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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, 2003
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
344 Seventeenth Street, Ashland, Kentucky 41101
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 326-2800
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 3, 2004, there were 1,404,825 shares of the Registrant's
common stock outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
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CLASSIC BANCSHARES, INC.
INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2003
and March 31, 2003 3
Consolidated Statements of Income for the three and
nine months ended December 31, 2003 and 2002 4
Consolidated Statements of Comprehensive Income for the three
and nine months ended December 31, 2003 and 2002 5
Consolidated Statements of Stockholders' Equity for the
nine months ended December 31, 2003 6
Consolidated Statements of Cash Flows for the nine
months ended December 31, 2003 and 2002 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-19
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION 20
Signatures 21
Index to Exhibits 22
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2003
------------ ------------
(Unaudited)
(In Thouands)
ASSETS
------
Cash and due from banks $ 7,876 $ 8,124
Federal funds sold 59 24
------------ ------------
Cash and cash equivalents 7,935 8,148
Securities available for sale 54,075 37,843
Loans receivable, net 255,071 187,175
Accrued interest receivable 1,609 1,157
Federal Home Loan Bank stock 2,866 1,949
Premises and equipment, net 7,825 6,267
Goodwill 8,051 5,555
Other intangible assets 840 --
Prepaid expenses and other assets 3,180 1,787
------------ ------------
TOTAL ASSETS $ 341,452 $ 249,881
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Non-interest bearing demand deposits $ 27,688 $ 23,159
Savings, NOW, and money market demand deposits 105,017 65,762
Other time deposits 123,712 101,235
------------ ------------
Total deposits 256,417 190,156
Securities sold under agreements to repurchase 9,171 4,382
Advances from Federal Home Loan Bank 39,051 28,126
Other short-term borrowings 348 6
Accrued expenses and other liabilities 2,244 1,445
Accrued interest payable 314 344
------------ ------------
Total Liabilities $ 307,545 $ 224,459
------------ ------------
Stockholders' Equity
Common stock, $.01 par value, 1,684,443 and 1,322,500 shares
issued and 1,404,825 and 1,105,486 shares outstanding $ 17 $ 13
Additional paid-in capital 31,066 20,436
Retained earnings 5,348 7,721
Accumulated other comprehensive income (loss) 935 751
Unearned ESOP shares (62,244 and 65,843 shares) (566) (599)
Unearned RRP shares (360 and 850 shares) (5) (12)
Treasury stock, at cost (217,014 shares) (2,888) (2,888)
------------ ------------
Total Stockholders' Equity $ 33,907 $ 25,422
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 341,452 $ 249,881
============ ============
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,
------------ ------------
2003 2002 2003 2002
-------- -------- -------- --------
(In Thousands)
INTEREST INCOME
---------------
Loans $ 3,972 $ 3,105 $ 11,074 $ 9,171
Securities 551 452 1,493 1,421
Dividends on Federal Home Loan Bank stock 29 22 77 64
Other interest 8 2 27 5
-------- -------- -------- --------
Total Interest Income 4,560 3,581 12,671 10,661
-------- -------- -------- --------
INTEREST EXPENSE
----------------
Deposits 1,067 988 3,138 2,985
Federal Home Loan Bank advances 293 241 849 750
Securities sold under repurchase agreements 24 12 55 45
Other short-term borrowings 1 1 3 3
-------- -------- -------- --------
Total Interest Expense 1,385 1,242 4,045 3,783
-------- -------- -------- --------
Net Interest Income 3,175 2,339 8,626 6,878
Provision for loss on loans 66 96 158 306
-------- -------- -------- --------
Net interest income after
provision for loss on
loans 3,109 2,243 8,468 6,572
-------- -------- -------- --------
NON-INTEREST INCOME
-------------------
Service charges and other fees 418 383 1,269 1,028
Gain on sale of securities 1 7 2 11
Secondary market commissions 15 31 102 53
Other income 65 43 203 128
-------- -------- -------- --------
Total Non-Interest Income 499 464 1,576 1,220
-------- -------- -------- --------
NON-INTEREST EXPENSES
---------------------
Employee compensation and benefits 1,076 785 2,993 2,395
Occupancy and equipment expense 334 270 919 745
Advertising 83 72 321 229
Communications 64 47 190 138
Franchise and deposit taxes 66 58 192 172
Directors fees 24 24 74 72
Professional fees 80 39 219 132
