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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 0-27170
CLASSIC BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 61-1289391
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
344 Seventeenth Street, Ashland, Kentucky 41101
- --------------------------------------------------------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 325-4789
--------------
Check here whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 6, 1996, there were 1,322,500 shares of the
Registrant's common stock issued and outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
CLASSIC BANCSHARES, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (Unaudited)
and March 31, 1996 3
Consolidated Statements of Income for the three months
ended June 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity for the three months
ended June 30, 1996 and Year Ended March 31, 1996 5
Consolidated Statements of Cash Flows for the three months ended
June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-14
PART II. OTHER INFORMATION 15
Signatures 16
Index to Exhibits 17
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1996 1996
---- ----
(Unaudited)
ASSETS
Cash and due from bank $ 1,335,228 $ 1,531,862
Federal funds sold and securities purchased under resell agreement 505,000 975,000
Certificates of deposits in other financial institutions 4,550,935 4,599,600
Investment securities available for sale 10,241,581 10,438,445
Mortgage-backed securities available for sale 2,762,247 2,840,339
Loans receivable, net 47,120,814 43,721,967
Foreclosed real estate, net 10,000 5,000
Accrued interest receivable 416,621 331,991
Federal Home Loan Bank stock 631,600 620,800
Office property and equipment, net 772,345 723,930
Deferred income taxes 69,729 26,180
Other assets 338,014 267,880
-------------- ----------------
TOTAL ASSETS $ 68,754,114 $ 66,082,994
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 46,418,764 $ 46,200,423
Advances from Federal Home Loan Bank 2,500,000 --
Accrued interest on deposits 102,523 140,035
Accrued income taxes 19,402 --
Accounts payable and accrued expenses 208,503 242,273
-------------- ----------------
Total Liabilities $ 49,249,192 $ 46,582,731
-------------- ----------------
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 12,710,898 12,710,898
Retained earnings - substantially restricted 7,868,419 7,707,753
Net unrealized gain (loss) on securities available for sale (70,077) 86,285
Unearned ESOP shares (1,005,100) (1,005,100)
Minimum pension liability adjustment (12,443) (12,798)
-------------- ----------------
Total Stockholders' Equity $ 19,504,922 $ 19,500,263
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,754,114 $ 66,082,994
============== ================
See accompanying notes to consolidated financial statements.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------
1996 1995 (1)
---- --------
INTEREST INCOME
Loans $ 849,320 $ 635,096
Investment securities 172,534 212,616
Mortgage-backed securities 45,290 143,617
Other interest earning assets 91,920 61,534
------------ ------------
Total Interest Income 1,159,064 1,052,863
------------ ------------
INTEREST EXPENSE
Interest on deposits 612,860 646,135
Interest on FHLB Advances 7,796 74,398
------------ ------------
Total Interest Expense 620,656 720,533
------------ ------------
Net Interest Income 538,408 332,330
Provision for loss on loans 15,000 110,000
------------ ------------
Net interest income after
provision for loss on
loans 523,408 222,330
------------ ------------
NON-INTEREST INCOME
Late charges and other fees on loans 5,782 3,873
Insurance service fees 3,530 3,400
Loss on sale of mortgage-backed
securities available for sale -- (61,929)
Other income 2,564 2,252
------------ ------------
Total Non-Interest Income 11,876 (52,404)
------------ ------------
NON-INTEREST EXPENSES
Compensation and benefits 119,162 96,746
Occupancy and equipment expense 24,449 19,176
Federal deposit insurance premiums 27,364 27,790
(Gain) loss on foreclosed real estate (500) 2,163
Other general and administrative
expenses 149,869 80,125
------------ ------------
Total Non-Interest Expense 320,344 226,000
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 214,940 (56,074)
Income tax expense (benefit) 54,274 (39,384)
------------ ------------
NET INCOME (LOSS) $ 160,666 $ (16,690)
============ ============
Earnings per common share $ 0.13 N/A
============ ============
(1) Refers to Ashland Federal Savings Bank only.
