SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 December 31, 1999
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 61-1289391
- ----------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 February 7, 2000, there were 1,232,500 shares of the Registrant's
common stock issued and 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 December 31, 1999 (Unaudited)
and March 31, 1999 3
Consolidated Statements of Income for the three and nine months
ended December 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income for the three and
nine months ended December 31, 1999 and 1998 5
Consolidated Statements of Stockholders' Equity for the nine months
ended December 31, 1999 (Unaudited) and Year Ended March 31, 1999 6
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1999 and 1998 7-8
Notes to Consolidated Financial Statements 9-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-18
PART II. OTHER INFORMATION 19
Signatures 20
Index to Exhibits 21
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 1999
--------------- ---------------
(Unaudited)
ASSETS
Cash and due from bank $ 6,314,850 $ 3,088,248
Federal funds sold 404,042 1,397,908
Securities available for sale 23,939,034 25,141,436
Mortgage-backed and related securities available for sale 3,445,437 4,479,136
Loans receivable, net 125,638,051 97,527,492
Real estate acquired in the settlement of loans 238,690 225,590
Accrued interest receivable 1,175,385 951,877
Federal Home Loan Bank and Federal Reserve Bank stock 1,442,650 1,384,450
Premises and equipment, net 5,129,759 4,523,720
Cost in excess of fair value of net assets acquired (goodwill),
net of accumulated amortization 5,753,688 2,779,349
Other assets 1,470,333 1,239,835
--------------- ---------------
TOTAL ASSETS $ 174,951,919 $ 142,739,041
- ------------ =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Non-interest bearing demand deposits $ 13,632,749 $ 9,600,258
Savings, NOW, and money market demand deposits 45,178,897 35,674,021
Other time deposits 75,749,218 72,457,492
--------------- ---------------
Total deposits 134,560,864 117,731,771
Federal funds purchased and securities sold under
agreements to repurchase 3,365,861 2,817,154
Advances from Federal Home Loan Bank 15,934,918 387,739
Other short-term borrowings 673,865 84,578
Accrued expenses and other liabilities 525,119 428,065
Accrued interest payable 626,844 418,642
Accrued income taxes 10,645 45,134
Deferred income taxes - 536,978
--------------- ---------------
Total Liabilities $ 155,698,116 $ 122,450,061
--------------- ---------------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and 1,232,500 outstanding $ 13,225 $ 13,225
Additional paid-in capital 12,806,544 12,806,544
Retained earnings - substantially restricted 9,878,066 9,362,668
Accumulated other comprehensive income (1,176,994) 83,977
Unearned ESOP shares (785,150) (785,150)
Unearned RRP shares (208,523) (294,332)
Treasury stock, at cost (1,273,365) (897,952)
--------------- ---------------
Total Stockholders' Equity $ 19,253,803 $ 20,288,980
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 174,951,919 $ 142,739,041
- ----------------------------------- =============== ===============
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
INTEREST INCOME
Loans $ 2,632,286 $ 2,024,654 $ 7,400,089 $ 5,883,790
Investment securities 396,781 378,211 1,190,231 1,041,100
Mortgage-backed securities 55,385 73,798 168,427 327,415
Other interest earning assets 9,033 7,101 28,269 80,644
------------- ------------- ------------- -------------
Total Interest Income 3,093,485 2,483,764 8,787,016 7,332,949
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest on deposits 1,358,481 1,205,290 3,925,534 3,531,031
Interest on FHLB Advances 117,790 10,432 204,272 67,543
Interest on other borrowed funds 60,087 46,190 157,745 166,697
------------- ------------- ------------- -------------
Total Interest Expense 1,536,358 1,261,912 4,287,551 3,765,271
------------- ------------- ------------- -------------
Net Interest Income 1,557,127 1,221,852 4,499,465 3,567,678
Provision for loss on loans 72,500 25,000 160,000 65,000
------------- ------------- ------------- -------------
Net interest income after provision for
loss on loans 1,484,627 1,196,852 4,339,465 3,502,678
------------- ------------- ------------- -------------
NON-INTEREST INCOME
Service charges and other fees 199,903 123,991 518,586 336,982
(Loss) gain on sale of securities available for sale - - (2,500) 3,904
Gain (Loss) on disposal of assets 24,284 - 27,988 -
Other income 41,691 47,026 127,321 152,689
------------- ------------- ------------- -------------
Total Non-Interest Income 265,878 171,017 671,395 493,575
