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 December 31, 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.
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(Exact name of registrant as specified in its charter)
Delaware 61-1289391
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
or incorporation or organization)
344 Seventeenth Street, Ashland, Kentucky 41101
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(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 9, 1999, there were 1,322,500 shares of the Registrant's
common stock issued and 1,298,100 shares outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
CLASSIC BANCSHARES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 (Unaudited)
and March 31, 1998 3
Consolidated Statements of Income for the three and nine months
ended December 31, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity for the
nine months ended December 31, 1998 (Unaudited) and
Year Ended March March 31, 1998 5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial Condition and 10-16
Results of Operations
PART II.OTHER INFORMATION 17
Signatures 18
Index to Exhibits 19
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1998 1998
----------- -----------
(Unaudited)
ASSETS
Cash and due from bank $ 2,721,913 $ 2,500,841
Federal funds sold and securities purchased
under resell agreement - 1,131,414
Certificates of deposits in other
financial institutions - 293,000
Investment securities available for sale 25,657,526 18,176,807
Mortgage-backed securities available for sale 4,761,160 7,830,714
Loans receivable, net 97,143,302 90,100,000
Real estate acquired in the settlement of loans 282,722 229,390
Accrued interest receivable 1,019,808 851,767
Federal Home Loan Bank and
Federal Reserve Bank stock 1,366,250 1,297,150
Premises and equipment, net 4,532,320 4,468,002
Cost in excess of fair value of net assets
acquired (goodwill), net of accumulated
amortization 2,809,806 2,902,869
Other assets 1,353,438 1,338,572
------------- -------------
TOTAL ASSETS $ 141,648,245 $ 131,120,526
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 115,432,595 $ 104,926,667
Securities sold under agreement to repurchase 2,109,570 3,521,799
Advances from Federal Home Loan Bank 896,891 -
Other short-term borrowings 501,395 273,697
Accrued expenses and other liabilities 443,870 402,090
Accrued interest payable 435,212 390,409
Accrued income taxes 176,647 -
Long-term debt - 550,000
Deferred income taxes 764,383 648,802
------------- -------------
Total Liabilities $ 120,760,563 $ 110,713,464
------------- -------------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and 1,298,100 outstanding $ 13,225 $ 13,225
Additional paid-in capital 12,753,789 12,753,789
Retained earnings - substantially restricted 9,213,033 8,853,606
Accumulated other comprehensive income 433,393 287,171
Unearned ESOP shares (834,970) (834,970)
Unearned RRP shares (340,198) (371,879)
Treasury stock, at cost (350,590) (293,880)
------------- -------------
Total Stockholders' Equity $ 20,887,682 $ 20,407,062
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,648,245 $ 131,120,526
============= =============
See accompanying notes to consolidated financial statements.
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
Loans $ 2,024,654 $ 1,892,380 $ 5,883,790 $ 5,541,428
Investment securities 378,211 353,897 1,041,100 1,120,971
Mortgage-backed securities 73,798 130,870 327,415 424,384
Other interest earning assets 7,101 13,703 80,644 58,029
----------- ----------- ----------- -----------
Total Interest Income 2,483,764 2,390,850 7,332,949 7,144,812
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 1,205,290 1,058,765 3,531,031 3,139,859
Interest on FHLB Advances 10,432 92,539 67,543 277,372
Interest on other borrowed funds 46,190 65,153 166,697 196,524
----------- ----------- ----------- -----------
Total Interest Expense 1,261,912 1,216,457 3,765,271 3,613,755
----------- ----------- ----------- -----------
Net Interest Income 1,221,852 1,174,393 3,567,678 3,531,057
Provision for loss on loans 25,000 25,000 65,000 127,500
----------- ----------- ----------- -----------
Net interest income after
provision for loss on
loans 1,196,852 1,149,393 3,502,678 3,403,557
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges and other fees 123,991 110,844 336,982 269,069
Gain on sale of securities
available for sale - 10,437 3,904 28,491
Pension plan settlement gain - - - 329,915
Loss on disposal of assets - - - (31,971)
Other income 47,026 34,722 152,689 87,258
----------- ----------- ----------- -----------
Total Non-Interest Income 171,017 156,003 493,575 682,762
----------- ----------- ----------- -----------
NON-INTEREST EXPENSES
Employee compensation and benefits 467,084 437,965 1,435,628 1,337,003
