ 317,545                           $ 1,195        $ 316,350
GNMA certificate                                    615                                 2              613
                                              ---------        ----------         -------        ---------
                                              $ 318,160                           $ 1,197        $ 316,963
                                              =========        ==========         =======        =========
</TABLE>


                                       26
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   MORTGAGED-BACKED SECURITIES, CONTINUED:

     There were no purchases or sales of mortgage-backed  securities during 2000
     or 1999.

     Accrued interest receivable on held to maturity mortgage-backed  securities
     totaled $1,917 and $2,399 at June 30, 2000 and 1999, respectively.

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


4.   INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES:

<TABLE>
<CAPTION>
                                                                        JUNE 30,
                                                             ---------------------------
                                                               2000               1999
                                                             --------           --------
<S>                                                          <C>                <C>

     Federal Home Loan Bank of Cincinnati capital
       stock, 8,175 and 7,616 shares in 2000 and
       1999, respectively                                    $817,500           $761,600
     Intrieve, Inc. capital stock, 10 shares                   15,000             15,000
                                                             --------           --------
                                                             $832,500           $776,000
                                                             ========           ========

</TABLE>

5.   LOANS RECEIVABLE, NET:

     The Bank's loan portfolio  consists  principally of long-term  conventional
     loans collateralized by first mortgages on single-family residences.  Loans
     receivable, net at June 30, 2000 and 1999 consist of the following:

<TABLE>
<CAPTION>
                                                                           2000                   1999
                                                                        -----------            -----------
<S>                                                                     <C>                    <C>
Single-family residential                                               $37,023,083            $34,707,075
Multi-family residential and commercial                                   4,446,741              1,771,968
Construction                                                              5,774,985              8,999,631
Nonresidential                                                            4,300,053              3,035,500
Consumer loans                                                              631,217                528,104
                                                                        -----------            -----------
                                                                         52,176,079             49,042,278

Less:       Unearned loan origination fees                                   76,562                 71,031
            Undisbursed portion of construction loans                     2,394,207              2,227,932
            Allowance for loan losses                                       331,445                551,000
                                                                        -----------            -----------
                                                                        $49,373,865            $46,192,315
                                                                        ===========            ===========
</TABLE>



                                       27
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   LOANS RECEIVABLE, NET, CONTINUED:

     Accrued interest  receivable on loans totaled $339,536 and $363,234 at June
     30, 2000 and 1999, respectively.

     The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>

                                                        2000             1999
                                                     ---------        ---------
<S>                                                  <C>              <C>
Balance at beginning of year                         $ 551,000        $ 200,000
Provision charged to operations                         39,000          501,000
Loans charged off                                     (258,555)        (150,000)
                                                     ---------        ---------
Balance at end of year                               $ 331,445        $ 551,000
                                                     =========        =========
</TABLE>

     The following is a summary of non-performing loans:
<TABLE>
<CAPTION>

                                                             2000           1999
                                                           ---------      ---------
<S>                                                       <C>              <C>
Accruing loan 90 days past due                             $       --    $       --
Nonaccrual loans                                              314,167     1,359,133
                                                           ----------    ----------

Total non-performing loans at year end                        314,167     1,359,133
                                                           ==========    ==========

Non-performing loans as a percentage of total loans, net         0.64%         2.94%

</TABLE>


     At June 30, 2000 and 1999,  the amount of  interest  income that would have
     been recorded on loans in non-accrual  status,  had such loans performed in
     accordance  with their  terms,  would have been  approximately  $14,662 and
     $74,000, respectively.

     At June 30, 2000 and 1999,  the Bank had loans  outstanding to directors or
     executive officers of $69,116 and $0, respectively.

     At June 30,  2000 the Bank had  $128,666  in  impaired  loans with  related
     allowances  for loan  losses  of  $22,700.  At June  30,  1999 the Bank had
     $665,295  in  impaired  loans with  related  allowances  for loan losses of
     $235,000.  There  are no  impaired  loans  for  which  there is no  related
     allowance for loan losses.


                                       28
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.   FINANCIAL  INSTRUMENTS WITH OFF-BALANCE  SHEET RISK AND  CONCENTRATIONS  OF
     CREDIT RISK:

     The Bank is party to financial  instruments with off-balance  sheet risk in
     the normal course of business to meet the financing needs of its customers.
     These financial  instruments include mortgage commitments which amounted to
     $878,200  and  $1,253,500  at June 30, 2000 and 1999,  respectively.  These
     instruments  involve,  to varying degrees,  elements of credit and interest
     rate risk in excess of the amount recognized in the consolidated statements
     of financial condition.

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

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

     The  Bank  has  $1,450,316  and  $2,231,109  of cash on  deposit  with  one
     financial institution at June 30, 2000 and 1999, respectively.