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED MINIMUM
ADDITIONAL GAIN (LOSS) ON PENSION
COMMON PAID-IN RETAINED AVAILABLE FOR UNEARNED LIABILITY
STOCK CAPITAL EARNINGS SALE SECURITIES ESOP SHARES ADJUSTMENT TOTAL
------ ---------- -------- --------------- ----------- ---------- -----
Balance at April 1, 1995 $ - $ - $ 7,415,121 $ (29,056) $ - $ - 7,386,065
Net income for the year
ended March 31, 1996 - - 292,632 - - - 292,632
Common stock issued in
conversion, net of costs 13,225 12,704,127 - - - - 12,717,352
Change in unrealized gain
(loss) on securities available
for sale - - - 115,341 - - 115,341
Contribution for unearned
ESOP shares - - - - (1,058,000) - (1,058,000)
ESOP shares earned - 6,771 - - 52,900 - 59,671
Excess of minimum pension
liability over recognized
prior service cost on
directors retirement plan - - - - - (12,798) (12,798)
-------- ---------- ----------- ------------- ---------- -------- -----------
Balances at March 31, 1996 13,225 12,710,898 7,707,753 86,285 (1,005,100) (12,798) 19,500,263
Net income - - 160,666 - - - 160,666
Change in unrealized gain
(loss) on securities available
for sale - - - (156,362) - - (156,362)
Change in excess of minimum pension
liability over recognized
prior service cost on
directors retirement plan - - - - - 355 355
-------- ---------- ----------- ------------- ---------- -------- -----------
Balances at June 30, 1996 $ 13,225 $12,710,898 $ 7,868,419 $ (70,077) $(1,005,100) $(12,443) $19,504,922
======== =========== =========== ============= =========== ======== ===========
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------
1996 1995 (1)<F1>
---- --------
OPERATING ACTIVITIES
Net Income $ 160,666 $ (16,690)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 17,778 8,509
Provision for loss on loans 15,000 110,000
Loss (gain) on sale of mortgage-backed securities available for sale
Federal Home Loan Bank stock dividends (10,800) (9,500)
Deferred income tax expense (benefit) 37,001 2,663
Loss (gain) on foreclosed real estate 500 2,142
Amortization and accretion of investment
securities premiums and discounts, net 2,336 179
Decrease (increase) in:
Accrued interest receivable (84,630) (63,279)
Other assets (70,134) (10,911)
Increase (decrease) in:
Accrued interest payable (37,512) 19,680
Accrued income taxes 19,402 --
Accounts payable and accrued expenses (33,770) (95,296)
---------- ------------
Net cash provided by operating activities 15,837 (52,503)
---------- ------------
INVESTING ACTIVITIES
Securities:
Proceeds from maturities or calls -- 650,000
Purchased -- (1,350,000)
Mortgage-backed securities:
Proceeds from sale -- 369,091
Principal payments 35,707 106,826
Certificates of deposits:
Proceeds from maturities 100,000 200,000
Purchases -- (500,000)
Loan originations and principal payments, net (3,430,059) (971,886)
Proceeds from the sale of foreclosed real estate 5,500 10,358
Purchases of premises and equipment (60,625) (74,273)
---------- ------------
Net cash provided (used) by investing activities (3,349,477) (1,559,884)
---------- ------------
FINANCING ACTIVITIES
Net (decrease) increase in savings deposits and
certificates of deposit 218,341 527,478
Proceeds from FHLB borrowings 2,500,000 --
---------- ------------
Net cash provided by financing activities 2,718,341 527,478
---------- ------------
Increase (decrease) in cash and cash equivalents (615,299) (1,084,909)
Cash and cash equivalent at beginning of period 6,523,462 2,165,148
---------- ------------
Cash and cash equivalents at end of period $5,908,163 $ 1,080,239
========== ============
<FN>
(1) Refers to Ashland Federal Savings Bank only.
</FN>
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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.
