SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-27170
CLASSIC BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1259391
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
344 Seventeenth Street, Ashland, Kentucky 41101
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 325-4789
Check here whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of November 9, 1998, there were 1,322,500 shares of the Registrant's
common stock issued and 1,299,590 shares outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
CLASSIC BANCSHARES, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and March 31, 1998 3
Consolidated Statements of Income for the three and six months
ended September 30, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity for the
six months ended September 30, 1998 (Unaudited) and
Year Ended March 31, 1998 5
Consolidated Statements of Cash Flows for the six months ended
September 30, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
PART II. OTHER INFORMATION 17
Signatures 18
Index to Exhibits 19
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1998 1998
------------- -------------
(Unaudited)
ASSETS
Cash and due from bank $ 3,469,310 $ 2,500,841
Federal funds sold and securities purchased under resell agreement 2,943,135 1,131,414
Certificates of deposits in other financial institutions 99,000 293,000
Investment securities available for sale 24,503,117 18,176,807
Mortgage-backed securities available for sale 5,045,140 7,830,714
Loans receivable, net 96,042,290 90,100,000
Real estate acquired in the settlement of loans 273,290 229,390
Accrued interest receivable 940,804 851,767
Federal Home Loan Bank and Federal Reserve Bank stock 1,347,950 1,297,150
Premises and equipment, net 4,609,632 4,468,002
Cost in excess of fair value of net assets acquired (goodwill),
net of accumulated amortization 2,840,940 2,902,869
Other assets 1,335,877 1,338,572
------------- -------------
TOTAL ASSETS $ 143,450,485 $ 131,120,526
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 117,186,415 $ 104,926,667
Securities sold under agreement to repurchase 2,109,994 3,521,799
Advances from Federal Home Loan Bank 397,325 --
Other short-term borrowings 856,235 273,697
Accrued expenses and other liabilities 412,509 402,090
Accrued interest payable 452,931 390,409
Accrued income taxes 125,220 --
Long-term debt 500,000 550,000
Deferred income taxes 692,907 648,802
------------- -------------
Total Liabilities $ 122,733,536 $ 110,713,464
------------- -------------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and 1,299,590 outstanding $ 13,225 $ 13,225
Additional paid-in capital 12,753,789 12,753,789
Retained earnings - substantially restricted 9,078,016 8,853,606
Net unrealized gain (loss) on securities available for sale 350,802 297,125
Unearned ESOP shares (834,970) (834,970)
Unearned RRP shares (340,198) (371,879)
Minimum pension liability adjustment (9,835) (9,954)
Treasury stock, at cost (293,880) (293,880)
------------- -------------
Total Stockholders' Equity $ 20,716,949 $ 20,407,062
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 143,450,485 $ 131,120,526
============= =============
See accompanying notes to consolidated financial statements.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
Loans $ 1,941,667 $ 1,854,975 $ 3,859,136 $ 3,649,048
Investment securities 325,668 373,778 662,889 767,074
Mortgage-backed securities 111,274 142,093 253,617 293,514
Other interest earning assets 55,145 13,308 73,543 44,326
----------- ----------- ----------- -----------
Total Interest Income 2,433,754 2,384,154 4,849,185 4,753,962
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 1,208,474 1,051,107 2,325,741 2,081,094
Interest on FHLB Advances 13,202 102,375 57,111 184,833
Interest on other borrowed funds 54,440 63,470 120,506 131,370
----------- ----------- ----------- -----------
Total Interest Expense 1,276,116 1,216,952 2,503,358 2,397,297
----------- ----------- ----------- -----------
Net Interest Income 1,157,638 1,167,202 2,345,827 2,356,665
Provision for loss on loans 15,000 55,000 40,000 102,500