Stationery and supplies 73 79 279 222
Other operating expenses 395 240 1,149 697
-------- -------- -------- --------
Total Non-Interest Expense 2,195 1,614 6,336 4,802
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,413 1,093 3,708 2,990
--------------------------
Income tax expense 410 305 1,055 818
-------- -------- -------- --------
NET INCOME $ 1,003 $ 788 $ 2,653 $ 2,172
======== ======== ======== ========
Basic earnings per share $ 0.71 $ 0.69 $ 1.98 $ 1.89
Diluted earnings per share $ 0.65 $ 0.63 $ 1.80 $ 1.73
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------- -------- -------- --------
(In Thousands)
Net Income $ 1,003 $ 788 $ 2,653 $ 2,172
-------- -------- -------- --------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax 354 298 185 848
Reclassification adjustments for realized (gains)
losses included in earnings, net of tax -- (5) (1) (7)
-------- -------- -------- --------
Other comprehensive income 354 293 184 841
-------- -------- -------- --------
Comprehensive Income $ 1,357 $ 1,081 $ 2,837 $ 3,013
======== ======== ======== ========
Accumulated Other Comprehensive Income $ 935 $ 515 $ 935 $ 515
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
ACCUMULATED
ADDITIONAL OTHER UNEARNED UNEARNED
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP RRP TREASURY
STOCK CAPITAL EARNINGS INCOME SHARES SHARES STOCK TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
Balances at April 1, 2003 $ 13 $ 20,436 $ 7,721 $ 751 $ (599) $ (12) $ (2,888) $ 25,422
Net income for the nine months
ended December 31, 2003 -- -- 2,653 -- -- -- -- 2,653
Stock dividend - 10% 1 4,723 (4,729) -- -- -- -- (5)
Dividend paid ($.24 per share) -- -- (297) -- -- -- -- (297)
Commitment of shares to be
released under ESOP (3,599) -- 78 -- -- 33 -- -- 111
RRP shares earned (490) -- -- -- -- -- 7 -- 7
Common stock issued in
acquisition (228,665) 3 5,829 -- -- -- -- -- 5,832
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
taxes and reclassifications -- -- -- 184 -- -- -- 184
-------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 2003 $ 17 $ 31,066 $ 5,348 $ 935 $ (566) $ (5) $ (2,888) $ 33,907
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------
2003 2002
-------- --------
(In Thousands)
OPERATING ACTIVITIES
--------------------
Net Income $ 2,653 $ 2,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 653 304
Provision for loss on loans 158 306
Gain on sale of securities available for sale (2) (11)
Gain on sale of fixed assets (13) --
Loss (gain) on foreclosed real estate 20 (1)
Federal Home Loan Bank stock dividends (77) (64)
Net amortization of securities 208 63
ESOP shares earned 111 --
RRP shares earned 7 6
Decrease (increase) in:
Accrued interest receivable (127) (131)
Other assets 18 (342)
Increase (decrease) in:
Accrued interest payable (219) (24)
Accounts payable and accrued expenses (239) 190
-------- --------
Net cash provided by operating activities 3,151 2,468
-------- --------
INVESTING ACTIVITIES
--------------------
Securities:
Proceeds from sale, maturities or calls 2,398 1,905
Purchased (971) (2,377)
Mortgage-backed securities:
Purchased (10,698)
Principal payments 2,809 2,241
Purchase of Federal Home Loan Bank stock -- (386)
Loan originations and principal payments, net (18,707) (20,227)
Proceeds from sale of foreclosed real estate 88 155
Purchases of software (230) --
Purchases of premises and equipment (445) (970)
Proceeds from sale of premises and equipment 245 --
Net cash acquired in acquisition 3,564 --
-------- --------
Net cash used by investing activities (21,947) (19,659)
-------- --------
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
------------
2003 2002
-------- --------
FINANCING ACTIVITIES
--------------------
Net increase in deposits $ 9,197 $ 17,113
Net proceeds from FHLB borrowings 4,552 1,746
Increase (decrease) in securities sold under
agreements to repurchase 4,789 (766)
Net increase in short-term borrowings 342 55
Purchase of treasury stock -- (334)
Dividends paid (297) (252)
-------- --------
Net cash provided by financing activities 18,583 17,562
-------- --------
Increase in cash and cash equivalents (213) 371
Cash and cash equivalent at beginning of period 8,148 5,400
-------- --------
Cash and cash equivalents at end of period $ 7,935 $ 5,771
======== ========
Additional cash flows and supplementary information
Cash paid during the period for:
Interest on deposits and borrowings $ 4,075 $ 3,807
Taxes $ 900 $ 800
Assets acquired in settlement of loans $ 708 $ 76
See accompanying notes to consolidated financial statements.
