SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
 (Mark One)

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

For the fiscal year ended June 30, 2000
                                       OR

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

For the transition period from _____________________ to ________________

                           Commission File No. 0-20899

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

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

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

       Registrant's telephone number, including area code: (859) 792-3368

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

           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of Class)

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

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

Issuer's revenues for the fiscal year ended June 30, 2000:  $4,232,468

As of September 21, 2000,  the aggregate  market value of the 651,123  shares of
Common Stock of the registrant  issued and outstanding held by non-affiliates on
such date was  approximately  $7.1  million  based on the  average bid and asked
price of $10.94 per share of the  registrant's  Common  Stock on  September  21,
2000. For purposes of this calculation,  it is assumed that directors,  officers
and beneficial  owners of more than 5% of the  registrant's  outstanding  voting
stock are affiliates.

Number of shares of Common Stock outstanding as of September 21, 2000: 840,328

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

                       DOCUMENTS INCORPORATED BY REFERENCE

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

     1. Portions of the Annual Report to Stockholders  for the fiscal year ended
June 30, 2000 (Parts I and II)

     2.  Portions of Proxy  Statement  for 2000 Annual  Meeting of  Stockholders
(Part III)


<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

GENERAL

         FIRST LANCASTER BANCSHARES,  INC. First Lancaster Bancshares, Inc. (the
"Company"), a Delaware corporation,  was organized at the direction of the Board
of Directors of First Lancaster Federal Savings Bank,  Lancaster,  Kentucky (the
"Bank"),  in February  1996 to acquire all of the capital  stock to be issued by
the Bank in its  conversion  from mutual to stock form (the  "Conversion").  The
Company does not have any significant assets other than the outstanding  capital
stock of the Bank,  a portion of the net proceeds of the  Conversion  and a note
receivable  from the ESOP. The Company's  principal  business is the business of
the Bank.

         FIRST  LANCASTER  FEDERAL  SAVINGS BANK. The Bank is a federal  savings
bank  serving  Garrard,  Jessamine  and  Fayette  Counties,  Kentucky  and which
operates a  full-service  office in  Lancaster,  Kentucky and a loan  production
office in Nicholasville, Kentucky. The Bank was chartered by the Commonwealth of
Kentucky in 1873 under the name  Lancaster  Building and Loan  Association.  The
Bank  adopted a federal  charter and received  federal  insurance of its deposit
accounts  in 1966,  at which time it adopted  the name First  Lancaster  Federal
Savings  and  Loan  Association.  In 1988 the Bank  converted  from a  federally
chartered  mutual savings and loan  association to a federally  chartered mutual
savings bank and adopted its present name.

         The principal business of the Bank consists of attracting deposits from
the  general  public and  investing  these  deposits  in loans  secured by first
mortgages  on  single-family  residences  in the Bank's  market  area.  The Bank
derives its income  principally  from interest  earned on loans and, to a lesser
extent, interest earned on mortgage-backed  securities and investment securities
and noninterest income.  Funds for these activities are provided  principally by
operating revenues,  deposits,  repayments of outstanding loans and Federal Home
Loan Bank ("FHLB") advances, to the extent necessary.

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

         The  Company's  and the Bank's  executive  offices  are  located at 208
Lexington Street, Lancaster,  Kentucky 40444-1131, and their telephone number is
(859) 792-3368.

LENDING ACTIVITIES

         GENERAL.  The Bank's loan  portfolio  totaled $49.4 million at June 30,
2000,  representing  89.4% of total assets at that date. It is the Bank's policy
to  concentrate  its lending  within its market area.  At June 30,  2000,  $37.0
million,   or  71.0%  of  the  Bank's   gross  loan   portfolio,   consisted  of
single-family,  residential  mortgage loans.  Other loans secured by real estate
include multi-family  residential,  commercial,  construction and nonresidential
loans,  which  amounted to $14.5  million,  or 27.8%,  of the Bank's  gross loan
portfolio at June 30, 2000. To a lesser  extent,  the Bank  originates  consumer
loans,  which consists  primarily of loans secured by deposits and vehicles.  At
June 30, 2000, consumer loans totaled $631,000, or 1.2% of the Bank's gross loan
portfolio.


                                       2
<PAGE>

         LOAN  PORTFOLIO  COMPOSITION.  The following  table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated.  At June 30, 2000, the Bank had no  concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
                                                                              At June 30,
                                                            -------------------------------------------------------
                                                                    2000                             1999
                                                            ---------------------           ----------------------
                                                            Amount            %             Amount            %
                                                            ------          -----           ------          ------
                                                                             (Dollars in thousands)
<S>                                                         <C>               <C>           <C>                <C>
Real estate loans:
   Single-family residential..............................  $   37,023        71.0%         $  34,707          70.8%
   Multi-family residential and commercial................       4,447         8.5              1,772           3.6
   Construction...........................................       5,775        11.1              9,000          18.3
   Nonresidential (1).....................................       4,300         8.2              3,035           6.2
                                                            ----------       -----          ---------         -----
      Total real estate loans.............................      51,545                         48,514
Consumer loans............................................         631         1.2                528           1.1
                                                            ----------       -----          ---------         -----
                                                                52,176       100.0%            49,042         100.0%
                                                                             =====                            =====
Less:
   Loans in process.......................................       2,394                          2,228
   Unearned loan origination fees.........................          77                             71
   Allowance for loan losses..............................         331                            551
                                                            ----------                      ---------
      Total...............................................  $   49,374                      $  46,192
                                                            ==========                      =========
<FN>
___________
(1)      Consists of loans secured by first liens on residential  lots and loans
         secured by first mortgages on commercial real property.
</FN>
</TABLE>

         LOAN  MATURITY  SCHEDULE.   The  following  table  sets  forth  certain
information  at June 30, 2000  regarding the dollar amount of loans  maturing in
the Bank's portfolio based on their contractual terms to maturity. Demand loans,
loans  having no stated  schedule  of  repayments  and no stated  maturity,  and
overdrafts  are reported as due in one year or less.  The table does not include
any estimate of prepayments which significantly  shorten the average life of all
mortgage loans and may cause the Bank's repayment experience to differ from that
shown below.
<TABLE>
<CAPTION>
                                                          Due after
                                       Due during          1 through          Due after
                                    the year ending     5 years after       5 years after
                                     June 30, 2001      June 30, 2000       June 30, 2000          Total
                                     -------------      -------------       -------------       ----------
                                                                 (In thousands)
<S>                                  <C>                  <C>                 <C>               <C>
Single-family residential.........   $        48          $      620          $   36,355        $   37,023
Multi-family residential..........         1,295                 138               3,014             4,447
Construction......................         5,775                  --                  --             5,775
Nonresidential....................         2,524               1,363                 413             4,300
Consumer..........................           396                 154                  81               631
                                     -----------          ----------          ----------        ----------
     Total........................   $    10,038          $    2,275          $   39,863        $   52,176
                                     ===========          ==========          ==========        ==========
</TABLE>

                                       3
<PAGE>

         The following  table sets forth at June 30, 2000,  the dollar amount of
all loans and which have predetermined  interest rates or floating or adjustable
interest rates.
<TABLE>
<CAPTION>

                                                          Predetermined         Floating or
                                                              Rate            Adjustable Rates
                                                          -------------       ----------------
                                                                  (In thousands)
         <S>                                              <C>                     <C>
         Single-family residential.....................   $   4,513               $ 32,510
         Multi-family residential......................       2,168                  2,279
         Construction..................................       5,775                     --
         Nonresidential................................       3,825                    475
         Consumer......................................         388                    243
                                                          ---------               --------
                Total..................................   $  16,669               $ 35,507
                                                          =========               ========
</TABLE>

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

         ORIGINATIONS,  PURCHASES  AND SALES OF LOANS.  The Bank  generally  has
authority  to  originate  and  purchase  loans  secured by real  estate  located
throughout  the  United  States.   Consistent  with  its  emphasis  on  being  a
community-oriented  financial  institution,  the Bank  concentrates  its lending
activities in its market area.