(the "Company") as of June 30, 1996, and the results of operations for all
interim periods presented.
Operating results for the three months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1997.
(2) Regulatory Capital Requirement
Pursuant to the Financial Institution Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), as implemented by rules promulgated by the Office of
Thrift Supervision, savings institutions must meet three separate minimum
capital-to-asset requirements. The following table summarizes, as of June 30,
1996, the capital requirements applicable to Ashland Federal Savings Bank (the
"Bank") and its actual capital ratios. As of June 30, 1996, the Bank exceeded
all current regulatory capital standards.
Regulatory Actual Capital
Capital Requirement (Bank Only)
------------------- -----------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based $2,339 8.0% $13,369 44.8%
Core Capital 1,986 3.0 13,154 20.7
Tangible Capital 950 1.5 13,154 20.7
(3) Earnings Per Share of Common Stock
Earnings per share of common stock is computed by dividing net income
for the period by the weighted average number of common stock and common stock
equivalents outstanding during the three month period ended June 30, 1996.
Weighted average number of shares used in the earnings per share computations
was 1,221,990 for the three month period ended June 30, 1996. No shares of
common stock were outstanding at June 30, 1995.
(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. The Bank makes scheduled
7
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. The
expense under the ESOP for the three months ended June 30, 1996 was $24,000. As
of June 30, 1996, the Bank considered 100,510 as unearned ESOP shares with a
fair value of $1,055,355.
(5) Stock Option and Incentive Plan and Recognition and Retention Plan
Subsequent to June 30, 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 112,412 shares at $10.8125 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 48,798 shares.
(6) Proposed Acquisition of First Paintsville Bancshares, Inc.
On April 22, 1996, the Company entered into an agreement (subject to
stockholder and regulatory approval) to acquire 100% of the outstanding stock of
First Paintsville Bancshares, Inc., a one-bank holding company, for $9.3 million
in cash. The proxy materials related to this transaction were mailed to
stockholders on August 6, 1996. In connection with the acquisition of First
Paintsville Bancshares, Inc., the Company will assume $722,000 of long-term debt
of First Paintsville Bancshares, Inc. The cost of the transaction will be funded
with a $4.5 million short-term loan and the use of cash and temporary
investments of $5.5 million.
(7) Supplemental Disclosure of Cash Flows Information
Three months ended June 30,
---------------------------
1996 1995
---- ----
Cash paid for:
Interest $175,068 $332,149
Taxes -0- -0-
Noncash investing activities:
Transfer from loans to real estate
acquired through foreclosure 18,000 -0-
8
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business
The accompanying Consolidated Financial Statements include the accounts
of Classic Bancshares, Inc. (the "Company") and its wholly-owned subsidiary,
Ashland Federal Savings Bank (the "Bank"). All significant inter-company
transactions and balances are eliminated in consolidation. The primary activity
of the Company is to act as a holding company for the Bank. As a result, unless
otherwise noted, the following discussion relates primarily to the Bank. The
primary business of savings banks, including Ashland Federal, has historically
consisted of attracting deposits from the general public and providing financing
for the purchase of residential properties. The Bank also, to a lesser extent,
makes consumer and commercial real estate and business loans. The operations of
the Bank are significantly affected by prevailing economic conditions as well as
by government policies and regulations relating to monetary and fiscal affairs,
housing and financial institutions.
Net income is primarily dependent upon the difference (or "spread")
between the average yield earned on loans, securities and investments, and the
average rate paid on deposits and borrowings, as well as the relative amounts of
such assets and liabilities. The interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows. The Bank, like other thrift institutions, is subject to interest
rate risk to the degree that its interest-bearing liabilities mature or reprice
at different times, or on a different basis, than its interest-earning assets.
Net income is also affected by, among other things, gains and losses on
sales of real estate and investments, mortgage-backed and related securities,
investment securities and foreclosed assets, provisions for loan losses, service
charges and other fees, operating expenses and income taxes.
Forward-Looking Statements
When used in this Form 10-Q 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.