Occupancy and equipment expense 151,013 122,060 438,714 397,728
Federal deposit insurance premiums 9,144 10,585 26,869 25,209
Loss (gain) on foreclosed real estate 2,731 (27,645) 3,645 25,595
Goodwill amortization 31,134 31,133 93,063 93,063
Other general and administrative
expenses 417,995 336,429 1,156,696 1,096,122
----------- ----------- ----------- -----------
Total Non-Interest Expense 1,079,101 910,527 3,154,615 2,974,720
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 288,768 394,869 841,638 1,111,599
Income tax expense (benefit) 56,231 113,977 202,278 319,976
----------- ----------- ----------- -----------
NET INCOME $ 232,537 $ 280,892 $ 639,360 $ 791,623
=========== =========== =========== ===========
Basic earnings per share $ 0.20 $ 0.23 $ 0.55 $ 0.65
=========== =========== =========== ===========
Diluted earnings per share $ 0.19 $ 0.23 $ 0.52 $ 0.65
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER UNEARNED UNEARNED
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP RRP TREASURY
STOCK CAPITAL EARNINGS INCOME SHARES SHARES STOCK TOTAL
-------- ----------- ---------- ------------- ---------- --------- -------- -----------
Balance at April 1, 1997 $13,225 $12,689,158 $8,172,085 $ (69,990) $(918,660) $(486,055) $(29,963) $19,369,800
Comprehensive income:
Net income for 1998 - - 1,020,486 - - - - 1,020,486
Other comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities
available for sale - - - 336,489 - - - 336,489
Less: Reclassification
adjustment - - - 19,250 - - - 19,250
Change in minimum pension
liability adjustment - - - 1,422 - - - 1,422
-----------
Total Comprehensive
Income - - - - - - - 357,161
-----------
Dividend paid - - (338,965) - - - - (338,965)
ESOP shares earned - 49,796 - - 83,690 - - 133,486
RRP shares earned - - - - - 110,283 - 110,283
RRP shares forfeited - 337 - - - 3,893 (4,230) -
Tax benefit from RRP - 14,498 - - - - - 14,498
Purchased 20,000 treasury
shares - - - - - - (259,687) (259,687)
------- ----------- ---------- --------- --------- --------- --------- -----------
Balances at March 31, 1998 13,225 12,753,789 8,853,606 287,171 (834,970) (371,879) (293,880) 20,407,062
Comprehensive income:
Net income for the nine
months ended
December 31, 1998 - - 639,360 - - - - 639,360
Other comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities
available for sale - - - 136,268 - - - 136,268
Change in minimum pension
liability adjustment - - - 9,954 - - - 9,954
-----------
Total Comprehensive
Income - - - - - - - 146,222
-----------
Dividend paid - - (279,933) - - - - (279,933)
RRP shares earned - - - - - 31,681 - 31,681
Purchased 4,200 treasury
shares - - - - - - (56,710) (56,710)
------- ----------- ---------- --------- --------- --------- --------- -----------
Balances at December 31, 1998 $13,225 $12,753,789 $9,213,033 $ 433,393 $(834,970) $(340,198) $(350,590) $20,887,682
======= =========== ========== ========= ========= ========= ========= ===========
See accompanying notes to consolidated financial statements.
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net Income $ 639,360 $ 791,623
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 285,999 229,840
Provision for loss on loans 65,000 127,500
Provision for loss on foreclosed
real estate - 50,000
Gain on sale of securities available
for sale (3,904) (28,491)
Loss on disposal of assets - 31,971
Gain on pension plan settlement - (329,915)
Federal Home Loan Bank stock dividends (55,000) (50,900)
Deferred income tax expense (benefit) 34,814 118,622
Loss (gain) on foreclosed real estate 1,700 (30,353)
Amortization and accretion of invesment
securities premiums and discounts, net 71,868 5,687
Amortization of goodwill 93,063 93,063
Decrease (increase) in:
Accrued interest payable (168,041) (237,271)
Other assets (14,866) 183,726
Increase (decrease) in:
Accrued interest payable 44,803 131,500
Accrued income taxes 176,647 7,314
Accounts payable and accrued expenses 41,781 201,666
---------- ----------
Net cash provided by
operating activities 1,213,224 1,295,582
---------- ----------
INVESTING ACTIVITIES
Securities:
Proceeds from sale, maturities or calls 10,338,703 8,230,979
Purchased (17,536,506) (6,242,157)
Mortgage-backed securities:
Proceeds from sale 5,035,426 1,004,375
Purchased (3,839,846) (2,187,378)
Principal payments 1,715,222 894,120
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 (7,119,756) (7,472,490)
Proceeds from the sale of foreclosed
real estate 31,700 100,000
Proceeds from the sale of equipment - 53,403
Purchases of software (6,677) (26,321)
Purchases of premises ad equipment (352,377) (828,589)
---------- ----------
Net cash used by
investing activities (11,455,211) (6,474,058)
---------- ----------
See accompanying notes to consolidated financial statements.