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

                                                                        Year Ended June 30,
                                                                 ----------------------------------
                                                                    2000                     1999
                                                                 ----------               ---------
                                                                            (In thousands)
<S>                                                              <C>                <C>
       Loans originated:
         Real estate loans:
            Single-family residential (1)......................  $   8,019          $   5,631
            Construction (2)...................................      9,289             10,597
            Nonresidential (3).................................      2,573              1,531
          Consumer loans.......................................        511                333
                                                                 ---------          ---------
            Total loans originated.............................  $  20,361          $  18,092
                                                                 =========          =========
<FN>
_____________
(1)      Includes home equity loans.
(2)      Loans are generally for twelve months.
(3)      Includes loans secured by first liens on residential lots.
</FN>
</TABLE>

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

                                       4
<PAGE>

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

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

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

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

         Under  applicable  law,  with  certain  limited  exceptions,  loans and
extensions of credit by a savings  institution  to a person  outstanding  at one
time shall not exceed 15% of the institution's  unimpaired  capital and surplus,
including  the loan loss  allowance  of the Bank.  Under this  general  law, the
Bank's  loans to one  borrower  were  limited to $1.8  million at June 30, 2000.
Loans and  extensions of credit fully secured by readily  marketable  collateral
may comprise an additional 10% of unimpaired capital and surplus. Applicable law
additionally  authorizes savings institutions to make loans to one borrower, for
any purpose,  in an amount not to exceed  $500,000 or in an amount not to exceed
the lesser of  $30,000,000  or 30% of unimpaired  capital and surplus to develop
residential  housing,  provided:  (i) the purchase  price of each  single-family
dwelling  in  the  development  does  not  exceed  $500,000;  (ii)  the  savings
institution  is and  continues  to be in  compliance  with its  fully  phased-in
regulatory  capital  requirements;   (iii)  the  loans  comply  with  applicable
loan-to-value  requirements;  (iv) the aggregate amount of loans made under this
authority  does not exceed 150% of unimpaired  capital and surplus;  and (v) the
Director of OTS, by order,  permits the savings  institution  to avail itself of
this higher  limit.  Under these  limits,  the Bank's  loans to one  borrower to
develop  residential  housing were limited to $3.7 million at June 30, 2000.  At
that   date,   the  Bank  had  no  lending   relationships   in  excess  of  the
loans-to-one-borrower  limit.  At June 30,  2000,  the  Bank's  largest  lending
relationship  was a $1.0 million loan to develop a commercial  convenience/truck
plaza.  The loan was current and performing in accordance with its terms at June
30, 2000.

         Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes.  These factors are, in turn,  affected by general


                                       5
<PAGE>

economic conditions, monetary policies of the federal government,  including the
Federal  Reserve  Board,  legislative  tax  policies  and  government  budgetary
matters.

         SINGLE-FAMILY  RESIDENTIAL REAL ESTATE LENDING.  The Bank  historically
has been and continues to be an originator of  single-family,  residential  real
estate loans in its market area.  At June 30,  2000,  single-family  residential
mortgage  loans,  totaled  approximately  $37.0 million,  or 71.0% of the Bank's
gross loan  portfolio.  All loans  originated by the Bank are  maintained in its
portfolio rather than sold in the secondary market.

         The  Bank  primarily   originates   residential   mortgage  loans  with
adjustable rates ("ARM's"). As of June 30, 2000, 87.8% of single-family mortgage
loans in the Bank's loan  portfolio  carried  adjustable  rates.  Such loans are
primarily for terms of 30 years,  although the Bank does occasionally  originate
ARM's for 20 year and 25 year terms,  in each case  amortized on a monthly basis
with  principal  and  interest  due  each  month.  The  interest  rates on these
mortgages  are  adjusted  once a  year,  with  a  maximum  adjustment  of 2% per
adjustment period and a maximum aggregate  adjustment of 5% over the life of the
loan.  Further,  the  interest  rates on such loans may not be decreased by more
than 1%  below  the  interest  rate at  which  the  loan  was  originated.  Rate
adjustments  on the  Bank's  adjustable-rate  loans are  indexed to a rate which
adjusts  annually  based upon  changes in an index  based on the weekly  average
yield on U.S. Treasury  securities adjusted to a constant comparable maturity of
one year,  as made  available  by the Federal  Reserve  Board,  and the adjusted
interest rate is equal to such Treasury rate plus 2.75% for owner  occupied real
estate  and  3.75% for  non-owner  occupied  real  estate.  The  adjustable-rate
mortgage  loans offered by the Bank do not provide for initial rates of interest
below the rates that would prevail when the index used for repricing is applied.

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

         The Bank also  originates,  to a limited extent,  fixed-rate  loans for
terms of 15 years to 30 years.  In each case,  such  loans are  secured by first
mortgages on single-family,  owner-occupied residential real property located in
the Bank's market area. Because of the Bank's policy to mitigate its exposure to
interest  rate risk through the use of  adjustable-rate  rather than  fixed-rate
products,  the Bank does not emphasize  fixed-rate  mortgage  loans. At June 30,
2000,  $16.7  million,  or 31.9%,  of the Bank's  loan  portfolio  consisted  of
fixed-rate  mortgage  loans. To further reduce its interest rate risk associated
with such loans,  the Bank relies upon Federal Home Loan Bank ("FHLB")  advances
with similar  maturities to fund such loans.  See "-- Deposit Activity and Other
Sources of Funds -- Borrowings."

         At June 30, 2000,  the Bank's loan  portfolio  included $5.8 million of
loans secured by properties under construction,  the majority of which are loans
to qualified  builders for the  construction of one- to four-family  residential
housing located in established  subdivisions  in Garrard,  Jessamine and Fayette
Counties,  Kentucky.  Because such homes are intended for resale, such loans are
generally  not  converted  to  permanent  financing  at the Bank.  The Bank also
engages in construction  lending involving loans to individuals for construction
of one- to  four-family  residential  housing  located  within the Bank's market
area,  with such loans  converting  to permanent  financing  upon  completion of
construction.  Such loans are generally  made to  individuals  for  construction
primarily in  established  subdivisions  within  Garrard,  Jessamine and Fayette
Counties,  Kentucky.  All construction  loans are secured by a first lien on the
property  under  construction.  Loan  proceeds are  disbursed in  increments  as
construction progresses and as inspections warrant. Construction/permanent loans
may have  adjustable or fixed interest rates and


                                       6
<PAGE>

are  underwritten  in  accordance  with the same terms and  requirements  as the
Bank's permanent mortgages,  except the loans generally provide for disbursement
in stages  during a  construction  period of up to twelve  months,  during which
period the  borrower is required to make  interest-only  monthly  payments.  The
permanent loans are typically  30-year ARM's, with the same terms and conditions
otherwise  offered by the Bank.  Monthly  payments  of  principal  and  interest
commence one month from the date the loan is  converted to permanent  financing.
Borrowers  must satisfy all credit  requirements  that would apply to the Bank's
permanent mortgage loan financing prior to receiving  construction financing for
the subject  property and must execute a  Construction  Loan  Agreement with the
Bank.