------------- ------------- ------------- -------------
NON-INTEREST EXPENSES
Employee compensation and benefits 629,264 467,084 1,841,663 1,435,628
Occupancy and equipment expense 198,878 151,013 563,543 438,714
Federal deposit insurance premiums 12,089 9,144 32,113 26,869
Loss (gain) on foreclosed real estate 1,623 2,731 3,606 3,645
Other general and administrative expenses 489,751 417,995 1,386,432 1,156,696
------------- ------------- ------------- -------------
Total Non-Interest Expense 1,331,605 1,047,967 3,827,357 3,061,552
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 418,900 319,902 1,183,503 934,701
- --------------------------
Income tax expense 77,241 56,231 221,287 202,278
------------- ------------- ------------- -------------
INCOME BEFORE GOODWILL AMORTIZATION 341,659 263,671 962,216 732,423
- ----------------------------------- ------------- ------------- ------------- -------------
Goodwill amortization (63,279) (31,134) (171,080) (93,063)
------------- ------------- ------------- -------------
NET INCOME $ 278,380 $ 232,537 $ 791,136 $ 639,360
- ---------- ============= ============= ============= =============
Basic earnings per share before
goodwill amortization $ 0.30 $ 0.22 $ 0.85 $ 0.63
Goodwill amortization (0.06) (0.03) (0.15) (0.08)
------------- ------------- ------------- -------------
Basic earnings per share after
goodwill amortization $ 0.25 $ 0.20 $ 0.70 $ 0.55
============= ============= ============= =============
Diluted earnings per share before goodwill
amortization $ 0.29 $ 0.21 $ 0.83 $ 0.59
Goodwill amortization (0.05) (0.03) (0.15) (0.08)
------------- ------------- ------------- -------------
Diluted earnings per share before goodwill
amortization $ 0.24 $ 0.19 $ 0.68 $ 0.52
============= ============= ============= =============
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- --------------------------------
1999 1998 1999 1998
-------------- ------------- --------------- --------------
Net Income $ 278,380 $ 232,537 $ 791,136 $ 639,360
-------------- ------------- --------------- --------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period (244,220) 82,591 (1,262,621) 148,680
Reclassification adjustments for realized gains
(losses) included in earnings - - 1,650 (2,577)
Minimum pension liability adjustment - - - 119
-------------- ------------- --------------- --------------
Other comprehensive income (244,220) 82,591 (1,260,971) 146,222
-------------- ------------- --------------- --------------
Comprehensive Income (Loss) $ 34,160 $ 315,128 $ (469,835) $ 785,582
============== ============= =============== ==============
Accumulated Other Comprehensive Income $ (1,176,994) $ 433,393 $ (1,176,994) $ 433,393
============== ============= =============== ==============
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
UNREALIZED MINIMUM
ADDITIONAL GAIN (LOSS) ON PENSION
COMMON PAID-IN RETAINED AVAILABLE FOR LIABILITY
STOCK CAPITAL EARNINGS SALE SECURITIES ADJUSTMENT
---------- ------------ -------------- --------------- ----------
Balances at April 1, 1998 $ 13,225 $ 12,753,789 $ 8,853,606 $ 297,125 $ (9,954)
Net income for the year
ended March 31, 1999 - - 885,324 - -
Dividend paid - - (376,262) - -
ESOP shares earned - 28,198 - - -
RRP shares earned - - - - -
RRPshares granted - 4,742 - - -
Tax benefit from RRP - 19,815 - - -
Purchased 43,894 treasury shares - - - - -
Change in minimum
pension liability adjustment - - - - 9,954
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
deferred income taxes of $183,259 - - - (213,148) -
----------- ------------ -------------- ------------- --------
Balances at March 31, 1999 13,225 12,806,544 9,362,668 83,977 -
Net income for the nine months
ended December 31, 1999 - - 791,136 - -
Dividend paid - - (275,738) - -
RRP shares earned - - - - -
Purchased 26,106 treasury shares - - - - -
Change in unrealized gain
(loss) on available for sale
securities, net of applicable -
deferred income taxes of $606,329 - - - (1,260,971) -
----------- ------------ -------------- ------------- --------
Balances at December 31, 1999 $ 13,225 $ 12,806,544 $ 9,878,066 $ (1,176,994) $ -
=========== ============ ============== ============= ========
UNEARNED UNEARNED TREASURY
ESOP SHARES RRP SHARES STOCK TOTAL
----------- ----------- ------------- ----------
Balances at April 1, 1998 $ (834,970) $ (371,879) $ (293,880) $ 20,407,062
Net income for the year
ended March 31, 1999 - - - 885,324
Dividend paid - - - (376,262)
ESOP shares earned 49,820 - - 78,018
RRP shares earned - 114,132 - 114,132
RRPshares granted - (36,585) 31,843 -
Tax benefit from RRP - - - 19,815
Purchased 43,894 treasury shares - - (635,915) (635,915)