7.   OFFICE PROPERTY AND EQUIPMENT, AT COST:
<TABLE>
<CAPTION>

                                                          2000             1999
                                                        --------        --------
<S>                                                     <C>             <C>
Land                                                    $ 30,000        $ 30,000
Office building and improvements                         393,002         388,067
Furniture and equipment                                  211,123         165,489
                                                        --------        --------
                                                         634,125         583,556
Less accumulated depreciation                            240,587         200,216
                                                        --------        --------
                                                        $393,538        $383,340
                                                        ========        ========
</TABLE>

                                       29
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   DEPOSITS:

     Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
                                                         2000          1999
                                                     -----------   -----------

<S>                                                  <C>           <C>
Demand deposit accounts                              $ 1,482,700   $ 1,553,723
NOW and MMDA deposits with a weighted average
      rate of 2.70% and 2.86% at June 30, 2000 and
      1999, respectively                               1,896,616     2,140,479
                                                     -----------   -----------

                 Savings deposits                      3,379,316     3,694,202

Certificates of deposits with a weighted average
      rate of 5.91% and 5.55% at June 30, 2000
      and 1999, respectively                          25,699,235    25,959,044
                                                     -----------   -----------
                 Total deposits                      $29,078,551   $29,653,246
                                                     ===========   ===========

</TABLE>


     Certificates  of  deposit  by  maturity  at June  30,  2000 and 1999 are as
     follows:
<TABLE>
<CAPTION>
                                                         2000          1999
                                                     -----------   -----------

<S>                                                  <C>           <C>
1 year or less                                       $17,476,213   $19,130,650
1 year - 3 years                                       6,434,315     5,920,123
Maturing in years thereafter                           1,788,707       908,271
                                                     -----------   -----------
                                                     $25,699,235   $25,959,044
                                                     ===========   ===========
</TABLE>


                                       30
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   DEPOSITS (CONTINUED):

     Certificates  of deposit by maturity and interest rate category at June 30,
     2000 and 1999 are as follows:
<TABLE>
<CAPTION>

                                        AMOUNT DUE JUNE 30, 2000
                                            (In Thousands)
                     LESS THAN                                          AFTER
                     ONE YEAR    1-2 YEARS   2-3 YEARS     3 YEARS      TOTAL
                     ---------   ---------   ---------     -------      -----

<S>                  <C>         <C>         <C>          <C>         <C>
2.00-3.99%          $    --      $    --     $    --      $    14     $    14
4.00-5.99%           11,308        1,307          --          178      12,793
6.00-7.99%            6,168        3,266       1,330        2,128      12,892
                    -------      -------     -------      -------     -------
                    $17,476      $ 4,573     $ 1,330      $ 2,320     $25,699
                    =======      =======     =======      =======     =======

<CAPTION>

                                        AMOUNT DUE JUNE 30, 1999
                                            (In Thousands)
                     LESS THAN                                          AFTER
                     ONE YEAR    1-2 YEARS   2-3 YEARS     3 YEARS      TOTAL
                     ---------   ---------   ---------     -------      -----

<S>                  <C>         <C>         <C>          <C>         <C>
2.00-3.99%          $   405      $    --     $   16        $  --       $   421
4.00-5.99%           13,693        2,063        324          195        16,275
6.00-7.99%            5,033        3,410        107          713         9,263
                    -------      -------     ------        -----       -------
                    $19,131      $ 5,473     $  447        $ 908       $25,959
                    =======      =======     ======        =====       =======

</TABLE>

                                       31
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.   FEDERAL HOME LOAN BANK ADVANCES:

     Federal Home Loan Bank advances at June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>

