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, 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)
or 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 August 9, 1999, 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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and March 31, 1999 3
Consolidated Statements of Income for the three and
six months ended September 30, 1999 and 1998 4-5
Consolidated Statements of Stockholders' Equity for the
six months ended September 30, 1999 (Unaudited) and
Year Ended March 31, 1999 6
Consolidated Statements of Cash Flows for the six months
ended September 30, 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
September 30, March 31,
1999 1999
------------- ------------
(Unaudited)
ASSETS
- ------
Cash and due from bank $ 4,277,280 $ 3,088,248
Federal funds sold 29,822 1,397,908
Securities available for sale 24,303,801 25,141,436
Mortgage-backed and related securities available for sale 3,693,883 4,479,136
Loans receivable, net 123,842,458 97,527,492
Real estate acquired in the settlement of loans 245,590 225,590
Accrued interest receivable 1,169,506 951,877
Federal Home Loan Bank and Federal Reserve Bank stock 1,423,050 1,384,450
Premises and equipment, net 5,206,877 4,523,720
Cost in excess of fair value of net assets acquired
(goodwill), net of accumulated amortization 5,816,967 2,779,349
Other assets 1,180,679 1,239,835
------------ ------------
TOTAL ASSETS $171,189,913 $142,739,041
- ------------ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
Non-interest bearing demand deposits $ 13,623,909 $ 9,600,258
Savings, NOW, and money market demand deposits 46,141,128 35,674,021
Other time deposits 80,388,838 72,457,492
------------ ------------
Total deposits 140,153,875 117,731,771
Federal funds purchased and securities sold
under agreements to repurchase 4,289,893 2,817,154
Advances from Federal Home Loan Bank 5,294,297 387,739
Other short-term borrowings 1,059,630 84,578
Accrued expenses and other liabilities 490,863 428,065
Accrued interest payable 551,881 418,642
Accrued income taxes - 45,134
Deferred income taxes 65,247 536,978
------------ ------------
Total Liabilities $151,905,686 $122,450,061
------------ ------------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and outstanding $ 13,225 $ 13,225
Additional paid-in capital 12,806,544 12,806,544
Retained earnings - substantially restricted 9,690,153 9,362,668
Accumulated other comprehensive income (932,774) 83,977
Unearned ESOP shares (785,150) (785,150)
Unearned RRP shares (234,406) (294,332)
Treasury stock, at cost (1,273,365) (897,952)
------------ ------------
Total Stockholders' Equity $ 19,284,227 $ 20,288,980
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $171,189,913 $142,739,041
- ------------------------------------------ ============ ============
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,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ------------ ----------- ------------
INTEREST INCOME
- ---------------
Loans $ 2,538,893 $1,941,667 $4,767,803 $3,859,136
Investment securities 396,547 325,668 793,450 662,889
Mortgage-backed securities 53,702 111,274 113,043 253,617
Other interest earning assets 5,756 55,145 19,236 73,543
---------- ---------- ---------- ----------
Total Interest Income 2,994,898 2,433,754 5,693,532 4,849,185
---------- ---------- ---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits 1,345,625 1,208,474 2,567,053 2,325,741
Interest on FHLB advances 54,127 13,202 86,481 57,111
Interest on other borrowed funds 55,637 54,440 97,658 120,506
---------- ---------- ---------- ----------
Total Interest Expense 1,455,389 1,276,116 2,751,192 2,503,358
---------- ---------- ---------- ----------
Net Interest Income 1,539,509 1,157,638 2,942,340 2,345,827
Provision for loss on loans 52,500 15,000 87,500 40,000
---------- ---------- ---------- ----------
Net interest income after
provision for loss on
loans 1,487,009 1,142,638 2,854,840 2,305,827
---------- ---------- ---------- ----------
NON-INTEREST INCOME
- -------------------
Service charges and other fees 169,798 105,187 318,683 222,279
(Loss) gain on sale of securities
available for sale (2,500) 3,340 (2,500) 3,904
Gain (Loss) on disposal of assets 3,704 - 3,704 -
Other income 43,708 68,688 85,629 96,375
---------- ---------- ---------- ----------
Total Non-Interest Income 214,710 177,215 405,516 322,558
---------- ---------- ---------- ----------
NON-INTEREST EXPENSES
- ---------------------
Employee compensation and benefits 654,549 471,905 1,212,399 968,545
Occupancy and equipment expense 192,497 149,460 364,665 287,701
Federal deposit insurance premiums 10,310 9,042 20,024 17,725
Loss (gain) on foreclosed real estate 1,708 875 1,983 914
