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, 1997
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 November 10, 1997, there were 1,322,500 shares of the
Registrant's common stock issued and 1,299,950 shares 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, 1997 (Unaudited)
and March 31, 1997 3
Consolidated Statements of Income for the three and six months
ended September 30, 1997 and 1996 4
Consolidated Statements of Stockholders' Equity for the six months
ended September 30, 1997 and Year Ended March 31, 1997 5
Consolidated Statements of Cash Flows for the six months ended
September 30, 1997 and 1996 6-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-15
PART II. OTHER INFORMATION 16
Signatures 17
Index to Exhibits 18
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
1997 1997
---- ----
(Unaudited)
ASSETS
- ------
Cash and due from bank $ 2,011,816 $ 3,309,309
Federal funds sold and securities purchased under resell agreement 1,975,000 5,525,000
Certificates of deposits in other financial institutions 293,000 293,000
Investment securities available for sale 21,186,875 23,374,597
Mortgage-backed securities available for sale 8,668,081 7,884,835
Loans receivable, net 88,156,860 81,727,685
Real estate acquired in the settlement of loans 282,714 336,337
Accrued interest receivable 855,693 690,186
Federal Home Loan Bank and Federal Reserve Bank stock 1,071,800 1,015,400
Premises and equipment, net 3,463,082 3,297,016
Cost in excess of fair value of net assets acquired (goodwill),
net of accumulated amortization 2,964,459 3,026,389
Other assets 1,256,154 1,074,481
------------- -------------
TOTAL ASSETS $ 132,185,534 $ 131,554,235
- ------------ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
Deposits $ 99,328,881 $ 100,519,473
Securities sold under agreement to repurchase 3,538,719 4,955,766
Advances from Federal Home Loan Bank 7,475,000 4,750,000
Treasury tax and loan note 222,591 428,954
Accrued expenses and other liabilities 454,415 287,836
Accrued interest payable 305,716 217,731
Accrued income taxes 89,724 90,588
Long-term debt 600,000 650,000
Deferred income taxes 504,214 284,087
------------- -------------
Total Liabilities $ 112,519,260 $ 112,184,435
============= =============
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and 1,299,950 outstanding $ 13,225 $ 13,225
Additional paid-in capital 12,689,158 12,689,158
Retained earnings - substantially restricted 8,512,983 8,172,085
Net unrealized gain (loss) on securities available for sale 124,307 (58,614)
Unearned ESOP shares (918,660) (918,660)
Unearned RRP shares (454,428) (486,055)
Minimum pension liability adjustment (10,661) (11,376)
Treasury stock, at cost (289,650) (29,963)
------------- -------------
Total Stockholders' Equity $ 19,666,274 $ 19,369,800
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 132,185,534 $ 131,554,235
- ------------------------------------------ ============= =============
See accompanying notes to financial statements.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
- ---------------
Loans $ 1,854,975 $ 925,283 $ 3,649,048 $ 1,774,603
Investment securities 373,778 164,901 767,074 337,435
Mortgage-backed securities 142,093 45,392 293,514 90,682
Other interest earning assets 13,308 83,575 44,326 175,494
----------- ----------- ----------- -----------
Total Interest Income 2,384,154 1,219,151 4,753,962 2,378,214
----------- ----------- ----------- -----------
INTEREST EXPENSE
- ----------------
Interest on deposits 1,051,107 597,690 2,081,094 1,210,550
Interest on FHLB Advances 102,375 55,538 184,833 63,334
Interest on other borrowed funds 63,470 -- 131,370 --
----------- ----------- ----------- -----------
Total Interest Expense 1,216,952 653,228 2,397,297 1,273,884
----------- ----------- ----------- -----------
Net Interest Income 1,167,202 565,923 2,356,665 1,104,330
Provision for loss on loans 55,000 15,000 102,500 30,000
----------- ----------- ----------- -----------
