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, 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.
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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 incorporation or organization) (I.R.S. Employer Identification Number)
344 Seventeenth Street, Ashland, Kentucky 41101
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(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 10, 1998, 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
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 (Unaudited)
and March 31, 1997 3
Consolidated Statements of Income for the three and nine months
ended December 31, 1997 and 1996 4
Consolidated Statements of Stockholders' Equity for the nine months
ended December 31, 1997 and Year Ended March 31, 1997 5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 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 10-16
PART II. OTHER INFORMATION 17
Signatures 18
Index to Exhibits 19
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1997 1997
---- ----
(Unaudited)
ASSETS
Cash and due from bank $ 3,099,873 $ 3,309,309
Federal funds sold and securities purchased under resell agreement 25,000 5,525,000
Certificates of deposits in other financial institutions 293,000 293,000
Investment securities available for sale 21,625,584 23,374,597
Mortgage-backed securities available for sale 8,229,986 7,884,835
Loans receivable, net 89,073,340 81,727,685
Real estate acquired in the settlement of loans 228,690 336,337
Accrued interest receivable 927,457 690,186
Federal Home Loan Bank and Federal Reserve Bank stock 1,279,850 1,015,400
Premises and equipment, net 3,856,252 3,297,016
Cost in excess of fair value of net assets acquired (goodwill),
net of accumulated amortization 2,933,326 3,026,389
Other assets 1,220,670 1,074,481
------------- -------------
TOTAL ASSETS $ 132,793,028 $ 131,554,235
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 99,718,817 $ 100,519,473
Securities sold under agreement to repurchase 3,529,086 4,955,766
Advances from Federal Home Loan Bank 6,760,000 4,750,000
Treasury tax and loan note 704,418 428,954
Accrued expenses and other liabilities 489,502 287,836
Accrued interest payable 349,231 217,731
Accrued income taxes 97,902 90,588
Long-term debt 575,000 650,000
Deferred income taxes 573,985 284,087
------------- -------------
Total Liabilities $ 112,797,941 $ 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 8,709,310 8,172,085
Net unrealized gain (loss) on securities available for sale 256,430 (58,614)
Unearned ESOP shares (918,660) (918,660)
Unearned RRP shares (454,428) (486,055)
Minimum pension liability adjustment (10,298) (11,376)
Treasury stock, at cost (289,650) (29,963)
------------- -------------
Total Stockholders' Equity $ 19,995,087 $ 19,369,800
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 132,793,028 $ 131,554,235
============= =============
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,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
INTEREST INCOME
Loans $ 1,892,380 $ 1,683,279 $ 5,541,428 $ 3,471,561
Investment securities 353,897 424,971 1,120,971 762,406
Mortgage-backed securities 130,870 44,946 424,384 135,627
Other interest earning assets 13,703 187,383 58,029 362,877
--------- --------- --------- ---------
Total Interest Income 2,390,850 2,340,579 7,144,812 4,732,471
--------- --------- --------- ---------
INTEREST EXPENSE
Interest on deposits 1,058,765 1,081,419 3,139,859 2,291,970
Interest on FHLB Advances 92,539 91,277 277,372 154,611
Interest on other borrowed funds 65,153 16,896 196,524 16,896
--------- --------- --------- ---------
Total Interest Expense 1,216,457 1,189,592 3,613,755 2,463,477
--------- --------- --------- ---------
Net Interest Income 1,174,393 1,150,987 3,531,057 2,268,994
Provision for loss on loans 25,000 37,500 127,500 67,500
--------- --------- --------- ---------
Net interest income after
provision for loss on
loans 1,149,393 1,113,487 3,403,557 2,201,494
--------- --------- --------- ---------
NON-INTEREST INCOME
Service charges and other fees 110,844 60,607 269,069 66,088
Gain on sale of securities
available for sale 10,437 7,844 28,491 7,844
Pension plan settlement gain - - 329,915 -
Loss on disposal of assets - - (31,971) -
Other income 34,722 36,164 87,258 39,941
--------- --------- --------- ---------
Total Non-Interest Income 156,003 104,615 682,762 113,873
--------- --------- --------- ---------
NON-INTEREST EXPENSES
Compensation and benefits 437,965 379,103 1,337,003 647,343
Occupancy and equipment expense 122,060 105,386 397,728 160,059
Federal deposit insurance premiums 10,585 26,966 25,209 396,970
(Gain) loss on foreclosed real estate (27,645) - 25,595 (500)
Goodwill amortization 31,133 31,134 93,063 31,134
Other general and administrative
expenses 336,429 278,539 1,096,122 691,746
--------- --------- --------- ---------
Total Non-Interest Expense 910,527 821,128 2,974,720 1,926,752