Other general and administrative
expenses 443,069 366,418 896,685 738,700
---------- ---------- ---------- ----------
Total Non-Interest Expense 1,302,133 997,700 2,495,756 2,013,585
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 399,586 322,153 764,600 614,800
- --------------------------
Income tax expense 76,124 81,236 144,046 146,047
---------- ---------- ---------- ----------
INCOME BEFORE GOODWILL AMORTIZATION 323,462 240,917 620,554 468,753
- -----------------------------------
---------- ---------- ---------- ----------
Goodwill amortization (62,234) (31,133) (107,801) (61,929)
---------- ---------- ---------- ----------
NET INCOME $ 261,228 $ 209,784 $ 512,753 $ 406,824
- ---------- ========== ========== ========== ==========
Basic earnings per share before goodwill
amortization $ 0.29 $ 0.20 $ 0.55 $ 0.40
Goodwill amortization (0.06) (0.02) (0.10) (0.05)
---------- ---------- ---------- ----------
Basic earnings per share after goodwill
amortization $ 0.23 $ 0.18 $ 0.45 $ 0.35
========== ========== ========== ==========
Diluted earnings per share before goodwill
amortization $ 0.28 $ 0.19 $ 0.54 $ 0.38
Goodwill amortization (0.06) (0.02) (0.10) (0.05)
---------- ---------- ---------- ----------
Diluted earnings per share after goodwill
amortization $ 0.22 $ 0.17 $ 0.44 $ 0.33
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- ---------- --------- ----------
Net Income $ 261,228 $ 209,784 $ 512,753 $ 406,824
--------- --------- ---------- ---------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period (430,417) 59,665 (1,018,401) 56,254
Reclassification adjustments for realized
gains (losses) included in earnings 1,650 (2,204) 1,650 (2,577)
Minimum pension liability adjustment - - - 119
--------- --------- ---------- ---------
Other comprehensive income (428,767) 57,461 (1,016,751) 53,796
--------- --------- ---------- ---------
Comprehensive Income (Loss) $ (167,539) $ 267,245 $ (503,998) $ 460,620
========== ========= ========== =========
Accumulated Other Comprehensive Income $ (932,774) $ 340,967 $ (932,744) $ 340,967
========== ========= ========== =========
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON
COMMON PAID-IN RETAINED AVAILABLE FOR
STOCK CAPTIAL EARNINGS SALE SECURITIES
--------- ------------ ----------- ---------------
Balance at April 1, 1998 $ 13,225 $ 12,753,789 $ 8,853,606 $ 297,125
Net income for the year
ended March 31, 1999 - - 885,324 -
Dividend paid - - (376,262) -
ESOP shares earned - 28,198 - -
RRP shares earned - - - -
RRP shares granted 4,742
Tax benefit from RRP - 19,815 - -
Purchased 43,894 treasury shares - - - -
Change in minimum
pension liability adjustment - - - -
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 six months
ended September 30, 1999 - - 512,753 -
Dividend paid - - (185,268) -
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 $480,519 - - - (1,016,751)
-------- ------------ ----------- -----------
Balances at September 30, 1999 $ 13,225 $ 12,806,544 $ 9,690,153 $ (932,774)
======== ============ ========== ===========
MINIMUM
PENSION
LIABILITY UNEARNED
ADJUSTMENT ESOP SHARES RRP SHARES STOCK TOTAL
---------- ----------- ---------- ----------- ------------
Balance at April 1, 1998 $ (9,954) $ (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
RRP shares 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 - - - 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 six months
ended September 30, 1999 - - - - 512,753
Dividend paid - - - - (185,268)
RRP shares earned - - 59,926 - 59,926
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 $480,519 - - - - (1,016,751)
--------- ---------- --------- ----------- ------------
Balances at September 30, 1999 $ - $ (785,150) $(234,406) $(1,273,365) $ 19,284,227
========= ========== ========= =========== ============
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ -------------
OPERATING ACTIVITIES
- --------------------
Net Income $ 512,753 $ 406,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 254,339 188,784
Provision for loss on loans 87,500 40,000
Loss (gain) on sale of securities
available for sale 2,500 (3,904)
Gain on disposal of equipment (3,704) -
Federal Home Loan Bank stock dividends (38,600) (36,700)
Deferred income tax expense (benefit) 46,176 14,408
Amortization and accretion of invesment
securities premiums and discounts, net 47,954 50,737
RRP shares earned 59,926 -
Amortization of goodwill 107,801 61,929
Decrease (increase) in:
Accrued interest receivable (217,629) (89,037)
Other assets 59,156 2,695
Increase (decrease) in:
Accrued interest payable 133,239 62,522
Accrued income taxes (45,134) 125,220
Accounts payable and accrued expenses 62,798 10,419
----------- ------------