----------- ----------- ----------- -----------
Net interest income after
provision for loss on
loans 1,142,638 1,112,202 2,305,827 2,254,165
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges and other fees 105,187 84,668 222,279 158,225
Gain on sale of securities
available for sale 3,340 17,556 3,904 18,054
Pension plan settlement gain -- 329,915 -- 329,915
Loss on disposal of assets -- (37,282) -- (37,282)
Other income 68,688 23,716 96,375 57,847
----------- ----------- ----------- -----------
Total Non-Interest Income 177,215 418,573 322,558 526,759
----------- ----------- ----------- -----------
NON-INTEREST EXPENSES
Employee compensation and benefits 471,905 449,529 968,545 899,038
Occupancy and equipment expense 149,460 159,371 287,701 275,668
Federal deposit insurance premiums 9,042 7,269 17,725 14,623
Loss (gain) on foreclosed real estate 875 52,682 914 53,240
Goodwill amortization 31,133 31,133 61,929 61,929
Other general and administrative
expenses 366,418 443,600 738,700 759,696
----------- ----------- ----------- -----------
Total Non-Interest Expense 1,028,833 1,143,584 2,075,514 2,064,194
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 291,020 387,191 552,871 716,730
Income tax expense (benefit) 81,236 113,502 146,047 205,999
----------- ----------- ----------- -----------
NET INCOME $ 209,784 $ 273,689 $ 406,824 $ 510,731
=========== =========== =========== ===========
Basic earnings per share $ 0.18 $ 0.22 $ 0.35 $ 0.42
=========== =========== =========== ===========
Diluted earnings per share $ 0.17 $ 0.22 $ 0.33 $ 0.42
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------------
NET UNREALIZED MINIMUM
ADDITIONAL GAIN (LOSS) ON PENSION
COMMON PAID-IN RETAINED AVAILABLE FOR LIABILITY
STOCK CAPITAL EARNINGS SALE SECURITIES ADJUSTMENT
------------ ------------ ------------ ------------- -------------
Balance at April 1, 1997 $ 13,225 $ 12,689,158 $ 8,172,085 $ (58,614) $ (11,376)
Net income for the year
ended March 31, 1998 -- -- 1,020,486 -- --
Dividend paid -- -- (338,965) -- --
ESOP shares earned -- 49,796 -- -- --
RRP shares earned -- -- -- -- --
RRP shares forfeited -- 337 -- -- --
Tax benefit from RRP -- 14,498 -- -- --
Purchased 20,000 treasury shares -- -- -- -- --
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 355,739 --
Amortization of minimum
pension liability adjustment -- -- -- -- 1,422
------------ ------------ ------------ ------------ ------------
Balances at March 31, 1998 13,225 12,753,789 8,853,606 297,125 (9,954)
Net income for the six months
ended September 30, 1998 -- -- 406,824 -- --
Dividend paid -- -- (182,414) -- --
RRP shares earned -- -- -- -- --
Other comprehensive income, net of tax:
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 53,677 --
Amortization of minimum
pension liability adjustment -- -- -- -- 119
------------ ------------ ------------ ------------ ------------
Balances at September 30, 1998 $ 13,225 $ 12,753,789 $ 9,078,016 $ 350,802 $ (9,835)
============ ============ ============ ============ ============
UNEARNED UNEARNED TREASURY
ESOP SHARES RRP SHARES STOCK TOTAL
------------ ------------ ------------ ------------
Balance at April 1, 1997 $ (918,660) $ (486,055) $ (29,963) $ 19,369,800
Net income for the year
ended March 31, 1998 -- -- -- 1,020,486
Dividend paid -- -- -- (338,965)
ESOP shares earned 83,690 -- -- 133,486
RRP shares earned -- 110,283 -- 110,283
RRP shares forfeited -- 3,893 (4,230) --
Tax benefit from RRP -- -- -- 14,498
Purchased 20,000 treasury shares -- -- (259,687) (259,687)
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 355,739
Amortization of minimum
pension liability adjustment -- -- -- 1,422
------------ ------------ ------------ ------------
Balances at March 31, 1998 (834,970) (371,879) (293,880) 20,407,062
Net income for the six months
ended September 30, 1998 -- -- -- 406,824
Dividend paid -- -- -- (182,414)
RRP shares earned -- 31,681 -- 31,681
Other comprehensive income, net of tax:
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 53,677
Amortization of minimum
