SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 (I.R.S. Employer Identification Number)
of incorporation or organization)
344 Seventeenth Street, Ashland, Kentucky 41101
- ------------------------------------------ ----------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 325-4789
--------------
Check here whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of February 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
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996 (Unaudited)
and March 31, 1996 3
Consolidated Statements of Income for the three and nine months
ended December 31, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity for the nine
months ended December 31, 1996 and Year Ended March 31, 1996 5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-16
PART II. OTHER INFORMATION 17
Signatures 18
Index to Exhibits 19
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1996
------------- -------------
(Unaudited)
ASSETS
Cash and due from bank $ 2,870,233 $ 1,531,862
Federal funds sold and securities purchased under resell agreement 3,380,000 975,000
Certificates of deposits in other financial institutions 388,000 4,599,600
Investment securities available for sale 24,952,669 10,438,445
Mortgage-backed securities available for sale 7,962,706 2,840,339
Loans receivable, net 79,805,238 43,721,967
Foreclosed real estate, net 389,714 5,000
Accrued interest receivable 737,516 331,991
Federal Home Loan Bank stock 884,800 620,800
Office property and equipment, net 2,933,454 723,930
Deferred income taxes -- 26,180
Cost in excess of fair value of net
assets acquired (goodwill) 3,056,845 --
Other assets 1,000,207 267,880
------------- -------------
TOTAL ASSETS $ 128,361,382 $ 66,082,994
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 97,361,895 $ 46,200,423
Securities sold under agreement to repurchase 4,995,068 --
Advances from Federal Home Loan Bank 4,500,000 --
Treasury tax and loan note 544,469 --
Accrued interest on deposits 218,618 140,035
Debt payable 675,000 --
Deferred income taxes 310,197 --
Accrued income taxes 44,511 --
Accounts payable and accrued expenses 560,275 242,273
------------- -------------
Total Liabilities $ 109,210,033 $ 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 7,926,583 7,707,753
Net unrealized gain (loss) on securities available for sale 139,050 86,285
Unearned ESOP shares (1,005,100) (1,005,100)
Unearned RRP shares (621,575) --
Minimum pension liability adjustment (11,732) (12,798)
------------- -------------
Total Stockholders' Equity $ 19,151,349 $ 19,500,263
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 128,361,382 $ 66,082,994
============= =============
See accompanying notes to consolidated financial statements.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
INTEREST INCOME
Loans $ 1,683,279 $ 782,375 $ 3,471,561 $ 2,086,458
Investment securities 424,971 175,601 762,406 592,714
Mortgage-backed securities 44,946 106,131 135,627 383,278
Other interest earning assets 187,383 92,740 362,877 196,599
----------- ----------- ----------- -----------
Total Interest Income 2,340,579 1,156,847 4,732,471 3,259,049
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 1,081,419 670,332 2,291,970 1,982,566
Interest on FHLB Advances 91,277 97,094 154,611 247,988
Interest on other borrowed funds 16,896 -- 16,896 --
----------- ----------- ----------- -----------
Total Interest Expense 1,189,592 767,426 2,463,477 2,230,554
----------- ----------- ----------- -----------
Net Interest Income 1,150,987 389,421 2,268,994 1,028,495
Provision for loss on loans 37,500 28,000 67,500 143,000
----------- ----------- ----------- -----------
Net interest income after
provision for loss on
loans 1,113,487 361,421 2,201,494 885,495
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges and other fees 60,607 12,294 66,088 33,006
Gain on sale of mortgage-backed
securities available for sale 1,865 108,494 1,865 46,565
Gain on sale of investment
securities available for sale 5,979 (17,125) 5,979 (17,125)
Other income 36,164 2,440 39,941 15,779
----------- ----------- ----------- -----------
Total Non-Interest Income 104,615 106,103 113,873 78,225
----------- ----------- ----------- -----------
NON-INTEREST EXPENSES
Compensation and benefits 379,103 95,434 647,343 269,072
Occupancy and equipment expense 105,386 27,889 160,059 65,527
Federal deposit insurance premiums 26,966 27,991 396,970 83,459
Loss (gain) on foreclosed real estate -- (25,325) (500) (24,112)
Other general and administrative
expenses 309,673 132,952 722,880 385,479
----------- ----------- ----------- -----------
Total Non-Interest Expense 821,128 258,941 1,926,752 779,425
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 396,974 208,583 388,615 184,295
Income tax expense (benefit) 138,899 45,174 96,465 (5,210)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 258,075 $ 163,409 $ 292,150 $ 189,505
=========== =========== =========== ===========
Earnings per common share $ 0.21 N/A* $ 0.24 N/A*
=========== =========== =========== ===========
* - Earnings per share calculations have been eliminated due to the fact that
shares were not issued until December 28, 1995.