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
---------- -----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits $10,505,928 $ (800,659)
Net proceeds from FHLB borrowings 896,891 2,010,000
Repayment of long-term borrowings (550,000) (75,000)
Decrease in securities sold under
agreement to repurchase (1,412,229) (1,426,680)
Net increase (decrease) in
short-term borrowings 227,698 275,464
Purchase of treasury stock (56,710) (259,687)
Dividends paid (279,933) (254,398)
----------- -----------
Net cash (used) provided by
financing activities 9,331,645 (530,960)
----------- -----------
(Decrease) increase in cash and
cash equivalents (910,342) (5,709,436)
Cash and cash equivalent at
beginning of period 3,632,255 8,834,309
----------- -----------
Cash and cash equivalents at
end of period $ 2,721,913 $ 3,124,873
=========== ===========
Additional cash flows and
supplementary information
Cash paid during the period for:
Interest on deposits and borrowings $ 801,420 $ 1,371,015
Taxes 141,550 255,082
Assets acquired in settlement of loans 79,400 59,989
See accompanying notes to consolidated financial statements.
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
nine months ended December 31, 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 December 31, 1998, and the results of operations for all interim periods
presented. Operating results for the nine months ended December 31, 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 December 31, 1998 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 1,182,513 and 1,166,999 for the three month period ended
December 31, 1998 and 1997 and 1,179,391 and 1,170,144 for the nine month period
ended December 31, 1998 and 1997. Weighted average number of shares used in the
diluted earnings per share computations was 1,236,023 and 1,220,553 for the
three month period ended December 31, 1998 and 1997 and 1,233,346 and 1,223,698
for the nine month period ended December 31, 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 $7,253 and $30,683 for the three
months ended December 31, 1998 and 1997 and $60,545 and $92,999 for the nine
months ended December 31, 1998 and 1997. As of December 31, 1998, the Company
considered 83,497 shares as unearned ESOP shares with a fair value of
$1,231,581.
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, options on 4,500 shares at $13.875 and options on October 12,
1998 shares at $13.75. 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 52,700 shares. Ungranted RRP shares (200) 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 January 18, 1999, the Board declared a cash dividend of $.08 per
share payable on February 15, 1999 to shareholders of record on February 1,
1999.
(7) Acquisition of Citizens Bank, Grayson
On January 19, 1999 the Company announced the execution a definitive
agreement which will result in the acquisition of Citizens Bank, Grayson. The
transaction is valued at approximately $4.5 million. In the transaction Citizens
shareholders will receive$75 in cash for each share of Citizens common stock.
The transaction is subject to the approval of the shareholders of Citizens as
well as banking regulators.
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company's total assets increased $10.5 million, or 8.0%, from
$131.1 million at March 31, 1998 to $141.6 million at December 31, 1998. The
increase was due primarily an increase in loans of $7.0 million, and an increase
in investment securities of $7.5 million, partially offset by a decrease in cash
and cash equivalents of $1.0 million and a decrease in mortgage-backed
securities of $3.0 million.
Net loans receivable increased $7.0 million from $90.1 million at March
31, 1998 to $97.1 million at December 31, 1998 due to aggressive origination
efforts and improved loan demand that resulted in originations of $12.0 million
of one to four family loans, $4.5 million in commercial real estate loans, $10.9
million in commercial business loans and $8.4 million in consumer loans offset
by repayments since March 31, 1998.