Net interest income after
provision for loss on
loans 1,112,202 550,923 2,254,165 1,074,330
----------- ----------- ----------- -----------
NON-INTEREST INCOME
- -------------------
Service charges and other fees 84,668 7,897 158,225 13,679
Gain on sale of securities
available for sale 17,556 -- 18,054 --
Pension plan settlement gain 329,915 -- 329,915 --
Loss on disposal of assets (37,282) -- (37,282) --
Other income 23,716 3,165 57,847 9,260
----------- ----------- ----------- -----------
Total Non-Interest Income 418,573 11,062 526,759 22,939
----------- ----------- ----------- -----------
NON-INTEREST EXPENSES
- ---------------------
Compensation and benefits 449,529 149,078 899,038 268,240
Occupancy and equipment expense 159,371 30,224 275,668 54,673
Federal deposit insurance premiums 7,269 342,639 14,623 370,004
Loss (gain) on foreclosed real estate 52,682 -- 53,240 (500)
Goodwill amortization 31,133 -- 61,929 --
Other general and administrative
expenses 443,600 263,343 759,696 413,211
----------- ----------- ----------- -----------
Total Non-Interest Expense 1,143,584 785,284 2,064,194 1,105,628
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 387,191 (223,299) 716,730 (8,359)
- ---------------------------------
Income tax expense (benefit) 113,502 (96,708) 205,999 (42,434)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 273,689 $ (126,591) $ 510,731 $ 34,075
- ---------------- =========== =========== =========== ===========
Earnings per common share $ 0.22 $ (0.10) $ 0.42 $ 0.03
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON
COMMON PAID-IN RETAINED AVAILABLE FOR UNEARNED
STOCK CAPITAL EARNINGS SALE SECURITIES ESOP SHARES
----- ------- -------- --------------- -----------
Balance at April 1, 1996 $ 13,225 $ 12,710,898 $ 7,707,753 $ 86,285 $ (1,005,100)
Net income for the year
ended March 31, 1997 -- -- 622,619 -- --
Dividend paid -- -- (158,287) -- --
ESOP shares earned -- 15,213 -- -- 86,440
Change in unrealized gain
(loss) on securities available
for sale -- -- -- (144,899) --
Shares repurchased for
RRP Plan -- (36,953) -- -- --
RRP shares earned -- -- -- -- --
Amortization of minimum
pension liability adjustment -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Balances at March 31, 1997 13,225 12,689,158 8,172,085 (58,614) (918,660)
Net income for the six months
ended September 30, 1997 -- -- 510,731 -- --
Dividend paid -- -- (169,833) -- --
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 182,921 --
Amortization of minimum
pension liability adjustment -- -- -- -- --
RRP shares earned -- -- -- -- --
Purchased 15,000 shares
of treasury stock -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Balances at September 30, 1997 $ 13,225 $ 12,689,158 $ 8,512,983 $ 124,307 $ (918,660)
[RESTUBBED TABLE]
MINIMUM
PENSION
UNEARNED LIABILITY TREASURY
RRP SHARES ADJUSTMENT STOCK TOTAL
---------- ---------- ----- -----
Balance at April 1, 1996 $ -- $ (12,798) $ -- $ 19,500,263
Net income for the year
ended March 31, 1997 -- -- -- 622,619
Dividend paid -- -- -- (158,287)
ESOP shares earned -- -- -- 101,653
Change in unrealized gain
(loss) on securities available
for sale -- -- -- (144,899)
Shares repurchased for
RRP Plan (554,659) -- (29,963) (621,575)
RRP shares earned 68,604 -- -- 68,604
Amortization of minimum
pension liability adjustment -- 1,422 -- 1,422
------------ ------------ ------------- ------------
Balances at March 31, 1997 (486,055) (11,376) (29,963) 19,369,800
Net income for the six months
ended September 30, 1997 -- -- -- 510,731
Dividend paid -- -- -- (169,833)
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 182,921
Amortization of minimum
pension liability adjustment -- 715 -- 715
RRP shares earned 31,627 -- -- 31,627
Purchased 15,000 shares
of treasury stock -- -- (259,687) (259,687)
------------ ------------ ------------- ------------
Balances at September 30, 1997 $ (454,428) $ (10,661) $ (289,650) 19,666,274
See accompanying notes to financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