Change in minimum
pension liability adjustment - - - 9,954
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
deferred income taxes of $183,259 - - - (213,148)
------------ ----------- ------------ ------------
Balances at March 31, 1999 (785,150) (294,332) (897,952) 20,288,980
Net income for the nine months
ended December 31, 1999 - - - 791,136
Dividend paid - - - (275,738)
RRP shares earned - 85,809 - 85,809
Purchased 26,106 treasury shares - - (375,413) (375,413)
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
deferred income taxes of $606,329 - - - (1,260,971)
------------ ----------- ------------ ------------
Balances at December 31, 1999 $ (785,150) $ (208,523 $ (1,273,365) $ 19,253,803
============ =========== ============ =============
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1999 1998
---------------- ---------------
OPERATING ACTIVITIES
Net Income $ 791,136 $ 639,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 391,451 285,999
Provision for loss on loans 160,000 65,000
Loss (gain) on sale of securities available for sale 2,500 (3,904)
Gain on disposal of equipment (27,988) -
Federal Home Loan Bank stock dividends (58,200) (55,000)
Deferred income tax expense (benefit) 51,263 34,814
Gain on foreclosed real estate 45 1,700
Amortization and accretion of invesment
securities premiums and discounts, net 65,325 71,868
RRP shares earned 85,809 -
Amortization of goodwill 171,080 93,063
Decrease (increase) in:
Accrued interest receivable (223,508) (168,041)
Other assets (112,506) (14,866)
Increase (decrease) in:
Accrued interest payable 208,202 44,803
Accrued income taxes (34,489) 176,647
Accounts payable and accrued expenses 97,054 41,781
---------------- ---------------
Net cash provided by operating activities 1,567,174 1,213,224
---------------- ---------------
INVESTING ACTIVITIES
Securities:
Proceeds from sale, maturities or calls 527,500 10,338,703
Purchased - (17,536,506)
Mortgage-backed securities:
Proceeds from sale - 5,035,426
Purchased - (3,839,846)
Principal payments 960,264 1,715,222
Redemption of Federal Reserve Bank Stock 45,000 -
Purchased Federal Home Loan Bank stock - (14,100)
Certificates of deposits with other banks:
Proceeds from maturities - 293,000
Loan originations and principal payments, net (20,119,303) (7,119,756)
Proceeds from sale of foreclosed real estate 51,903 31,700
Proceeds from sale of equipment 241,700 -
Purchases of software (23,467) (6,677)
Purchases of premises and equipment (385,931) (352,377)
Cash invested in purchase of Bank subsidiary in excess of cash and
cash equivalents acquired (1,497,572) -
---------------- ---------------
Net cash used by investing activities (20,199,906) (11,455,211)
---------------- ---------------
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------------------------------------
1999 1998
--------------- -------------
FINANCING ACTIVITIES
Net increase in deposits $ 4,831,446 $ 10,505,928
Net proceeds from FHLB borrowings 15,547,179 896,891
Repayment of long-term borrowings - (550,000)
Increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase 548,707
(1,412,229)
Net increase in short-term borrowings 589,287 227,698
Purchase of treasury stock
(375,413) (56,710)
Dividends paid
(275,738) (279,933)
---------------- -------------
Net cash (used) provided by financing activities 20,865,468 9,331,645
---------------- -------------
Increase (decrease) in cash and cash equivalents 2,232,736
(910,342)
Cash and cash equivalent at beginning of period 4,486,156 3,632,255
---------------- -------------
Cash and cash equivalents at end of period $ 6,718,892 $ 2,721,913
================ =============
Additional cash flows and supplementary information
Cash paid during the period for:
Interest on deposits and borrowings $ 979,532 $ 801,420
Taxes $ 208,592 $ 141,550
Assets acquired in settlement of loans $ 65,000 $ 79,400
Net unrealized gain (loss) on securities available for sale $ (1,260,971) $ 146,103
Liabilities assumed and cash paid in acquisition of
Citizens Bank $ 16,852,774 -
Fair value of assets received $ 13,707,355 -
Amount assigned to goodwill $ 3,145,419 -
8
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ACQUISITION
Effective May 14, 1999, Classic Bancshares, Inc. (the "Company") acquired
all of the 60,000 outstanding shares of common stock of Citizens Bank, Grayson
("Citizens") for $75 per share in cash. In connection with the acquisition, the
Company recorded $3.1 million in goodwill. The acquisition was accounted for
under the purchase method of accounting. At the close of the transaction,
Citizens Bank, Grayson was merged with and into Classic Bank with Classic Bank
as the surviving institution.