                                                        JUNE 30,            JUNE 30,
                              DATE OF                     2000                1999          INTEREST
     DATE OF ISSUE            MATURITY                   AMOUNT              AMOUNT           RATE
     -------------            --------                  --------            ---------       --------
       <S>                    <C>                       <C>                  <C>              <C>
       1/31/95                1/30/15                   650,000              650,000          5.75
       3/25/97                3/24/00                        --              500,000          6.75
       1/28/98                 2/1/08                    73,798               81,037          6.37
       7/31/98                7/30/99                        --            1,000,000          5.80
       8/14/98                8/13/99                        --              500,000          5.73
       8/24/98                8/24/99                        --              250,000          5.69
       8/25/98                8/24/99                        --              250,000          5.69
       3/12/99                3/10/00                        --              750,000          5.32
       3/19/99                3/17/00                        --              750,000          5.23
       3/24/99                9/20/99                        --              500,000          5.07
       3/25/99                3/24/00                        --            2,000,000          5.33
       4/23/99                4/21/00                        --            1,000,000          5.29
       6/24/99               10/22/99                        --              600,000          5.37
       7/2/99                  8/1/19                   159,124                               6.55
       7/30/99                7/28/00                   500,000                               5.96
       8/13/99                8/11/00                   500,000                               6.18
       8/24/99                8/24/00                   500,000                               6.06
       9/20/99                9/20/00                   750,000                               6.12
       11/8/99                12/1/04                   963,885                               6.50
      12/20/99                 1/1/03                   787,209                               6.93
      12/20/99                 1/1/05                   506,345                               7.08
      12/20/99               12/20/00                 1,175,000                               6.59
       3/17/00                9/13/00                   750,000                               6.43
       3/24/00                9/20/00                 2,500,000                               6.48
       4/21/00               10/18/00                 1,000,000                               6.57
       5/17/00               11/13/00                   350,000                               7.06
       6/15/00                 7/5/00                   250,000                               6.73
       6/16/00                9/14/00                   270,000                               7.35
       6/16/00                9/14/00                 1,150,000                               6.78
                                                    -----------          -----------
                                                    $12,835,361          $ 8,831,037
                                                    ===========          ===========
</TABLE>

                                       32
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.   FEDERAL HOME LOAN BANK ADVANCES (CONTINUED):

     The  scheduled  maturities  of Federal Home Loan Bank advances for the five
     fiscal years subsequent to June 30, 2000 are as follows:

         2001                                $ 9,695,000
         2003                                    787,209
         2005                                  1,470,230
      After 2005                                 882,922
                                             -----------
                                             $12,835,361
                                             ===========

     As collateral for the advances,  the Bank has pledged $19,253,041 of one to
     four family residential  mortgages,  which represents 150% of the amount of
     the advances.

     As of June 30, 2000 the Corporation had a borrowing  capacity with the FHLB
     of $16,350,000.

10.  LINE OF CREDIT:

     On March 5,  1999,  the  Corporation  entered  into a line of  credit  with
     Community  Trust Bank N.A. for $2.5 million with an interest  rate of prime
     less .5%. Any outstanding  balance on this line of credit is collateralized
     by 100% of the Bank's  stock.  As of June 30,  2000 and 1999,  there was no
     outstanding balance.

11.  REGULATORY MATTERS:

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

     Quantitative  measures established by regulation to ensure capital adequacy
     require the Bank to maintain  minimum  amounts and ratios (set forth in the
     table on the following page) of total and Tier I capital (as defined in the
     regulations) to risk-weighted  assets (as defined),  core/leverage  capital
     (as defined) to adjusted  total  assets,  and tangible  capital to adjusted
     total assets.  Management believes, as of June 30, 2000 that the Bank meets
     all capital adequacy requirements to which it is subject.



                                       33
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  REGULATORY MATTERS (CONTINUED):

     As of April 2000, the most recent notification from the OTS categorized the
     Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
     corrective  action.  To be  categorized as well  capitalized  the Bank must
     maintain minimum total  risk-based,  Tier I risk-based,  and  core/leverage
     ratios as set forth in the table below.  There have been no  conditions  or
     events since that  notification  that management  believes have changed the
     institution's category.

     Amounts are in the thousands.
<TABLE>
<CAPTION>

                                                                                            TO BE WELL
                                                                    FOR CAPITAL          CAPITALIZED UNDER
                                                                     ADEQUACY            PROMPT CORRECTIVE
                                              ACTUAL                 PURPOSES            ACTION PROVISIONS
                                        -----------------       -----------------        -----------------
                                        AMOUNT      RATIO       AMOUNT      RATIO        AMOUNT     RATIO
                                        ------      -----       ------      -----        ------     -----
<S>                                     <C>           <C>        <C>           <C>       <C>          <C>
As of June 30, 2000:
    Total Capital (to Risk
       Weighted Assets)                 $ 11,941      32%        $ 2,986       8%        $3,732       10%
    Tier I Capital (to Risk
       Weighted Assets)                 $ 11,624      31%            N/A                 $2,239        6%
    Core/Leverage Capital (to
        Adjusted Total Assets)          $ 11,624      21%        $ 2,192       4%        $2,740        5%
    Tangible Capital Equity (to
       Tangible Assets)                 $ 11,624      21%          $ 822     1.5%        $1,096        2% (A)
As of June 30, 1999:
    Total Capital (to Risk
       Weighted Assets)                 $ 12,579      38%        $ 2,669       8%        $3,337       10%
    Tier I Capital (to Risk
       Weighted Assets)                 $ 12,263      37%            N/A                 $2,002        6%
    Core/Leverage Capital
        (to Adjusted Total Assets)      $ 12,263      24%        $ 2,086       4%        $2,607        5%
    Tangible Capital Equity (to
       Tangible Assets)                 $ 12,263      24%          $ 782     1.5%        $1,043        2% (A)