8
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2003, and the results of operations for all interim periods
presented. Operating results for the nine months ended December 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2004.
Certain financial information and footnote disclosures normally included in
annual financial statements prepared in conformity with generally accepted
accounting principles have been omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. The unaudited interim consolidated
financial statements presented herein should be read in conjunction with the
annual consolidated financial statements of the Company as of and for the fiscal
year ended March 31, 2003.
STOCK OPTION PLANS
------------------
Employee compensation expense under stock option plans is reported using
the intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
THREE MONTHS ENDED
DECEMBER 31,
------------
2003 2002
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $ 1,003 $ 788
Deduct:
Stock-based compensation
expense determined under fair
value-based method -- 1
------- -------
Pro forma net income $ 1,003 $ 787
======= =======
Basic earnings per share as reported $0.71 $0.69
Pro forma basic earnings per share 0.71 0.69
Diluted earnings per share as reported 0.65 0.63
Pro forma diluted earnings per share 0.65 0.63
9
NINE MONTHS ENDED
DECEMBER 31,
------------
2003 2002
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $ 2,653 $ 2,172
Deduct:
Stock-based compensation
expense determined under fair
value-based method 430 51
------- -------
Pro forma net income $ 2,223 $ 2,121
======= =======
Basic earnings per share as reported $1.98 $1.89
Pro forma basic earnings per share 1.66 1.84
Diluted earnings per share as reported 1.80 1.73
Pro forma diluted earnings per share 1.51 1.68
Options to purchase 60,000 shares of common stock were granted on September
18, 2003 at an exercise price of $34.99 per share.
PRINCIPLES OF CONSOLIDATION
---------------------------
The financial statements include the accounts of Classic Bancshares, Inc.
(the "Company") and its wholly owned subsidiary, Classic Bank. All significant
intercompany balances and transactions have been eliminated.
DIVIDEND
--------
The Company declared a 10% dividend on October 20, 2003, payable on
November 17, 2003. The payment of this dividend is in addition to the regular
quarterly cash dividend. Per share amounts have been restated for the impact of
this stock dividend.
(2) EARNINGS PER SHARE
Earnings per share are presented pursuant to the provisions of SFAS No.
128, "Earnings Per Share." Basic earnings per share are calculated based on the
weighted average number of common shares outstanding during the respective
periods.
Diluted earnings per share are computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under the
Company's stock option plans and recognition and retention plan.