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

         MULTI-FAMILY  RESIDENTIAL AND COMMERCIAL AND NONRESIDENTIAL REAL ESTATE
LENDING.  The Bank's multi-family  residential loan portfolio generally consists
of both  fixed-rate  and ARM loans  secured by small  (i.e.,  fewer than sixteen
units)  apartment  buildings.  Such loans currently range in size from $8,400 to
$1.0 million.  The Bank's real estate portfolio generally consists of fixed-rate
or  adjustable-rate  loans secured by first  mortgages on residential  lots upon
which  single-family homes will be constructed or upon a business's building and
real property. In each case, such property is located in Garrard,  Jessamine and
Fayette  Counties,  Kentucky.  At June 30,  2000,  the Bank had $4.4  million of
multi-family  residential  and commercial  real estate loans,  which amounted to
8.5% of the Bank's gross loan portfolio at such date. The Bank's  nonresidential
loan portfolio  consists of loans secured by first liens on residential lots and
loans secured by first mortgages on commercial real property.  At June 30, 2000,
the Bank had approximately  $4.3 million of such loans,  which comprised 8.2% of
its loan portfolio. Multi-family residential, commercial and nonresidential real
estate loans are originated either on an adjustable-rate  basis with terms of up
to 20 years or on a fixed rate for a fifteen-year term and are underwritten with
loan-to-value  ratios of up to 80% of the lesser of the  appraised  value or the
purchase price of the property.

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

         CONSUMER  LENDING.  The  majority of consumer  loans  currently  in the
Bank's loan portfolio consist of loans secured by savings deposits and vehicles.
Such savings account loans may be made for up to 100% of the depositor's savings
account balance.  The interest rate is normally 2.0% above the rate paid on such
deposit  account  serving  as  collateral,  and the  account  must be pledged as
collateral  to secure the loan.  Interest  generally is billed on a  semi-annual
basis. At June 30, 2000, loans on deposit accounts totaled  $216,000,  or .4% of
the Bank's  gross loan  portfolio.  The  remaining  $415,000 in  consumer  loans
includes loans secured mainly by vehicles.

                                       7
<PAGE>

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

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

         Real  estate  acquired  by the  Bank  as a  result  of  foreclosure  is
classified as real estate acquired through  foreclosure until such time as it is
sold. When such property is acquired, it is initially recorded at estimated fair
value and subsequently at the lower of book value or fair value,  less estimated
costs to sell.  Costs  relating to holding such real estate are charged  against
income in the current period, while costs relating to improving such real estate
are capitalized until a salable condition is reached. Any required write-down of
the loan to its fair value less  estimated  selling  costs upon  foreclosure  is
accounted  for as a  valuation  reserve.  See Note 1 of  Notes  to  Consolidated
Financial Statements.

         The following table sets forth  information  with respect to the Bank's
nonperforming assets at the dates indicated.  Further, no loans were recorded as
restructured  loans  within the meaning of  Statement  of  Financial  Accounting
Standards ("SFAS") No. 15 at the dates indicated.
<TABLE>
<CAPTION>
                                                                                      At June 30,
                                                                              -----------------------------
                                                                                2000               1999
                                                                              --------           ----------
                                                                                  (Dollars in thousands)
<S>                                                                           <C>                <C>
         Loans accounted for on a non-accrual basis: (1)
            Real estate:
               Single-family residential....................................  $    314           $     686
               Construction.................................................        --                 665
         Consumer...........................................................        --                   8
         Accruing loans which are contractually past due 90 days
            or as to which repayment is in doubt............................        --                  --
                                                                              --------           ---------
               Total nonperforming loans....................................  $    314           $   1,359
                                                                              ========           =========
         Percentage of real estate loans....................................       .61%               2.80%
                                                                              ========           =========
         Other non-performing assets (2)....................................  $    952           $     456
                                                                              ========           =========
<FN>
___________
(1)      Loans, including impaired loans, are generally classified as nonaccrual
         if they are past due as to maturity or payment of principal or interest
         for a period of more than 90 days,  unless such loans are  well-secured
         and in the process of collection.  Loans that are on a current  payment
         status  or past  due  less  than  90 days  may  also be  classified  as
         nonaccrual  if  repayment in full of  principal  and/or  interest is in
         doubt.
 (2)     Other  nonperforming  assets  represent  property  acquired by the Bank
         through foreclosure or repossession.  This property is carried at lower
         of book value or fair market value, less estimated costs to sell.
</FN>
</TABLE>


         For the year  ended  June 30,  2000,  gross  interest  accrued  but not
recognized of approximately  $15,000 would have been recorded on loans accounted
for on a nonaccrual basis if the loans had been current.  Interest on such loans
paid and  included  in income  during the year ended June 30,  2000  amounted to
approximately $14,000.



                                       8
<PAGE>

         At June 30, 2000,  nonaccrual  loans  consisted  of nine  single-family
residential real estate loans aggregating $314,000 and represented a decrease of
$1.0 million,  or 76.9% from nonaccrual  loans of $1.4 million at June 30, 1999.
At  June  30,  2000,  $952,000  of real  estate  acquired  through  foreclosure,
consisting of three single-family residences, was held by the Bank.

         Federal  regulations  require  savings  institutions  to classify their
assets on the basis of quality on a regular  basis.  An asset meeting one of the
classification  definitions  set forth  below may be  classified  and still be a
performing loan. An asset is classified as substandard if it is determined to be
inadequately  protected by the current retained  earnings and paying capacity of
the  obligor or of the  collateral  pledged,  if any.  Real  estate  acquired by
foreclosure  is also  required by the OTS to be classified  as  substandard.  An
asset is classified as doubtful if full  collection  is highly  questionable  or
improbable.  An asset is classified  as loss if it is considered  uncollectible,
even if a partial recovery could be expected in the future. The regulations also
provide for a special  mention  designation,  described  as assets  which do not
currently expose a savings institution to a sufficient degree of risk to warrant
classification  but do  possess  credit  deficiencies  or  potential  weaknesses
deserving  management's  close  attention.  Such  assets  designated  as special
mention may include  nonperforming  loans consistent with the above  definition.
Assets  classified as substandard or doubtful  require a savings  institution to
establish general  allowances for loan losses. If an asset or portion thereof is
classified  loss,  a  savings  institution  must  either  establish  a  specific
allowance for loss in the amount of the portion of the asset classified loss, or
charge  off  such  amount.   Federal  examiners  may  disagree  with  a  savings
institution's  classifications.  If a savings institution does not agree with an
examiner's  classification of an asset, it may appeal this  determination to the
OTS  Regional  Director.  The Bank  regularly  reviews  its assets to  determine
whether any assets  require  classification  or  re-classification.  At June 30,
2000, the Bank had $1.9 million in assets  classified as special  mention,  $1.3
million in assets  classified as substandard,  no assets  classified as doubtful
and  $14,000  in assets  classified  as loss.  Special  mention  assets  consist
primarily  of a $1.0  million  loan to  develop  a  commercial  truck  plaza and
residential real estate loans secured by first mortgages. This classification is
primarily used by management as a "watch list" to monitor loans that exhibit any
potential  deviation  in  performance  from the  contractual  terms of the loan.
Substandard   assets  are  primarily   residential   real  estate   acquired  by
foreclosure;  the highest  balance on a single property was $462,000 at June 30,
2000.

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

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

         The Bank's  methodology for  establishing the allowance for loan losses
takes into consideration probable losses that have been identified in connection
with specific  assets as well as losses that have not been identified but can be
expected to occur.  Management conducts monthly reviews of the Bank's assets and
evaluates  the  need to  establish  allowances  on the  basis  of  this  review.
Allowances  are  established  by the Board of  Directors on at least a quarterly
basis  based  on an  assessment  of  risk  in  the  Bank's  assets  taking  into
consideration the composition and quality of the portfolio,  delinquency trends,
current charge-off and loss experience,  loan  concentrations,  the state of the
real estate market,  regulatory reviews conducted in the regulatory  examination
process and general economic conditions.  Specific reserves will be provided for
individual assets, or portions of assets, when ultimate collection


                                       9
<PAGE>
is considered  improbable by management  based on the current  payment status of
the assets and the fair value of the  security.  At the date of  foreclosure  or
other repossession, the Bank would transfer the property to real estate acquired
in settlement of loans initially at estimated fair value and subsequently at the
lower of book value or fair value less estimated  selling costs.  Any portion of
the  outstanding  loan  balance in excess of fair value less  estimated  selling
costs  would be charged  off against the  allowance  for loan  losses.  If, upon
ultimate disposition of the property, net sales proceeds exceed the net carrying
value of the property, a gain on sale of real estate would be recorded.

