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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
incorporation or organization Identification Number)
344 Seventeenth Street, Ashland, Kentucky 41101
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including (606) 325-4789
---------------
Check here whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of November 8, 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
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
(Unaudited) and March 31, 1996 3
Consolidated Statements of Income for the three and six
months ended September 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity for the
six months ended September 30, 1996 and Year Ended
March 31, 1996 5
Consolidated Statements of Cash Flows for the six months
ended September 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 9-15
PART II. OTHER INFORMATION 16
Signatures 17
Index to Exhibits 18
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1996 1996
---- ----
(Unaudited)
ASSETS
Cash and due from bank $ 3,189,922 $ 1,531,862
Federal funds sold and securities purchased under resell agreement 13,562,000 975,000
Certificates of deposits in other financial institutions 483,000 4,599,600
Investment securities available for sale 29,989,248 10,438,445
Mortgage-backed securities available for sale 2,748,628 2,840,339
Loans receivable, net 77,403,226 43,721,967
Foreclosed real estate, net 387,810 5,000
Accrued interest receivable 766,146 331,991
Federal Home Loan Bank stock 869,600 620,800
Office property and equipment, net 2,651,280 723,930
Deferred income taxes -- 26,180
Cost in excess of fair value of net
assets acquired (goodwill) 3,086,492 --
Other assets 1,080,630 267,880
------------ ------------
TOTAL ASSETS $136,217,982 $ 66,082,994
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 99,390,239 $ 46,200,423
Securities sold under agreement to repurchase 5,283,243 --
Advances from Federal Home Loan Bank 10,200,000 --
Treasury tax and loan note 567,444 --
Accrued interest on deposits 236,028 140,035
Debt payable 700,000 --
Deferred income taxes 127,982 --
Accrued income taxes 5,686 --
Accounts payable and accrued expenses 909,754 242,273
------------ ------------
Total Liabilities $117,420,376 $ 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 7,741,828 7,707,753
Net unrealized gain (loss) on securities available (29,583) 86,285
Unearned ESOP shares (1,005,100) (1,005,100)
Unearned RRP shares (621,575) --
Minimum pension liability adjustment (12,087) (12,798)
------------ ------------
Total Stockholders' Equity $ 18,797,606 $ 19,500,263
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,217,982 $ 66,082,994
============ ============
See accompanying notes to consolidated financial statements.
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1996 1995 (1) 1996 1995 (1)
---- -------- ---- --------
INTEREST INCOME
Loans $ 925,283 $ 668,986 $ 1,774,603 $ 1,304,082
Investment securities 164,901 204,497 337,435 417,113
Mortgage-backed securities 45,392 133,530 90,682 277,147
Other interest earning assets 83,575 42,326 175,494 103,859
---------- ---------- ---------- ----------
Total Interest Income 1,219,151 1,049,339 2,378,214 2,102,201
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 597,690 666,099 1,210,550 1,312,234
Interest on FHLB Advances 55,538 76,496 63,334 150,895
---------- ---------- ---------- ----------
Total Interest Expense 653,228 742,595 1,273,884 1,463,129
---------- ---------- ---------- ----------
Net Interest Income 565,923 306,744 1,104,330 639,072
Provision for loss on loans 15,000 5,000 30,000 115,000
---------- ---------- ---------- ----------
Net interest income after
provision for loss on
loans 550,923 301,744 1,074,330 524,072
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Service charges and other fees 7,897 9,543 13,679 13,466
Net loss on sale of mortgage-backed
securities available for sale -- -- -- (61,929)
Other income 3,165 11,056 9,260 17,534
---------- ---------- ---------- ----------
Total Non-Interest Income 11,062 20,599 22,939 (30,929)
---------- ---------- ---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits 149,078 91,693 268,240 173,638
Occupancy and equipment expense 30,224 23,777 54,673 37,638
Federal deposit insurance premiums 342,639 27,679 370,004 55,468
Loss (gain) on foreclosed real estate -- (928) (500) 1,214
Other general and administrative
expenses 263,343 148,385 413,211 249,474
---------- ---------- ---------- ----------
Total Non-Interest Expense 785,284 290,606 1,105,628 517,432
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (223,299) 31,737 (8,359) (24,289)
Income tax expense (benefit) (96,708) (11,000) (42,434) (50,384)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $(126,591) $ 42,737 $ 34,075 $ 26,095
========== ========== ========== ==========