pension liability adjustment -- -- -- 119
------------ ------------ ------------ ------------
Balances at September 30, 1998 $ (834,970) $ (340,198) $ (293,880) $ 20,716,949
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net Income $ 406,824 $ 510,731
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 188,784 147,853
Provision for loss on loans 40,000 102,500
Provision for loss on foreclosed real estate -- 50,000
Gain on sale of securities available for sale (3,904) (18,054)
Loss on disposal of assets -- 37,282
Gain on pension plan settlement -- (329,915)
Federal Home Loan Bank stock dividends (36,700) (33,600)
Deferred income tax expense (benefit) 14,408 114,866
Amortization and accretion of investment
securities premiums and discounts, net 50,737 2,523
Amortization of goodwill 61,929 61,929
Decrease (increase) in:
Accrued interest receivable (89,037) (165,507)
Other assets 2,695 148,242
Increase (decrease) in:
Accrued interest payable 62,522 87,985
Accrued income taxes 125,220 (864)
Accounts payable and accrued expenses 10,419 166,579
------------ ------------
Net cash provided by operating activities 833,897 882,550
------------ ------------
INVESTING ACTIVITIES
Securities:
Proceeds from sale, maturities or calls 10,298,703 5,222,960
Purchased (16,481,096) (2,803,155)
Mortgage-backed securities:
Proceeds from sale 5,035,426 1,004,375
Purchased (3,839,846) (2,187,378)
Principal payments 1,467,148 464,150
Purchased Federal Home Loan Bank stock (14,100) --
Certificates of deposits with other banks:
Proceeds from maturities 194,000 --
Loan originations and principal payments, net (5,970,083) (6,498,761)
Purchases of software (6,677) (10,414)
Purchases of premises and equipment (332,574) (353,295)
------------ ------------
Net cash used by investing activities (9,649,099) (5,161,518)
------------ ------------
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 12,259,748 (1,190,595)
Net proceeds from FHLB borrowings 397,325 2,725,000
Repayment of long-term borrowings (50,000) (50,000)
Decrease in securities sold under agreement to repurchase (1,411,805) (1,417,047)
Net increase (decrease) in short-term borrowings 582,538 (206,363)
Purchase of treasury stock -- (259,687)
Dividends paid (182,414) (169,833)
------------ ------------
Net cash (used) provided by financing activities 11,595,392 (568,525)
------------ ------------
(Decrease) increase in cash and cash equivalents 2,780,190 (4,847,493)
Cash and cash equivalent at beginning of period 3,632,255 8,834,309
------------ ------------
Cash and cash equivalents at end of period $ 6,412,445 $ 3,986,816
============ ============
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Principles of Consolidation
The financial statements for 1998 are presented for Classic Bancshares,
Inc. (the "Company") and its wholly-owned subsidiaries, Classic Bank, and The
First National Bank of Paintsville ("First National"). The consolidated balance
sheets for September 30, 1998 and March 31, 1998 is for the Company, Classic
Bank, and First National. The consolidated statements of income include the
operations of the Company, Classic Bank and First National for the three and six
months ended September 30, 1998 and 1997.
(2) Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation S-B.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the Consolidated Financial Statements contain
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial condition of Classic Bancshares, Inc. as of
September 30, 1998, and the results of operations for all interim periods
presented. Operating results for the six months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1999.
Certain financial information and footnote disclosures normally included in
annual financial statements prepared in conformity with generally accepted
accounting principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. The unaudited interim consolidated
financial statements presented herein should be read in conjunction with the
annual consolidated financial statements of the Company as of and for the fiscal
year ended March 31, 1998.