Investment securities increased approximately $7.5 million from $18.2
million at March 31, 1998 to $25.7 million at December 31, 1998 primarily as the
result of purchases of $17.5 million and an increase in the market value of
these available for sale securities partially offset by sold or called
securities of $10.2. Mortgage-backed securities decreased approximately $3.0
million from $7.8 million at March 31, 1998 to $4.8 million at December 31,
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 $1.7 million and a decrease in the market value of these available
for sale securities.
Net deposits increased $10.5 million from $104.9 million at March 31,
1998 to $115.4 million at December 31, 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 December 31, 1998. The decrease was due to a
withdrawal in the normal course of business.
Federal Home Loan Bank advances increased to $897,000 at December 31,
1998 compared to no advances at March 31, 1998. Net proceeds from the advances
were used to fund loans.
Total stockholders' equity was $20.4 million at March 31, 1998 compared to
$20.9 million at December 31, 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 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
summarizes 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. However, the Company has contacted commercial customers
with a lending relationship greater than $200,000 to determine Y2K compliance.
Each customer was rated based on Y2K readiness. 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.
Validation (Testing) Phase. The validation phase is designed to test
the ability of hardware and software to accurately process date sensitive data.
The Company has completed validation testing of each mission critical system.
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 completed this phase by 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 $21,000 for testing its
data processing software. These costs are being amortized through March 2000.
The Company also has spent costs of approximately $10,000 in new hardware
purchases. These costs will be capitalized and depreciated over the period of
time allowed by accounting guidelines.
Contingency Plans. The Company has developed a contingency plan
outlining alternative plans if remediation efforts are not successful and
established trigger dates for activating the remediation contingency plan. In
addition, a business resumption contingency plan has been implemented, which
addresses the potential failure of mission critical systems to achieve Year 2000
readiness. Employee training for contingency plans will be completed by June 30,
1999.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE
THREE AND NINE MONTHS ENDED DECEMBER 31, 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 $233,000 during the three months
ended December 31, 1998 compared to net income of $281,000 during the three
months ended December 31, 1997. The decrease in income of $48,000 between the
two periods was primarily the result of an increase in non-interest expenses of
$168,000 partially offset by an increase in net interest income of $47,000, an
increase in non-interest income of $15,000, and a decrease in income taxes of
$58,000.
The Company reported net income of $639,000 for the nine months ended
December 31, 1998 compared to net income of $792,000 for the nine months ended
December 31, 1997. The decrease in income of $153,000 between the two periods
was primarily the result of a decrease in non-interest income of $189,000 and an
increase in non-interest expenses of $180,000 partially offset by an increase in
net interest income of $36,000 a decrease in provision for loan losses of
$62,000, and a decrease in income taxes of $118,000.
Interest Income. Total interest income increased $93,000 and $188,000
for the three and nine months ended December 31, 1998 as compared to the three
and nine months ended December 31, 1997. The increase in interest income for the
periods resulted primarily from an increase in the average balance of
interest-earning assets of $5.8 million from $120.7 million at December 31, 1997
to $126.5 million at December 31, 1998. The increase in the average balance 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 7.7% for the three and nine months ended December
31, 1998 compared to 7.9% for the three and nine months ended December 31, 1997.
The decrease was due to a decrease in the average rate earned on loans.
Interest Expense. Interest expense increased $45,000 and $152,000 for
the three and nine months ended December 31, 1998 as compared to the same period
in 1997. 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 $101.1 million at December 31, 1997
to $107.0 million at December 31, 1998 as a result of an increase in deposits.
The average rate paid on interest-bearing liabilities was 4.7% and 4.6% for the
three and nine months ended December 31, 1998 compared to 4.8% for the three and
nine months ended December 31, 1997.
Provision for Loan Losses. The Company's provision for loan losses
totaled $25,000 and $65,000 for the three and nine months ended December 31,
1998 compared to $25,000 and $127,500 for the three and nine months ended
December 31, 1997 based on management's overall assessment of the loan
portfolio. The decrease for the nine-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 increased approximately
$15,000 for the three months ended December 31, 1998 compared to the same period
in 1997. The increase for the three-month period is primarily the result of an
increase in service charges and other fees on deposits of $13,000, an increase
on fees earned on the origination of secondary market loans of $12,000 offset by
a decrease in the gain on sale of securities of $10,000.