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 394,869 396,974 1,111,599 388,615
Income tax expense (benefit) 113,977 138,899 319,976 96,465
--------- --------- --------- ---------
NET INCOME (LOSS) $ 280,892 $ 258,075 $ 791,623 $ 292,150
========= ========= ========= =========
Basic earnings per common share $ 0.23 $ 0.21 $ 0.65 $ 0.24
========= ========= ========= =========
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 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 nine months
ended December 31, 1997 -- -- 791,623 -- --
Dividend paid -- -- (254,398) -- --
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 315,044 --
Amortization of minimum
pension liability adjustment -- -- -- -- --
RRP shares earned -- -- -- -- --
Purchased 20,000 shares
of treasury stock -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 $ 13,225 $ 12,689,158 $ 8,709,310 $ 256,430 $ (918,660)
[RESTUBBED FROM TABLE ABOVE]
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 nine months
ended December 31, 1997 -- -- -- 791,623
Dividend paid -- -- -- (254,398)
Change in unrealized gain
(loss) on securities available
for sale -- -- -- 315,044
Amortization of minimum
pension liability adjustment -- 1,078 -- 1,078
RRP shares earned 31,627 -- -- 31,627
Purchased 20,000 shares
of treasury stock -- -- (259,687) (259,687)
------------ ------------ ------------ ------------
Balances at December 31, 1997 $ (454,428) $ (10,298) $ (289,650) 19,995,087
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
---------------------
1997 1996
---- ----
OPERATING ACTIVITIES
Net Income $ 791,623 $ 292,150
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 229,840 96,918
Provision for loss on loans 127,500 67,500
Gain on sale of securities available for sale (28,491) (7,844)
Loss on disposal of assets 31,971 --
Federal Home Loan Bank stock dividends (50,900) (37,100)
Deferred income tax expense (benefit) 118,622 (8,977)
Loss (gain) on foreclosed real estate 19,647 (500)
Amortization and accretion of invesment
securities premiums and discounts, net 5,687 4,879
Amortization of goodwill 93,063 31,134
Decrease (increase) in:
Accrued interest receivable (237,271) 4,076
Other assets (146,189) 106,730
Increase (decrease) in:
Accrued interest payable 131,500 (73,382)
Accrued income taxes 7,314 44,511
Accounts payable and accrued expenses 201,666 201,258
----------- -----------
Net cash provided by operating activities 1,295,582 721,353
----------- -----------
INVESTING ACTIVITIES
Securities:
Proceeds from sale, maturities or calls 8,230,979 5,821,400
Purchased (6,242,157) (3,312,802)
Mortgage-backed securities:
Proceeds from sale 1,004,375 2,171,786
Purchased (2,187,378) (4,040,006)
Principal payments 894,120 257,121
Certificates of deposits:
Proceeds from maturities -- 195,000
Loan originations and principal payments, net (7,472,490) (8,350,480)
Proceeds from the sale of foreclosed real estate 100,000 5,500
Proceeds from the sale of equipment 53,403 --
Purchases of software (26,321) --
Purchases of premises and equipment (828,589) (644,139)
Cash and cash equivalents acquired in purchase of subsidiary
in excess of cash invested -- 4,411,002
----------- -----------
Net cash used by investing activities (6,474,058) (3,485,618)
----------- -----------
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
---- ----
FINANCING ACTIVITIES
Net (decrease) increase in deposits (800,659) (1,677,915)
Net proceeds from FHLB borrowings 2,010,000 4,500,000
Repayment of long-term borrowings (75,000) (25,000)
Decrease in securities sold under agreements to repurchase (1,426,680) (288,175)
Net increase (decrease) in term treasury tax and loan borrowings 275,464 (22,979)
Purchase of treasury stock (259,687) --
Dividends paid (254,398) (73,320)
RRP stock repurchase -- (621,575)
Long-term note assumed in acquisition of subsidiary -- 700,000
----------- -----------
Net cash (used) provided by financing activities (530,960) 2,491,036
----------- -----------
(Decrease) increase in cash and cash equivalents (5,709,436) (273,229)
Cash and cash equivalent at beginning of period 8,834,309 6,523,462
----------- -----------
Cash and cash equivalents at end of period $ 3,124,873 $ 6,250,233
=========== ===========
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 December 31, 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 nine months ended December 31, 1997. The statement of income
for the three months ended December 31, 1996 include the operations of the
Company, Classic Bank and First National. The statement of income for the nine
months ended December 31, 1996 includes only the operations of the Company and
Classic Bank for the first six months and the operations of the Company,
Classic Bank and First National for the last three months. 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 December 31, 1997, and the results of operations for all interim
periods presented.