(3) Earnings Per Share
Effective December 31, 1997, the Company began presenting earnings per
share pursuant to the provisions of SFAS No. 128, "Earnings Per Share." In
accordance with the Statement, the September 30, 1997 earnings per share
presentation have been restated to conform to SFAS No. 128.
Basic earnings per share are calculated based on the weighted average
number of common shares outstanding during the respective periods.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under the
Company's stock option plan and recognition and retention plan.
Weighted average number of shares used in the basic earnings per share
computations was 1,182,451 and 1,167,883 for the three month period ended
September 30, 1998 and 1997 and 1,179,327 and 1,165,651 for the six month period
ended September 30, 1998 and 1997. Weighted average number of shares used in the
diluted earnings per share computations was 1,236,459 and
8
1,215,716 for the three month period ended September 30, 1998 and 1997 and
1,232,710 and 1,213,484 for the six month period ended September 30, 1998 and
1997.
(4) Employee Stock Ownership Plan (ESOP)
In conjunction with the Bank's conversion on December 28, 1995, the Company
established an Employee Stock Ownership Plan (ESOP) which covers substantially
all employees. The ESOP borrowed $1,058,000 from the Company, and purchased
105,800 common shares, equal to 8% of the total number of shares issued in the
conversion. Classic Bank makes scheduled discretionary contributions to the ESOP
sufficient to service the debt. Shares are allocated to participants' accounts
under the shares allocated method. The cost of shares committed to be released
and unallocated shares is reported as a reduction of stockholders' equity.
Compensation expense is recorded based on the average fair market value of the
ESOP shares when committed to be released. Furthermore, ESOP shares that have
not been committed to be released are not considered outstanding. The expense
under the ESOP was $17,929 and $33,816 for the three months ended September 30,
1998 and 1997 and $53,292 and $62,316 for the six months ended September 30,
1998 and 1997. As of September 30, 1998, the Company considered 83,497 shares as
unearned ESOP shares with a fair value of $1,189,832.
On September 14, 1998, the Board of Directors of the Company adopted a
resolution to refinance the ESOP loan by extending its term to twenty-five years
effective for the plan year beginning April 1, 1998.
(5) Stock Option and Incentive Plan and Recognition and Retention Plan
On July 29, 1996, the shareholders of the Company ratified the adoption of
the Company's 1996 Stock Option and Incentive Plan and the Recognition and
Retention Plan ("RRP"). Pursuant to the Stock Option Plan, 132,250 shares of the
Company's common stock are reserved for issuance, of which the Company has
granted options on 106,774 shares at $10.8125 per share, options on 19,750
shares at $13.375 and options on 4,500 shares at $13.875. Pursuant to the
Recognition and Retention Plan, 52,900 shares of the Company's common stock are
reserved for issuance, of which the Company has granted awards on 49,990 shares.
Ungranted RRP shares (2,910) are included in treasury stock at cost. RRP shares
that are granted are considered common stock equivalents.
On July 27, 1998, the shareholders of the Company ratified the adoption of
the Company's 1998 Premium Price Stock Option Plan. Pursuant to the Premium
Price Stock Option Plan, 50,000 shares of the Company's common stock is reserved
for issuance. No awards have been granted under the Premium Price Stock Option
Plan.
(6) Cash Dividend
On July 27, 1998, the Board declared a cash dividend of $.08 per share
payable on November 9, 1998 to shareholders of record on October 26, 1998.
9
(7) Supplemental Disclosure of Cash Flows Information
Six months ended September 30,
------------------------------
1998 1997
----------- -----------
Cash paid for:
Interest on deposits and borrowings $495,095 $797,234
Taxes 112,341 164,128
Transfer from loans to real estate
acquired through foreclosure 37,782 33,347
10
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company's total assets increased $12.4 million, or 9.5%, from $131.1
million at March 31, 1998 to $143.5 million at September 30, 1998. The increase
was due primarily to an increase in cash and cash equivalents of $2.8 million,
an increase in loans of $5.9 million, and an increase in investment securities
of $6.3 million, partially offset by a decrease in mortgage-backed securities of
$2.8 million.