During the quarter ending December 31, 1999 alleged defalcation involving a
Citizens employee was discovered and determined to have taken place prior to the
acquisition of Citizens. As a result, the value of the assets acquired will be
adjusted by the amount of the loss and goodwill will be increased by the amount
of the loss. The loss is estimated to be approximately $25,000.
(2) PRINCIPLES OF CONSOLIDATION
The financial statements for 1999 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 December 31, 1999 and March 31, 1999 is for the Company, Classic
Bank, and First National. Citizen's balance sheet was merged in with Classic
Bank on the date of closing and therefore is included in the consolidated
balance sheet as of December 31, 1999. The consolidated statements of income
include the operations of the Company, Classic Bank and First National for the
three and nine months ended December 31, 1999 and 1998. The earnings of Citizens
Bank are included in the consolidated statement of income from the date of
closing.
(3) 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
December 31, 1999, and the results of operations for all interim periods
presented. Operating results for the nine months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2000.
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, 1999.
9
(4) 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."
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 1,130,601 and 1,182,513 for the three-month period ended
December 31, 1999 and 1998 and 1,128,573 and 1,179,391 for the nine month period
ended December 31, 1999 and 1998. Weighted average number of shares used in the
diluted earnings per share computations was 1,160,911 and 1,236,023 for the
three-month period ended December 31, 1999 and 1998 and 1,158,883 and 1,233,346
for the nine month period ended December 31, 1999 and 1998.
(5) 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. The Company's subsidiary banks make 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 $17,536 and $7,253 for the three
months ended December 31, 1999 and 1998 and $60,545 and $53,292 for the nine
months ended December 31, 1999 and 1998. As of December 31, 1999, the Company
considered 78,515 shares as unearned ESOP shares with a fair value of $922,551.
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.
(6) 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 per share, options on 4,500 shares at $13.875 per share,
options on 1,026 shares at $13.75 per share and options on 200 shares at $13.625
per share. 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 52,900 shares. During the quarter, 450 stock option shares and
544 RRP shares were forfeited and remain ungranted. Ungranted RRP shares are
included in treasury stock at cost.
10
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 of which the Company has granted options on 5,000 shares at $16.295
per share and options on 6,300 shares at $14.988 per share.
(7) CASH DIVIDEND
On January 17, 2000, the Board declared a cash dividend of $.08 per share
payable on February 14, 2000 to shareholders of record on January 31, 2000.
11
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's total assets increased $32.3 million, or 22.6%, from $142.7
million at March 31, 1999 to $175.0 million at December 31, 1999. The increase
was due primarily to an increase in loans of $28.1 million, an increase in cash
and cash equivalents of $2.2 million, an increase in premises and equipment of
approximately $600,000, an increase other assets of approximately $600,000 and
an increase in goodwill of $3.0 million partially offset by a decrease in
investment securities of $1.2 million and a decrease in mortgage-backed
securities of $1.0 million.
Net loans receivable increased $28.1 million from $97.5 million at March
31, 1999 to $125.6 million at December 31, 1999 with $9.0 million of the
increase attributable to the acquisition of Citizens. The remainder of the
increase is due to aggressive origination efforts and continued loan demand that
resulted in originations of $23.7 million in commercial business loans, $17.8
million in one-to-four family mortgage loans, $9.3 million in consumer loans and
$6.4 million in commercial real estate loans offset by repayments since March
31, 1999.