Earnings per common share $ (0.10) N/A $ 0.03 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 UNEARNED LIABILITY
STOCK CAPITAL EARNINGS SALE SECURITIES ESOP SHARES RRP 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 for the six months
ended September 30, 1996 - - 34,075 - - - - 34,075
Change in unrealized gain
(loss) on securities available
for sale - - - (115,868) - - - (115,868)
Contribution for unearned
RRP shares - - - - - (621,575) - (621,575)
Change in excess of minimum
pension liability over
recognized prior service
cost on directors
retirement plan - - - - - - 711 711
-------- ----------- ---------- ---------- ------------ ---------- ---------- -----------
Balances at September 30,
1996 $ 13,225 $12,710,898 $7,741,828 $ (29,583) $(1,005,100) $(621,575) $ (12,087) $18,797,606
======== =========== ========== ========== ============ ========== ========== ===========
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995 (1)
---- --------
OPERATING ACTIVITIES
Net Income 34,075 $ 26,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 35,713 19,019
Provision for loss on loans 30,000 115,000
Loss (gain) on sale of mortgage-backed securities available for sale - 61,929
Federal Home Loan Bank stock dividends (21,900) (19,800)
Deferred income tax expense (benefit) (115,007) 2,663
Loss (gain) on foreclosed real estate (500) 1,214
Amortization and accretion of invesment
securities premiums and discounts, net 4,387 412
Decrease (increase) in:
Accrued interest receivable (24,554) (43,969)
Other assets 26,308 (114,773)
Increase (decrease) in:
Accrued interest payable (55,972) 18,745
Accrued income taxes 5,686 --
Accounts payable and accrued expenses 550,737 (44,686)
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Net cash provided by operating activities 468,973 21,849
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INVESTING ACTIVITIES
Securities:
Proceeds from maturities or calls 750,000 3,150,000
Purchased -- (2,100,000)
Mortgage-backed securities:
Proceeds from sale -- 369,091
Principal payments 62,550 316,637
Certificates of deposits:
Proceeds from maturities 100,000 302,266
Purchases -- (500,000)
Loan originations and principal payments, net (5,926,793) (4,805,207)
Proceeds from the sale of foreclosed real estate 5,500 24,786
Purchases of premises and equipment (300,685) (297,271)
Cash and cash equivalents acquired in purchase of subsidiary
in excess of cash invested 4,411,002 --
----------- -----------
Net cash provided (used) by investing activities (898,426) (3,539,698)
----------- -----------
FINANCING ACTIVITIES
Net (decrease) increase in savings deposits and
certificates of deposit 379,488 340,257
RRP Stock Repurchase (621,575) --
Long-term note assumed in acquisition of subsidiary 700,000 --
Net proceeds from FHLB borrowings 10,200,000 1,175,000
----------- -----------
Net cash provided by financing activities 10,657,913 1,515,257
----------- -----------
10,228,460 (2,002,592)
Cash and cash equivalent at beginning of period 6,523,462 2,165,148
----------- -----------
Cash and cash equivalents at end of period $16,751,922 $ 162,556
=========== ===========
(1) Refers to Ashland Federal Savings Bank only.
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Acquisition
-----------
Effective September 30, 1996, Classic Bancshares, Inc. (the "Company")
acquired all of the 72,375 outstanding shares of common stock of First
Paintsville Bancshares, Inc., the holding company of The First National Bank of
Paintsville ("First National") for $125 per share in cash and all of the 2,433
outstanding shares of First National common stock from the minority stockholders
at a price of $114 per share in cash. The Company also assumed $700,000 in
long-term debt as part of the acquisition. In connection with the acquisition,
the Company recorded $3.1 million in goodwill. The acquisition was accounted for
under the purchase method of accounting.
(2) Principles of Consolidation
---------------------------
The financial statements for 1996 are presented for Classic Bancshares,
Inc. and its wholly-owned subsidiaries, Ashland Federal Savings Bank ("Ashland
Federal") and The First National Bank of Paintsville. The consolidated balance
sheet for September 30, 1996 is for the Company, Ashland Federal, and First
National. The consolidated statements of income include the operations of the
Company and Ashland Federal for the three and six months ended September 30,
1996. The statements of income for the three and six months ended September 30,
1995 include only the operations of Ashland Federal. First National was acquired
as of the close of business, September 30, 1996 in a transaction accounted for
under the purchase method of accounting and accordingly, the consolidated
statements of income do not include the operations of First National.