Net loans receivable increased $5.9 million from $90.1 million at March 31,
1998 to $96.0 million at September 30, 1998 due to aggressive origination
efforts and improved loan demand that resulted in originations of $8.8 million
of one to four family loans, $3.5 million in commercial real estate loans, $8.2
million in commercial business loans and $5.8 million in consumer loans offset
by repayments since March 31, 1998.
Investment securities increased approximately $6.3 million from $18.2
million at March 31, 1998 to $24.5 million at September 30, 1998 primarily as
the result of purchases of $16.5 million partially offset by sold or called
securities of $10.2. Mortgage-backed securities decreased approximately $2.8
million from $7.8 million at March 31, 1998 to $5.0 million at September 30,
1998. The decrease was primarily the result of purchases of $3.8 million
partially offset by sales of $5.0 million and principal repayments of
approximately $1.5 million.
Net deposits increased $12.3 million from $104.9 million at March 31, 1998
to $117.2 million at September 30, 1998. The increase in deposits was due the
opening of the two new banking offices in the last quarter of fiscal 1998 and
increased marketing efforts within the Company's market area. Securities sold
under agreement to repurchase decreased $1.4 million from $3.5 million at March
31, 1998 to $2.1 million at September 30, 1998. The decrease was due to a
withdrawal in the normal course of business.
Federal Home Loan Bank advances increased to $397,000 at September 30, 1998
compared to no advances at March 31, 1998. Net proceeds from the advance were
used to fund a loan.
Total stockholders' equity was $20.4 million at March 31, 1998 compared to
$20.7 million at September 30, 1998.
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions
11
in the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake - and specifically declines any obligation -
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000 Issue
The advent of the year 2000 brings a potentially critical problem to all
computers, software and micro-chip dependent systems. Many computer programs use
only a two-digit character for the year (1998 would appear only as "98") and
thus the computer is unable to distinguish between, for example, the years 1900
and 2000 or 1901 and 2001. Left uncorrected, this situation will result in
erroneous data and reports, inability to effectuate electronic funds transfers,
and possibly the shut down of entire systems.
The Company's operations are heavily dependent on information technology
systems. As a result, the Company has put much effort in addressing potential
problems that could exist with the turn of the century. The following paragraphs
summarize the phases of the Company's Y2K plan:
Awareness Phase. The Company formally established a Y2K plan and a Y2K
committee that is responsible for implementing the plan, determining the
resources (including personnel, time and expense estimates) required to complete
specific procedures, monitoring progress, establishing time lines and developing
contingency plans. This phase is substantially complete.
Assessment Phase. The Company developed a strategy to determine the size
and complexity of the Y2K problem as it relates to the Company. A Y2K risk
assessment was completed on each mission critical system to assess the ability
of hardware and software to accurately process date sensitive data, including a
process specific rating assessing the relative risk of each of these processes.
The Company's primarily lending relationships are with borrowers for 1-4
family residences. As a result, the Company does not anticipate any Y2K issues
with regard to its loan portfolio.
Renovation Phase. The Company's assessment of each mission critical system
revealed that new hardware purchases and software upgrades could adequately
address Y2K date sensitive applications. These hardware purchases and software
upgrades have been delivered and placed into production and entered the
validation and testing phase.
12
Validation (Testing) Phase. The validation phase is designed to test the
ability of hardware and software to accurately process date sensitive data. The
Company currently is in process of validation testing of each mission critical
system with the degree of completion of such testing ranging from 75% to 100%.
The testing environment is insulated from production and development
environments, therefore, assuring minimal interruption of current operations. No
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems. The Company anticipates completion of this
phase prior to December 31, 1998.