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

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

                                                                   Year Ended June 30,
                                                              --------------------------
                                                                2000              1999
                                                              ---------         --------
                                                                (Dollars in thousands)

         <S>                                                  <C>               <C>
         Balance at end of period.............................$      551        $    200

         Loans charged off:
           Real estate mortgage:
                Single-family residential.....................        21              --
                Construction..................................       238             150
                                                              ----------        --------
         Total charge offs....................................       259             150
                                                              ----------        --------

         Recoveries...........................................        --              --
         Net loans charged off................................      (259)           (150)
         Provision for loan losses............................        39             501
                                                              ----------        --------
         Balance at end of period.............................$      331        $    551
                                                              ==========        ========
         Ratio of net charge-offs to average
          loans outstanding during the period.................       .54%            .31%
                                                              ==========        ========
</TABLE>

                                       10
<PAGE>


         The  following  table  allocates  the allowance for loan losses by loan
category  at the  dates  indicated.  The  allocation  of the  allowance  to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                             At June 30,
                                                     -----------------------------------------------------------
                                                            2000                              1999
                                                     ---------------------------       -------------------------
                                                                   Percent of                       Percent of
                                                                 Loans in Each                     Loans in Each
                                                                    Category to                      Category to
                                                     Amount        Total Loans         Amount      Total Loans
                                                     ------      ---------------       -------    ---------------
                                                                       (Dollars in thousands)
<S>                                                  <C>               <C>            <C>              <C>
Real estate - mortgage:
   Single-family residential.......................  $   236           71.0%          $    236         70.8%
   Multi-family residential........................       28            8.5                 12          3.6
   Construction....................................       36           11.1                279         18.3
   Nonresidential .................................       27            8.2                 21          6.2
   Consumer........................................        4            1.2                  3          1.1
                                                     -------                          --------
    Total allowance for loan losses................  $   331                          $    551
                                                     =======                          ========
</TABLE>

                                       11
<PAGE>
INVESTMENT ACTIVITIES

         GENERAL.  The  Bank is  permitted  under  federal  law to make  certain
investments,  including  investments  in  securities  issued by various  federal
agencies  and  state  and  municipal  governments,   deposits  at  the  FHLB  of
Cincinnati,  certificates of deposit in federally insured institutions,  certain
bankers'  acceptances and federal funds. It may also invest,  subject to certain
limitations,  in  commercial  paper rated in one of the two  highest  investment
rating categories of a nationally  recognized credit rating agency,  and certain
other types of corporate debt securities and mutual funds.  Federal  regulations
require the Bank to maintain an investment in FHLB stock and a minimum amount of
liquid assets which may be invested in cash and specified securities.  From time
to time, the OTS adjusts the percentage of liquid assets which savings banks are
required  to  maintain.   See  "  --   Regulation   of  the  Bank  --  Liquidity
Requirements."

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

         Pursuant to SFAS No. 115, the Bank has  classified  securities  with an
aggregate  cost of $24,000 and an  approximate  market value of $999,000 at June
30, 2000 as  available-for-sale.  Management  presently  does not intend to sell
such securities and, based on the Bank's current  liquidity level and the Bank's
access to borrowings through the FHLB of Cincinnati,  management  currently does
not  anticipate  that the Bank will be placed  in a  position  of having to sell
securities with material unrealized losses.

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

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

         Mortgage-backed  securities  typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest  rates  that  are  within  a range  and have  similar  maturities.  The
underlying   pool  of  mortgages  can  be  composed  of  either   fixed-rate  or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  generally  are
referred to as mortgage participation certificates or pass-through certificates.
As a


                                       12
<PAGE>
result,  the  interest  rate  risk  characteristics  of the  underlying  pool of
mortgages, i.e., fixed-rate or adjustable-rate,  as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security is equal to the life of the underlying mortgages.

         The actual maturity of a mortgage-backed  security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying  mortgages may shorten the life of the investment,  thereby adversely
affecting   its  yield  to  maturity  and  the  related   market  value  of  the
mortgage-backed  security.  The yield is based upon the interest  income and the
amortization  of the  premium  or  accretion  of  the  discount  related  to the
mortgage-backed security.  Premiums and discounts on mortgage-backed  securities
are amortized or accredited  over the estimated term of the  securities  using a
level  yield  method.   The  prepayment   assumptions   used  to  determine  the
amortization  period for premiums and  discounts  can  significantly  affect the
yield of the  mortgage-backed  security,  and  these  assumptions  are  reviewed
periodically  to reflect the actual  prepayment.  The actual  prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon  rate,  the  age of  the  mortgages,  the  geographical  location  of the
underlying  real estate  collateralizing  the  mortgages  and general  levels of
market  interest  rates.  The  difference  between  the  interest  rates  on the
underlying  mortgages and the prevailing mortgage interest rates is an important
determinant  in the rate of  prepayments.  During  periods of  falling  mortgage
interest rates, prepayments generally increase, and, conversely,  during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying  mortgage  significantly  exceeds the  prevailing  market
interest rates offered for mortgage loans,  refinancing  generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

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

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

                                                                                       At June 30,
                                                                              ----------------------------
                                                                                2000                1999
                                                                              --------            --------
                                                                                (Dollars in thousands)
                  <S>                                                         <C>             <C>
                  Securities available-for-sale:
                     U.S. government and agency securities..................  $    999        $ 1,431
                  Securities held to maturity:
                     Mortgage-backed securities.............................       255            318
                                                                              --------        -------
                        Total investment securities.........................  $  1,254        $ 1,749
                                                                              ========        =======
</TABLE>

                                       13
<PAGE>

         The following table sets forth information in the scheduled maturities,
amortized  cost,  market  values and  average  yields for the Bank's  investment
portfolio at June 30, 2000.
<TABLE>
<CAPTION>
                                  One Year or Less     One to Five Years       Five to Ten Years     More than Ten Years
                                 ------------------    ------------------    --------------------    -------------------
                                 Carrying   Average    Carrying   Average    Carrying     Average    Carrying    Average
                                   Value     Yield      Value      Yield      Value        Yield      Value       Yield
                                 --------   -------    --------   -------    --------    --------    --------   --------
                                                                             (Dollars in thousands)
<S>                              <C>           <C>    <C>           <C>     <C>            <C>      <C>            <C>
Securities available-for-sale:

   U.S. government and agency
      securities...............  $   999 (1)    63.7%  $    --       -- %    $     --       -- %     $    --       -- %
Securities held to maturity:
   Mortgage-backed securities..       --        --           3       7.9          237       7.2           15      13.0
                                 -------               -------               --------                -------
        Total..................  $   999        63.7   $     3       7.9     $    237       7.2      $    15      13.0
                                 =======               =======               ========                =======

<CAPTION>
                                       Total Investment Portfolio
                                     ----------------------------
                                     Carrying    Market   Average
                                       Value     Value     Yield
                                     --------   -------   -------

<S>                                <C>         <C>         <C>
Securities available-for-sale:

   U.S. government and agency
      securities...............     $    999    $    999    63.7 % (1)
Securities held to maturity:
   Mortgage-backed securities..          255         251     7.4
                                     -------    --------
        Total..................      $ 1,254    $  1,250    12.2
                                     =======    ========
----------
(1) Amortized cost of $24,000 and average yield is based on amortized cost.