For the Three Months Ended For the Three Months Ended
December 31, 2003 December 31, 2002
(In thousands, except per share data) (In thousands, except per share data)
-------------------------------------- --------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS $1,003 1,405 $0.71 $788 1,144 $0.69
Effect of Dilutive
Securities-Options -- 138 (0.06) -- 107 (0.06)
-------------------------------------- --------------------------------------
Diluted EPS $1,003 1,543 $0.65 $788 1,251 $0.63
====================================== ======================================
10
For the Three Months Ended For the Three Months Ended
December 31, 2003 December 31, 2002
(In thousands, except per share data) (In thousands, except per share data)
-------------------------------------- --------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS $2,653 1,337 $1.98 $2,172 1,152 $1.89
Effect of Dilutive
Securities-Options -- 133 (0.18) -- 107 (0.16)
-------------------------------------- --------------------------------------
Diluted EPS $2,653 1,470 $1.80 $2,172 1,259 $1.73
====================================== ======================================
Options to purchase 319,935 shares of common stock were outstanding at
December 31, 2003. Options to purchase 206,635 shares of common stock were
outstanding at December 31, 2002.
(3) IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
On April 1, 2003, the Company adopted Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. On July 1, 2003, the
Company adopted Statement 149, amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities. On
October 1, 2003, the Company adopted Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
(4) ACQUISITION OF FIRST FEDERAL FINANCIAL BANCORP
On June 20, 2003, the Company acquired 100 percent of the outstanding
common stock of First Federal Financial Bancorp, Inc., headquartered in Ironton,
Ohio, the holding company for First Federal Savings Bank of Ironton, which
operated three offices in southeastern Ohio. In the transaction, First Federal
Savings Bank of Ironton was merged with and into Classic Bank with Classic Bank
as the surviving institution. All locations of First Federal will be operated as
branch offices of Classic Bank. Shareholders of First Federal were able to elect
to receive either shares of Classic common stock, $24.00 in cash or a
combination of stock and cash subject to the requirement that 50% of First
Federal shares were exchanged for cash and 50% were exchanged for Classic common
stock. The results of First Federal's operations have been included in the
consolidated financial statements since June 20, 2003. Presented below are the
net assets acquired from First Federal. Management believes that the assets and
liabilities acquired are similar to those of the Company.
(IN THOUSANDS)
Cash $ 9,573
Loans, net 49,474
Securities 9,490
Other assets 3,665
Deposits (56,682)
FHLB borrowings (6,373)
Other liabilities (720)
----------
Net asset acquired $ 8,427
==========
First Federal is located in the market area of the Company and thus, the
acquisition enabled the Bank to gain market share and affords the Company the
opportunity to reduce costs through economies of scale.
11
The aggregate purchase price was $11.4 million, including $5.6 million of
cash and common stock valued at $5.8 million and resulted in goodwill and other
intangibles of $3.6 million. The value of the 228,665 common shares issued was
determined based upon the closing market price of Classic's common shares on
December 30, 2002, the date the terms of the acquisition were agreed to and
announced. Under the terms of the agreement, the number of shares of the
Company's common stock for which each First Federal shares was exchanged was
..9797.
Presented below are the unaudited, pro-forma condensed consolidated results
of operations of the Company for the nine months ended December 31, 2003 and the
three and nine months ended December 31, 2002, assuming the transaction occurred
on April 1, 2003 and April 1, 2002.
9 MOS. ENDED 3 MOS. ENDED 9 MOS. ENDED
DEC. 31, 2003 DEC. 31, 2002 DEC. 31, 2002
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net interest income $9,123 $2,914 $8,470
Net income 1,639 781 2,202
Basic income per share 1.17 .56 1.57
Diluted income per share 1.06 .52 1.45
The pro-forma information for the nine-month period ending December 31,
2003 results included material expense items recorded by First Federal. The
material items recorded during the period by First Federal include a provision
to the loan loss allowance of $500,000, and merger expenses of $499,490. First
Federal's merger expenses include employee severance payments, the payment of an
employment contract, legal fees, accounting fees, fees paid to an investment
banker and data processing termination fees. The total non-recurring expense
items for the period net of tax was $659,663.