Net cash provided by operating activities 1,069,075 833,897
----------- ------------
INVESTING ACTIVITIES
- --------------------
Securities:
Proceeds from sale, maturities or calls 527,500 10,298,703
Purchased - (16,481,096)
Mortgage-backed securities:
Proceeds from sale - 5,035,426
Purchased - (3,839,846)
Principal payments 734,452 1,467,148
Redemption of Federal Reserve Bank Stock 45,000 -
Purchased Federal Home Loan Bank stock - (14,100)
Certificates of deposits with other banks:
Proceeds from maturies - 194,000
Loan originations and principal payments, net (18,135,566) (5,970,083)
Proceed from sale of equipment 28,000 -
Purchases of software (4,755) (6,677)
Purchases of premises and equipment (163,313) (332,574)
Cash invested in purchase of Bank
subsidiary in excess of cash and
cash equivalents acquired (1,497,572) -
----------- ------------
Net cash used by investing activities (18,466,254) (9,649,099)
----------- ------------
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------ ------------
FINANCING ACTIVITIES
- --------------------
Net increase in deposits $ 10,424,457 $12,259,748
Net proceeds from FHLB borrowings 4,906,558 397,325
Repayment of long-term borrowings - (50,000)
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 1,472,739 (1,411,805)
Net increase in short-term borrowings 975,052 582,538
Purchase of treasury stock (375,413) -
Dividends paid (185,268) (182,414)
------------ -----------
Net cash (used) provided by financing activities 17,218,125 11,595,392
------------ -----------
Increase (decrease) in cash and cash equivalents (179,054) 2,780,190
Cash and cash equivalent at beginning of period 4,486,156 3,632,255
------------ -----------
Cash and cash equivalents at end of period $ 4,307,102 $ 6,412,445
============ ===========
Additional cash flows and supplementary information
Cash paid during the period for:
Interest on deposits and borrowings $ 688,281 $ 495,095
Taxes $ 155,001 $ 112,341
Assets acquired in settlement of loans $ 45,000 $ 37,782
Net unrealized gain (loss) on securities $(1,016,751) $ 53,677
available for sale
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 -
See accompanying notes to consolidated financial statements.
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.
(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 September 30, 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 September 30, 1999. 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, 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
September 30, 1999, and the results of operations for all interim periods
presented. Operating results for the six months ended September 30, 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.
(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.
9
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 1,127,512 and 1,182,451 for the three-month period ended
September 30, 1999 and 1998 and 1,127,548 and 1,179,327 for the six month period
ended September 30, 1999 and 1998. Weighted average number of shares used in the
diluted earnings per share computations was 1,159,509 and 1,236,459 for the
three-month period ended September 30, 1999 and 1998 and 1,159,544 and 1,232,710
for the six month period ended September 30, 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. 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 $17,361 and $17,929 for the three months ended September 30,
1999 and 1998 and $35,284 and $53,292 for the six months ended September 30,
1999 and 1998. As of September 30, 1999, the Company considered 78,515 shares as
unearned ESOP shares with a fair value of $1,099,210.
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.
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.
10
(7) Cash Dividend
-------------
On October 11, 1999, the Board declared a cash dividend of $.08 per share
payable on November 8, 1999 to shareholders of record on October 25, 1999.
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 $28.5 million, or 20.0%, from $142.7
million at March 31, 1999 to $171.2 million at September 30, 1999. The increase
was due primarily to an increase in loans of $26.3 million, an increase in
premises and equipment of $700,000, an increase in goodwill of $3.0 million
partially offset by a decrease in investment securities of $800,000 and a
decrease in mortgage-backed securities of $800,000.
Net loans receivable increased $26.3 million from $97.5 million at March
31, 1999 to $123.8 million at September 30, 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 $15.4 million in commercial business loans, $14.8
million in one-to-four family mortgage loans, $7.0 million in consumer loans and
$5.3 million in commercial real estate loans offset by repayments since March
31, 1999.