OPERATING ACTIVITIES
- --------------------
Net Income $ 510,731 $ 34,075
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 147,853 35,713
Provision for loss on loans 102,500 30,000
(Gain) on sale of securities available for sale (18,054) --
Loss on disposal of assets 37,282
Federal Home Loan Bank stock dividends (33,600) (21,900)
Deferred income tax expense (benefit) 114,866 (115,007)
Loss (gain) on foreclosed real estate 50,000 (500)
Amortization and accretion of invesment
securities premiums and discounts, net 2,523 4,387
Amortization of goodwill 61,929 --
Decrease (increase) in:
Accrued interest receivable (165,507) (24,554)
Other assets (181,673) 26,308
Increase (decrease) in:
Accrued interest payable 87,985 (55,972)
Accrued income taxes (864) 5,686
Accounts payable and accrued expenses 166,579 550,737
----------- -----------
Net cash provided by operating activities 882,550 468,973
----------- -----------
INVESTING ACTIVITIES
- --------------------
Securities:
Proceeds from sale, maturities or calls 5,222,960 750,000
Purchased (2,803,155) --
Mortgage-backed securities:
Proceeds from sale 1,004,375 --
Purchased (2,187,378) --
Principal payments 464,150 62,550
Certificates of deposits:
Proceeds from maturities -- 100,000
Loan originations and principal payments, net (6,498,761) (5,926,793)
Proceeds from the sale of foreclosed real estate -- 5,500
Purchases of software (10,414) --
Purchases of premises and equipment (353,295) (300,685)
Cash and cash equivalents acquired in purchase of subsidiary
in excess of cash invested -- 4,411,002
----------- -----------
Net cash used by investing activities (5,161,518) (898,426)
----------- -----------
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
FINANCING ACTIVITIES
Net (decrease) increase in deposits (1,190,595) 379,488
Net proceeds from FHLB borrowings 2,725,000 10,200,000
Repayment of long-term borrowings (50,000) --
Decrease in securities sold under agreements to repurchase (1,417,047) --
Decrease in term treasury tax and loan borrowings (206,363) --
Purchase of treasury stock (259,687) --
Dividends paid (169,833) --
RRP stock repurchase -- (621,575)
Long-term note assumed in acquisition of subsidiary -- 700,000
------------ ------------
Net cash (used) provided by financing activities (568,525) 10,657,913
------------ ------------
(Decrease) increase in cash and cash equivalents (4,847,493) 10,228,460
Cash and cash equivalent at beginning of period 8,834,309 6,523,462
------------ ------------
Cash and cash equivalents at end of period $ 3,986,816 $ 16,751,922
============ ============
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Principles of Consolidation
---------------------------
The financial statements for 1997 are presented for Classic Bancshares,
Inc. (the "Company") and its wholly-owned subsidiaries, Classic Bank, and The
First National Bank of Paintsville ("First National"). The consolidated balance
sheets for September 30, 1997 and March 31, 1997 are for the Company, Classic
Bank, and First National. The consolidated statements of income include the
operations of the Company, Classic Bank and First National for the three and six
months ended September 30, 1997. The statements of income for the three and six
months ended September 30, 1996 include only the operations of the Company and
Classic Bank. 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.
as of September 30, 1997, and the results of operations for all interim periods
presented.
Operating results for the six months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1998.
(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 six month period ended September
30, 1997. Weighted average number of shares used in the earnings per share
computations was 1,212,051 for the three month period ended September 30, 1997
and 1,213,303 for the six month period ended September 30, 1997. 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.