(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.
(the "Company") as of September 30, 1996, and the results of operations for all
interim periods presented.
Operating results for the three and six months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ended March 31, 1997.
(4) 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 and six month period ended September
30, 1996. Weighted average number of shares used in the earnings per share
computations was 1,213,472 for the three month period ended September 30, 1996
and 1,217,709 for the six month period ended September 30, 1996. No shares of
common stock were outstanding at September 30, 1995.
7
(5) Employee Stock Ownership Plan (ESOP)
------------------------------------
In conjunction with the Bank's conversion on December 28, 1995, the
Company established an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. The ESOP borrowed $1,058,000 from the Company, and
purchased 105,800 common shares, equal to 8% of the total number of shares
issued in the conversion . The 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 for the three months and six months
ended September 30, 1996 was $25,080 and $49,080, respectively. As of September
30, 1996, the Bank considered 100,510 as unearned ESOP shares with a fair value
of $1,180,993.
(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 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.
Stock options and RRP shares that are vested are considered common stock
equivalents.
(7) Supplemental Disclosure of Cash Flows Information
-------------------------------------------------
Six months ended September 30,
------------------------------
1996 1995
---- ----
Cash paid for:
Interest $314,687 $507,217
Taxes 75,987 -0-
Noncash investing activities:
Transfer from loans to real estate
acquired through foreclosure 19,023 -0-
8
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
The Company's total assets increased $70.1 million, or 106.1%, from
$66.1 million at March 31, 1996 to $136.2 million at September 30, 1996. This
increase was due primarily to the September 30, 1996 acquisition of First
National in which the Company acquired $69.7 million in assets including $3.1
million of goodwill.
Net loans receivable increased $33.7 million from $43.7 at March 31,
1996 to $77.4 million at September 30, 1996. The increase in loans is primarily
the result of the addition of First National's loans receivable amounting to
$28.0 million. The increase is also due to the aggressive origination efforts on
the part of Ashland Federal that resulted in $5.7 million in originations offset
by repayments since March 31, 1996.
Investment securities increased $19.6 million from $10.4 million at
March 31, 1996 to $30.0 million at September 30, 1996 primarily as the result of
the addition of First Paintsville's investment securities of $20.5 million
offset by matured and called securities of $750,000 and a temporary decline in
market value on these available for sale securities of $150,000. Mortgage-backed
securities decreased $92,000 from $2.8 million at March 31, 1996 to $2.7 million
at September 30, 1996. The decrease in these available for sale securities was a
result of a temporary decline in market value and principal repayments.
Office property and equipment increased $1.9 million over the six
months from $724,000 at March 31, 1996 to $2.7 million at September 30, 1996.
The increase is primarily the result of the acquisition of First National.
Net deposits increased $53.2 million from $46.2 million at March 31,
1996 to $99.4 million at September 30, 1996. The increase in deposits was
primarily attributable to the acquisition of First National which contributed
deposits of $52.8 million.
Federal Home Loan Bank advances increased to $10.2 million at September
30, 1996. Advances of $4.5 million were used to fund loan demand and advances of
$5.7 million were used to fund the acquisition of First Paintsville Bancshares,
Inc.
Total stockholders' equity decreased $703,000 from $19.5 million at
March 31, 1996 to $18.8 million at September 30, 1996. The decrease in equity
was the result of the purchase of shares for the Company's Recognition and
Retention Plan for $622,000 and a decrease in the net unrealized gain on
securities available for sale of $115,000 offset by net income of $34,000.
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
9
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake - and specifically declines any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
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 a net loss of $127,000 during the three month
period ended September 30, 1996 compared to net income of $43,000 during the
three month period ended September 30, 1995. The decrease in income of $170,000
between the three month periods ended September 30, 1996 and 1995 was primarily
the result of an increase in provision for loss on loans of $10,000, a decrease
in non-interest income of $10,000 and an increase in non-interest expenses of
$495,000 partially offset by an increase in net interest income of $259,000 and
an increase in an income tax benefit of $86,000. The increase in non-interest
expense consisted primarily of a one-time SAIF assessment of $316,000.
