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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, 2004
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 (I.R.S. Employer
incorporation or organization) Identification Number)
344 SEVENTEENTH STREET, ASHLAND, KENTUCKY 41101
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 326-2800
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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 4, 2005, there were 1,540,530 shares of the Registrant's
common stock outstanding.
Transitional Small Disclosure (check one): Yes [_] No [X]
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CLASSIC BANCSHARES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2004
and March 31, 2004 ............................................ 3
Consolidated Statements of Income for the three and
nine months ended December 31, 2004 and 2003 .................. 4
Consolidated Statements of Comprehensive Income for the
three and nine months ended December 31, 2004 and 2003 ........ 5
Consolidated Statements of Stockholders' Equity for the
nine months ended December 31, 2004 ........................... 6
Consolidated Statements of Cash Flows for the nine
months ended December 31, 2004 and 2003 ....................... 7-8
Notes to Consolidated Financial Statements .................... 9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 12-19
Item 3. Controls and Procedures ....................................... 19
PART II. OTHER INFORMATION ............................................. 20
Signatures .................................................... 21
Index to Exhibits ............................................. 22
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2004 2004
------------ ------------
(UNAUDITED)
(IN THOUANDS)
ASSETS
------
Cash and due from banks $ 10,834 $ 9,155
Federal funds sold 57 58
------------ ------------
Cash and cash equivalents 10,891 9,213
Securities available for sale 46,379 50,916
Loans receivable, net 263,560 257,455
Foreclosed assets, net 305 856
Accrued interest receivable 1,527 1,446
Federal Home Loan Bank stock 2,986 2,894
Premises and equipment, net 9,266 8,288
Goodwill 7,681 7,681
Other intangible assets 729 811
Prepaid expenses and other assets 2,228 1,899
------------ ------------
TOTAL ASSETS $ 345,552 $ 341,459
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Non-interest bearing demand deposits $ 31,165 $ 29,165
Savings, NOW, and money market demand deposits 90,429 109,772
Other time deposits 120,035 121,304
------------ ------------
Total deposits 241,629 260,241
Securities sold under agreements to repurchase 11,172 9,168
Advances from Federal Home Loan Bank 49,277 34,218
Other short-term borrowings 25 12
Accrued expenses and other liabilities 2,192 2,287
Accrued interest payable 323 306
------------ ------------
Total Liabilities 304,618 306,232
------------ ------------
Stockholders' Equity
Common stock, $.01 par value, 1,684,443 shares issued 17 17
Additional paid-in capital 33,011 31,100
Retained earnings 8,756 6,207
Accumulated other comprehensive income (loss) 822 1,350
Unearned ESOP shares (57,578 and 61,061 shares) (523) (555)
Unearned RRP shares (210 and 310 shares) (3) (4)
Treasury stock, at cost (86,125 and 217,014 shares) (1,146) (2,888)
------------ ------------
Total Stockholders' Equity 40,934 35,227
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 345,552 $ 341,459
============ ============
See accompanying notes.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(IN THOUSANDS)
INTEREST INCOME
---------------
Loans $ 4,127 $ 3,972 $ 12,034 $ 11,074
Securities 545 551 1,654 1,493
Dividends on Federal Home Loan Bank stock 32 29 92 77
Other interest 3 8 4 27
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 4,707 4,560 13,784 12,671
------------ ------------ ------------ ------------
INTEREST EXPENSE
----------------
Deposits 942 1,067 2,870 3,138
Federal Home Loan Bank advances 375 293 969 849
Securities sold under repurchase agreements 54 24 117 55
Other short-term borrowings -- 1 -- 3
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 1,371 1,385 3,956 4,045
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,336 3,175 9,828 8,626
Provision for loss on loans 202 66 462 158
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOSS ON
LOANS 3,134 3,109 9,366 8,468
------------ ------------ ------------ ------------