(4) Employee Stock Ownership Plan (ESOP)
-----------------------------------
In conjunction with the Bank's conversion on December 28, 1995, the
Company established an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. The ESOP borrowed $1,058,000 from the Company, and
purchased 105,800 common shares, equal to 8% of the total number of shares
issued in the conversion . Classic Bank makes scheduled discretionary
contributions to the ESOP sufficient to service the debt. Shares are allocated
to participants' accounts under the shares allocated method. The cost of shares
committed to be released and unallocated shares is reported as a reduction of
stockholders' equity. Compensation expense is recorded based on the average fair
market value of the ESOP shares when committed to be released. Furthermore, ESOP
shares that have not been committed to be released are not
8
considered outstanding. The expense under the ESOP was $33,816 and $62,316 for
the three and six months ended September 30, 1997 and $25,080 and $49,080 for
the three and six months ended September 30, 1996. As of September 30, 1997, the
Company considered 91,866 shares as unearned ESOP shares with a fair value of
$1,446,890.
(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 112,447 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 50,350 shares. Ungranted RRP shares (2,550) are included
in treasury stock at cost. RRP shares that are granted are considered common
stock equivalents.
(6) Cash Dividend
-------------
On October 21, 1997, the Board declared a cash dividend of $.07 per
share payable on November 17, 1997 to shareholders of record on November 3,
1997.
(7) Pension Plan Settlement Gain
----------------------------
During the quarter, the Company merged the pension plan of First
National into Classic Bank's pension plan, creating one pension plan for the
Company. As a result, the Company recorded a one-time gain of approximately
$330,000 from the settlement of First National's pension plan.
(8) Supplemental Disclosure of Cash Flows Information
-------------------------------------------------
Six months ended September 30,
------------------------------
1997 1996
---- ----
Cash paid for:
Interest $797,234 $314,687
Taxes 164,128 75,987
Noncash investing activities:
Transfer from loans to real estate
acquired through foreclosure 33,347 19,023
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 $631,000, or .5%, from $131.6
million at March 31, 1997 to $132.2 million at September 30, 1997. The increase
was due primarily to an increase in loans of $6.4 million offset by a decrease
in cash and cash equivalents of $4.8 million and a decrease in investment
securities of $2.2 million.
Net loans receivable increased $6.4 million from $81.7 million at March
31, 1997 to $88.1 million at September 30, 1997 due to aggressive origination
efforts and strong loan demand that resulted in originations of $10.9 million of
one to four family loans, $1.8 million in commercial real estate loans, $5.4
million in commercial business loans and $4.1 million in consumer loans offset
by repayments since March 31, 1997.
Investment securities decreased approximately $2.2 million from March
31, 1997 to September 30, 1997 primarily as the result of purchases of $2.8
million and an increase in the market value on these available for sale
securities of approximately $200,000 offset by sold or called securities of $5.2
million. Mortgage-backed securities increased approximately $800,000 from $7.9
million at March 31, 1997 to $8.7 million at September 30, 1997. The increase is
primarily the result of purchases of $2.2 million offset by sales of $1.0
million and principal repayments.
Net deposits decreased $1.2 million from $100.5 million at March 31,
1997 to $99.3 million at September 30, 1997. The decrease in deposits was due to
a more conservative pricing structure in an effort to reduce interest costs.
Securities purchased under agreement to repurchase decreased $1.3 million from
$4.9 million at March 31, 1997 to $3.6 million at September 30, 1997. The
decrease was due to a withdrawal in the normal course of business.
Federal Home Loan Bank advances increased $2.8 million from $4.7
million at March 31, 1997 to $7.5 million at September 30, 1997. Net proceeds
from advances were used to fund loan demand and the outflow of deposits and
repurchase agreements.
Total stockholders' equity was $19.4 million at March 31, 1997 compared
to $19.7 at September 30, 1997.
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
10
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, 1997 AND 1996
- --------------------------------------------
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 $274,000 during the three months
ended September 30, 1997 compared to a net loss of $127,000 during the three
months ended September 30, 1996. The increase in income of $401,000 between the
two periods was primarily the result of an increase in net interest income of
$601,000, an increase in non-interest income of $408,000, partially offset by an
increase in the provision for loss on loans of $40,000, an increase in
non-interest expenses of $358,000 and an increase in income tax expense of
$210,000.