12
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
-------------------
The Company's total assets increased $91.6 million from $249.9 million at
March 31, 2003 to $341.5 million at December 31, 2003. The increase was due
primarily to an increase in loans of $67.9 million, an increase in securities of
$16.3 million, an increase in goodwill and other intangibles of $3.3 million, an
increase in premises and equipment of approximately $1.6 million, an increase in
other assets of approximately $1.6 million and an increase in FHLB stock of
approximately $900,000.
Net loans receivable increased $67.9 million from $187.2 million at March
31, 2003 to $255.1 million at December 31, 2003. The increase was due primarily
to net loans acquired from First Federal of approximately $49.5 million and a
premium of approximately $700,000 recorded on the acquired loans based on the
market valuation of the loans. The remainder of the increase of $17.7 million
was due to internal loan growth primarily in the consumer and commercial
portfolios.
Securities increased approximately $16.3 million from $37.8 million at
March 31, 2003 to $54.1 million at December 31, 2003 primarily due to the
acquisition of $9.5 million of securities in connection with the acquisition of
First Federal, purchases of $11.7 million and an increase in the market value of
the available for sale securities of approximately $300,000 offset by
maturities, calls and principal repayments of $5.2 million
Deposits increased $66.2 million from $190.2 million at March 31, 2003 to
$256.4 million at December 31, 2003. The increase was due primarily to the
acquisition of First Federal. Deposits acquired from First Federal totaling
$56.7 million. The remainder of the increase of $9.5 million was a result of
internal deposit growth. The increase in deposits was used to fund loan growth.
Total stockholders' equity was $33.9 million at December 31, 2003 compared
to $25.4 million at March 31, 2003. The increase was due primarily to the
issuance of additional shares of the Company's stock in connection with the
acquisition of First Federal. The increase was also due to net income recorded
for the period and an increase in the market value of available for sale
securities offset by cash dividends paid.
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 including unemployment levels and plant closings, changes in real estate
values in the Company's market area, changes in policies by regulatory
13
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition and the failure to achieve anticipated merger cost
savings or difficulty in merger integration, 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, 2003 AND 2002
---------------------------------------
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 $1.0 million for the three months ended
December 31, 2003 compared to net income of $788,000 for the three months ended
December 31, 2002. The increase in net income of $215,000 between the two
periods was primarily the result of an increase in net interest income of
$836,000, an increase in non-interest income of $35,000 and a decrease in
provision for loss on loans of $30,000 partially offset by an increase in
non-interest expense of $581,000 and an increase in income taxes of $105,000.
The Company reported net income of $2.7 million for the nine months ended
December 31, 2003 compared to net income of $2.2 million for the nine months
ended December 31, 2002. The increase in net income of $481,000 between the two
periods was primarily the result of an increase in net interest income of $1.7
million and an increase in non-interest income of $356,000 and a decrease in
provision for loss on loans of $148,000 offset by an increase in non-interest
expense of $1.5 million and an increase in income taxes of $237,000.
INTEREST INCOME. Total interest income increased $979,000 for the three
months ended December 31, 2003 and increased $2.0 million for the nine months
ended December 31, 2003 as compared to the three and nine months ended December
31, 2002. The increase in interest income for the three and six-month period was
due to an increase in the average balance of interest-earning assets of $94.8
million for the three months ended December 31, 2003 and an increase of $70.1
for the nine-month period offset by a decrease in the yield earned on
interest-earning assets. The increase in the average balance of interest-earning
assets was due primarily to an increase in the average balance of loans and
securities primarily as a result of the
14
acquisition of First Federal. The average tax equivalent yield on
interest-earning assets was 6.0% and 6.2% for the three and nine months ended
December 31, 2003 compared to 6.9% and 7.0% for the same periods in 2002. The
decrease in the yield was due to a decrease in market interest rates between the
two periods.
INTEREST EXPENSE. Interest expense increased $143,000 and $262,000 for the
three and nine months ended December 31, 2003 as compared to the same periods in
2002. Interest expense increased for the periods primarily due to an increase in
the average balance of interest-bearing liabilities offset by a decrease in the
average rate paid on interest-bearing liabilities. The average balance of
interest-bearing liabilities increased $85.5 million for the three months ended
December 31, 2003 and $64.7 million for the nine months ended December 31, 2003
compared to the same periods in 2002. The increase in these balances is
primarily the result of an increase in the average balance of interest-bearing
deposits and FHLB borrowings due primarily to the acquisition of First Federal.