Operating results for the nine months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 1998.
(3) Basic Earnings Per Share of Common Stock
During the quarter, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Under Statement
128, basic earnings per share of common stock replaces "primary earnings per
share," and is computed by dividing income available to common shareholders
for the period by the weighted average number of common shares outstanding
during the period. Basic earnings per share does not consider dilution from
potentially dilutive securities such as stock options, warrants, convertible
securities and contingent share agreements. Diluted earnings per share
replaces "fully diluted earnings per share". It assumes dilutive potential
common shares have been issued.
Weighted average number of shares used in the basic earnings per
share computations was 1,208,084 for the three month period ended December 31,
1997 and 1,211,557 for the nine month period ended December 31, 1997. 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. The diluted earnings per share
do not differ materially from the basic earnings per share and therefore, have
not been disclosed.
8
(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 considered outstanding. The expense under the ESOP was $30,683 and
$92,999 for the three and nine months ended December 31, 1997 and $24,000 and
$73,080 for the three and nine months ended December 31, 1996. As of December
31, 1997, the Company considered 91,866 shares as unearned ESOP shares with a
fair value of $1,538,756.
(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 January 12, 1998, the Board declared a cash dividend of $.07 per
share payable on February 9, 1998 to shareholders of record on January 26,
1998.
(7) Pension Plan Settlement Gain
During the nine month period ended December 31, 1997, 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
Nine months ended December 31,
------------------------------
1997 1996
---- ----
Cash paid for:
Interest $1,371,015 $1,106,865
Taxes 255,082 77,923
Noncash investing activities:
Transfer from loans to real estate
acquired through foreclosure 59,989 10,000
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 $1.2 million, or .9%, from
$131.6 million at March 31, 1997 to $132.8 million at December 31, 1997. The
increase was due primarily to an increase in loans of $7.3 million, an
increase in mortgage-backed securities of $350,000 and an increase in premises
and equipment of $560,000 partially offset by a decrease in cash and cash
equivalents of $5.7 million and a decrease in investment securities of $1.4
million.
Net loans receivable increased $7.3 million from $81.7 million at
March 31, 1997 to $89.0 million at December 31, 1997 due to aggressive
origination efforts and strong loan demand that resulted in originations of
$14.2 million of one to four family loans, $3.2 million in commercial real
estate loans, $8.6 million in commercial business loans and $6.2 million in
consumer loans offset by repayments since March 31, 1997.
Investment securities decreased approximately $1.4 million from March
31, 1997 to December 31, 1997 primarily as the result of purchases of $6.2
million and an increase in the market value on these available for sale
securities of approximately $200,000 partially offset by sold or called
securities of $8.2 million. Mortgage-backed securities increased approximately
$350,000 from $7.9 million at March 31, 1997 to $8.2 million at December 31,
1997. The increase was primarily the result of purchases of $2.2 million
partially offset by sales of $1.0 million and principal repayments.
Premises and equipment increased approximately $560,000 from March
31, 1997 to December 31, 1997 primarily as the result of the construction of
two new branch offices which are scheduled to open in the next quarter.