NON-INTEREST INCOME
-------------------
Service charges and other fees 522 418 1,581 1,269
Gain on sale of securities -- 1 17 2
Secondary market commissions 13 15 47 102
Other income 81 65 186 203
------------ ------------ ------------ ------------
TOTAL NON-INTEREST INCOME 616 499 1,831 1,576
------------ ------------ ------------ ------------
NON-INTEREST EXPENSES
---------------------
Employee compensation and benefits 1,319 1,076 3,491 2,993
Occupancy and equipment expense 335 334 986 919
Advertising 53 83 145 321
Communications 64 64 200 190
Franchise and deposit taxes 87 66 253 192
Directors fees 25 24 74 74
Professional fees 171 80 360 219
Stationery and supplies 72 73 230 279
Other operating expenses 417 395 1,247 1,149
------------ ------------ ------------ ------------
TOTAL NON-INTEREST EXPENSE 2,543 2,195 6,986 6,336
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,207 1,413 4,211 3,708
-------------------------
Income tax expense 353 410 1,268 1,055
------------ ------------ ------------ ------------
NET INCOME $ 854 $ 1,003 $ 2,943 $ 2,653
---------- ============ ============ ============ ============
Basic earnings per share $ 0.60 $ 0.71 $ 2.09 $ 1.98
Diluted earnings per share $ 0.55 $ 0.65 $ 1.89 $ 1.80
See accompanying notes.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(IN THOUSANDS)
NET INCOME $ 854 $ 1,003 $ 2,943 $ 2,653
------------ ------------ ------------ ------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities during the period, net of tax (50) 354 (517) 185
Reclassification adjustments for realized
(gains) losses included in earnings,
net of tax -- -- (11) (1)
------------ ------------ ------------ ------------
Other comprehensive income (50) 354 (528) 184
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 804 $ 1,357 $ 2,415 $ 2,837
============ ============ ============ ============
See accompanying notes.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON ADDITIONAL OTHER
SHARES COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED UNEARNED TREASURY
OUTSTANDING STOCK CAPITAL EARNINGS INCOME (LOSS) ESOP SHARES RRP SHARES STOCK TOTAL
--------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCES AT
APRIL 1, 2004 1,406,058 $ 17 $ 31,100 $ 6,207 $ 1,350 $ (555) $ (4) $ (2,888) $ 35,227
Net income for the nine
months ended December
31, 2004 -- -- -- 2,943 -- -- -- -- 2,943
Dividend paid ($.28 per
share) -- -- -- (394) -- -- -- -- (394)
Commitment of shares to
be released under ESOP 3,483 -- 106 -- -- 32 -- -- 138
RRP shares earned 100 -- -- -- -- -- 1 -- 1
Stock options exercised 130,889 -- 598 -- -- -- -- 1,742 2,340
Tax benefit
recorded - stock
options -- -- 1,207 1,207
Change in unrealized
gain (loss) on
available for sale
securities, net of
applicable taxes and
reclassifications -- -- -- -- (528) -- -- -- (528)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCES AT
DECEMBER 31, 2004 1,540,530 $ 17 $ 33,011 $ 8,756 $ 822 $ (523) $ (3) $ (1,146) $ 40,934
========= ========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES
--------------------
Net Income $ 2,943 $ 2,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 600 653
Provision for loss on loans 462 158
Gain on sale of securities available for sale (17) (2)
Gain on sale of fixed assets (2) (13)
Loss on foreclosed real estate 48 20
Federal Home Loan Bank stock dividends (91) (77)
Net amortization of securities 139 208
ESOP shares earned 138 111
RRP shares earned 1 7
Tax benefit for stock options 1,207 --
Decrease (increase) in:
Accrued interest receivable (81) (127)
Other assets (328) 18
Increase (decrease) in:
Accrued interest payable 17 (219)
Accounts payable and accrued expenses 177 (239)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,213 3,151
------------ ------------
INVESTING ACTIVITIES
--------------------
Securities:
Proceeds from sale, maturities or calls 1,872 2,398
Purchases (2,087) (971)
Mortgage-backed securities:
Purchased -- (10,698)
Principal payments 3,816 2,809
Loan originations and principal payments, net (6,929) (18,707)
Proceeds from the sale of foreclosed assets 707 88
Purchases of software (10) (230)
Purchases of premises and equipment (1,472) (445)
Proceeds from sale of fixed assets 17 245
Net cash acquired in acquisition -- 3,564
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,086) (21,947)
------------ ------------
See accompanying notes.