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON
COMMON PAID-IN RETAINED AVAILABLE FOR
STOCK CAPITAL EARNINGS SALE SECURITIES
----------- ----------- ----------- ----------------
Balance at April 1, 1995 $ -- $ -- $ 7,415,121 $ (29,056)
Net income for the year
ended March 31, 1996 -- -- 292,632 --
Common stock issued in
conversion, net of costs 13,225 12,704,127 -- --
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 115,341
Contribution for unearned
ESOP shares -- -- -- --
ESOP shares earned -- 6,771 -- --
Excess of minimum pension
liability over recognized
prior service cost on
directors retirement plan -- -- -- --
----------- ----------- ----------- -----------
Balances at March 31, 1996 13,225 12,710,898 7,707,753 86,285
Net income for the nine months
ended December 31, 1996 -- -- 292,150 --
Dividend paid -- -- (73,320) --
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 52,765
Contribution for unearned
RRP shares -- -- -- --
Change in excess of minimum pension
liability over recognized
prior service cost on
directors retirement plan -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1996 $ 13,225 $12,710,898 $ 7,926,583 $ 139,050
=========== =========== =========== ===========
MINIMUM
PENSION
UNEARNED UNEARNED LIABILITY
ESOP SHARES RRP SHARES ADJUSTMENT TOTAL
------------ ------------ ------------ ------------
Balance at April 1, 1995 $ -- $ -- $ -- $ 7,386,065
Net income for the year
ended March 31, 1996 -- -- -- 292,632
Common stock issued in
conversion, net of costs -- -- -- 12,717,352
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 115,341
Contribution for unearned
ESOP shares (1,058,000) -- -- (1,058,000)
ESOP shares earned 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 (1,005,100) -- (12,798) 19,500,263
Net income for the nine months
ended December 31, 1996 -- -- -- 292,150
Dividend paid -- -- -- (73,320)
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 52,765
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 -- -- 1,066 1,066
------------ ------------ ------------ ------------
Balances at December 31, 1996 $ (1,005,100) $ (621,575) $ (11,732) $ 19,151,349
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net Income $ 292,150 $ 189,505
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 96,918 35,889
Amortization of goodwill 31,134 --
Provision for loss on loans 67,500 143,000
(Gain) on sale of mortgage-backed securities available for sale (1,865) (46,565)
(Gain) loss on sale of investment securities available for sale (5,979) 17,125
Federal Home Loan Bank stock dividends (37,100) (30,300)
Deferred income tax expense (benefit) (8,977) 40,974
Loss (gain) on foreclosed real estate (500) (24,112)
Amortization and accretion of invesment
securities premiums and discounts, net 4,879 999
Decrease (increase) in:
Accrued interest receivable 4,076 (87,941)
Other assets 106,730 45,566
Increase (decrease) in:
Accrued interest payable (73,382) 34,345
Accrued income taxes 44,511 --
Accounts payable and accrued expenses 201,258 (12,037)
----------- -----------
Net cash provided by operating activities 721,353 306,448
----------- -----------
INVESTING ACTIVITIES
Securities:
Proceeds from sales, maturities or calls 5,821,400 5,532,876
Purchased (3,312,802) (2,587,588)
Mortgage-backed securities:
Proceeds from sale 2,171,786 6,291,556
Principal payments 257,121 544,577
Purchases (4,040,006) (2,022,188)
Proceeds from maturities of certificates of deposit 195,000 501,266
Loan originations and principal payments, net (8,350,480) (6,989,957)
Proceeds from the sale of foreclosed real estate 5,500 132,429
Purchases of premises and equipment (644,139) (422,128)
Cash and cash equivalents acquired in purchase of subsidiary
in excess of cash invested 4,411,002 --
----------- -----------
Net cash (used) provided by investing activities (3,485,618) 980,843
----------- -----------
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------
1996 1995
----------- -----------
FINANCING ACTIVITIES
Net (decrease) increase in savings deposits and
certificates of deposit (1,677,915) (586,594)
Net change in repurchase agreements (288,175) --
Net change in treasury tax and loan note (22,979) --
RRP Stock Repurchase (621,575) --
Long-term note assumed in acquisition of subsidiary less principal repayments 675,000 --
Proceeds from FHLB borrowings 12,700,000 3,175,000
Repayment of FHLB borrowings (8,200,000) (7,975,000)
Dividend Paid (73,320) --
Proceeds from sale of common stock, net of conversion costs -- 11,659,352