Investment securities decreased approximately $1.2 million from $25.1
million at March 31, 1999 to $23.9 million at December 31, 1999 as a result of
$1.2 million of securities acquired due to the acquisition of Citizens more than
offset by sold securities of $528,000 and a $1.9 million temporary decline in
market value since March 31, 1999. This decrease is due primarily to a
significant increase in interest rates. Mortgage-backed securities decreased
approximately $1.0 million from $4.5 million at March 31, 1999 to $3.4 million
at December 31, 1999. The decrease was primarily the result of principal
repayments of approximately $960,000 and a decrease in the market value of these
available for sale securities.
Cash and cash equivalents increased approximately $2.2 million due to the
increase in the amount of cash on hand in preparation for Y2K. Premises and
equipment increased approximately $600,000 primarily as a result of the
acquisition of Citizens. Goodwill increased approximately $3.0 million as a
result of the goodwill recorded in connection with the acquisition of Citizens.
Other assets increased approximately $600,000 due to the acquisition of
Citizens.
Net deposits increased $16.8 million from $117.7 million at March 31, 1999
to $134.6 million at December 31, 1999 with $12.0 million of the increase
attributable to the acquisition of Citizens. The remainder of the increase is
the result of marketing and sales efforts and an increased deposit base due to
the opening of two additional banking offices during fiscal 1999. Non-interest
bearing demand deposits increased $4.0 million, savings, NOW and money market
demand deposits increased $9.5 million, and other time deposits consisting
primarily of certificates of deposit increased $3.3 million.
Federal Home Loan Bank advances increased $15.5 million from $388,000 at
March 31, 1999 to $15.9 million at December 31, 1999. The advances are
short-term, variable rate advances with an average term of 90 days. Net proceeds
from the advances were used to fund the increase in loans.
12
Total stockholders' equity was $20.3 million at March 31, 1999 compared to
$19.3 million at December 31, 1999. The decrease was due to a decrease in the
market value of available for sale securities, the purchase of treasury stock
and cash dividends paid partially offset by net income recorded for the period.
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 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.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE
AND NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
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 $278,000 during the three months ended
December 31, 1999 compared to net income of $233,000 during the three months
ended December 31, 1998. The increase in income of $45,000 between the two
periods was primarily the result of an increase in net interest income of
$335,000, an increase in non-interest income of $95,000 partially offset by an
increase in provision for loss on loans of $48,000, an increase in non-interest
expenses of $284,000, an increase in goodwill amortization of $32,000 and an
increase in income taxes of $21,000.
13
The Company reported net income of $791,000 for the nine months ended
December 31, 1999 compared to net income of $639,000 for the nine months ended
December 31, 1998. The increase in income of $152,000 between the two periods
was primarily the result of an increase in net interest income of $932,000, an
increase in non-interest income of $178,000 partially offset by an increase in
provision for loss on loans of $95,000, an increase in non-interest expenses of
$766,000, an increase in goodwill amortization of $78,000, and an increase in
income taxes of $19,000.
INTEREST INCOME. Total interest income increased $610,000 and $1.5 million
for the three and nine months ended December 31, 1999 as compared to the three
and nine months ended December 31, 1998. The increase in interest income for the
three-month period resulted primarily from an increase in the average balance of
interest-earning assets of $28.2 million from $128.8 million for the three
months ended December 31, 1998 to $157.0 million for the three months ended
December 31, 1999. The increase in interest income for the nine-month period
resulted primarily from an increase in the average balance of interest-earning
assets of $22.4 million from $126.5 million for the nine months ended December
31,1998 to $148.9 million for the nine months ended December 31, 1999. The
increase in the average balance of interest-earning assets was due primarily to
the increase in the average balance of loans and the average balance of
mortgage-backed and investment securities offset by a decrease in the average
balance of other interest earning assets. The increase in these balances is the
result of the significant growth that the Company experienced during the period
within the Company's existing market area and from the acquisition of Citizens
Bank. The average yield on interest-earning assets was 7.9% for the three and
nine months ended December 31, 1999 compared to 7.7% for the three and nine
months ended December 31, 1998. The increase in the yield was due to the
continued diversification of the loan portfolio in higher yielding commercial
and consumer lending. No tax equivalent adjustments were made to the yield.