The average rate paid on interest-bearing liabilities was 2.0% and 2.2% for the
three and nine months ended December 31, 2003 compared to 2.6% and 2.7% for the
three and nine months ended December 31, 2002 due to a general decline in
interest rates.
The resulting interest rate spread was 4.0% for the three and nine months
ended December 31, 2003 compared to 4.3% for the same periods in 2002. The
resulting net interest margin was 4.2% and 4.3% for the three and nine months
ended compared to 4.6% for the three and nine months ended December 31, 2002.
The Company's interest rate spread and net interest margin has declined
primarily due to the incorporation of First's Federal balance sheet. Over time,
management intends to change the composition of the former First Federal balance
sheet to a mix more similar to that of the Company's other interest-bearing
assets and liabilities.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses totaled
$66,000 and $158,000 for the three and nine months ended December 31, 2003
compared to $96,000 and $306,000 for the three and nine months ended December
31, 2002. The provision for the three and nine-month period decreased based on
management's assessment of improving trends within the Company's loan portfolio
notwithstanding the acquired non-performing loans which were provided for prior
to the acquisition of First Federal. The provision recorded for the three and
nine-month period was based on management's evaluation of the Company's current
portfolio including factors such as the quality of the portfolio, the increase
in loans that are not secured by 1-4 family real estate, the level of
non-performing loans, charge-off history, the economy in the Company's market
area and overall growth in the loan portfolio. Management continually monitors
the Company's allowance for loan losses and makes adjustments as economic
conditions, portfolio quality and portfolio diversity dictates. Although the
Company maintains its allowance for loan losses at a level which the Board
considers to be adequate to provide for probable losses on existing loans, 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 $35,000
and $356,000 for the three and nine months ended December 31, 2003 compared to
the same periods in 2002. The increase for the three and nine-month periods is
primarily the result of an increase in service charges and other fees on
deposits of $35,000 for the three-month period and an increase of $241,000 for
the nine-month period. The remainder of the increase was due to an increase in
other income for the three-month period of $6,000 and an increase of $124,000
for the nine-month period. These increases were offset by a decrease in the gain
realized on the sale
15
of securities of $6,000 for the three-month period and $9,000 for the nine-month
period. The increase in service charges and other fees on deposits for the
periods is the result of increased deposit accounts. The increase in other
non-interest income is due to an increase in the commissions earned on secondary
market loans, letter of credit fees and commissions on insurance sold with
loans. Although the commissions earned on the origination of secondary market
loans increased for the nine months, these commissions have begun to slow,
therefore decreasing the amount of commissions earned during the quarter and
possibly in future periods. The Company's secondary market activity consists
only of commissions earned from a third party originator and represents a small
portion of the Company's non-interest income.
NON-INTEREST EXPENSE. Non-interest expenses increased $581,000 and $1.5
million for the three and nine months ended December 31, 2003 compared to the
same period in 2002. Non-interest expenses increased for the three-month period
due to an increase in employee compensation and benefits of $291,000, an
increase in occupancy and equipment expense of $64,000, an increase in
advertising expense of $11,000, an increase in communications expense of
$17,000, an increase in deposit and franchise taxes of $8,000, an increase in
professional fees of $41,000, and an increase in other operating expenses of
$155,000 offset by a decrease in stationery and supplies of $6,000.
Non-interest expenses increased for the nine-month period due to an
increase in employee compensation and benefits of $598,000, an increase in
occupancy and equipment expense of $174,000, an increase in advertising expense
of $92,000, an increase in communications expense of $52,000, an increase in
deposit and franchise taxes of $20,000, an increase in professional fees of
$87,000, an increase in stationery, printing and supplies of $57,000 and an
increase in other operating expenses of $454,000.