------------ ------------
Net cash provided by financing activities 2,491,036 6,272,758
------------ ------------
Increase (decrease) in cash and cash equivalents (273,229) 7,560,049
Cash and cash equivalent at beginning of period 6,523,462 2,165,148
------------ ------------
Cash and cash equivalents at end of period $ 6,250,233 $ 9,725,197
============ ============
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 ("First National"). The
consolidated balance sheet for December 31, 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 nine months
ended December 31, 1996 and First National's operations for the three months
ended December 31, 1996. The statements of income for the three and nine months
ended December 31, 1995 include only the operations of the Company and 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.
(2) Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of Classic Bancshares, Inc.
(the "Company") as of December 31, 1996, and the results of operations for all
interim periods presented.
Operating results for the three and nine months ended December 31, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ended March 31, 1997.
(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 and nine month period ended December
31, 1996. Weighted average number of shares used in the earnings per share
computations was 1,217,688 for the three month period ended December 31, 1996
and 1,213,450 for the nine month period ended December 31, 1996. Earnings per
share calculations have been eliminated for the three and nine months ended
December 31, 1995 due to the fact that shares were not issued until December 28,
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 . Ashland Federal 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 nine months
ended December 31, 1996 was $24,000 and $73,080, respectively. As of December
31, 1996, the Company considered 100,510 as unearned ESOP shares with a fair
value of $1,168,429.
8
(5) Stock Option and Incentive Plan and Recognition and Retention Plan
On July 29, 1996, the shareholders of the Company ratified the adoption
of the Company's 1996 Stock Option and Incentive Plan and the Recognition and
Retention Plan ("RRP"). Pursuant to the Stock Option Plan, 132,250 shares of the
Company's common stock are reserved for issuance, of which the Company has
granted options on 112,412 shares at $10.8125 per share and options on 19,750
shares at $13.375. 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 52,598 shares. RRP shares that are granted are considered
common stock equivalents.
(6) Cash Dividend and Stock Repurchase Program
On January 21, 1997, the Board declared a cash dividend of $.07 per
share payable on February 17, 1997 to shareholders of record on February 1,
1997. On January 22, 1997, the Company announced that it had filed a notice with
the Office of Thrift Supervision to repurchase 5% of its outstanding shares of
common stock in the open market over a six-month period. Subject to approval,
the shares will be purchased at prevailing market prices from time to time
depending upon market conditions.
(7) Supplemental Disclosure of Cash Flows Information
Nine months ended
December 31,
---------------------
1996 1995
---- ----
Cash paid for:
Interest $1,106,865 $ 682,600
Taxes 77,923 -0-
Noncash investing activities:
Transfer from loans to real estate
acquired through foreclosure 10,000 67,500
9
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The Company's total assets increased $62.3 million, or 94.3%, from
$66.1 million at March 31, 1996 to $128.4 million at December 31, 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. This increase was offset by the fact that since the
acquisition, cash and cash equivalents have decreased as a result of the
repayment of $5.7 million in FHLB advances used for the acquisition of First
National and the outflow of deposits of approximately $2.0 million. The outflow
of deposits was primarily the result of the reduction of brokered deposits for
Ashland Federal.
Net loans receivable increased $36.1 million from $43.7 at March 31,
1996 to $79.8 million at December 31, 1996. The increase in loans is primarily
the result of the addition of First National's loans receivable on September 30,
1996 amounting to $28.0 million. The increase is also due to the aggressive
origination efforts that resulted in $8.4 million in originations offset by
repayments primarily by Ashland Federal since March 31, 1996.