Net deposits decreased $800,000 from $100.5 million at March 31, 1997
to $99.7 million at December 31, 1997. The decrease in deposits was due to
increased competition within the Company's market area. Securities sold under
agreement to repurchase decreased $1.4 million from $4.9 million at March 31,
1997 to $3.5 million at December 31, 1997. The decrease was due to a
withdrawal in the normal course of business.
Federal Home Loan Bank advances increased $2.1 million from $4.7
million at March 31, 1997 to $6.8 million at December 31, 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 $20.0 million at December 31, 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
10
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, 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 $281,000 during the three months
ended December 31, 1997 compared to net income of $258,000 during the three
months ended December 31, 1996. The increase in income of $23,000 between the
two periods was primarily the result of an increase in net interest income of
$23,000, an increase in non-interest income of $51,000, a decrease in the
provision for loss on loans of $13,000, and a decrease in income tax expense
of $25,000 partially offset by an increase in non-interest expenses of
$89,000.
The Company reported net income of $792,000 for the nine months ended
December 31, 1997 compared to net income of $292,000 for the nine months ended
December 31, 1996. The increase in income of $500,000 between the two periods
was primarily the result of an increase in net interest income of $1.2
million, and increase in non-interest income of $570,000, partially offset by
an increase in the provision for loss on loans of $60,000, an increase in
non-interest expenses of $1.0 million and an increase in income tax expense of
$224,000.
Interest Income. Total interest income increased $50,000 and $2.4
million for the three and nine months ended December 31, 1997 as compared to
the three and nine months ended December 31, 1996. The increase in interest
income for the three month period resulted primarily from an increase in the
average yield on interest-earning assets. The increase in interest income for
the nine month period resulted primarily from the inclusion of First
National's interest income for the period. The average yield on
11
interest-earning assets increased from 7.8% and 7.6% for the three and nine
months ended December 31, 1996 to 7.9% for the three and nine months ended
December 31, 1997. The average yield increased due to an increase in the
origination of higher yielding loans and an increase in higher yielding
investments. The average balance of interest-earning assets increased from
$83.2 million at December 31, 1996 to $120.7 million at December 31, 1997. 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 $26,000 and $1.2 million
for the three and nine months ended December 31, 1997 as compared to the same
period in 1996. Interest expense increased for the three month period
primarily due to an increase in the cost of interest-bearing liabilities.
Interest expense increased for the nine month period primarily as a result of
the inclusion of First National's interest expense for the entire nine month
period compared to only three months for the same period in 1996. The average
balance of interest-bearing liabilities increased from $66.6 million at
December 31, 1996 to $101.1 million at December 31, 1997 as a result of the
inclusion of First National's interest-bearing liabilities. The average rate
paid on interest-bearing liabilities was 4.8% for the three and nine months
ended December 31, 1997 compared to 4.7% and 5.0% for the three and nine
months ended December 31, 1996. The average cost of interest-bearing
liabilities increased slightly for the three month period due to an increase
in the average rate paid on deposits in order to be competitive within the
Company's market area. The average cost of interest-bearing liabilities
decreased for the nine month period 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 $25,000 and $127,500 for the three and nine months ended December 31,
1997 compared to $37,500 and $67,500 for the three and nine months ended
December 31, 1996 based on management's overall assessment of the loan
portfolio. The increase for the nine month period was due to 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
$51,000 and $570,000 for the three and nine months ended December 31, 1997
compared to the same period in 1996. The increase for the three month period
was due to an increase in service charges and other fees on deposits. The
increase for the nine month period 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 for the nine month period due to an
increase in service charges and other fees on deposits of approximately
$203,000, an increase in gain on sale of securities of $20,000, and an
increase in other income of $48,000 partially offset by a loss on disposal of
assets of $31,000. 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.
12
Non-interest Expense. Non-interest expense increased $89,000 for the
three months ended December 31, 1997 compared to the same period in 1996.