9
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.
Financial Condition
The Company's total assets increased $2.7 million, or 4.0%, from $66.1
million at March 31, 1996 to $68.8 million at June 30, 1996. This increase was
due primarily to an increase of $3.4 million in net loans receivable. This
increase was offset by a decrease of $667,000 in cash and cash equivalents. The
increase in loans was funded primarily by a $667,000 decrease in cash and cash
and cash equivalents and borrowings of $2.5 million from the Federal Home Loan
Bank of Cincinnati.
Net loans receivable increased $3.4 million from $43.7 million at March
31, 1996 to $47.1 million at June 30, 1996. The increase was primarily due to
the origination of one-to-four family residential loans exceeding loan
repayments by $2.7 million. The remainder of the increase is a result of the
Bank's new strategy to originate consumer and commercial real estate loans. The
Bank originated consumer loans of $71,000 and commercial real estate loans of
$697,000 from March 31, 1996 to June 30, 1996.
Investment securities remained virtually unchanged with a decrease of
approximately $197,000. This decrease in these available for sale securities was
a result of a temporary decline in market value from $10.4 million at March 31,
1996 to $10.2 million at June 30, 1996. Mortgage-backed securities decreased
$78,000 from $2.8 million at March 31, 1996 to $2.7 million at June 30, 1996.
The decrease in these available for sale securities was a result of a temporary
decline in market value and principal repayments.
Net deposits increased $218,000 from $46.2 million at March 31, 1996 to
$46.4 million at June 30, 1996. The increase in deposits was primarily
attributable to increased marketing efforts and offering rates competitive with
the market.
Federal Home Loan Bank advances increased to $2.5 million at June 30,
1996. The $2.5 million of proceeds received during the three months ended June
30, 1996 was used to fund loan demand.
Total stockholders' equity was $19.5 million at March 31, 1996 and June
30, 1996.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED JUNE 30, 1996 AND 1995
General. The Company reported net income of $161,000 during the three
month period ended June 30, 1996 compared to a net loss of $17,000 during the
three month period ended June 30, 1995. The increase in income between the three
month periods ended June 30, 1996 and 1995 was the result of an increase in net
interest income of $206,000, a decrease in provision for loss on loans of
$95,000 and an increase in non-interest income of $64,000 partially offset by an
increase in non-interest expenses of $93,000 and an increase in provision for
income taxes of $94,000.
10
Interest Income. Total interest income increased $106,000 for the three
months ended June 30, 1996 as compared to the three months ended June 30, 1995
due primarily to an increase in the yield on average interest-earning assets to
7.2% for the three month period ended June 30, 1996 from 6.9% for the three
month period ended June 30, 1995. This yield increased primarily due to the
transfer of funds from lower yielding investments to higher yielding loans, as
well as an increase in the average balance of interest earning-assets. The
average balance of interest-earning assets increased $5.2 million for the three
months ended June 30, 1996 compared to the three months ended June 30, 1995. The
increase in the average balance of interest-earning assets was due primarily to
the increase in the average balance of loans offset by decreases in the average
balance of mortgage-backed and investment securities.
Interest Expense. Interest expense decreased $100,000 for the three
months ended June 30, 1996 as compared to the same period in 1995. The decrease
was due primarily to the decrease in the average rate paid on interest-bearing
liabilities and a decrease in the average balance of interest-bearing
liabilities. The average rate paid on interest-bearing liabilities decreased to
5.2% for the three months ended June 30, 1996 from 5.4% for the three months
ended June 30, 1995. The average balance of interest-bearing liabilities
decreased $6.7 million for the three months ended June 30, 1996 compared to the
three months ended June 30, 1995. The average balance of interest-bearing
liabilities decreased as a result of management's efforts to reduce reliance on
higher costing brokered deposits as well as a decrease in FHLB advances.