Investment securities increased $14.6 million from $10.4 million at
March 31, 1996 to $25.0 million at December 31, 1996 primarily as the result of
the addition of First Paintsville's investment securities of $17.0 million and
purchases of $3.3 million offset by matured, called or sold securities of $5.8
million and an increase in market value on these available for sale securities
of $91,000. Mortgage-backed securities increased $5.2 million from $2.8 million
at March 31, 1996 to $8.0 million at December 31, 1996. The increase is
primarily the result of the addition of First Paintsville's mortgage-backed
securities of $3.5 million and purchases of $4.0 million offset by sales of $2.2
million and principal repayments.
Office property and equipment increased $2.2 million over the nine
months from $724,000 at March 31, 1996 to $2.9 million at December 31, 1996. The
increase is primarily the result of the acquisition of First National.
Net deposits increased $51.2 million from $46.2 million at March 31,
1996 to $97.4 million at December 31, 1996. The increase in deposits was
primarily attributable to the acquisition of First National which contributed
deposits of $52.8 million. The increase was offset by the outflow of deposits as
a result of the reduction of brokered deposits at Ashland Federal.
Federal Home Loan Bank advances increased to $4.5 million at December
31, 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. Advances of $5.7 million were repaid during the quarter.
Total stockholders' equity decreased $349,000 from $19.5 million at
March 31, 1996 to $19.2 million at December 31, 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 payment of a cash dividend of $73,000 offset by an
increase in the net unrealized gain on securities available for sale of $53,000
and net income of $293,000.
10
Forward-Looking Statements
When used in this Form 10-QSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake - and specifically declines any
obligation - to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE
THREE AND NINE MONTHS ENDED DECEMBER 31, 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 net income of $258,000 during the three month
period ended December 31, 1996 compared to net income of $163,000 during the
three month period ended December 31, 1995. The increase in income of $95,000
between the two periods was primarily the result of an increase in net interest
income of $762,000 partially offset by an increase in the provision for loss on
loans of $9,500, a decrease in non-interest income of $1,500 an increase in
non-interest expenses of $562,000 and an increase in income tax expense of
$94,000.
The Company reported net income of $292,000 for the nine months ended
December 31, 1996 compared to net income of $190,000 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 $1.2 million, a decrease in the provision
for loss on loans of $76,000 and an increase in non-interest income of $36,000
partially offset by an increase in non-interest expenses of $1.1 million and an
increase in income tax expense of $102,000.
11
Interest Income. Total interest income increased $1.2 million for the
three months ended December 31, 1996 as compared to the three months ended
December 31, 1995. Total interest income increased $1.5 million for the nine
months ended December 31, 1996 as compared to the same period in 1995. These
increases were due primarily to increases in the yield on average
interest-earning assets. The yields increased to 8.0% and 7.8% for the three and
nine months ended December 31, 1996, respectively compared to 7.5% and 7.1% for
three and nine months ended December 31, 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 $57.6 million and $22.1 million for the three and nine months ended
December 31, 1996 compared to the three and nine months ended December 31, 1995.
The increase in the average balance of interest-earning assets was due primarily
to the increase in the average balance of loans, mortgage-backed and investment
securities and other interest-earning assets as a result of the acquisition of
First National.
Interest Expense. Interest expense increased $422,000 and $233,000 for
the three and nine months ended December 31, 1996 as compared to the same period
in 1995. The average rate paid on interest-bearing liabilities decreased to 4.7%
and 5.0% for the three and nine months ended December 31, 1996 from 5.8% and
5.5% for the three and nine months ended December 31, 1995. However, the average
balance of interest-bearing liabilities increased $47.4 million and $12.7
million for the three and nine months ended December 31, 1996 compared to the
three and nine months ended December 31, 1995. The average balance of
interest-bearing liabilities increased primarily as a result of the acquisition
of First National.