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
FINANCING ACTIVITIES
--------------------
Net (decrease) increase in deposits $ (18,472) $ 9,197
Net proceeds from FHLB borrowings 15,059 4,552
Increase in securities sold under agreements to repurchase 2,005 4,789
Net increase in short-term borrowings 13 342
Stock option exercised 2,340 --
Dividends paid (394) (297)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 551 18,583
------------ ------------
Increase (decrease) in cash and cash equivalents 1,678 (213)
Cash and cash equivalents at beginning of period 9,213 8,148
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,891 $ 7,935
============ ============
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and borrowings $ 3,939 $ 4,075
Taxes $ 950 $ 900
Assets acquired in settlement of loans $ 196 $ 708
See accompanying notes.
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 accounting principles generally accepted in the United States
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 accounting principles generally accepted in the United
States 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, 2004, and the results of operations for all interim periods
presented. Operating results for the nine months ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2005.
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, 2004.
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,
---------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $ 854 $ 1,003
Deduct:
Stock-based compensation expense
determined under fair value based method -- --
------------ ------------
Pro forma net income $ 854 $ 1,003
============ ============
Basic earnings per share as reported $ 0.60 $ 0.71
Pro forma basic earnings per share 0.60 0.71
Diluted earnings per share as reported 0.55 0.65
Pro forma diluted earnings per share 0.55 0.65
9
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $ 2,943 $ 2,653
Deduct:
Stock-based compensation
expense determined under fair
value based method -- 430
------------ ------------
Pro forma net income $ 2,943 $ 2,223
============ ============
Basic earnings per share as reported $ 2.09 $ 1.98
Pro forma basic earnings per share 2.09 1.66
Diluted earnings per share as reported 1.89 1.80
Pro forma diluted earnings per share 1.89 1.51
Options to purchase 60,000 shares of common stock were granted on
September 18, 2003 at an exercise price of $34.991 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.
(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, 2004 December 31, 2003
(In thousands, except per share data) (In thousands, except per share data)
------------------------------------ ------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS $ 854 1,412 $ 0.60 $ 1,003 1,405 $ 0.71
Effect of
Dilutive
Securities-Options -- 151 (0.05) -- 138 (0.06)
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $ 854 1,563 $ 0.55 $ 1,003 1,543 $ 0.65
========== ========== ========== ========== ========== ==========
10
For the Nine Months Ended For the Nine Months Ended
December 31, 2004 December 31, 2003
(In thousands, except per share data) (In thousands, except per share data)
------------------------------------ ------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS $ 2,943 1,409 $ 2.09 $ 2,653 1,337 $ 1.98
Effect of
Dilutive
Securities-Options -- 149 (0.20) -- 133 (0.18)
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $ 2,943 1,558 $ 1.89 $ 2,653 1,470 $ 1.80
========== ========== ========== ========== ========== ==========
Options to purchase 189,046 shares of common stock were outstanding at
December 31, 2004. Options to purchase 319,935 shares of common stock were
outstanding at December 31, 2003. On December 31, 2004, a total of 130,889
options were exercised. All options exercised were non-qualified options. In
connection with the exercise of the options, the Company recorded a tax benefit
of $1.2 million.
(3) RECENT DEVELOPMENTS
On December 29, 2004, the Company entered into a definitive agreement
with City Holding Company for City Holding to merge with the Company and its
wholly-owned subsidiary, Classic Bank. City Holding Company is a $2.2 billion
financial holding company headquartered in Cross Lanes, West Virginia. City
Holding operates 56 branch locations and 64 ATMs serving communities across West
Virginia and Ohio. It is anticipated that the transaction will be completed in
the second quarter of 2005, pending regulatory approvals, the approval of the
shareholders of Classic and completion of other customary closing conditions.
Under the terms of the agreement, shareholders of Classic will receive
.9624 shares of City common stock and $11.08 in cash for each share of Classic
common stock owned by them. The total transaction value as of December 28, 2004,
was estimated at $77.4 million.