Provision for Loan Losses. The Bank's provision for loan losses totaled
$15,000 for the three months ended June 30, 1996 compared to $110,000 for the
three months ended June 30, 1995. The decrease was due to the provision of
approximately $100,000 to the specific loan loss allowance for the three month
period ended June 30, 1995 to cover losses on one large commercial real estate
loan and five residential real estate loans. 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
$64,000 for the three months ended June 30, 1996 compared to the same period in
1995. The increase was due primarily to a loss on the sale of mortgage-backed
securities of approximately $62,000 that was recorded during the three months
ended June 30, 1995. The remainder of the increase was due to management's
increased emphasis on the collection of delinquent loan payment fees and other
service charges.
Non-interest Expense. Non-interest expense increased $94,000 for the
three months ended June 30, 1996 compared to the same period in 1994 primarily
due to an increase in the following: compensation and benefits of $22,000,
occupancy and equipment expenses of $5,000, data processing expense of $3,000,
and an increase in office supplies of $19,000. The increase in office supplies
was due to the offering of new products which required the purchase and printing
of new paper products. The increase was also due to an increase in audit and
examination expense of $5,000, legal fees of $10,000, and in increase in other
general and administrative expense of $32,000. These increases were partially
offset by a decrease in the loss on foreclosed real estate of $2,000. The
increases in audit, legal and general and administrative expenses were the
result of operation as a public company. The increase in compensation and
benefits was due to the net
11
increase in the number of employees, the establishment of a supplemental
retirement plan and the establishment of an employee stock ownership plan. The
increase in occupancy and equipment expenses resulted from increased
depreciation as a result of improvements made to the building.
The deposits of savings associations such as the Bank are presently
insured by Savings Association Insurance Fund (the "SAIF"), which, along with
Bank Insurance Fund (the "BIF"), is one of the two insurance funds administered
by the FDIC. Financial institutions which are members of the BIF are
experiencing substantially lower deposit insurance premiums because the BIF has
achieved its required level of reserves while the SAIF has not yet achieved its
required reserves. A recapitalization plan for the SAIF under consideration by
Congress reportedly provides for a special assessment of 0.80% to 0.90% of
deposits to be imposed on all SAIF-insured institutions to enable the SAIF to
achieve its required level of reserves. If the proposed assessment of 0.90% was
effected based on deposits as of March 31, 1995 (as proposed), the Bank's
special assessment would amount to approximately $396,000 before taxes.
Accordingly, this special assessment would significantly increase non-interest
expense and adversely affect the Company's results of operations. Conversely,
depending upon the Association's capital level and supervisory rating, and
assuming the insurance premium levels for BIF and SAIF members are again
equalized, future deposit insurance premiums are expected to decrease
significantly, to as low as $2,000 per year from the 0.23% of deposits currently
paid by the Bank, which would significantly reduce non-interest expense for
future periods if enacted as proposed.
Income Tax Expense. Income tax expense increased $94,000 from a tax
benefit of $39,000 for the three months ended June 30, 1995 to an expense of
$54,000 for the three months ended June 30, 1996 primarily due to a higher
income before income taxes.
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 condition that may affect the borrower's repayment ability
and the Company's historical charge-offs. The Company's allowance for loan
losses as of June 30, 1996 was $290,000, or .6% of the total loans. The March
31, 1996 allowance for loan loss was $286,000, or .7% of total loans. The
allowance for loan losses at June 30, 1996 was allocated to non-performing loans
as follows: $3,000 to commercial real estate loans, $40,000 to one-to-four
family real estate loans, and $247,000 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
restructuring. The following table sets forth the amount of non-performing
assets at the periods indicated.
12
June 30, 1996 March 31, 1996
------------- --------------
(Dollars in Thousands)
Non-Accruing Loans ........................ $431 $595
Accruing Loans Delinquent 90 Days or More -- --
Foreclosed Assets ......................... 10 5
---- ----
Total Non-Performing Assets ............... $441 $600
Total Non-Performing Assets as a
Percentage of Total Assets ....... .6% .9%
Total non-performing assets decreased $159,000 from March 31, 1996 to
June 30, 1996. The declines in non-accruing loans and real estate acquired in
foreclosure were the result of management's increased efforts to reduce
non-performing loans through increased collection procedures and foreclosure
action when all collection efforts have been exhausted.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of June 30, 1996, 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 June 30, 1996 and
March 31, 1996, cash and cash equivalents totaled $5.9 million and $6.5 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.