Employee compensation and benefits increased primarily due to an increase
in the number of employees as a result of the First Federal acquisition; an
increase in costs related to incentive-based compensation programs; and an
increase in ESOP expense due to the increase in the average market price of the
Company's stock. Occupancy and equipment expense increased primarily due to an
increase in depreciation expense as a result of increased locations,
improvements to existing facilities, and upgrades in equipment. The increase in
other operating expenses was due partially to increased expenses as a result of
the acquisition of First Federal and the remainder of the increase was due to
increased costs related to technology for various services provided to
customers. The Company recently upgraded its on-line banking product and also
upgraded its operating environment so that customers may obtain real-time
balances at automated teller machines and point of sale terminals.
INCOME TAX EXPENSE. Income tax expense increased $105,000 and $237,000 for
the three and nine months ended December 31, 2003 primarily due to an increase
in income before income taxes for the periods.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
---------------------------------------------------
The allowance for loan losses is calculated based upon management's
evaluation and assessment of pertinent factors underlying the types and
qualities of the Company's loans. The assessment includes internal risk grading
of all commercial credits and based upon this evaluation, a specific allocation
allowance may be assigned to individual loans. Consumer and residential mortgage
loans are not specifically graded unless apparent weakness is determined
16
through payment history at which time a specific allowance allocation may be
made. Additionally, a general reserve is assigned to each lending segment in
recognition of probable incurred losses based upon historical loss and peer loss
information, while taking into consideration current delinquency trends, current
economic trends both local and national, strength of supervision and
administration of the loan portfolio, trends of non-performing assets to the
allowance and concentrations within commercial credits. These factors are
weighed quarterly and adjusted as deemed appropriate by management. The Company
has not materially changed any aspect of its overall approach in the
determination of the allowance for loan losses and there have been no material
changes in assumptions or estimations as compared to prior years that have
impacted the basis of the current year allowance.
The Company's allowance for loan losses as of December 31, 2003 was $2.2
million or .9% of the total loans. The March 31, 2003 allowance for loan loss
was $2.0 million, or 1.0% of total loans. The Company recorded a provision for
loan losses of $158,000 for the nine-month period, had net charge-offs of
$468,000 and $789,000 for the three and nine-month period and acquired an
allowance form First Federal of approximately $885,000. The loans charged off
consisted largely of loans acquired from First Federal, the losses for which had
been reserved prior to the acquisition.
The ratio of non-performing assets to total assets is an indicator of
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
restructurings. The following table sets forth the amount of non-performing
assets at the periods indicated.
December 31, 2003 March 31, 2003
----------------- --------------
(Dollars in Thousands)
Non-Accruing Loans .................. $ 624 $ 600
Accruing Loans Delinquent 90
Days or More ...................... 1,561 669
Foreclosed Assets ................... 817 --
------ ------
Total Non-Performing Assets ......... $3,002 $1,269
====== ======
Total Non-Performing Assets as a
Percentage of Total Assets ........ .9% .5%
Total non-performing assets increased $1.7 million from March 31, 2003 to
December 31, 2003 due primarily to delinquent one to four family loans acquired
in connection with the acquisition of First Federal. Management does not feel
that this is an indication of a trend of increased non-performing assets for the
Company. The problem credits with First Federal's portfolio were identified
through pre-acquisition due diligence and reserved for appropriately. Management
is attempting to resolve these credits at the earliest date.
OTHER ASSETS OF CONCERN. Other than the non-performing assets set forth in
the table above, as of December 31, 2003, 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.
17
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, 2003 and March 31, 2003, cash and cash
equivalents totaled $7.9 million and $8.1 million, respectively. The Company's
primary sources of funds include principal and interest payments on loans (both
scheduled and prepayments), maturities of and interest payments on investment
securities and principal and interest payments from mortgage-backed securities,
deposits and Federal Home Loan Bank of Cincinnati advances and other borrowings.