The Company reported net income of $511,000 for the six months ended
September 30, 1997 compared to net income of $34,000 for the six months ended
September 30, 1996. The increase in income of $477,000 between the two periods
was primarily the result of an increase in net interest income of $1.3 million,
and increase in non-interest income of $504,000, partially offset by an increase
in the provision for loss on loans of $73,000, an increase in non-interest
expenses of $959,000 and an increase in income tax expense of $248,000.
Interest Income. Total interest income increased $1.2 million and $2.4
million for the three and six months ended September 30, 1997 as compared to the
three and six months ended September 30, 1996. The increase in interest income
resulted primarily from the inclusion of First National's interest income for
the periods. The average yield on interest-earning assets increased from 7.6%
and 7.3% for the three and six months ended September 30, 1996 to 7.9% for the
three and six months ended September 30, 1997. The average yield increased due
to an increase in higher yielding loans and investments as a result of the
acquisition of First National, as well as, an increase in the origination of
higher yielding loans. The average balance of interest-earning assets increased
from $65.1 million at September 30, 1996 to $120.7 million at September 30,
1997. The increase in the
11
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 $564,000 and $1.1 million
for the three and six months ended September 30, 1997 as compared to the same
period in 1996 primarily as a result of the inclusion of First National's
interest expense for the period. The average balance of interest-earning
liabilities increased from $49.9 million at September 30, 1996 to $101.2 million
at September 30, 1997 as a result of the inclusion of First National's
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities decreased to 4.8% and 4.7% for the three and six months ended
September 30, 1997 from 5.1% and 5.2% for the three and six months ended
September 30, 1996. The average cost of interest-bearing liabilities decreased
primarily as a result of the acquisition of a substantial amount of
non-certificate accounts, including transaction accounts, from First National as
well as the success of Classic Bank's efforts to increase its non-certificate
accounts.
Provision for Loan Losses. The Company's provision for loan losses
totaled $55,000 and $102,500 for the three and six months ended September 30,
1997 compared to $15,000 and $30,000 for the three and six months ended
September 30, 1996 based on management's overall assessment of the loan
portfolio. The increase was due to an increase in foreclosed assets as well as
an increase in charge-offs as 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 increased approximately
$408,000 and $504,000 for the three and six months ended September 30, 1997
compared to the same period in 1996. The increase was primarily the result of a
$330,000 gain recorded from the settlement of First National's pension plan. The
settlement of the pension plan is the result of merging First National's plan
into Classic Bank's pension plan, creating one pension plan for the Company.
Non-interest income also increased due to an increase in service charges and
other fees on deposits of approximately $77,000 and $145,000 for the three and
six month period. The increase in service charges and other fees on deposits is
the result of the inclusion of First National's income, as well as, an increase
in service charges on deposits charged by Classic Bank. Non-interest income also
increased due to a gain on sale of securities of $18,000 for the three and six
month period, an increase in other income of $20,000 and $48,000 for the three
and six month period partially offset by a loss on disposal of assets of $37,000
for the three and six month period.
Non-interest Expense. Non-interest expense increased $358,000 for the
three months ended September 30, 1997 compared to the same period in 1996.
Non-interest expenses increased due to an increase in compensation and benefits
of $300,000 for the three month period; an increase in occupancy expense of
$129,000 for the three month period; a loss on foreclosed real estate of $53,000
due to a write-down and other expenses related to foreclosed real estate; the
amortization of goodwill of $31,000 and an increase in audit, legal and other
general and administrative expenses of $180,000 for the three month period
partially offset by a decrease in federal deposit insurance premiums of
$335,000. 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, and the establishment
of a management
12
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 the continued consolidation of the
operations of the Company's subsidiaries and the inclusion of the expenses of
First National for the three month period. Federal deposit insurance premiums
decreased as the result of a one-time special assessment for SAIF-insured
institutions of $316,000 recorded during the September 30, 1996 quarter.