Implementation Phase. The Company's plan requires that all required
hardware purchase and software upgrades be installed and in production with
respect to all mission critical systems during the validation phase.
The Company has incurred costs of approximately $20,000 for testing its
data processing software. These costs are being amortized through March 2000.
The Company also anticipates costs of approximately $30,000 in new hardware
purchases. Management anticipates that these costs will be capitalized and
depreciated over the period of time allowed by accounting guidelines.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
General. The Company's results of operations depend primarily upon the
level of net interest income, which is the difference between the interest
income earned on its interest-earning assets such as loans and investments, and
the costs of the Company's interest-bearing liabilities, primarily deposits and
borrowings. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on them, respectively.
The Company reported net income of $210,000 during the three months ended
September 30, 1998 compared to net income of $274,000 during the three months
ended September 30, 1997. The decrease in income of $64,000 between the two
periods was primarily the result of a decrease in net interest income of $10,000
and a decrease in non-interest income of $241,000 (including a one time $330,000
gain in 1997) partially offset by a decrease in non-interest expenses of
$115,000, a decrease in provision for loan losses of $40,000, and a decrease in
income taxes of $32,000.
The Company reported net income of $407,000 for the six months ended
September 30, 1998 compared to net income of $511,000 for the six months ended
September 30, 1997. The decrease in income of $104,000 between the two periods
was primarily the result of a decrease in net interest income of $11,000, a
decrease in non-interest income of $204,000 and an increase in non-interest
expenses of $11,000 partially offset by a decrease in provision for loan losses
of $62,000, and a decrease in income taxes of $60,000.
Interest Income. Total interest income increased $50,000 and $95,000 for
the three and six months ended September 30, 1998 as compared to the three and
six months ended September 30, 1997. The increase in interest income for the
three-month period resulted primarily from an increase in the average balance of
interest-earning assets of $4.6 million from $120.7 million at September 30,
1997 to $125.3 million at September 30, 1998. The increase in the average
balance
13
of interest-earning assets was due primarily to the increase in the average
balance of loans, offset by a decrease in the average balance of mortgage-backed
and investment securities and other interest earning assets. The average yield
on interest-earning assets was 7.6% and 7.7% for the three and six months ended
September 30, 1998 compared to 7.9% for the three and six months ended September
30, 1997. The decrease was due to a decrease in the average rate earned on
loans.
Interest Expense. Interest expense increased $59,000 and $106,000 for the
three and six months ended September 30, 1998 as compared to the same period in
1997. Interest expense increased for the three month period primarily due to an
increase in the average balance of interest-bearing liabilities. The average
balance of interest-bearing liabilities increased from $101.2 million at
September 30, 1997 to $106.1 million at September 30, 1998 as a result of an
increase in deposits offset by a decrease in FHLB borrowings. The average rate
paid on interest-bearing liabilities was 4.7% for the three and six months ended
September 30, 1998 compared to 4.8% and 4.7% for the three and six months ended
September 30, 1997.
Provision for Loan Losses. The Company's provision for loan losses totaled
$15,000 and $40,000 for the three and six months ended September 30, 1998
compared to $55,000 and $102,500 for the three and six months ended September
30, 1997 based on management's overall assessment of the loan portfolio. The
decrease for the three and six month period was due to a decrease in charge-offs
and management's decision to decrease the provision as a result of an evaluation
of the Company's current portfolio. Management continually monitors its
allowance for loan losses and makes adjustments as economic conditions,
portfolio quality and portfolio diversity dictate. Although the Company
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for potential losses, there can be no assurance that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required for future periods.
Non-interest Income. Non-interest income decreased approximately $241,000
and $204,000 for the three and six months ended September 30, 1998 compared to
the same period in 1997. The decrease was primarily the result of a one time
$330,000 gain recorded from the settlement of First National's pension plan in
1997 offset by a loss on disposal of assets of $37,000 recorded in 1997.