While scheduled loan and mortgage-backed security repayments and proceeds from
maturing investment securities are relatively predictable, deposit flows and
early repayments are more influenced by interest rates, general economic
conditions and competition. Certificates of deposit as of December 31, 2003
maturing within one year totaled $80.4 million. Management believes based on
experience that most of these funds will remain with the Company.
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 other assets, and the liquidity goals 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 subsidiary of the Company
has the ability to borrow funds from the FHLB and other third parties. At
December 31, 2003, the Company had $39.1 million in borrowings outstanding with
the FHLB and additional borrowing capacity of $79.1 million. On a limited basis,
the Company at times utilizes repurchase agreements for the generation of
additional funds from our established relationship business customers. At
December 31, 2003, the Company had $9.2 million of repurchase agreements with
existing relationship based business customers.
At December 31, 2003, the Company had outstanding commitments to fund loans
of $29.1 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.
Classic Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). The following table
summarizes, as of December 31, 2003, the capital requirements applicable to
Classic Bank and its actual capital ratios. As of December 31, 2003, Classic
Bank was in compliance with its capital requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
------------------- ------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $18,627 8.0% $24,663 10.6%
Tier 1 Capital
(to Adjusted Total Assets) 13,049 4.0 22,435 6.9
The Company is subject to the regulatory capital requirements of the
Federal Reserve Board that generally parallels the capital requirements for FDIC
insured banks. The following table summarizes, as of December 31, 2003, the
capital requirements applicable to the Company
18
and its actual capital ratios. As of December 31, 2003, the Company was in
compliance with its capital requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
------------------- ------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $18,702 8.0% $26,309 11.3%
Tier 1 Capital
(to Adjusted Total Assets) 13,116 4.0 24,081 7.3
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.
ITEM 3 - CONTROLS AND PROCEDURES
The Company has adopted interim disclosure controls and procedures designed
to facilitate the Company's financial reporting. The interim disclosure controls
currently consist of communications among the Chief Executive Officer, the Chief
Financial Officer and each department head to identify any transactions, events,
trends, risks or contingencies which may be material to the Company's
operations. The Company's disclosure controls also contain certain elements of
its internal controls adopted in connection with applicable accounting and
regulatory guidelines. Finally, the Chief Executive Officer, Chief Financial
Officer, the Audit Committee and the Company's independent auditors also meet on
a quarterly basis and discuss the Company's material accounting policies. The
Company's Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of these interim disclosure controls as of the end of the period
covered by this report and found them to be adequate.
The Company maintains internal control over financial reporting. There have
not been any significant changes in such internal control over financial
reporting in the last quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
19
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
a. Exhibits
Exhibit 31.1 Certification of David B. Barbour pursuant to Rule
13a-14 under the Securities Exchange Act of 1934.
Exhibit 31.2 Certification of Lisah M. Frazier pursuant to Rule
13a-14 under the Securities Exchange Act of 1934.
Exhibit 32.1 Certification of David B. Barbour pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Lisah M. Frazier pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
The Registrant filed the following current reports on Form 8-K during
the three months ended December 31, 2003:
Report filed on October 22, 2003 containing press release, dated
October 22, 2003, announcing the declaration of a stock dividend and
a quarterly cash dividend.
Report filed on November 3, 2003 containing press release, dated
November 3, 2003, announcing earnings for the quarter ended September
30, 2003.
20
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 12, 2004 /s/ David B. Barbour
----------------- --------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Duly Authorized Officer)
Date: February 12, 2004 /s/ Lisah M. Frazier
----------------- --------------------------------
Lisah M. Frazier, Chief Operating Officer,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
21
INDEX TO EXHIBITS
Exhibit
Number
------
11 Statement regarding computation of Per Share Earnings in the Notes
to the Consolidated Financial Statements in Part I of this Report.
For such computation, see Note 2 "Earnings Per Share."
31.1 Certification of David B. Barbour pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934
31.2 Certification of Lisah M. Frazier pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934
32.1 Certification of David B. Barbour Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of Lisah M. Frazier Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
22