<FN>
(A) To be "other  than  critically  undercapitalized"  under  prompt  corrective
action provisions
</FN>
</TABLE>


                                       34
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.    INCOME TAXES:

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

       The provision for income taxes consists of:
<TABLE>
<CAPTION>

                                         JUNE 30,
                                     2000        1999
                                  ---------   ---------
              <S>                 <C>         <C>
              Current             $ 181,278   $ 290,789
              Deferred               73,879    (129,491)
                                  ---------   ---------

                                  $ 255,157   $ 161,298
                                  =========   =========
</TABLE>

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

                                                               JUNE 30,
                                                          2000           1999
                                                       ---------      ---------
<S>                                                    <C>            <C>
Stock dividends on FHLB stock                          $  19,006      $  17,442
Provision for loan losses                                 74,649       (119,340)
Provision for uncollected interest                         1,689           (674)
Depreciation                                               2,822           (316)
Deferred fees                                             (1,881)        (8,280)
Directors retirement expense                              (1,700)         2,890
Supplemental executive retirement expense                (11,424)       (11,359)
Management recognition plan expense                       (2,732)        (1,248)
ESOP expense                                              (5,870)        (7,756)
Bonus expense                                               (680)          (850)
                                                       ---------      ---------
                                                       $  73,879      $(129,491)
                                                       =========      =========
</TABLE>

                                       35
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  INCOME TAXES (CONTINUED):

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

                                                                      JUNE 30,
                                                                      --------
                                                     2000                                     1999
                                           ---------------------                   -----------------------
<S>                                        <C>              <C>                    <C>               <C>
Tax at statutory rate                      $250,726         34.0%                  $157,162          34.0%
Increases (decreases) in
       taxes resulting from:
ESOP adjustments                              7,758          1.0%                     9,665           2.1%
Other, net                                   (3,327)        (0.4%)                   (5,529)         (1.2%)
                                           --------        -----                   --------         -----
Effective rate                             $255,157         34.6%                  $161,298          34.9%
                                           ========        =====                   ========         =====
</TABLE>

     The tax effect of temporary  differences  giving rise to the  Corporation's
     consolidated  deferred  income tax asset  (liability)  at June 30, 2000 and
     1999 are as follows:
<TABLE>
<CAPTION>

                                                                               2000                1999
<S>                                                                         <C>                 <C>
Deferred tax assets
     Allowance for loan losses                                              $ 112,691           $ 187,340
     Uncollected interest                                                       4,985               6,674
     Deferred loan fees                                                        26,031              24,150
     Directors retirement expense                                              45,317              43,617
     Supplemental executive retirement expense                                 45,298              33,874
     Management recognition plan expense                                       21,724              18,992
     ESOP expense                                                              15,693               9,823
     Bonus expense                                                             15,130              14,450
                                                                            ---------           ---------
                                                                              286,869             338,920

Deferred tax liabilities:
     FHLB stock dividends                                                    (109,853)            (90,847)
     Depreciation on office property and
        equipment                                                             (13,656)            (10,834)
     Unrealized gain on available-for-sale
        securities                                                           (331,520)           (478,318)
                                                                            ---------           ---------
Deferred income tax liability                                               $(168,160)          $(241,079)
                                                                            =========           =========
</TABLE>

       As of June 30, 2000, the Bank's bad debt reserve for federal tax purposes
       was  approximately  $816,000  which  represents  the base year amount.  A
       deferred tax liability has not been  recognized for the base year amount.
       If the Bank uses the base  year  reserve  for any  reason  other  than to
       absorb  loan  losses,  a tax  liability  could  be  incurred.  It is  not
       anticipated that the reserve will be used for any other purpose.



                                       36
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.    TREASURY STOCK:

       During the year ended June 30,  1999 the  Corporation  repurchased  7,800
       shares in conjunction with the Management  Recognition Plan at $14.48 per
       share for an aggregate  cost of  approximately  $113,000.  No  additional
       shares  were  purchased  during  the  year  ended  June 30,  2000.  After
       distributions,  treasury stock owned in conjunction with the MRP plan was
       19,854 and 25,470 shares at June 30, 2000 and 1999, respectively.

       In November 1998, the Corporation  began a series of 5% stock repurchases
       of its Common Stock. The Corporation's Board of Directors authorized a 5%
       repurchase in November 1998 which was completed March 1999,  authorized a
       5%  repurchase  in July  1999  which  was  completed  in  March  2000 and
       authorized  a 5%  repurchase  in March  2000 which is  approximately  50%
       complete  at  June  30,  2000.  The  repurchase   authority   allows  the
       Corporation  at  management's  discretion to  selectively  repurchase its
       stock  from time to time in the open  market or in  privately  negotiated
       transactions  depending upon market price and other  factors.  During the
       year ended June 30, 1999, the  Corporation  repurchased  47,940 shares at
       prices  ranging from $12.56 to $13.13 per share for an aggregate  cost of
       approximately  $622,000.  During  the  year  ended  June  30,  2000,  the
       Corporation  repurchased  70,544 shares at prices  ranging from $11.50 to
       $13.38 for an aggregate cost of approximately $885,000.