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
-------------------
The Company's total assets increased $4.1 million from $341.5 million
at March 31, 2004 to $345.6 million at December 31, 2004. The increase was due
primarily to an increase in loans of approximately $6.1 million, an increase in
cash and cash equivalents of $1.7 million and an increase in premises and
equipment of $978,000 partially offset by a decrease in securities of $4.5
million and a decrease in foreclosed assets of $551,000.
Net loans receivable increased approximately $6.1 million from $257.5
million at March 31, 2004 to $263.6 million at December 31, 2004. The Company
experienced the majority of growth in loans during the current quarter. The
majority of the growth during the quarter was in commercial loans. The Company
experienced little growth in consumer loans during the period due to a slowing
of loan demand within the Company's market area. Management believes this was
caused by a softening of the local economy, which could be attributable to
higher energy prices and increases in interest rates.
Securities decreased approximately $4.5 million from $50.9 million at
March 31, 2004 to $46.4 million at December 31, 2004 primarily due to the
maturities, calls and principal repayments of $5.7 million and a decline in the
market value of these available for sale securities offset by purchases of $2.1
million.
Deposits decreased approximately $18.6 million from $260.2 million at
March 31, 2004 to $241.6 million at December 31, 2004. The decrease was due
primarily to the loss of one public fund account, which amounted to $15.2
million at June 30, 2004. Retention of the deposit was based upon pricing and
management felt the cost to retain the deposit was too high. Management chose to
replace the deposit with FHLB borrowings at a lower cost. The remainder of the
decrease was due to the outflow of deposits in the normal course of business as
well as pricing discipline in an environment of soft loan demand and rising
interest rates. Borrowings from FHLB increased $15.1 million and repurchase
agreements increased $2.0 million.
Total stockholders' equity was $41.0 million at December 31, 2004
compared to $35.2 million at March 31, 2004. The increase was due primarily to
net income recorded for the period, the exercise of stock options and a tax
benefit recorded in connection with the exercise of stock options offset by a
decrease in the market value of available for sale securities and 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
12
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 agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition and merger expenses 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, 2004 AND 2003
---------------------------------------
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,
administrative and merger 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 $854,000 for the three months ended
December 31, 2004 compared to net income of $1.0 million for the three months
ended December 31, 2003. The decrease in net income of $149,000 between the two
periods was primarily the result of an increase in provision for loss on loans
of $136,000, and increase in non-interest expense of $348,000 offset by an
increase in net interest income of $161,000, an increase in non-interest income
of $117,000 and a decrease in income taxes of $57,000.
The Company reported net income of $2.9 million for the nine months
ended December 31, 2004 compared to net income of $2.7 million for the nine
months ended December 31, 2003. The increase in net income of $290,000 between
the two periods was primarily the result of an increase in net interest income
of $1.2 million and an increase in non-interest income of $255,000 offset by an
increase in provision for loss on loans of $304,000, an increase in non-interest
expense of $650,000 and an increase in income taxes of $213,000.
INTEREST INCOME. Total interest income increased $147,000 for the three
months ended December 31, 2004 and $1.1 million for the nine months ended
December 31, 2004 as compared to the three and nine months ended December 31,
2003. The increase in interest income for the three and nine-month period was
due to an increase in the average balance of interest-earning assets of $3.3
million for the three months ended December 31, 2004 and an increase of $29.4
million for the nine-month period. The increase in the average balance of
interest-earning assets for the three months was due primarily to an increase in
the average balance of loans. The
13
increase in the average balance of interest-earning assets for the nine months
was due primarily to an increase in the average balance of loans and securities
primarily as a result of the acquisition of First Federal Financial Bancorp,
Inc. ("First Federal") completed in June 2003. The average tax equivalent yield
on interest-earning assets was 6.2% for the three and nine months ended December
31, 2004 compared to 6.0% and 6.2% for the three and nine months ended December
31, 2003 due to an increase in interest rates.