</TABLE>

                                       14
<PAGE>

DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

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

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

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

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

                                                                               Year Ended June 30,
                                                            ---------------------------------------------------
                                                                       2000                        1999
                                                            -----------------------       ---------------------
                                                            Average         Average       Average      Average
                                                            Deposits          Rate        Deposits       Rate
                                                            --------        -------       --------      -------
                                                                               (Dollars in thousands)

<S>                                                         <C>              <C>          <C>             <C>
Non-interest bearing demand deposits......................  $      428        -- %        $     356        -- %
Savings deposits..........................................       3,185       3.26             3,260       3.23
Time deposits.............................................      25,225       5.56            24,862       5.80
                                                            ----------                     --------
     Total deposits.......................................  $   28,838                     $ 28,478
                                                            ==========                     ========

</TABLE>

         The following table indicates the amount of the Bank's  certificates of
deposit of  $100,000  or more by time  remaining  until  maturity as of June 30,
2000.

                                                 Certificates
  Maturity Period                                 of Deposits
  ---------------                               ---------------
                                                (In thousands)

Three months or less ...........................    $1,357
Over three through six months ..................       835
Over six through 12 months .....................     1,886
Over 12 months .................................     2,345
                                                    ------
      Total ....................................    $6,423
                                                    ======


                                       15
<PAGE>

         BORROWINGS. Savings deposits historically have been the source of funds
for  the  Bank's  lending,  investments  and  general  activities.  The  Bank is
authorized,  however,  to use advances from the FHLB of Cincinnati to supplement
its supply of lendable funds and to deposit withdrawal requirements. The FHLB of
Cincinnati  functions  as a central  reserve bank  providing  credit for savings
institutions and certain other member financial institutions. As a member of the
FHLB System,  the Bank is required to own stock in the FHLB of Cincinnati and is
authorized  to apply for  advances.  Advances are pursuant to several  different
programs,  each of which has its own interest rate and range of maturities.  The
Bank has a Blanket  Agreement for advances with the FHLB.  The Bank must perform
certain  calculations,  which  are  based on  capital  stock,  mortgage  assets,
collateral,  and total assets,  to determine the amount the Bank may borrow.  At
June 30, 2000 the Bank may borrow approximately $16.4 million. Advances from the
FHLB of Cincinnati are secured by the Bank's stock in the FHLB of Cincinnati and
first mortgage loans.

         As  of  June  30,  2000,   the  Bank  had  $12.8  million  in  advances
outstanding.  For  further  information,  see Note 9 of  Notes  to  Consolidated
Financial  Statements included under Item 7 hereof.  Further asset growth may be
funded through additional advances.

SUBSIDIARY ACTIVITIES

         As a federally  chartered savings bank, the Bank is permitted to invest
an  amount  equal  to 2% of its  assets  in  subsidiaries,  with  an  additional
investment of 1% of assets where such  investment  serves  primarily  community,
inner-city and community  development  purposes.  Under such limitations,  as of
June 30,  2000,  the Bank was  authorized  to  invest up to  approximately  $1.7
million in the stock of or loans to  subsidiaries,  including the  additional 1%
investment  for  community  inner-city  and  community   development   purposes.
Institutions  meeting their applicable minimum  regulatory capital  requirements
may invest up to 50% of their  regulatory  capital in conforming  first mortgage
loans to subsidiaries in which they own 10% or more of the capital stock.

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

MARKET AREA

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

COMPETITION

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

         The Bank  attracts  its  deposits  through its  full-service  office in
Lancaster  primarily from the local  community.  Consequently,  competition  for
deposits is principally  from other savings  institutions,  commercial banks and
brokers  in the local  community  as well as from the  corporate  credit  unions
sponsored by the large  private


                                       16
<PAGE>
employers in the Bank's market area. The Bank competes for deposits and loans by
offering  what it  believes to be a variety of deposit  accounts at  competitive
rates,  convenient business hours, a commitment to outstanding  customer service
and  a  well-trained   staff.   The  Bank  believes  it  has  developed   strong
relationships with local realtors and the community in general.

         Management  considers  its market  area for  gathering  deposits  to be
Garrard and Jessamine Counties in Kentucky.  The Bank estimates that it competes
with five banks for deposits and loans.  Based on data provided by the FHLB, the
Bank estimates that at June 30, 1999, the latest date for which  information was
available,  it had 7.4% of deposits  held by all banks and thrifts in its market
area, and 22.5% of deposits held by all banks and thrifts in Garrard County.

EMPLOYEES

         As of June 30,  2000,  the Bank had 12  full-time  and three  part-time
employees.

REGULATION OF THE COMPANY

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

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

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


                                       17
<PAGE>

companies,  unless the  Director of OTS by  regulation  prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(viii) above must also be approved by the Director of OTS prior to being engaged
in by a multiple savings and loan holding company.

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

         Savings institutions are also subject to the restrictions  contained in
Section 22(h) and Section 22(g) of the Federal Reserve Act on loans to executive
officers, directors and principal stockholders.  Under Section 22(h), loans to a
director,  executive  officer or to a greater than 10%  stockholder of a savings
institution,  and certain affiliated entities of the foregoing,  may not exceed,
together with all other outstanding loans to such person and affiliated entities
the  institution's  loan to one borrower  limit  (generally  equal to 15% of the
institution's  unimpaired  capital  and surplus  and an  additional  10% of such
capital  and  surplus  for loans  fully  secured by certain  readily  marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and greater
than 10% stockholders of a savings institution, and their respective affiliates,
unless such loan is approved in advance by a majority of the board of  directors
of the  institution  with any  "interested"  director not  participating  in the
voting. The Federal Reserve Board has prescribed the loan amount (which includes
all other  outstanding  loans to such  person),  as to which such prior board of
director approval is required,  as being the greater of $25,000 or 5% of capital
and surplus (up to $500,000).  Further,  the Federal  Reserve Board  pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders  be made on terms  substantially  the same as offered in comparable
transactions  to  other  persons.  Section  22(h)  also  generally  prohibits  a
depository  institution  from  paying  the  overdrafts  of any of its  executive
officers or directors.

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

         RESTRICTIONS ON ACQUISITIONS.  The HOLA generally prohibits savings and
loan holding  companies,  without  prior  approval of the Director of OTS,  from
acquiring  (i)  control of any other  savings  institution  or savings  and loan
holding company or substantially all the assets thereof, or (ii) more than 5% of
the voting shares of a savings  institution or holding  company thereof which is
not a subsidiary.  Under certain  circumstances,  a registered


                                       18
<PAGE>

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

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

         OTS regulations  permit federal  savings  institutions to branch in any
state or states of the United States and its territories.  Except in supervisory
cases or when interstate  branching is otherwise permitted by state law or other
statutory  provision,  a  federal  savings  institution  may  not  establish  an
out-of-state  branch  unless  (i)  the  institution  qualifies  as a QTL or as a
"domestic  building and loan association"  under  ss.7701(a)(19) of the Code and
the total assets  attributable  to all branches of the  institution in the state
would  qualify  such  branches  taken as a whole for  treatment as a QTL or as a
domestic  building and loan association and (ii) such branch would not result in
(a)  formation of a  prohibited  multi-state  multiple  savings and loan holding
company or (b) a violation  of certain  statutory  restrictions  on branching by
savings  institution  subsidiaries  of bank holding  companies.  Federal savings
institutions  generally may not establish  new branches  unless the  institution
meets or exceeds  minimum  regulatory  capital  requirements.  The OTS will also
consider the institution's record of compliance with the Community  Reinvestment
Act of 1977 in connection with any branch application.

REGULATION OF THE BANK

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

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

         The  system  of  regulation  and  supervision  applicable  to the  Bank
establishes  a  comprehensive  framework  for the  operations of the Bank and is
intended  primarily for the protection of the depositors of the Bank. Changes in


                                       19
<PAGE>
the  regulatory  framework  could  have a  material  effect  on the Bank and its
operations that in turn, could have a material adverse effect on the Company.