14.    EMPLOYEE BENEFIT PLANS:

       RETIREMENT PLAN

       The Bank is a participant in the Financial Institution's Retirement Fund,
       a   multi-employer   defined  benefit   retirement   plan.  The  plan  is
       noncontributory and covers all employees who meet certain requirements as
       to age and length of  service.  The Bank's  policy is to fund  retirement
       costs accrued. No contributions were made to the plan for the years ended
       June 30, 2000 and 1999; however, administrative expenses were paid to the
       plan in the  amounts of $1,176 and $992 for the years ended June 30, 2000
       and 1999, respectively.

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

       PROFIT-SHARING PLAN

       The Bank is a participant in the profit-sharing  feature of the Financial
       Institutions  Thrift  Plan.  The  plan is  contributory  and  covers  all
       salaried employees who meet certain  requirements as to age and length of
       service.  Employees  become  vested  upon  completion  of five  years  of
       service.  Contributions  are at the  discretion of the Board of Directors
       and are computed as a percentage of eligible employees' compensation. The
       Board of  Directors  authorized  contributions  equal  to 4% of  eligible
       employees'  compensation for 2000 and 1999, which amounted to $14,024 and
       $12,937 for 2000 and 1999, respectively.



                                       37
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.    EMPLOYEE BENEFIT PLANS (CONTINUED):

       EMPLOYEE STOCK OWNERSHIP PLAN

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

       Compensation expense for the ESOP was $110,240 and $140,847 for the years
       ended June 30, 2000 and 1999,  respectively.  Interest on the debt is not
       considered compensation expense by the Corporation.  The ESOP shares were
       as follows as of June 30:
<TABLE>
<CAPTION>

                                                            2000          1999
                                                         --------       --------
<S>                                                        <C>            <C>
Allocated Shares                                           35,700         25,320
Unearned Shares                                            40,391         51,384
                                                         --------       --------
Total ESOP Shares                                          76,091         76,704
                                                         ========       ========
Fair Value of Unearned Shares at June 30                 $444,301       $571,647

Market Price per share                                   $ 11.000       $ 11.125
</TABLE>


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


                                       38
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.    EMPLOYEE BENEFIT PLANS (CONTINUED):

       STOCK AWARD PLANS

           MANAGEMENT RECOGNITION PLAN (MRP)

           In connection with the conversion,  the Corporation adopted the First
           Lancaster Bancshares, Inc. Management Recognition Plan, the objective
           of  which  is to  enable  the  Corporation  to  retain  personnel  of
           experience  and ability in key  positions  of  responsibility.  Those
           eligible to receive benefits under the MRP include certain  directors
           and executive officers of the Corporation and First Lancaster Federal
           Savings Bank as determined by members of a committee appointed by the
           Board of Directors.  On January 9, 1997,  28,761 shares were awarded.
           The fair  market  value of the common  stock at that date was $14.625
           and there is no exercise price for the stock. Awards to directors and
           eligible  employees  will  vest 20% on each  anniversary  date of the
           award.  On July 3,  1997,  July 6, 1998 and July 8,  1999  additional
           shares of 231, 1,251 and 1,534 were granted, respectively. Shares are
           held by the  trustee  and are  voted by the MRP  trustee  in the same
           proportion as the trustee of the Corporation's  ESOP plan vote shares
           held  therein.  Assets  of the  trust  are  subject  to  the  general
           creditors of the Corporation. All shares vest immediately in the case
           of a participant's  death or disability.  The Corporation applied APB
           Opinion 25 and related  Interpretations  in  accounting  for the MRP.
           Compensation  cost charged to operations for the MRP totaled  $95,191
           and $89,008 for the years ended June 30, 2000 and 1999, respectively.