INTEREST EXPENSE. Interest expense decreased $14,000 and $89,000 for
the three and nine months ended December 31, 2004 as compared to the same
periods in 2003. Interest expense only decreased slightly for the three-month
period primarily due to a small decrease in the average balance of
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities was 2.0% for the three months ended December 31, 2004 and 2003. The
Company has been able to maintain the average rate paid due primarily to a
disciplined deposit pricing structure. The average balance of interest-bearing
liabilities decreased $3.0 million for the three months ended December 31, 2004
primarily as a result of a decline in the average balance of interest-bearing
deposits as the Company has shifted some its deposits to non-interest bearing
deposits.
Interest expense decreased for the nine-month period primarily due to a
decrease in the average rate paid on interest-bearing liabilities offset by an
increase in the average balance of interest-bearing liabilities. The average
rate paid on interest-bearing liabilities was 2.0% for the nine months ended
December 31, 2004 compared to 2.2% for the nine months ended December 31, 2003
due primarily to a disciplined pricing structure and replacing some higher
costing deposits with lower costing FHLB borrowings. The average balance of
interest-bearing liabilities increased $21.3 million for the nine months ended
December 31, 2004 compared to the same period in 2003. 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 resulting interest rate spread was 4.2% for the three and nine
months ended December 31, 2004 compared to 4.0% for the three and nine months
ended December 31, 2003. The resulting net interest margin was 4.4% for the
three and nine months ended December 31, 2004 compared to 4.2% and 4.3% for the
three and nine months ended December 31, 2003.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
totaled $202,000 and $462,000 for the three and nine months ended December 31,
2004 compared to $66,000 and $158,000 for the three and nine months ended
December 31, 2003. The provision for the three and nine-month period increased
as result of specific consumer and commercial credits identified during the
periods requiring additional coverage. The specific identified credits were not
geographically concentrated in any of the Company's specific market areas so as
to characterize trends within the Company's specific market areas, but rather
driven by general situational circumstances of individual customers of the
Company. Additionally, the increases recorded over prior periods were evenly
stratified across each of the Company's individual loan categories, therefore
leading to the assessment that increases were situational in nature and not
representing trends with the Company's loan portfolio. 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 and the economy in the
Company's market area. Management continually monitors the Company's allowance
14
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 incurred 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
$117,000 and $255,000 for the three and nine months ended December 31, 2004
compared to the same period in 2003. Non-interest income increased for the
three-month period due to an increase in service charges and other fees on
deposits of $104,000 and an increase in other income of $16,000 offset by a
decrease in gain on sale of securities of $1,000 and a decrease in secondary
market commissions of $2,000.
The increase for the nine-month period is primarily the result of an
increase in service charges and other fees on deposits of $312,000 and an
increase in gain on sale of securities of $15,000, offset by a decrease in
secondary market commissions of $55,000, and a decrease in other income of
$17,000. The increase in service charges and other fees on deposits for the
periods is the primarily result of increased deposit accounts.
NON-INTEREST EXPENSE. Non-interest expenses increased $348,000 for the
three months ended December 31, 2004 compared to the same period in 2003.
Non-interest expenses increased for the three-month period due to an increase in
employee compensation and benefits of $243,000, an increase in franchise and
deposit taxes of $21,000, an increase in professional fees of $91,000 and an
increase in other operating expenses of $22,000 offset by a decrease in
advertising of $30,000.
Non-interest expense increased $650,000 for the nine-month period due
to an increase in employee compensation and benefits of $498,000, an increase in
occupancy and equipment expense of $67,000, an increase in communications
expense of $10,000, an increase in franchise and deposit taxes of $61,000, an
increase in professional fees of $141,000, an increase in ATM expense of $3,000,
an increase in postage expense of $7,000, an increase in charitable
contributions of $11,000 and an increase in other operating expense of $77,000
offset by a decrease in advertising expense of $176,000, and a decrease in
stationery and supplies of $49,000.