Investment securities decreased approximately $800,000 from $25.1 million
at March 31, 1999 to $24.3 million at September 30, 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 decrease in the market value of
these available for sale securities. These securities experienced approximately
a $1.5 million temporary decline in market value since March 31, 1999. This
decrease is due primarily to a significant increase in interest rates and the
duration of the securities. Mortgage-backed securities decreased approximately
$800,000 from $4.5 million at March 31, 1999 to $3.7 million at September 30,
1999. The decrease was primarily the result of principal repayments of
approximately $734,000 and a decrease in the market value of these available for
sale securities.
Premises and equipment increased approximately $700,000 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.
Net deposits increased $22.5 million from $117.7 million at March 31, 1999
to $140.2 million at September 30, 1999 with $12.0 million of the increase
attributable to the acquisition of Citizens. The remainder of the increase is
the result of aggressive 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 $10.5 million, and other time deposits
consisting primarily of certificates of deposit increased $8.0 million.
Federal Home Loan Bank advances increased $4.9 million from $388,000 at
March 31, 1999 to $5.3 million at September 30, 1999. Net proceeds from the
advances were used to fund the increase in loans.
Total stockholders' equity was $20.3 million at March 31, 1999 compared
to $19.3 million at September 30, 1999. The decrease was due to a decrease in
12
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.
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.
13
The Company's primary 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. The Company does not anticipate having
any material additional costs.
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.
The Company's contingency plan requires in the event that the Company's mission
critical systems become inoperable that all procedures performed by those
systems would be performed manually. Employee training for these manual
procedures will continue to be done through the end of 1999.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE
- ---------------------------------------------------------------
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 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.
14
The Company reported net income of $261,000 during the three months ended
September 30, 1999 compared to net income of $210,000 during the three months
ended September 30, 1998. The increase in income of $51,000 between the two
periods was primarily the result of an increase in net interest income of
$382,000, an increase in non-interest income of $37,000 and a decrease in income
taxes of $5,000 partially offset by an increase in provision for loss on loans
of $37,000 and an increase in non-interest expenses of $336,000.
The Company reported net income of $513,000 for the six months ended
September 30, 1999 compared to net income of $407,000 for the six months ended
September 30, 1998. The increase in income of $106,000 between the two periods
was primarily the result of an increase in net interest income of $597,000, an
increase in non-interest income of $83,000 and a decrease in income taxes of
$2,000 partially offset by an increase in provision for loss on loans of $48,000
and an increase in non-interest expenses of $528,000.
Interest Income. Total interest income increased $561,000 and $845,000 for
the three and six months ended September 30, 1999 as compared to the three and
six months ended September 30, 1998. The increase in interest income for the
periods resulted primarily from an increase in the average balance of
interest-earning assets of $19.7 million from $125.3 million for the six months
ended September 30, 1998 to $145.0 million for the six months ended September
30, 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 7.8% and 7.9%
for the three and six months ended September 30, 1999 compared to 7.6% and 7.7%
for the three and six months ended September 30, 1998.
Interest Expense. Interest expense increased $179,000 and $248,000 for the
three and six months ended September 30, 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 $106.1 million for the six months
ended September 30, 1998 to $129.3 million for the six months ended September
30, 1999 as a result of an increase in deposits and an increase in FHLB and
other borrowings. The average rate paid on interest-bearing liabilities was 4.3%
for the three and six months ended September 30, 1999 compared to 4.7% for the
three and six months ended September 30, 1998. The decrease in the average rate
paid on interest-bearing liabilities 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
$52,000 and $88,000 for the three and six months ended September 30, 1999
compared to $15,000 and $40,000 for the three and six months ended September 30,
1998 based on management's overall assessment of the loan portfolio. The
increase for the three and six month period was due to an increase in
charge-offs and management's decision to increase 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
15
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 $37,000
for the three months ended September 30, 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 $64,000 and a gain on
disposal of assets of $4,000 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. 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 $83,000 for the six months
ended September 30, 1999 compared to the same period in 1998. The increase for
the six month period is primarily the result of an increase in service charges
and other fees on deposits of $96,000 and a gain on disposal of assets of $4,000
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 $11,000.
Non-interest Expense. Non-interest expense increased $336,000 for the three
months ended September 30, 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 $183,000, an increase in occupancy and
equipment expense of $43,000, an increase in goodwill amortization of $31,000,
an increase in ATM expense of $6,000, an increase in marketing and advertising
expense of $8,000, an increase in legal and accounting fees of $26,000, an
increase in stationary, printing and other supplies of $18,000 and an increase
in other general and administrative expenses of $21,000. 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 and additional costs as a result of
improved technology put in place by the Company. Goodwill amortization increased
due to the goodwill recorded in connection with the acquisition of Citizens.