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 Bank has the ability to
borrow funds from the FHLB. At June 30, 1996, the Bank had $2.5 million in
borrowings outstanding with the FHLB.
The 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 5.0%. The Bank's liquidity ratios have consistently been maintained at
levels in excess of regulatory requirements. As of June 30, 1996 and March 30,
1996, the Bank's liquidity ratios were 5.43% and 5.13% respectively.
13
At June 30, 1996, the Bank had outstanding commitments to originate
loans of $1.3 million. The Bank 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.
Regulatory standards impose the following capital requirements: a
risk-based capital standard expressed as a percent of risk-adjusted assets, a
leverage ratio of core capital to total adjusted assets, and a tangible capital
ratio expressed as a percent of total adjusted assets. As of June 30, 1996, the
Bank exceeded all fully phased-in regulatory capital standards.
At June 30, 1996, the Bank's tangible capital was $13.1 million, or
20.7%, of adjusted total assets, which is in excess of the 1.5% requirement by
$12.2 million. In addition, at June 30, 1996, the Bank had core capital of $13.1
million, or 20.7%, of adjusted total assets, which exceeds the 3% requirement by
$11.2 million. The Bank had risk-based capital of $13.4 million at June 30,
1996, or 44.8% of risk-adjusted assets which exceeds the 8.0% risk-based capital
requirement by $11.0 million.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk to deduct from its total
capital, for purposes of determining compliance with such requirement, an amount
equal to 50% of its interest-rate risk exposure multiplied by the present value
of its assets. This exposure is a measure of the potential decline in the net
portfolio value ("NPV") of a savings institution, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). NPV is the
present value of expected cash flows from assets, liabilities and off-balance
sheet contracts. The rule provides for a two quarter lag between calculating
interest-rate risk and recognizing any deduction from capital. The rule will not
become effective until the OTS evaluates the process by which savings
associations appeal an interest-rate risk determination. Any saving association
with less than $300 million in assets and a total capital ratio in excess of
12%, such as the Bank, is exempt from this requirement unless the OTS determines
otherwise.
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 Bank 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.
14
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 29, 1996. 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
-------- ---------------
For Withheld
--- --------
Election of the following directors for the terms indicated:
Robert L. Goodpaster (three years) 1,123,606 77,749
Robert B. Keifer, Jr. (three years) 1,121,731 79,624
David A. Lang (three years) 1,123,396 77,959
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
The ratification of the adoption of the 1996 Stock
Option and Incentive Plan 828,948 142,224 3,271 231,912
The ratification of the adoption of the 1996 Recognition
and Retention Plan 840,078 146,716 3,971 210,590
The ratification of the appointment of Smith, Goolsby,
Artis, and Reams, P.S.C. as the Company's auditors for
the fiscal year ending March 31, 1997 1,179,584 6,000 8,271 -0-
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 27 Financial Data Schedule
Reports on Form 8-K
On April 24, 1996, the Registrant filed a Current Report on
Form 8-K to report the execution of the definitive agreement to
acquire First Paintsville Bancshares, Inc.
15
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: August 13, 1996 /s/ David B. Barbour
------------------ --------------------------------------------------
David B. Barbour, President, Chief Executive Officer
and Director (Duly Authorized Officer)
Date: August 13, 1996 /s/ Lisah M. Frazier
------------------- --------------------------------------------------
Lisah M. Frazier, Vice President, Treasurer and
Chief Financial Officer (Principal Financial Officer)
16
INDEX TO EXHIBITS
Exhibit Page
Number Number
- ------- ------
27 Financial Data Schedule 18