Employee compensation and benefits increased during the three and
nine-month period due primarily to the advance of $200,000 to the CEO of the
termination payment under his employment contract which will become applicable
when the proposed merger with City Holding is completed. The advance was made
with the approval of City Holding in an attempt to ensure that such termination
payment will be tax deductible. Employee compensation and benefits also
increased primarily due to an increase in the number of employees as a result of
the First Federal acquisition and an increase in ESOP expense attributable to
the increase in the Company's stock price between the periods. Occupancy and
equipment expense increased primarily due the additional locations from the
acquisition of First Federal. Professional fees increased primarily as a result
of the Company's efforts to upgrade its corporate governance and comply with new
regulatory requirements and additional legal and investment banking fees related
the proposed merger with City Holding.
15
INCOME TAX EXPENSE. Income tax expense decreased $57,000 for the three
months ended December 31, 2004 primarily due to a decrease in income before
income taxes for the period. Income tax expense increased $213,000 for the nine
months ended December 31, 2004 primarily due to an increase in income before
income taxes for the period.
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 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, 2004 was
$2.3 million or .9% of total loans and 141% of total non-performing loans. The
March 31, 2004 allowance for loan loss was $2.2 million, or .9% of total loans
and 91% of total non-performing loans. Activity in the allowance for loan losses
is summarized as follows:
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
(IN THOUSANDS)
Balance at beginning of year $ 2,209 $ 1,975
Acquisition of First Federal -- 885
Provision for losses 462 158
Charge-offs (503) (826)
Recoveries 93 36
------------ ------------
Ending balance $ 2,261 $ 2,228
============ ============
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.
16
DECEMBER 31, 2004 MARCH 31, 2004
------------ ------------
(IN THOUSANDS)
Non-Accruing Loans $ 1,062 $ 507
Accruing Loans Delinquent 90 Days or More 537 969
Foreclosed Assets 305 856
------------ ------------
Total Non-Performing Assets $ 1,904 $ 2,332
============ ============
Total Non-Performing Assets as a
Percentage of Total Assets .6% .7%
Total non-performing assets decreased $428,000 from March 31, 2004 to
December 31, 2004 due primarily to a decline in foreclosed assets. The decline
was primarily attributable to the Company's sale of a 1-4 family residence
during the quarter that was included in foreclosed assets at March 31, 2004.
OTHER ASSETS OF CONCERN. Other than the non-performing assets set forth
in the table above, as of December 31, 2004, 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, 2004 and March 31, 2004, cash and cash
equivalents totaled $10.9 million and $9.2 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, 2004
maturing within one year totaled $76.0 million. Management believes based on
experience that most of these funds will remain with the Company. The Company's
ability to attract and retain deposits could be limited by a provision in the
merger agreement between the Company and City Holding prohibiting deposit rate
increases in excess of the market average without City Holding's approval.
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, 2004, the Company had $49.3 million in borrowings outstanding with
the FHLB and additional borrowing capacity of approximately $70.0 million. The
Company at times utilizes repurchase agreements for the generation of additional
funds from our established relationship business customers. At December 31,
2004, the Company had $11.2 million of repurchase agreements with existing
relationship based business customers.
17
At December 31, 2004, the Company had outstanding commitments to fund
loans of $25.1 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, 2004, the capital requirements applicable to
Classic Bank and its actual capital ratios. As of December 31, 2004, 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) $ 19,124 8.0% $ 29,016 12.1%
Tier 1 Capital
(to Adjusted Total Assets) 13,355 4.0 26,755 8.0
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, 2004, the
capital requirements applicable to the Company and its actual capital ratios. As
of December 31, 2004, the Company was in compliance with its capital
requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANCSHARES, INC.
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $ 19,171 8.0% $ 34,013 14.2%
Tier 1 Capital
(to Adjusted Total Assets) 13,324 4.0 31,752 9.5
IMPACT OF INFLATION AND CHANGING PRICES
---------------------------------------
The consolidated financial statements and related data presented herein
have been prepared in accordance with accounting principles generally accepted
in the United States 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.
18
ITEM 3 - CONTROLS AND PROCEDURES
The Company has adopted disclosure controls and procedures designed to
facilitate the Company's financial reporting. The disclosure controls currently
consist of communications among the Chief Executive Officer, the Chief Operating
and 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 Operating and
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 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
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
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 14, 2005 /s/ David B. Barbour
----------------- -------------------------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Duly Authorized Officer)
Date: February 14, 2005 /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