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

         The core  capital,  or "leverage  ratio,"  requirement  mandates that a
savings  institution  maintain core capital equal to at least 4% of its adjusted
total assets.  "Core capital"  includes common  stockholders'  equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority  interests in the equity accounts of fully  consolidated  subsidiaries,
certain   nonwithdrawable   accounts  and  pledged   deposits  and   "qualifying
supervisory  goodwill."  Core capital is generally  reduced by the amount of the
savings  institution's  intangible  assets for which no market  exists.  Limited
exceptions to the reduction of intangible  assets include  permissible  mortgage
servicing rights,  purchased credit card relationships,  qualifying  supervisory
goodwill and certain intangible assets arising from prior regulatory  accounting
practices.  Tangible  capital is given the same  definition  as core capital but
does not include an exception for qualifying supervisory goodwill and is reduced
by the amount of all the  savings  association's  intangible  assets with only a
limited  exception  for  purchased  mortgage  servicing  rights.  Both  core and
tangible  capital  are  further  reduced  by an  amount  equal  to  the  savings
institution's debt and equity investments in subsidiaries  engaged in activities
not permissible to national banks (other than subsidiaries engaged in activities
undertaken  as  agent  for  customers  or in  mortgage  banking  activities  and
subsidiary  depository  institutions  or their holding  companies).  At June 30,
2000, the Bank had no such investments.

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

         In determining  compliance with the risk-based capital  requirement,  a
savings  institution  is  allowed  to use both core  capital  and  supplementary
capital  in its total  capital  provided  the  amount of  supplementary  capital
included does not exceed the savings  institution's core capital.  Supplementary
capital is defined to include certain  preferred  stock issues,  nonwithdrawable
accounts  and  pledged  deposits  that do not qualify as core  capital,  certain
approved  subordinated debt, certain other capital  instruments and a portion of
the savings  institution's  general loss  allowances and up to 45% of unrealized
gains in equity securities.  Total core and supplementary capital are reduced by
the amount of capital instruments held by other depository institutions pursuant
to reciprocal arrangements and by that portion of the savings institution's land
loans and  non-residential  construction  loans in  excess of 80%  loan-to-value
ratio and all  equity  investments,  other  than  those  deducted  from core and
tangible  capital.  At  June  30,  2000,  the  Bank  had no high  ratio  land or
nonresidential  construction  loans and had no equity  investments for which OTS
regulations require a deduction from total capital.

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


                                       20
<PAGE>

         The  table  below  provides  information  with  respect  to the  Bank's
compliance with its regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>

                                                                                        Percent of
                                                                   Amount               Assets  (1)
                                                                   ------               -----------
                                                                   (Dollars in thousands)

            <S>                                                    <C>                     <C>
            Tangible capital.....................................  $   11,624              21.0%
            Tangible capital requirement.........................         822               1.5
                                                                   ----------              ----
                Excess (deficit).................................  $   10,802              19.5%
                                                                   ==========              ====

            Core capital (2).....................................  $   11,624              21.0%
            Core capital requirement.............................       2,192               4.0
                                                                   ----------              ----
                Excess (deficit).................................  $    9,432              17.0%
                                                                   ==========              ====

            Risk-based capital...................................  $   11,941              32.0%
            Risk-based capital requirement.......................       2,986               8.0
                                                                   ----------              ----
                Excess (deficit)................................   $    8,955              24.0%
                                                                   ==========              ====
<FN>
             ---------------
             (1) Based on adjusted  total  assets for  purposes of the  tangible
             capital and core capital  requirements and risk-weighted assets for
             purpose of the  risk-based  capital  requirement.  (2) Reflects the
             capital requirement which the Bank must satisfy to avoid regulatory
             restrictions  that may be  imposed  pursuant  to prompt  corrective
             action regulations. The core requirement applicable to the Bank may
             increase to 5.0% if the OTS amends its capital  regulations,  as it
             has  proposed,  to conform  to the more  stringent  leverage  ratio
             adopted  by the  Office  of the  Comptroller  of the  Currency  for
             national banks.
</FN>
</TABLE>

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

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

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


                                       21
<PAGE>

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

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

         Under regulations jointly adopted by the federal banking regulators,  a
savings  association's  capital  adequacy  for  purposes  of the  FDICIA  prompt
corrective  action rules is determined on the basis of the  institution's  total
risk-based  capital  ratio  (the  ratio of its total  capital  to  risk-weighted
assets),  Tier 1  risk-based  capital  ratio (the  ratio of its core  capital to
risk-weighted  assets)  and  leverage  ratio  (the  ratio  of its Tier 1 or core
capital to adjusted total assets).  The following  table shows the capital ratio
requirements for each prompt corrective action category:
<TABLE>
<CAPTION>


                                                     Adequately                                  Significantly
                           Well Capitalized          Capitalized         Undercapitalized      Undercapitalized
                           ----------------          -----------         ----------------      ----------------
<S>                        <C>                       <C>                 <C>                     <C>
Total risk-based
    capital ratio          10.0% or more             8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio           6.0% or more             4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio              5.0% or more             4.0% or more *      Less than 4.0% *        Less than 3.0%
<FN>

-----------
*  3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>

A  "critically  undercapitalized"  savings  association  is defined as a savings
association  that has a ratio of "tangible  equity" to total assets of less than
2.0%.  Tangible  equity is defined as core  capital  plus  cumulative  perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory  goodwill and certain purchased  mortgage  servicing rights. The OTS
may reclassify a well capitalized savings association as adequately


                                       22
<PAGE>

capitalized  and may  require  an  adequately  capitalized  or  undercapitalized
association to comply with the supervisory actions applicable to associations in
the  next  lower  capital  category  (but  may not  reclassify  a  significantly
undercapitalized   institution  as  critically   undercapitalized)  if  the  OTS
determines,  after  notice and an  opportunity  for a hearing,  that the savings
association  is in an unsafe or unsound  condition or that the  association  has
received and not corrected a less-than-satisfactory rating for any CAMELS rating
category. For information regarding the position of the Bank with respect to the
FDICIA  prompt  corrective  action rules,  see Note 11 of Notes to  Consolidated
Financial Statements included under Item 7 hereof.

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

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

         FEDERAL HOME LOAN BANK SYSTEM.  The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB").  The FHLBs  provide a central  credit  facility  primarily  for member
institutions.  As a member of the FHLB of  Cincinnati,  the Bank is  required to
acquire and hold shares of capital  stock in the FHLB of Cincinnati in an amount
at least equal to 1% of the  aggregate  unpaid  principal  of its home  mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year,  or  1/20 of its  advances  (borrowings)  from  the  FHLB  of  Cincinnati,
whichever is greater.  The Bank was in  compliance  with this  requirement  with
investment in FHLB of Cincinnati stock at June 30, 2000 of $818,000. The FHLB of
Cincinnati  serves as a reserve  or  central  bank for its  member  institutions
within its assigned district.  It is funded primarily from proceeds derived from
the sale of consolidated  obligations of the FHLB System.  It offers advances to
members in accordance  with policies and procedures  established by the FHFB and
the Board of Directors of the FHLB of Cincinnati. Long-term advances may only be
made for the purpose of providing  funds for  residential  housing finance or to
small businesses,  small farms or small  agri-businesses.  At June 30, 2000, the
Bank had $3.1  million in  long-term  advances  and $9.7  million in  short-term
advances outstanding from the FHLB of Cincinnati.

         FEDERAL RESERVE SYSTEM.  Pursuant to regulations of the Federal Reserve
Board, a thrift  institution must maintain average daily reserves equal to 3% on
transactions accounts of between $4.9 million and $44.3 million, plus 10% on the
amount over $44.3  million.  This  percentage  is subject to  adjustment  by the
Federal Reserve Board.  Because required reserves must be maintained in the form
of vault cash or in a non-interest  bearing  account at a


                                       23
<PAGE>

Federal  Reserve Bank,  the effect of the reserve  requirement  is to reduce the
amount of the  institution's  interest-earning  assets. As of June 30, 2000, the
Bank met its reserve requirements.