INTEREST EXPENSE. Interest expense increased $274,000 and $523,000 for the
three and nine months ended December 31, 1999 as compared to the same period in
1998. Interest expense increased for the periods primarily due to an increase in
the average balance of interest-bearing liabilities. The average balance of
interest-bearing liabilities increased from $108.6 million for the three months
ended December 31, 1998 to $138.7 million for the three months ended December
31, 1999. The average balance of interest-bearing liabilities increased from
$107.0 million for the nine months ended December 31, 1998 to $132.4 million for
the nine months ended December 31, 1999 The increase in these balances is the
result of an increase in deposits and an increase in FHLB and other borrowings.
The average rate paid on interest-bearing liabilities was 4.4% and 4.3% for the
three and nine months ended December 31, 1999 compared to 4.7% and 4.6% for the
three and nine months ended December 31, 1998. The decrease in the average rate
paid on interest-bearing liabilities for the three and nine-month period is due
to the continued increase in interest-bearing transaction accounts that pay a
lower rate of interest than the certificate of deposit accounts.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses totaled
$73,000 and $160,000 for the three and nine months ended December 31, 1999
compared to $25,000 and $65,000 for the three and nine months ended December 31,
1998 based on management's overall assessment of the loan portfolio. The
increase for the three and nine month period was based on management's
evaluation of the Company's current portfolio including factors such as an
increase in charge-offs and non-performing loans and the increase in
non-residential loans. Management continually monitors the Company's allowance
for loan losses and makes adjustments as economic conditions, portfolio quality
and portfolio diversity dictate. Although the Company maintains its
14
allowance for loan losses at a level which the Board 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 increased approximately $95,000
for the three months ended December 31, 1999 compared to the same period in
1998. The increase for the three-month period is primarily the result of an
increase in service charges and other fees on deposits of $76,000 and a gain on
disposal of assets of $24,000 offset by a decrease in fees earned on the
origination of secondary market loans and other income of $5,000. The increase
in service charges and other fees on deposits is the result of increased product
offerings, an increased deposit base and aggressive pricing strategies.
Non-interest income increased approximately $178,000 for the nine months
ended December 31, 1999 compared to the same period in 1998. The increase for
the nine month period is primarily the result of an increase in service charges
and other fees on deposits of $181,000 and a gain on disposal of assets of
approximately $28,000 offset by a decrease in the gain on the sale of securities
of $6,000 and a decrease in fees earned on the origination of secondary market
loans and other income of $25,000.
NON-INTEREST EXPENSE. Non-interest expense increased $284,000 for the three
months ended December 31, 1999 compared to the same period in 1998. Non-interest
expenses increased for the three-month period due to an increase in employee
compensation and benefits of $162,000, an increase in occupancy and equipment
expense of $48,000, an increase in ATM expense of $8,000, an increase in
marketing and advertising expense of $2,000, an increase in professional fees of
$10,000, an increase in stationary, printing and other supplies of $22,000 and
an increase in other general and administrative expense of $32,000. Employee
compensation and benefits increased as a result of an increase in the net number
of employees due to the acquisition of Citizens and the hiring of additional
employees in order to facilitate the growth of the Company. Occupancy and
equipment expense increased due to increased costs related to an additional
banking office as a result of the acquisition of Citizens. Stationary, printing
and other general and administrative expenses increased as a result of the
significant growth that the Company has experienced in this fiscal year and the
costs associated with servicing a larger customer base.
Goodwill amortization increased $32,000 for the three months ended December
31, 1999. Goodwill amortization increased due to the goodwill recorded in
connection with the acquisition of Citizens.
Non-interest expense increased $766,000 for the nine months ended December
31, 1999 compared to the same period in 1998. Non-interest expenses increased
for the nine month period due to an increase in compensation and benefits of
$406,000, an increase in occupancy and equipment expense of $125,000, an
increase in ATM expense of $14,000, an increase in marketing and advertising
expense of $22,000, an increase in professional fees of $35,000, an increase in
stationary, printing and other supplies of $63,000, an increase in telephone
expense of $25,000, an increase in correspondent banking and other outside
services of $38,000 and an increase in other general and administrative expenses
of $38,000. Employee compensation and benefits increased as a result of an
increase in the net number of employees due to the acquisition of Citizens and
the hiring of additional employees in order to facilitate the growth of the
Company. Occupancy and equipment increased due to increased costs related to an
additional banking office as a result of the acquisition of Citizens.
