As filed with the Securities and Exchange Commission on _____________ , 2003
Registration No. _____________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
_____________________________________
CLASSIC BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 6022 61-1289391
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification
Incorporation or Classification Code Number)
Organization) Number)
344 SEVENTEENTH STREET
ASHLAND, KENTUCKY 41105
(606) 326-2800
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)
DAVID B. BARBOUR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
344 SEVENTEENTH STREET
ASHLAND, KENTUCKY 41105
(606) 326-2800
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
COPIES TO:
KIP A. WEISSMAN NORMAN ANTIN
MICHAEL A. TROY DAVID TEEPLES
JENKENS & GILCHRIST, P.C. KELLEY DRYE & WARREN
1919 PENNSYLVANIA AVENUE, N.W. 8000 TOWERS CRESCENT DRIVE, #1200
WASHINGTON, D.C. 20006 VIENNA, VIRGINIA 22182
(202) 326-1500 (703) 918-2300
__________________________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT AND THE SATISFACTION OR WAIVER OF ALL OTHER CONDITIONS TO THE MERGER
DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
_________________________________________________
Calculation of Registration Fee
- --------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities To Be To Be Price Offering Registration
Registered Registered(1) Per Share(2) Price (2) Fee (2)
- --------------------------------------------------------------------------------------------
Common Stock, par
value $0.01 per share 226,615 N/A $6,462,708 $522.84
- --------------------------------------------------------------------------------------------
(1) Represents the estimated maximum number of shares of common stock issuable
by Classic Bancshares, Inc. upon the consummation of the merger with First
Federal Financial Bancorp, Inc. and computed based on the estimated maximum
number of shares, that may be exchanged for the securities being
registered. Pursuant to Rule 416, this Registration Statement also covers
an indeterminate number of shares of common stock as may become issuable as
a result of stock splits, stock dividends or similar transactions.
(2) Pursuant to Rule 457(f)(1), the registration fee for the Classic
Bancshares, Inc. common stock is based on the market value of First Federal
Financial Bancorp, Inc. common stock, par value $.01 per share, on April 9,
2003 ($26.00). Pursuant to Rule 457(f)(3), the cash portion of the merger
consideration to be paid by Classic Bancshares, Inc. in connection with the
transaction has been deducted from the value of the securities to be
received by Classic Bancshares, Inc. in the transaction.
______________________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
03/12/03
[Classic Logo Omitted] [First Federal Logo Omitted]
JOINT PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of Classic Bancshares, Inc. and First Federal
Financial Bancorp, Inc. have approved an agreement to merge First Federal with
and into Classic. Following this proposed merger, First Federal Savings Bank of
Ironton, a wholly owned subsidiary of First Federal, will merge with and into
Classic Bank, a wholly owned subsidiary of Classic.
If we complete the merger, First Federal stockholders will have the
right to elect to receive in exchange for each share of First Federal common
stock they own, subject to adjustment or proration under certain circumstances:
o approximately $24.00 in cash; or
o approximately .9797 shares of Classic common stock.
You may elect either of these options or, if you desire, you may elect to
exchange some of your First Federal shares for cash and some of your First
Federal shares for Classic shares. Regardless of your choice, elections will be
limited by the requirement that 50% of the shares of First Federal common stock
be exchanged for Classic common stock. Therefore, the allocation of cash and
Classic common stock that you will receive will depend on the elections of other
First Federal stockholders. The federal income tax consequences of the merger to
you will depend on whether you receive cash, stock or a combination of cash and
stock in exchange for your shares of First Federal common stock. Classic's
common stock currently is traded on the Nasdaq SmallCap Market under the symbol
"CLAS."