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

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

         The FDIC has set the SAIF deposit  insurance  assessment  rates to zero
for well capitalized institutions with the highest supervisory ratings and 0.27%
of insured deposits for institutions in the highest risk-based premium category.
Until  December  31,  1999,  SAIF-insured  institutions  were  required  to  pay
assessments  to the FDIC at the rate of 6.5 basis  points to help fund  interest
payments on certain  bonds  issued by the  Financing  Corporation  ("FICO"),  an
agency of the federal  government  established to finance takeovers of insolvent
thrifts. Until that date, BIF members were assessed for these obligations at the
rate of 1.3 basis points. Effective December 31, 1999, both BIF and SAIF members
are assessed at the same rate for FICO payments.

         LIQUIDITY  REQUIREMENTS.  The Bank  generally  is  required to maintain
average daily balances of liquid assets (generally, cash, certain time deposits,
bankers'  acceptances,   highly  rated  corporate  debt  and  commercial  paper,
securities of certain  mutual funds,  and  specified  United States  government,
state or federal agency  obligations) in each calendar  quarter that is equal or
greater than 4% of its net  withdrawable  accounts  plus  short-term  borrowings
either at the end of the  preceding  calendar  quarter or on the  average  daily
balance  during the  preceding  quarter.  The Bank also is  required to maintain
sufficient liquidity to ensure its safe and sound operation.  Monetary penalties
may be imposed for failure to meet  liquidity  requirements.  The average  daily
balance of liquid  assets ratio of the Bank for the quarter  ended June 30, 2000
was 5.3%.

         QUALIFIED THRIFT LENDER TEST. The HOLA and OTS regulations require that
all savings  institutions  satisfy one of two Qualified  Thrift  Lender  ("QTL")
tests or suffer a number of sanctions,  including restrictions on activities. To
qualify as a QTL,  a savings  institution  must  either  qualify as a  "domestic
building and loan  association"  under the Internal  Revenue Code or maintain at
least 65% of its "portfolio" assets in Qualified Thrift  Investments.  Portfolio
assets are defined as total assets less intangibles,  the value of property used
by a savings institution in its business and liquidity  investments in an amount
not exceeding  20% of assets.  All of the following may be included as Qualified
Thrift  Investments:  investments  in  mortgage-backed  securities,  residential
mortgages,  home  equity  loans,  loans  made for  educational  purposes,  small
business  loans,  credit card loans and shares of stock issued by a Federal Home
Loan Bank. Subject to a 20% of portfolio assets limit,  savings institutions are
also able to treat the following as Qualified Thrift Investments: (i) 50% of the
dollar  amount of  residential  mortgage  loans  subject to sale  under  certain
conditions,  (ii)  investments,  both debt and equity,  in the capital  stock or
obligations  of and any  other  security  issued  by a  service  corporation  or
operating subsidiary,  provided that such subsidiary derives at least 80%


                                       24
<PAGE>

of its annual gross  revenues from  activities  directly  related to purchasing,
refinancing,  constructing,  improving or repairing domestic residential housing
or  manufactured  housing,  (iii) 200% of their  investments in loans to finance
"starter  homes"  and loans for  construction,  development  or  improvement  of
housing and community  service  facilities or for financing small  businesses in
"credit-needy" areas, (iv) loans for the purchase, construction,  development or
improvement of community service facilities, and (v) loans for personal, family,
household or  educational  purposes,  provided that the dollar amount treated as
Qualified  Thrift  Investments  may not exceed 10% of the savings  institution's
portfolio assets.

         A savings  institution  must  maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months.  An initial failure to qualify as
a QTL results in a number of  sanctions,  including  the  imposition  of certain
operating  restrictions and a restriction on obtaining  additional advances from
its Federal Home Loan Bank. If a savings  institution  does not requalify  under
the QTL test within the three-year  period after it fails the QTL test, it would
be required to terminate any activity not  permissible for a national bank and a
savings  association.  In addition,  the holding company of such an institution,
such as the Company,  would  similarly be required to register as a bank holding
company with the Federal  Reserve Board. At June 30, 2000, the Bank qualified as
a QTL.

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

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

         OTS regulations require that savings  institutions submit notice to the
OTS  prior  to  making  a  capital   distribution  if  (a)  they  would  not  be
well-capitalized  after the distribution,  (b) the distribution  would result in
the  retirement of any of the  institution's  common or preferred  stock or debt
counted as its regulatory  capital,  or (c) the institution is a subsidiary of a
holding company. A savings institution must make application to the OTS to pay a
capital distribution if (x) the institution would not be adequately  capitalized
following the distribution,  (y) the institution's  total  distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution  would  otherwise  violate  applicable  law  or  regulation  or  an
agreement  with  or  condition  imposed  by the  OTS.  If  neither  the  savings
institution  nor the proposed  capital  distribution  meet any of the  foregoing
criteria,  then no notice or  application  is  required to be filed with the OTS
before making a capital  distribution.  The OTS may disapprove or deny a capital
distribution  if in  the  view  of  the  OTS,  the  capital  distribution  would
constitute an unsafe or unsound practice.

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

         FINANCIAL  MODERNIZATION  LEGISLATION.  On November 12, 1999, President
Clinton  signed  legislation  which  could  have a  far-reaching  impact  on the
financial services industry. The Gramm-Leach-Bliley  ("G-L-B") Act,


                                       25
<PAGE>
which became effective on this date,  authorizes  affiliations  between banking,
securities  and  insurance  firms and  authorizes  bank  holding  companies  and
national banks to engage in a variety of new financial activities. Among the new
activities  that will be permitted to bank holding  companies are securities and
insurance  brokerage,   securities  underwriting,   insurance  underwriting  and
merchant  banking.  The Board of  Governors of the Federal  Reserve  System (the
"Federal  Reserve Board"),  in consultation  with the Secretary of the Treasury,
may approve additional financial activities.  National bank subsidiaries will be
permitted to engage in similar financial  activities but only on an agency basis
unless  they are one of the 50  largest  banks  in the  country.  National  bank
subsidiaries  will  be  prohibited  from  insurance  underwriting,  real  estate
development  and,  for at least five  years,  merchant  banking.  The G-L-B Act,
however,  prohibits  future  acquisitions  of existing  unitary savings and loan
holding  companies,  like the Company,  by firms which are engaged in commercial
activities and limits the permissible  activities of unitary  holding  companies
formed after May 4, 1999.

         The G-L-B Act imposes new requirements on financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six months of enactment.  The privacy provisions will become
effective six months thereafter.

         The G-L-B Act contains  significant  revisions to the FHLB System.  The
G-L-B Act imposes new capital  requirements  on the FHLBs and authorizes them to
issue  two  classes  of stock  with  differing  dividend  rates  and  redemption
requirements.  The G-L-B Act  deletes  the  current  requirement  that the FHLBs
annually   contribute  $300  million  to  pay  interest  on  certain  government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible  uses of FHLB advances by community  financial  institutions  (under
$500  million in assets) to include  funding  loans to small  businesses,  small
farms and small  agri-businesses.  The  G-L-B Act makes  membership  in the FHLB
voluntary for federal savings associations.

         The G-L-B  Act  contains  a variety  of other  provisions  including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

         The  Company  is unable to  predict  the impact of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
which may acquire control of the Company,  it may facilitate  affiliations  with
companies in the financial services industry.