           STOCK OPTION PLAN

           The Corporation granted stock options under the 1996 Stock Option and
           Incentive Plan. Under the plan the Corporation is authorized to issue
           shares of common stock pursuant to "Awards" granted in various forms,
           including  incentive stock options (intended to qualify under Section
           422 of the Internal Revenue Code of 1986, as amended),  non-qualified
           stock options,  and other similar stock-based awards. The Corporation
           granted  stock  options to employees  and directors in 1997 under the
           plan in the form of incentive and  non-qualified  stock options.  The
           stock options granted in 1997 have contractual terms of 10 years. All
           options granted to the employees and directors have an exercise price
           no less than the fair market  value of the stock at grant  date.  The
           option  price is equal to 110% of the fair market  value on the grant
           date in the case of Incentive  Stock Options (ISO) granted to persons
           owning more than 10% of the  outstanding  common shares.  Each option
           will become  exercisable  with respect to 20% of the optioned  shares
           upon an optionee's completion of each of five years of future service
           as an employee,  director or advisory or emeritus director,  provided
           that an  option  shall  become  100%  exercisable  immediately  if an
           optionee's  continuous service terminates due to death or disability.
           The options expire ten years after the date of grant. The Corporation
           granted 71,910 options in 1997 and 3,834 options in 2000.


                                       39
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



14.    EMPLOYEE BENEFIT PLANS (CONTINUED):

       STOCK AWARD PLANS, (CONTINUED)

           STOCK OPTION PLAN (CONTINUED)

           A summary of the status of the Corporation's stock options as of June
           30,  2000  and the  changes  during  the year  ended on that  date is
           presented below.
<TABLE>
<CAPTION>

                                                                                WEIGHTED
                                                               # SHARES OF      AVERAGE
                                                               UNDERLYING       EXERCISE
                                                                 OPTIONS         PRICE
                                                               -----------      --------
<S>                                                               <C>           <C>
Outstanding, July 1, 1999                                         67,116        $ 14.625
Granted during the year                                            3,834          11.063
Expired during the year                                                0
Exercised during the year                                              0
                                                                 -------
Outstanding, June 30, 2000                                        70,950        $ 14.433
                                                                 =======
Eligible for exercise at year-end                                 40,260
                                                                 =======
Weighted average fair value of options
 granted at a discount                                             $3.10

</TABLE>


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

           The fair value of each stock option  granted is estimated on the date
           of  grant  using  the  Black-Scholes  option-pricing  model  with the
           following weighted-average assumptions:
<TABLE>
<CAPTION>
  GRANT                  DIVIDEND          RISK-FREE          EXPECTED LIFE
  DATE                    YIELD         INTEREST RATE          OF OPTIONS        VOLATILITY
---------                --------       -------------         -------------      ----------
<S>                      <C>               <C>                 <C>                <C>
January 1997              4.10%             6.25%               6 years            21.69%

July 1999                 5.42%             5.60%               6 years            15.20%
</TABLE>

                                       40
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  EMPLOYEE BENEFIT PLANS (CONTINUED):

     STOCK AWARD PLANS, (CONTINUED)

     STOCK OPTION PLAN (CONTINUED)

     As of June 30, 2000, 70,950 options are outstanding with a weighted-average
     remaining contractual life of all stock options being 6.6 years.

     Had the compensation  cost for the Corporation's  stock-based  compensation
     plan been determined consistent with SFAS 123, the Corporation's net income
     and net income per common share for 2000 and 1999 would approximate the pro
     forma amounts below:
<TABLE>
<CAPTION>

                                                             AS REPORTED             PRO FORMA
                                                               6/30/00                6/30/00
                                                             -----------             ----------

<S>                                                           <C>                    <C>
Net Income                                                    $ 482,272              $ 435,407

Basic Earnings per Share                                         $ 0.60                 $ 0.54

Diluted Earnings per Share                                       $ 0.59                 $ 0.53

<CAPTION>

                                                             AS REPORTED             PRO FORMA
                                                               6/30/99                6/30/99
                                                             -----------             ----------

<S>                                                           <C>                    <C>
Net Income                                                    $ 300,944              $ 278,288

Basic and Diluted Earnings per Share                             $ 0.35                 $ 0.32

</TABLE>


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

     RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS

     Effective  December 7, 1995, the Board of Directors of the Bank adopted the
     First  Lancaster  Federal  Savings  Bank  Directors'  Retirement  Plan  for
     Non-Employee  Directors. A participant in the Plan will receive, on each of
     the ten annual  anniversary  dates of leaving the Board, an amount equal to
     the product of his "Benefit  Percentage," "Vested Percentage," (as defined)
     and 75% of the total fee he received  for  service on the Board  during the
     calendar year  preceding his  retirement.  The amount charged to operations
     under the plan totaled  $5,000 and $0 for the years ended June 30, 2000 and
     1999, respectively.


                                       41
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.    EMPLOYEE BENEFIT PLANS (CONTINUED):

       SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP)

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

       The Bank has  established an irrevocable  grantor trust to hold assets in
       order to provide  itself with a source of funds to assist the Bank in the
       meeting of the SERP liability. The amount charged to operations under the
       plan  totaled  $33,600  and $33,408 for the years ended June 30, 2000 and
       1999, respectively.