Non-interest income also decreased due to a decrease in the gain on available
for sale securities of $14,000 for the three and six months ended September 30,
1998. These decreases were offset by an increase in service charges and other
fees on deposits of $21,000 and $64,000 for the three and six months ended
September 30, 1998 and an increase in other income of $45,000 and $39,000 for
the three and six months ended September 30, 1998. The increase in service
charges and other fees on deposits was due to an increased deposit base and more
aggressive pricing strategies. The increase in other income was due primarily to
an increase in real estate service fees from secondary market loans.
Non-interest Expense. Non-interest expense decreased $115,000 for the three
months ended September 30, 1998 compared to the same period in 1997.
Non-interest expenses decreased for the three month period due to a decrease in
occupancy and equipment expense of $11,000 as a result of maintenance charges
taken in 1997, a decrease in the loss on foreclosed real estate of $50,000 as a
result of a write-down on foreclosed real estate taken in 1997, a decrease in
stationary, printing and other supplies of $44,000 due to new product offerings
and name and logo changes in 1997, a decrease in other general and
administrative expenses of $32,000 due to restructuring charges relative to the
continued consolidation of the operations of the Company's
14
subsidiaries taken in 1997 partially offset by an increase in compensation and
benefits of $22,000 due to an increase in the number of employees as a result of
the opening of two new banking offices.
Non-interest expense increased $11,000 for the six months ended September
30, 1998 compared to the same period in 1997. Non-interest expenses increased
for the six month period due to an increase in compensation and benefits of
$70,000 due to an increase in the number of employees as a result of the opening
of two new banking offices, an increase in occupancy and equipment expense of
$12,000 as a result of the opening of the two new banking offices, an increase
in federal deposit insurance premiums of $3,000, an increase in ATM expense of
$22,000 as the result of an increase in the number of ATM locations, and an
increase in marketing and advertising of $15,000 partially offset by a decrease
in the loss on foreclosed real estate of $52,000 as a result of a write-down on
foreclosed real estate taken in 1997, a decrease in stationary, printing and
other supplies of $43,000 due to new product offerings and name and logo changes
in 1997, and a decrease in other general and administrative expenses of $16,000
due to restructuring charges relative to the continued consolidation of the
operations of the Company's subsidiaries taken in 1997.
Income Tax Expense. Income tax expense decreased $32,000 and $60,000 for
the three and six months ended September 30, 1998 primarily due to a decrease in
income before income taxes and an increase in tax exempt income.
Non-Performing Assets and Allowance for Loan Losses. The allowance for loan
losses is calculated based upon an evaluation and assessment of pertinent
factors underlying the types and qualities of the Company's loans. Management
considers such factors as the payment status of a loan, the borrower's ability
to repay the loan, the estimated fair value of the underlying collateral,
anticipated economic conditions that may affect the borrower's repayment ability
and the Company's historical charge-offs. The Company's allowance for loan
losses as of September 30, 1998 was $848,000 or .9% of the total loans. The
March 31, 1998 allowance for loan loss was $831,000, or .9% of total loans. The
allowance for loan losses at September 30, 1998 was allocated as follows:
$201,000 to one-to-four family real estate loans, $43,000 to commercial real
estate loans, $91,000 to commercial business loans, $120,000 to consumer loans
and $393,000 remained unallocated.
The ratio of non-performing assets to total assets is one indicator of
other exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans, accruing loans delinquent 90 days or more, and foreclosed
assets, which have been acquired as a result of foreclosure or deed-in-lieu of
foreclosure. For all periods presented the Company had no troubled debt
restructurings. The following table sets forth the amount of non-performing
assets at the periods indicated.