The Company reported net income of $34,000 for the six months ended
September 30, 1996 compared to net income of $26,000 for the same period in
1995. The increase in income between the two periods was primarily the result of
an increase in net interest income of $465,000, a decrease in the provision for
loss on loans of $85,000, and an increase in non-interest income of $54,000
partially offset by an increase in non-interest expenses of $588,000 and a
decrease in an income tax benefit of $8,000. The increase in non-interest
expense consisted primarily of a one-time SAIF assessment of $316,000.
Interest Income. Total interest income increased $170,000 for the three
months ended September 30, 1996 as compared to the three months ended September
30, 1995. Total interest income increased $276,000 for the six months ended
September 30, 1996 as compared to the same period in 1995. These increases were
10
due primarily to increases in the yield on average interest-earning assets. The
yields increased to 7.6% and 7.3% for the three and six months ended September
30, 1996, respectively compared to 7.0% and 6.9% for three and six months ended
September 30, 1995, respectively. These yields 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 $3.9 million and $4.3
million for the three and six months ended September 30, 1996 compared to the
three and six months ended September 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 $89,000 and $189,000 for
the three and six months ended September 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 5.1% and 5.2% for the three and six months ended
September 30, 1996 from 5.5% and 5.4% for the three and six months ended
September 30, 1995. The average balance of interest-bearing liabilities
decreased $2.7 million and $4.7 million for the three and six months ended
September 30, 1996 compared to the three and six months ended September 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 the average balance of FHLB advances.
Provision for Loan Losses. The Company's provision for loan losses
totaled $15,000 and $30,000 for the three and six months ended September 30,
1996 compared to $5,000 and $115,000 for the three and six months ended
September 30, 1995. The decrease for the six month period ended September 30,
1996 was due to the provision in 1995 of approximately $100,000 to the specific
loan loss allowance 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 decreased approximately
$10,000 for the three months ended September 30, 1996 compared to the same
period in 1995 as the result of a decrease in miscellaneous income. Non-interest
income increased approximately $54,000 for the six months ended September 30,
1996 compared to the six months ended September 30, 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 six months ended September 30, 1995
partially offset by a decrease in miscellaneous income of $8,000.
Non-interest Expense. Non-interest expense increased $495,000 and
$588,000 for the three and six months ended September 30, 1996 compared to the
same periods in 1995. Non-interest expenses increased for both periods primarily
due to a one-time SAIF assessment of $316,000 and a one time restructuring
11
charge of $100,000. The deposits of savings associations such Ashland Federal
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. Legislation signed into law on September 30, 1996, to
recapitalize the Savings Association Insurance Fund required SAIF-insured
savings institutions to pay a one-time special assessment of 65.7 cents for
every $100 dollars of deposits. Future deposit insurance premiums are expected
to decrease significantly due to the fact that the deposit insurance premiums
that SAIF-insured institutions pay will decline from an average of 23.4 basis
points to 6.4 basis points, effective Jan. 1, 1997. No later than Jan. 1, 2000
deposit insurance premiums will be further reduced to 2.4 basis points.
Non-interest expenses also increased due to an increase in the
compensation and benefits of $57,000 and $95,000 for the three and six months
period; an increase in occupancy expense of $7,000 and $17,000 for the three and
six months period and an increase in audit, legal and other general and
administrative expenses of $15,000 and $60,000 for the three and six months
period. The increase in compensation and benefits was due to the net increase in
the number of employees, the establishment of a supplemental retirement plan,
the establishment of an employee stock ownership plan, and the establishment of
a management recognition and retention plan. The increase in occupancy expenses
resulted from increased depreciation as a result of improvements made to the
facilities. The increases in audit, legal and general and administrative
expenses were the result of the introduction of new product offerings and costs
relative to operation as a public company
Income Tax Expense. Income tax expense resulted in a tax benefit of
$97,000 and $42,000 for the three and six months ended September 30, 1996
compared to a tax benefit of $11,000 and $50,000 for the three and six months
ended September 30, 1995 primarily due to the change in 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 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, 1996 was $832,000 or 1.1% 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 September 30, 1996 was allocated to non-performing
loans as follows: $134,000 to one-to-four family real estate loans, $77,000 to
commercial business loans, $14,000 to consumer loans and $607,000 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
September 30, 1996 March 31, 1996
------------------ --------------
(Dollars in Thousands)
Non-Accruing Loans ....................... $ 448 $595
Accruing Loans Delinquent 90 Days or More 331 --
Foreclosed Assets ......................... 388 5
------ ------
Total Non-Performing Assets .............. $1,167 $600
Total Non-Performing Assets as a
Percentage of Total Assets ...... .9% .9%
Total non-performing assets increased $567,000 from March 31, 1996 to
September 30, 1996. The decline in non-accruing loans was 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. The increases in accruing loans delinquent 90 days or more and
real estate acquired by foreclosure were the result of the acquisition of First
National.