15.    DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

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

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

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

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

       CASH AND CASH EQUIVALENTS

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


                                       42
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.    DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):

       INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

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

       LOANS RECEIVABLE

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

       REAL ESTATE ACQUIRED BY FORECLOSURE

       Fair  values  for  real  estate  acquired  by  foreclosure  are  based on
       independent appraisals of fair market value, where available.  If current
       independent appraisals are not available, fair values are based on market
       values for comparable properties.

       DEPOSITS

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

       ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

       LOAN COMMITMENTS

       The fair  value of loan  commitments  is  estimated  to  approximate  the
       contract  values.  The  contract for each loan  commitment  has a current
       market rate,  the  creditworthiness  of the  counterparties  is presently
       considered in the commitments,  and the original fees charged do not vary
       significantly from the fee structure at June 30, 2000.


                                       43
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):

     The estimated fair values of the Corporation's financial instruments are as
     follows:
<TABLE>
<CAPTION>
                                                               JUNE 30,                    JUNE 30,
                                                                 2000                        1999
                                                        --------------------         --------------------
                                                         CARRYING      FAIR          CARRYING        FAIR
                                                         AMOUNT        VALUE          AMOUNT         VALUE
                                                        ---------      ------        --------        -----
                                                                           (in thousands)
<S>                                                      <C>           <C>             <C>           <C>
Financial Assets:
     Cash                                                $ 494         $ 494           $ 475         $ 475
     Interest-bearing deposits in other
        depository institutions                          1,450         1,450           2,231         2,231
     Investment securities                                 999           999           1,431         1,431
     Investment in nonmarketable
        equity securities                                  833           833             777           777
     Mortgage-backed securities                            255           251             318           317
     Loans receivable, net allowance for
        loan losses of $331 for 2000
         and $551 for 1999                              49,374        49,246          46,192        46,324
     Real estate acquired by foreclosure                   952           982             456           456

Financial Liabilities:
     Savings accounts and certificates                  29,079        29,118          29,653        29,826
     Federal Home Loan Bank advances                    12,835        12,618           8,831         8,743
</TABLE>


16.    DIVIDEND RESTRICTIONS:

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

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



                                       44
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.    DIVIDEND RESTRICTIONS (CONTINUED):

       The OTS regulates payment of dividends and other capital distributions by
       the Bank.  The Bank may not make  distributions  to the  Corporation  for
       dividends on or  repurchase of any of its stock if the effect would be to
       reduce retained  earnings of the Bank below the capital  requirements set
       forth by the OTS. OTS regulations  utilize certain  criteria that require
       notification of or application for distributions  based primarily upon an
       institution's  net income and  retained  capital.  Based upon current OTS
       regulations,  the bank must  either  (i) file  notification  with the OTS
       because it is a subsidiary of a savings and loan holding  company or (ii)
       apply for distributions if the total amount of capital  distributions for
       the  applicable  calendar  year  exceeds net income for that year to date
       plus  retained  net income  for the  preceding  two years.  The amount of
       distributions  cannot  reduce the Bank's  capital  below the  liquidation
       account  discussed above. As of June 30, 2000 the Bank is approved by the
       OTS to make capital  distributions  to the  Corporation  in the amount of
       $1.6 million through May 30, 2001.

17.    PREFERRED STOCK:

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



                                       45
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.    EARNINGS PER SHARE:
<TABLE>
<CAPTION>

                                       FOR THE YEAR ENDED JUNE 30, 2000     FOR THE YEAR ENDED JUNE 30, 1999
                                    ------------------------------------  ------------------------------------
                                     INCOME        SHARES      PER SHARE   INCOME          SHARES    PER SHARE
                                    (NUMERATOR) (DENOMINATOR)   AMOUNT    (NUMERATOR)   (DENOMINATOR)  AMOUNT
                                    ----------- -------------  ---------  -----------   ------------- --------
<S>                                  <C>             <C>         <C>        <C>            <C>          <C>
Basic earnings per share
Income available to
  common shareholders                $482,272        810,251     $0.60      $300,944       849,364      $0.35

Effect of dilutive securities
Management recognition
   plan                                               10,606                                13,349

Diluted earnings per share
Income available to common
  shareholders plus
  assumed conversions                $482,272        820,857     $0.59      $300,944       862,713      $0.35
</TABLE>