Non-interest expenses increased for the three month period due to an increase
in compensation and benefits of $59,000; an increase in occupancy expense of
$17,000; an increase in advertising expense of $16,000, an increase in the
Kentucky bank franchise tax of $15,000, and an increase in other general and
administrative expenses of $26,000 partially offset by a gain on foreclosed
real estate of $28,000 and a decrease in federal deposit insurance premiums of
$16,000. 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. The
increase in occupancy expenses resulted from increased depreciation as a
result of improvements made to the facilities. The increase in the bank
franchise tax was the result of new legislation. The increase in advertising
and other general and administrative expenses were the result of the
introduction of new product offerings and increases in expenses related to
automated teller machines due to the increased number of automated teller
machine locations. 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 $1.0 million for the nine months ended
December 31, 1997 compared to the same period in 1996. Non-interest expenses
increased due to an increase in compensation and benefits of $690,000; an
increase in occupancy expense of $238,000; an increase in the amortization of
goodwill of $62,000, a net loss on foreclosed real estate of $25,000 and an
increase in audit, legal and other general and administrative expenses of
$404,000 partially offset by a decrease in federal deposit insurance premiums
of $372,000. 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. 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 entire nine month period
in 1997 compared to only three months of expenses for the nine month period in
1996. 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 decreased $25,000 for the
three months ended December 31, 1997 primarily due to an decrease in income
before income taxes and an increase in tax exempt income. Income tax expense
increased $224,000 the nine months ended December 31, 1997 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, 1997 was $827,000 or
13
.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 December
31, 1997 was allocated as follows: $305,000 to one-to-four family real estate
loans, $43,000 to commercial real estate loans, $60,000 to commercial business
loans, $106,000 to consumer loans and $313,000 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.
December 31, 1997 March 31, 1997
----------------- --------------
(Dollars in Thousands)
Non-Accruing Loans ......................... $ 221 $ 559
Accruing Loans Delinquent 90 Days or More 107 157
Foreclosed Assets .......................... 228 360
------ ------
Total Non-Performing Assets ................ $ 556 $1,076
Total Non-Performing Assets as a
Percentage of Total Assets ........ .4% .8%
Total non-performing assets decreased $520,000 from March 31, 1997 to
December 31, 1997. The decrease in non-performing assets is the result of an
increase in management's collection efforts and the sale of foreclosed real
estate.
Other Assets of Concern. Other than the non-performing assets set
forth in the table above, as of December 31, 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 December 31, 1997
and March 31, 1997, cash and cash equivalents totaled $3.1 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
14
required beyond the funds generated internally, the subsidiaries of the
Company have the ability to borrow funds from the FHLB. At December 31, 1997,
the Company had $6.8 million in borrowings outstanding with the FHLB.
Classic Bank is required to maintain minimum levels of liquid assets
as defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending on economic conditions, is based upon a
percentage of deposits and short-term borrowings. The required ratio is
currently 4.0%. The Bank's liquidity ratios have consistently been maintained
at levels in compliance with regulatory requirements. As of December 31, 1997
and March 31, 1997, the Bank's liquidity ratios were 4.7% and 5.0%
respectively.
At December 31, 1997, the Company had outstanding commitments to
originate loans of $6.7 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 December 31, 1997, the
capital requirements applicable to Classic Bank and its actual capital ratios.
As of December 31, 1997, Classic Bank exceeded all current regulatory capital
standards.
Regulatory Actual Capital
Capital Requirement (CB Only)
------------------- ---------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars Thousands)
Risk-Based $2,752 8.0% $8,073 23.5%
Core Capital 1,977 3.0 7,747 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 December
31, 1997, the capital requirements applicable to First National and its actual
capital ratios. As of December 31, 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) $2,991 8.0% $8,658 22.9%
Tier 1 Capital
(to Risk Weighted Assets) 1,495 4.0 8,190 21.9
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
15
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
None
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 13, 1998 /s/ David B. Barbour
------------------------ --------------------------------------------------------------
David B. Barbour, President, Chief Executive Officer
and Director (Duly Authorized Officer)
Date: February 13, 1998 /s/ Lisah M. Frazier
------------------------ --------------------------------------------------------------
Lisah M. Frazier, Vice President, Treasurer and
Chief Financial Officer (Principal Financial Officer)
18
INDEX TO EXHIBITS
Exhibit
Number
------
27 Financial Data Schedule
19