Non-interest expense increased $959,000 for the six months ended
September 30, 1997 compared to the same period in 1996. Non-interest expenses
increased due to an increase in compensation and benefits of $631,000 for the
six month period; an increase in occupancy expense of $221,000 for the six month
period; a loss on foreclosed real estate of $53,000 due to a write-down and
other expenses related to foreclosed real estate; the amortization of goodwill
of $62,000 and an increase in audit, legal and other general and administrative
expenses of $347,000 for the six month period partially offset by a decrease in
federal deposit insurance premiums of $355,000. 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 six
month period, 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 the continued consolidation of the operations of
the Company's subsidiaries, and the inclusion of the expenses of First National
for the six month period. Federal deposit insurance premiums decreased as the
result of a one-time special assessment for SAIF-insured institutions of
$316,000 recorded during the September 30, 1996 quarter.
Non-interest expense is anticipated to increase significantly during
the last quarter of fiscal 1998 when the Company opens two new branches located
in Greenup and Boyd counties in Kentucky.
Income Tax Expense. Income tax expense increased $210,000 and $248,000
for the three and six months ended September 30, 1997 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 September 30, 1997 was $834,000 or .9% of the total loans. The
March 31, 1997 allowance for loan loss was $801,000, or 1.0% of total loans. The
allowance for loan losses at September 30, 1997 was allocated as follows:
$222,000 to one-to-four family real estate loans, $108,000 to commercial real
estate loans, $54,000 to commercial business loans, $95,000 to consumer loans
and $355,000 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
13
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.
September 30, 1997 March 31, 1997
------------------ --------------
(Dollars in Thousands)
Non-Accruing Loans ................................. $ 283 $ 559
Accruing Loans Delinquent 90 Days or More 324 157
Foreclosed Assets .................................. 283 360
------ ------
Total Non-Performing Assets ........................ $ 890 $1,076
Total Non-Performing Assets as a
Percentage of Total Assets ................ .7% .8%
Total non-performing assets decreased $186,000 from March 31, 1997 to
September 30, 1997. The decrease in non-performing assets is the result of an in
management's collection efforts.
Other Assets of Concern. Other than the non-performing assets set forth
in the table above, as of September 30, 1997, 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, 1997
and March 31, 1997, cash and cash equivalents totaled $4.0 million and $8.8
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, 1997, the
Company had $7.5 million in borrowings outstanding with the FHLB.
Classic Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending on economic conditions, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 5.0%. The Bank's liquidity ratios have consistently been maintained at
14
levels in compliance with regulatory requirements. As of September 30, 1997 and
March 31, 1997, the Bank's liquidity ratios were 5.02% and 5.0% respectively.
At September 30, 1997, the Company had outstanding commitments to
originate loans of $5.1 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments principally through
the use of current liquid assets and through its borrowing capacity with the
FHLB.
Pursuant to rules promulgated by the Office of Thrift Supervision,
savings institutions must meet several separate minimum capital-to-asset
requirements. The following table summarizes, as of September 30, 1997, the
capital requirements applicable to Classic Bank and its actual capital ratios.
As of September 30, 1997, Classic Bank exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (CB Only)
------------------- ---------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based $2,761 8.0% $8,001 23.2%
Core Capital 1,977 3.0 7,674 11.6
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, 1997, the
capital requirements applicable to First National and its actual capital ratios.
As of September 30, 1997, First National exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (FN Only)
------------------- ---------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Risk-Based Capital
(to Risk Weighted Assets) $2,937 8.0% $8,378 22.8%
Tier 1 Capital
(to Risk Weighted Assets) 1,469 4.0 7,918 21.6
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
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 September 30, 1997:
Press release, dated July 28, 1997 announcing the results of
September 30, 1997 quarter and declaration of a cash
dividend.
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, 1997 /s/ David B. Barbour
----------------- ----------------------------------------------------
David B. Barbour, President, Chief Executive Officer
and Director (Duly Authorized Officer)
Date: November 14, 1997 /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