Other Assets of Concern. Other than the non-performing assets set forth
in the table above, as of September 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 September 30, 1996
and March 31, 1996, cash and cash equivalents totaled $16.8 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 subsidiaries of the Company
have the ability to borrow funds from the FHLB. At September 30, 1996, Ashland
Federal had $10.2 million in borrowings outstanding with the FHLB.
Ashland Federal 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 compliance with regulatory requirements. As of September 30, 1996 and
March 31, 1996, the Bank's liquidity ratios were 5.00% and 5.13% respectively.
13
At September 30, 1996, the Company had outstanding commitments to
originate loans of $2.5 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 three separate minimum capital-to-asset
requirements. The following table summarizes, as of September 30, 1996, the
capital requirements applicable to Ashland Federal and its actual capital
ratios. As of September 30, 1996, Ashland Federal exceeded all current
regulatory capital standards.
Regulatory Actual Capital
Capital Requirement (AF Only)
------------------- ---------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based $2,536 8.0% $7,564 23.9%
Core Capital 1,976 3.0 7,325 11.1
Tangible Capital 988 1.5 7,325 11.1
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.
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, 1996, the
capital requirements applicable to First National and its actual capital ratios.
As of September 30, 1996, First National exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (FN Only)
------------------- ---------
Amount Percent Amount Percent
------ -------- ------ -------
(Dollars in Thousands)
Risk-Based $2,495 8.0% $7,513 24.1%
Leverage 1,791 3.0 7,121 11.9
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of it
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
14
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk, such as First National, would be exempt from the rule unless
otherwise determined by the OCC. Management of First National has not determined
what effect. if any, the OCC's proposed interest rate risk component would have
on First National's capital if adopted as proposed.
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.
15
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 special meeting of Shareholders (the "Meeting") of Classic
Bancshares, Inc. was held on September 16, 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
-------- ----------------
Broker
For Against Abstain Non-votes
--- ------- ------- ---------
The ratification of the adoption of the Agreement and Plan of Merger
dated April 22, 1996 including Amendment No. One thereto pursuant to
which (i) First Paintsville, Inc. will be merged with and into Classic
Bancshares, Inc. and (ii) each outstanding share of First Paintsville
Bancshares, Inc. common stock will be converted into the right to
receive $125.00 in cash, subject to increase to the extent the Merger
does not close by September 30, 1996, all on and subject to the terms
and conditions contained in the Merger Agreement and approval of the
Buy/Sell Agreements with certain First Paintsville
Bancshares, Inc. stockholders. 739,166 110,400 2,000 487,028
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
The Registrant filed the following current reports on Form 8-K during
the three months ended September 30, 1996:
Press release, dated July 29, 1996 announcing annual meeting
results and notice of intent to initiate stock repurchase program.
Press release, dated August 13, 1996 announcing a stock repurchase
program.
Press release, dated August 6, 1996 announcing the results of June
30, 1996 quarter.
Press release, dated September 16, 1996 declaring cash dividend.
Press release, dated September 17, 1996 announcing shareholder
approval of merger.
On September 30, 1996, the Registrant filed a Current Report on
Form 8-K to report the completion of the merger of First
Paintsville Bancshares, Inc. and a press release dated September
30, 1996.
16
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 14, 1996 /s/ David B. Barbour
----------------- ---------------------------------------
David B. Barbour, President,
Chief Executive Officer
and Director (Duly Authorized Officer)
Date: November 14, 1996 /s/ Lisah M. Frazier
----------------- ---------------------------------------
Lisah M. Frazier, Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
17
INDEX TO EXHIBITS
Exhibit
Number
------
27 Financial Data Schedule
18