September 30, 1998 March 31, 1998
------------------ --------------
(Dollars in Thousands)
Non-Accruing Loans ............................... $225 $308
Accruing Loans Delinquent 90 Days or More ........ 300 25
Foreclosed Assets ................................ 273 229
---- ----
Total Non-Performing Assets ...................... $798 $562
Total Non-Performing Assets as a
Percentage of Total Assets .............. .6% .4%
15
Total non-performing assets increased $236,000 from March 31, 1998 to
September 30, 1998. The increase in non-performing assets is the result of an
increase in loans delinquent 90 days or more. Management continually pursues
collection of these loans in order to decrease the level of non-performing
loans.
Other Assets of Concern. Other than the non-performing assets set forth in
the table above, as of September 30, 1998, there were no loans with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Liquidity and Capital Resources. The Company's most liquid assets are cash
and cash equivalents. The levels of these assets are dependent on the Company's
operating, financing, and investing activities. At September 30, 1998 and March
31, 1998, cash and cash equivalents totaled $6.4 million and $3.6 million,
respectively. The Company's primary sources of funds include principal and
interest payments on loans (both scheduled and prepayments), maturities of
investment securities and principal payments from mortgage-backed securities,
deposits and Federal Home Loan Bank of Cincinnati advances. While scheduled loan
repayments and proceeds from maturing investment securities and principal
payments on mortgage-backed securities are relatively predictable, deposit flows
and early repayments are more influenced by interest rates, general economic
conditions and competition.
Liquidity management is both a short- and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of expected loan demand, projected purchases of
investment and mortgage-backed securities, expected deposit flows, yields
available on interest-bearing deposits, and liquidity of its asset/liability
management program. Excess liquidity is generally invested in interest-bearing
overnight deposits and other short-term liquid asset funds. If funds are
required beyond the funds generated internally, the subsidiaries of the Company
have the ability to borrow funds from the FHLB. At September 30, 1998, the
Company had $397,000 in borrowings outstanding with the FHLB.
Classic Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending on economic conditions, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 4.0%. The Bank's liquidity ratios have consistently been maintained at
levels in compliance with regulatory requirements. As of September 30, 1998 and
March 31, 1998, Classic Bank's liquidity ratios was 4.43%. First National, as a
national bank, is not subject to any prescribed liquidity requirements.
At September 30, 1998, the Company had outstanding commitments to originate
loans of $6.9 million. The Company anticipates that it will have sufficient
funds available to meet its current commitments principally through the use of
current liquid assets and through its borrowing capacity with the FHLB.
16
Pursuant to rules promulgated by the Office of Thrift Supervision, savings
institutions must meet several separate minimum capital-to-asset requirements.
The following table summarizes, as of September 30, 1998, the capital
requirements applicable to Classic Bank and its actual capital ratios. As of
September 30, 1998, Classic Bank exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (CB Only)
----------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based
(to Risk Weighted Assets) $2,942 8.0% $8,255 22.5%
Tier 1 (Core) Capital
(to Risk Weighted Assets) 2,757 4.0 7,936 21.6
Pursuant to regulations promulgated by the Office of the Comptroller of the
Currency (the "OCC"), national banks must meet two minimum capital-to-asset
requirements. The following table summarizes, as of September 30, 1998, the
capital requirements applicable to First National and its actual capital ratios.
As of September 30, 1998, First National exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (FN Only)
----------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based Capital
(to Risk Weighted Assets) $3,591 8.0% $9,162 20.4%
Tier 1 Capital
(to Risk Weighted Assets) 1,796 4.0 8,653 19.3
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
17
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLASSIC BANCSHARES, INC.
REGISTRANT
Date: November 12, 1998 /s/ David B. Barbour
----------------------------------------
David B. Barbour, President,
Chief Executive Officer and Director
(Duly Authorized Officer)
Date: November 12, 1998 /s/ Lisah M. Frazier
----------------------------------------
Lisah M. Frazier, Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
18
INDEX TO EXHIBITS
Exhibit
Number
------
27 Financial Data Schedule
19