Provision for Loan Losses. The Company's provision for loan losses
totaled $37,500 and $67,500 for the three and nine months ended December 31,
1996 compared to $28,000 and $143,000 for the three and nine months ended
December 31, 1995. The decrease for the nine month period ended December 31,
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. The decrease was offset by increased
provisions as a result of the acquisition of First National. The increase in the
provision for the three month period was also a result of the acquisition of
First National. 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 $1,500
for the three months ended December 31, 1996 compared to the same period in 1995
as the result of a decrease in the net gain on the sale of investment and
mortgage-backed securities partially offset by an increase in service charges
and fees on deposits, late charges and fees on loans and other miscellaneous
income. Non-interest income increased approximately $36,000 for the nine months
ended December 31, 1996 compared to the nine months ended December 31, 1995. The
increase was due primarily to an increase in service charges and fees on
deposits, late charges and fees on loans and other miscellaneous income
partially offset by a decrease in the net gain on the sale of investment and
mortgage-backed securities.
12
Non-interest Expense. Non-interest expense increased $562,000 and $1.1
million for the three and nine months ended December 31, 1996 compared to the
same periods in 1995. Non-interest expenses increased for the nine months
primarily due to a one-time SAIF assessment of $316,000 and a one time
restructuring charge of $100,000.
Non-interest expenses also increased due to an increase in compensation
and benefits of $284,000 and $378,000 for the three and nine month period; an
increase in occupancy expense of $77,000 and $95,000 for the three and nine
month period, a decrease on the sale of foreclosed real estate of $25,000 for
the three and nine month period and an increase in audit, legal and other
general and administrative expenses of $176,000 and $237,000 for the three and
nine month period. The increase in compensation and benefits was due to the net
increase in the number of employees as a result of the hiring of new employees
and the acquisition of First National for the three month period, 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 and the
inclusion of the expenses of First National. The increases in audit, legal and
general and administrative expenses were the result of the introduction of new
product offerings, costs relative to operation as a public company, amortization
of goodwill and the inclusion of the expenses of First National.
Income Tax Expense. Income tax expense increased $94,000 and $102,000
for the three and nine months ended December 31, 1996 primarily due to an
increase 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 December 31, 1996 was $802,000 or 1.0% 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 as follows:
$105,000 to one-to-four family real estate loans, $33,000 to commercial real
estate loans, $33,000 to commercial business loans, $12,000 to consumer loans
and $619,000 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.
13
December 31, 1996 March 31, 1996
----------------- --------------
(Dollars in Thousands)
Non-Accruing Loans $ 635 $ 595
Accruing Loans Delinquent 90 Days or More 148 --
Foreclosed Assets 391 5
------ ------
Total Non-Performing Assets $1,174 $ 600
Total Non-Performing Assets as a
Percentage of Total Assets .9% .9%
Total non-performing assets increased $574,000 from March 31, 1996 to
December 31, 1996. The increase in non-performing assets is 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 December 31, 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 December 31, 1996
and March 31, 1996, cash and cash equivalents totaled $6.3 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 December 31, 1996, Ashland
Federal had $4.5 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 December 31, 1996 and
March 31, 1996, the Bank's liquidity ratios were 5.91% and 5.13% respectively.
14
At December 31, 1996, the Company had outstanding commitments to
originate loans of $2.4 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 December 31, 1996, the
capital requirements applicable to Ashland Federal and its actual capital
ratios. As of December 31, 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 $2,360 8.0% $7,701 26.1%
Core Capital 1,829 3.0 7,386 12.1
Tangible Capital 914 1.5 7,386 12.1
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 December 31, 1996, the
capital requirements applicable to First National and its actual capital ratios.
As of December 31, 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 $2,718 8.0% $7,789 22.9%
Leverage 2,689 4.0 7,363 11.0
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
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.
15
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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
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 December 31, 1996:
Press release, dated October 29, 1996 announcing the results of
September 30, 1996 quarter and a special one-time assessment.
17
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLASSIC BANCSHARES, INC.
REGISTRANT
Date: February 14, 1997 /s/ David B. Barbour
--------------------- ----------------------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Duly Authorized Officer)
Date: February 14, 1997 /s/ Lisah M. Frazier
--------------------- ----------------------------------------------
Lisah M. Frazier, Vice President, Treasurer
and Chief Financial Officer (Principal
Financial Officer)
18
INDEX TO EXHIBITS
Exhibits
Number
--------
27 Financial Data Schedule