TAXATION

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

         FEDERAL  INCOME  TAXATION.  Savings  institutions  such as the Bank are
subject to the provisions of the Internal  Revenue Code of 1986, as amended (the
"Internal  Revenue  Code") in the same  general  manner  as other  corporations.
However, institutions such as the Bank which meet certain definitional tests and
other  conditions  prescribed  by the  Internal  Revenue  Code may benefit  from
certain favorable  provisions regarding their deductions


                                       26
<PAGE>

from taxable income for annual additions to their bad debt reserve. For purposes
of the bad debt reserve  deduction,  loans are separated into  "qualifying  real
property  loans," which generally are loans secured by interests in certain real
property,  and "nonqualifying  loans",  which are all other loans. The amount of
the bad debt reserve  deduction  with respect to qualifying  real property loans
and  nonqualifying   loans  may  be  based  upon  actual  loss  experience  (the
"experience  method") or specific  charge-off  provisions.  Under the experience
method,  the bad debt  deduction  for an addition to the reserve for  qualifying
real property  loans and  nonqualifying  loans is an amount  determined  under a
formula  based  generally  on the bad  debts  actually  sustained  by a  savings
institution  over a period of years.  The Bank  generally has elected to use the
method  which has  resulted in the greatest  deductions  for federal  income tax
purposes in any given year.

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

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

         STATE  INCOME  TAXATION.  The State of  Delaware  imposes  no income or
franchise  taxes on savings  institutions  not doing  business in Delaware.  The
Company, however, is assessed a franchise tax by the State of Delaware. The Bank
is subject to an annual Kentucky ad valorem tax based on a calendar year and due
before the following July 1. This tax is 0.1% of the Bank's equity and deposits,
with  certain  deductions  allowed for amounts  borrowed by  depositors  and for
securities guaranteed by the U.S. Government or certain of its agencies.

EXECUTIVE OFFICERS OF THE REGISTRANT WHO ARE NOT DIRECTORS

         The  following  sets forth  information  with respect to the  executive
officer of the Company who does not serve on the Board of Directors.
<TABLE>
<CAPTION>

NAME                    AGE                  TITLE
----                    ---                  ------

<S>                      <C>      <C>
Julia G. Taylor          31       Chief Financial Officer of the Company and
                                  the Bank
</TABLE>

     JULIA G.  TAYLOR.  Ms.  Taylor  joined the Company and the Bank in December
1998 as Comptroller and was named Chief Financial Officer of the Company and the
Bank in January 2000.  Ms. Taylor is a C.P.A.  and worked with Coopers & Lybrand
from 1991 to 1997, she was then a Financial Analyst with Lexmark  International,
Inc. from December 1997 to December 1998.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

         The Company's  principal executive offices are located at 208 Lexington
Street,  Lancaster,  Kentucky in facilities owned by the Bank. At June 30, 2000,
the Company maintained a main office in Lancaster,  Kentucky (located in Garrard
County) and a loan  production  office in  Nicholasville,  Kentucky  (located in
Jessamine  County).  The Company owns its  premises in Lancaster  and leases the
premises in Nicholasville. The expiration date on the lease was May 31, 1999. To
date,  the Company  has not renewed the lease and is  currently a month to month
tenant,  thereby giving them the opportunity to explore other office  facilities
in the area.


                                       27
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.
--------------------------
         From time to time,  the  Company  and its  subsidiary  are  parties  to
various legal proceedings incident to its business. At June 30, 2000, there were
no legal  proceedings that management  anticipates would have a material adverse
effect on the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
----------------------------------------------------

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

                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

         The  information  contained  under the  section  captioned  "Market and
Dividend  Information" in the Company's 2000 Annual Report to Stockholders  (the
"Annual Report") filed as Exhibit 13 hereto is incorporated herein by reference.


ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
--------------------------------------------------------------------------------

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


ITEM 7.   FINANCIAL STATEMENTS
------------------------------

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


ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
         None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT
--------------------------------------------------------------------------------

         For information  concerning the Board of Directors of the Company,  the
information  contained  under the section  captioned  "Proposal I -- Election of
Directors" in the Company's  definitive  proxy  statement for the Company's 2000
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.

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

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

                                       28
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

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

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
----------------------------------------------------------

     (a) Security Ownership of Certain Beneficial Owners

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

     (b) Security Ownership of Management

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

     (c) Changes in Control

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

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

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

ITEM 13.  EXHIBITS, LISTS AND REPORTS ON FORM 8-K
-------------------------------------------------

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


     1.   Report of Independent Accountants.

     2.   Consolidated Statements of Financial Condition as of June 30, 2000 and
          1999.

     3.   Consolidated  Statements  of Income and  Comprehensive  Income for the
          Years Ended June 30, 2000 and 1999.

     4.   Consolidated  Statements  of Changes in  Stockholders'  Equity for the
          Years Ended June 30, 2000 and 1999.

     5.   Consolidated  Statements  of Cash  Flows for the Years  Ended June 30,
          2000 and 1999.

     6.   Notes to Consolidated Financial Statements

                                       29
<PAGE>
     (a)(2) Exhibits

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

   No.            Description
   ---            ------------

    3.1   Certificate of Incorporation of First Lancaster Bancshares, Inc.     *

    3.2   Bylaws of First Lancaster Bancshares, Inc.                           *

    4     Form of Common Stock Certificate of First Lancaster Bancshares, Inc. *

   10.1   First Lancaster Bancshares,  Inc. 1996 Stock Option and Incentive
          Plan                                                                 *

   10.2   First Lancaster Federal Savings Bank Management Recognition Plan     *

   10.3(a) Employment  Agreement  by and  between  First  Lancaster  Federal
           Savings Bank and Virginia R. S. Stump                              **

   10.3(b) Employment Agreement  by  and  between  First  Lancaster
           Bancshares, Inc. and Virginia  R. S. Stump                         **

   10.4    First  Lancaster  Federal  Savings  Bank Directors' Retirement
           Plan                                                                *

   10.5    First Lancaster Federal Savings Bank Incentive  Compensation Plan   *

   10.6    Supplemental  Executive Retirement Agreement between First
           Lancaster Federal Savings Bank and Virginia R. S. Stump             *

   10.7    Supplemental  Executive Retirement Agreement and Amendments thereto
           between First Lancaster Federal Savings Bank and Tony A. Merida

   10.8(a) Employment  Agreement  by and  between  First  Lancaster  Federal
           Savings Bank and Tonay A. Merida

   10.8(b) Employment Agreement  by  and  between  First  Lancaster
           Bancshares, Inc. and Tony A. Merida

   13      Annual Report to  Stockholders

   21      Subsidiaries of the Registrant

   23      Consent of Independent Auditors

   27      Financial  Data Schedule
________
*    Incorporated herein by reference from the Company's  Registration Statement
     on Form  SB-2  (Registration  No.  333-2468).
**   Incorporated  herein by reference from the Company's  Annual Report on Form
     10-KSB for the fiscal year ended June 30, 1997.


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


                                       30
<PAGE>
                                   SIGNATURES

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

                                        FIRST LANCASTER BANCSHARES, INC.


September 27, 2000                     By: /s/ Virginia R. S. Stump
                                           ----------------------------------
                                           Virginia R. S. Stump
                                           Chairman of the Board, President and
                                           Chief Executive Officer
                                           (Duly Authorized Representative)

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

/s/ Virginia R. S. Stump                              September 27, 2000
----------------------------------------------
Virginia R. S. Stump
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)


/s/ Julia Taylor                                      September 27, 2000
---------------------------------------------------
Julia Taylor
Chief Financial Officer
(Principal Accounting Officer)


/s/ Tony A. Merida                                    September 27, 2000
----------------------------------------------
Tony A. Merida
Vice Chairman of the Board and Executive
Vice President


/s/ David W. Gay                                      September 27, 2000
----------------------------------------------
David W. Gay
Director


/s/ Ronald L. Sutton                                  September 27, 2000
----------------------------------------------
Ronald L. Sutton
Director


/s/ Jack C. Zanone                                    September 27, 2000
----------------------------------------------
Jack C. Zanone
Director


/s/ Phyllis Swaffar                                   September 27, 2000
------------------------------------------------
Phyllis Swaffar
Director


/s/ Jerry Purcell                                     September 27, 2000
--------------------------------------------------
Jerry Purcell
Director