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


                                       46
<PAGE>
FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


19.    CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY):

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

       CONDENSED STATEMENTS OF FINANCIAL CONDITION                                           JUNE 30,
                                                                                  2000                   1999
                                                                               -----------            -----------
       <S>                                                                    <C>                    <C>
       ASSETS
       Cash and balances with bank                                             $    44,923            $   127,396
       Investment in subsidiary                                                 12,676,289             13,707,241
       Income tax receivable                                                       109,490                 70,273
       Accrued interest receivable                                                  21,559                 23,913
       Due from subsidiary                                                          12,438                  7,346
                                                                               -----------            -----------
                                                                               $12,864,699            $13,936,169
                                                                               ===========            ===========
       LIABILITIES AND STOCKHOLDERS' EQUITY
       Accounts payable                                                              $ 297                  $ 297
       Common stock owned by ESOP subject to put option                            386,949                310,614
       Stockholders' equity                                                     12,477,453             13,625,258
                                                                               -----------            -----------
                                                                               $12,864,699            $13,936,169
                                                                               ===========            ===========

       CONDENSED STATEMENTS OF INCOME                                                        JUNE 30,
                                                                                  2000                   1999
                                                                               -----------            -----------
       Dividend from bank subsidiary                                           $ 1,350,000            $ 1,088,263
       Interest income                                                              46,577                 57,496
       Legal, accounting and filing fees                                          (144,197)              (121,261)
       State franchise taxes                                                       (17,720)               (14,077)
                                                                               -----------            -----------

       Net income before income taxes                                            1,234,660              1,010,421
       Income tax benefit                                                           39,217                 26,466

       Net income before equity in undistributed net income of
         subsidiary                                                              1,273,877              1,036,887

       Dividends in excess of earnings of subsidiary                              (791,605)              (735,943)
                                                                               -----------            -----------
       Net income                                                                  482,272                300,944

       Other comprehensive (loss) income                                          (284,961)               178,101
                                                                               -----------            -----------
       Comprehensive income                                                    $   197,311            $   479,045
                                                                               ===========            ============
</TABLE>

                                       47
<PAGE>

FIRST LANCASTER BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.    CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED):

<TABLE>
<CAPTION>

       CONDENSED STATEMENTS OF CASH FLOWS                                                    JUNE 30,
                                                                                  2000                   1999
                                                                               -----------            -----------
       <S>                                                                    <C>                    <C>
       OPERATING ACTIVITIES:
         Net income                                                            $   482,272            $   300,944
         Adjustment to reconcile net income to cash provided
             by operating activities:
           Dividends in excess of earnings of subsidiary                           791,605                735,943
           Increase in income tax receivable                                       (39,217)               (26,466)
           Decrease in accrued interest receivable                                   2,354                  7,792
           Decrease in accounts payable                                                  -                 (3,147)
                                                                               -----------            -----------
         Net cash provided by operating activities                               1,237,014              1,015,066

       INVESTING ACTIVITIES:
         Payment on ESOP loan                                                       63,483                 53,698
                                                                               -----------            -----------

         Net cash provided by investing activities                                  63,483                 53,698
                                                                               -----------            -----------

       FINANCING ACTIVITIES:
         Purchase of treasury stock                                               (884,731)              (621,982)
         Dividends paid                                                           (498,239)              (512,300)
                                                                               -----------            -----------

         Net cash used in financing activities                                  (1,382,970)            (1,134,282)
                                                                               -----------            -----------

       Net decrease in cash                                                        (82,473)               (65,518)

       Cash, beginning of year                                                     127,396                192,914
                                                                               -----------            -----------

       Cash, end of year                                                       $    44,923            $   127,396
                                                                               ===========            ===========

</TABLE>


20.    SUBSEQUENT EVENT:

       On July 6, 2000 the Corporation declared a dividend of $0.30 per share or
       $252,098,  to  shareholders  of record as of July 21, 2000. The dividends
       were paid on July 31, 2000.



                                       48
<PAGE>
<TABLE>
<CAPTION>

                              CORPORATE INFORMATION

                               BOARD OF DIRECTORS

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


<CAPTION>

                               EXECUTIVE OFFICERS

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

<CAPTION>

                                OFFICE LOCATIONS

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

                                OTHER INFORMATION

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

               TRANSFER AGENT                                 ANNUAL MEETING
               Illinois Stock Transfer Company                The 2000 Annual Meeting of Stockholders
               209 W. Jackson Boulevard, Suite 903            will be held on October 30, 2000 at 4:00
               Chicago, Illinois  60606                       p.m. at the Bank's office located at 208
                                                              Lexington Street, Lancaster, Kentucky.
</TABLE>

            -------------------------------------------------------------
                          Annual Report on Form 10-KSB

            A copy of the Company's Annual Report on Form 10-KSB for
            the fiscal  year  ended June 30,  2000 as filed with the
            Securities  and  Exchange  Commission  will be furnished
            without charge to stockholders as of the record date for
            the 2000  Annual  Meeting  upon  written  request to the
            Corporate Secretary,  First Lancaster Bancshares,  Inc.,
            208 Lexington Street, Lancaster, Kentucky 40444- 1131.
            -----------------------------------------------------------------