Stationary, printing and other general administrative expenses increased as
15
a result of the significant growth that the Company experienced during the nine
month period and the costs associated with servicing a larger customer base.
Goodwill amortization increased $78,000 for the nine months ended December
31, 1999. Goodwill amortization increased due to the goodwill recorded in
connection with the acquisition of Citizens.
INCOME TAX EXPENSE. Income tax expense increased $21,000 and $19,000 for
the three and nine months ended December 31, 1999 primarily due to an increase
in income before income taxes for each period.
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 December 31, 1999 was $1.3 million or 1.0% of the total loans. The
March 31, 1999 allowance for loan loss was $861,000, or .9% of total loans. The
increase in the allowance since March 31, 1999 is due to the acquisition of
Citizens and the transfer of that allowance to Classic Bank. The Company
recorded a provision for loan losses of $160,000 for the nine-month period,
recorded an allowance of $506,000 from the acquisition of Citizens and had net
charge-offs of $170,000 for the nine-month period. The allowance for loan losses
at December 31, 1999 was allocated as follows: $387,000 to one-to-four family
real estate loans, $480,000 to commercial real estate and commercial business
loans, $98,000 to consumer loans and $359,000 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.
December 31, 1999 March 31, 1999
----------------- --------------
(Dollars in Thousands)
Non-Accruing Loans .......................... $ 736 $ 315
Accruing Loans Delinquent 90 Days or More.... 76 91
Foreclosed Assets ........................... 239 226
------ -------
Total Non-Performing Assets ................. $1,051 $ 632
Total Non-Performing Assets as a
Percentage of Total Assets ........ .6% .4%
Total non-performing assets increased $419,000 from March 31, 1999 to
December 31, 1999. This increase is due primarily to the acquisition of Citizens
and the inclusion of the acquired loans in non-performing loans. Management
continually pursues collection of these loans in order to decrease the level of
non-performing loans.
16
OTHER ASSETS OF CONCERN. Other than the non-performing assets set forth in
the table above, as of December 31, 1999, 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 December 31, 1999 and March
31, 1999, cash and cash equivalents totaled $6.7 million and $4.5 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. Certificates of deposit as of December 31, 1999
maturing within one year total $54.0 million.
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 December 31, 1999, the
Company had $15.9 million 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 December 31, 1999 and
March 31, 1999, Classic Bank's liquidity ratios were 7.30% and 4.12%,
respectively. First National, as a national bank, is not subject to any
prescribed liquidity requirements.
At December 31, 1999, the Company had outstanding commitments to originate
loans of $11.0 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.
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 December 31, 1999, the capital
requirements applicable to Classic Bank and its actual capital ratios. As of
December 31, 1999, Classic Bank exceeded all current regulatory capital
standards.
17
Regulatory Actual Capital
Capital Requirement (CB Only)
---------------------------------- -------------------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
(Dollars in Thousands)
Risk-Based Capital
(to Risk Weighted Assets) $5,196 8.0% $6,421 9.9%
Tier 1 (Core) Capital
(to Adjusted Total Assets) 3,872 4.0 5,609 5.8
Classic Bank experienced a decrease in regulatory capital and the related
ratios as a result of the acquisition of Citizens. Citizens was merged into
Classic Bank resulting in increased assets for Classic, the creation of goodwill
and no change in capital levels.
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 December 31, 1999, the
capital requirements applicable to First National and its actual capital ratios.
As of December 31, 1999, First National exceeded all current regulatory capital
standards.
17
Regulatory Actual Capital
Capital Requirement (FN Only)
------------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based Capital
(to Risk Weighted Assets) $4,073 8.0% $8,353 16.4%
Tier 1 Capital
(to Risk Weighted Assets) 2,037 4.0 7,878 15.5
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.
18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
The Registrant filed the following current reports on Form 8-K during
the three months ended December 31, 1999:
October 19, 1999 announcing earnings of the September 30, 1999 quarter
and declaring a cash dividend.
19
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: February 11, 2000 /s/ David B. Barbour
----------------- ------------------------------------------
David B. Barbour, President,
Chief Executive Officer and Director
(Duly Authorized Officer)
Date: February 11, 2000 /s/ Lisah M. Frazier
----------------- ------------------------------------------
Lisah M. Frazier, Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
20
INDEX TO EXHIBITS
Exhibit
Number
27 Financial Data Schedule
21