Non-interest income decreased $189,000 for the nine months ended
December 31, 1998 compared to the same period in 1997. The decrease for the
nine-month period was primarily the result of a one time gain of $330,000
recorded from the settlement of First National's pension plan in 1997 offset by
a loss on disposal of assets of $32,000 recorded in 1997. Non-interest income
also decreased due to a decrease in the gain on available for sale securities of
$24,000 for the nine months ended December 31, 1998. These decreases were offset
by an increase in service charges and other fees on deposits of $68,000 for the
nine months ended December 31, 1998 and an increase in other income of $65,000
for the nine months ended December 31, 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 on fees earned from the origination of secondary market loans.
Non-interest Expense. Non-interest expense increased $168,000 for the
three months ended December 31, 1998 compared to the same period in 1997.
Non-interest expenses increased for the three month period due to an increase in
occupancy and equipment expense of $29,000, an increase in employee compensation
of $29,000, a decrease in gain on foreclosed real estate $25,000, an increase in
stationary, printing and other supplies of $18,000, an increase in advertising
expense of $8,000 and an increase in other general and administrative expenses
of $59,000. These expenses increased as a result of the opening of two new
banking offices in the first quarter of fiscal 1998.
Non-interest expenses increased $180,000 for the nine months ended
December 31, 1998 compared to the same period in 1997. Non-interest expenses
increased for the nine month period due to an increase in compensation and
benefits of $98,000 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 $41,000 as a result of the opening of the two new banking offices, an
increase in ATM expense of $27,000 as the result of an increase in the number of
ATM locations, and an increase in marketing and advertising of $23,000 and an
increase in other general and administrative expenses of $13,000 partially
offset by a decrease in the loss on foreclosed real estate of $22,000.
Income Tax Expense. Income tax expense decreased $58,000 and $118,000
for the three and nine months ended December 31, 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 December 31, 1998 was $851,000 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 December 31, 1998 was allocated as follows:
$171,000 to one-to-four family real estate loans, $18,000 to commercial real
estate loans, $63,000 to commercial business loans, $79,000 to consumer loans,
$55,000 to year 2000 and $465,000 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, 1998 March 31, 1998
----------------- --------------
(Dollars in Thousands)
Non-Accruing Loans $ 260 $ 308
Accruing Loans Delinquent 90 Days or More 653 25
Foreclosed Assets 282 229
------ ---
Total Non-Performing Assets $1,195 $ 562
Total Non-Performing Assets as a
Percentage of Total Assets .8% .4%
Total non-performing assets increased $633,000 from March 31, 1998 to
December 31, 1998. The loans delinquent 90 days or more consisted primarily of
1-4 family mortgages. 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 December 31, 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 December 31, 1998
and March 31, 1998, cash and cash equivalents totaled $2.7 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 December 31, 1998, the
Company had $897,000 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 December 31, 1998 and
March 31, 1998, Classic Bank's liquidity ratios were 4.67% and 4.43%,
respectively. First National, as a national bank, is not subject to any
prescribed liquidity requirements.
At December 31, 1998, the Company had outstanding commitments to
originate loans of $9.3 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, 1998, the
capital requirements applicable to Classic Bank and its actual capital ratios.
As of December 31, 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) $3,261 8.0% $8,503 20.9%
Tier 1 (Core) Capital
(to Risk Weighted Assets) 2,750 4.0 8,159 20.0
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, 1998, the
capital requirements applicable to First National and its actual capital ratios.
As of December 31, 1998, First National exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (CB Only)
------------------- ------------------
Amount Percent Amount Percent
-------- -------- ------ -------
(Dollars in Thousands)
Risk-Based Capital
(to Risk Weighted Assets) $3,732 8.0% $8,801 18.9%
Tier 1 Capital
(to Risk Weighted Assets) 1,866 4.0 8,295 17.8
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Change 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
Exhibits 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, 1998:
Press release, dated October 28, 1998 announcing the earnings of
the September 30, 1998 quarter, declaring a cash dividend and
announcing the intent to initiate a stock repurchase program.
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 12, 1999 /s/ David B. Barbour
-----------------------------------------
David B. Barbour, President, Chief
Executive Officer and Director
(Duly Authorized Officer)
Date: February 12, 1999 /s/ Lisah M. Frazier
-----------------------------------------
Lisah M. Frazier, Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
INDEX TO EXHBITS
Exhibit
Number
- -------
27 Financial Data Schedule