Non-interest expense increased $528,000 for the six months ended September
30, 1999 compared to the same period in 1998. Non-interest expenses increased
for the six month period due to an increase in compensation and benefits of
$244,000, an increase in occupancy and equipment expense of $77,000, an increase
in goodwill amortization of $46,000, an increase in ATM expense of $6,000, an
increase in marketing and advertising expense of $18,000, an increase in legal
and accounting fees of $25,000, an increase in stationary, printing and other
supplies of $48,000, an increase in telephone expense of $17,000, and an
increase in other general and administrative expenses of $47,000. 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. Goodwill amortization
increased due to the goodwill recorded in connection with the acquisition of
Citizens. Stationary, printing and other general administrative expenses
increased as a result of the significant growth that the Company experienced
during the six month period and the costs associated with servicing a larger
customer base.
16
Income Tax Expense. Income tax expense decreased $5,000 and $2,000 for the
three and six months ended September 30, 1999 primarily due to 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, 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 $87,000 for the six-month period,
recorded an allowance of $550,000 from the acquisition of Citizens and had net
charge-offs of $137,000 for the six-month period. The allowance for loan losses
at September 30, 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, $70,000 to year 2000 and $250,000 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, 1999 March 31, 1999
------------------ --------------
(Dollars in Thousands)
Non-Accruing Loans ............................ $ 471 $ 315
Accruing Loans Delinquent 90 Days or More...... 293 91
Foreclosed Assets ............................. 271 226
------- ------
Total Non-Performing Assets ................... $ 1,035 $ 632
Total Non-Performing Assets as a
Percentage of Total Assets ........... .6% .4%
Total non-performing assets increased $403,000 from March 31, 1999 to
September 30, 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.
Other Assets of Concern. Other than the non-performing assets set forth in
the table above, as of September 30, 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.
17
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, 1999 and March
31, 1999, cash and cash equivalents totaled $4.3 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 September 30, 1999
maturing within one year total $63.4 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 September 30, 1999, the
Company had $5.3 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 September 30, 1999 and
March 31, 1999, Classic Bank's liquidity ratios were 4.63% and 4.12%,
respectively. First National, as a national bank, is not subject to any
prescribed liquidity requirements.
At September 30, 1999, the Company had outstanding commitments to originate
loans of $12.6 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 September 30, 1999, the capital
requirements applicable to Classic Bank and its actual capital ratios. As of
September 30, 1999, Classic Bank 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) $5,008 8.0% $6,264 10.0%
Tier 1 (Core) Capital
(to Adjusted Total Assets) 3,735 4.0 5,481 5.9
18
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 September 30, 1999, the
capital requirements applicable to First National and its actual capital ratios.
As of September 30, 1999, First National exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (FN Only)
------------------- -----------------
Amount Percent Amount Percent
-------- -------- ------ -------
Risk-Based Capital
(to Risk Weighted Assets) $4,121 8.0% $8,419 16.3%
Tier 1 Capital
(to Risk Weighted Assets) 2,060 4.0 7,991 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.
19
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
The annual meeting of Shareholders (the "Meeting") of Classic
Bancshares, Inc. was held on July 26, 1999. The matters approved by
shareholders at the Meeting and the number of votes cast for, against
or withheld (as well as the number of abstentions) as to each matter
are as follows:
PROPOSAL NUMBER OF VOTES
------------------------------------
Broker
For Withheld Non-votes
------- -------- ---------
Election of the following directors
for the terms indicated:
Robert B. Keifer, Jr. (three years) 946,930 6,665 0
David A. Lang (three years) 946,930 6,665 0
Robert L. Bayes (three years) 946,930 6,665 0
A. Bruce Addington (three years) 946,930 6,665 0
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
The ratification of the appointment
of Smith, Goolsby, Artis & Reams,
P.S.C. as the Company's auditors
for the fiscal year ending
March 31, 2000 947,895 1,300 4,400 0
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 September 30, 1999:
Press release, dated July 26, 1999 announcing earnings for the
quarter ending June 30, 1999 and declaring a cash dividend.
20
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 15, 1999 /s/ David B. Barbour
--------------------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Duly Authorized
Officer)
Date: November 15, 1999 /s/ Lisah M. Frazier
---------------------------------------------
Lisah M. Frazier, Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
21
INDEX TO EXHIBITS
Exhibit
Number
27 Financial Data Schedule
22