We cannot complete the merger unless we obtain the necessary government
approvals and unless the stockholders of Classic and First Federal approve the
merger agreement. Classic will hold a special meeting of its stockholders on
___________ at __:__ p.m. at __________ and First Federal will hold a special
meeting of its stockholders on _________ __, 2003 at __:__ _.m, local time at
_____________ to consider and vote on this merger proposal.
Whether or not you plan to attend your meeting, please take the time to
vote by completing and mailing the enclosed proxy card to us. If you sign, date
and mail your proxy card without indicating how you want to vote, your proxy
will be counted as a vote FOR the merger and the transactions contemplated by
the merger agreement. If you do not return your proxy card, abstain, or fail to
instruct your broker how to vote any shares held for you in "street name," the
effect will be a vote against the merger.
This document gives you detailed information about the merger, the
merger agreement, the procedures for electing to receive stock or cash in the
merger and the parties to the merger. You should read this document and all
attachments carefully. Before you make a decision on how to vote, you should
consider the "Risk Factors" beginning on page __ of this document.
We are enthusiastic about the merger and the strength and capabilities
we expect from the combined company. We join each other's board of directors in
recommending that you vote in favor of the merger agreement and the related
transactions.
David B. Barbour I. Vincent Rice
President and Chief Executive Officer President and Chief Executive Officer
Classic Bancshares, Inc. First Federal Financial Bancorp, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE SECURITIES OFFERED THROUGH THIS DOCUMENT ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
The date of this joint proxy statement/prospectus is _____________ ,
2003, and it is first being mailed to Classic and First Federal stockholders on
or about ___________, 2003.
<page>
This document incorporates important business and financial information
about Classic and First Federal from documents filed with the Securities and
Exchange Commission that have not been included in or delivered with this
document. You may read and copy these documents at the SEC's public reference
facilities. Please call the SEC at 1-800-SEC-0330 for information about these
facilities. This information is also available at the Internet site the SEC
maintains at http://www.sec.gov. See "Where You Can Find More Information" on
page __.
You also may request copies of these documents from Classic and First
Federal. Classic will provide you with copies of these documents, without
charge, upon written or oral request to:
Classic Bancshares, Inc.,
344 Seventeenth Street
Ashland, KY 41101
Attention: Lisah M. Frazier
Telephone: (606) 326-2800
First Federal will provide you with copies of these documents, without
charge, upon written or oral request to:
First Federal Financial Bancorp, Inc.
415 Center Street
Ironton, Ohio 45638-1505
Attention: Jeffery W. Clark
Telephone: (740) 532-6845
In order to receive timely delivery of the documents in advance of the
special meeting of stockholders, you should make your request no later than
_________________2003.
<page>
CLASSIC BANCSHARES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on June __, 2003 at ____ _.m.
At the Classic Bank Annex
340 Seventeenth Street, Ashland, Kentucky 41101
To the Stockholders of Classic Bancshares, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
Classic Bancshares, Inc., will be held at __.m., local time, on June __, 2003 at
the Classic Bank Annex located at 340 Seventeenth Street, Ashland, Kentucky
41101 for the following purposes:
o to consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated December 30, 2002, between Classic
Bancshares, Inc and First Federal Financial Bancorp, Inc., pursuant to
which First Federal will merge with and into Classic, as more fully
described in the attached joint proxy statement/prospectus; and
o to transact such other business as may properly come before the annual
meeting or any postponement or adjournment of the annual meeting.
Classic management is not aware of any such other business.
As more fully explained in the joint proxy statement/prospectus that
accompanies this notice, only Classic stockholders of record as of the close of
business on __________, 2003, are entitled to notice of and to vote at the
Classic special meeting or any adjournment or postponement of the special
meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THIS SPECIAL MEETING OF
STOCKHOLDERS. WHETHER OR NOT YOU PLAN TO ATTEND THIS SPECIAL MEETING IN PERSON,
WE URGE YOU TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE
ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE
MANNER PROVIDED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS. IF YOUR
SHARES ARE HELD IN "STREET NAME" BY YOUR BROKER OR OTHER NOMINEE, ONLY THAT
HOLDER CAN VOTE YOUR SHARES. YOU SHOULD FOLLOW THE DIRECTIONS PROVIDED BY YOUR
BROKER OR NOMINEE REGARDING HOW TO INSTRUCT THEM TO VOTE YOUR SHARES.
By order of the Board of Directors
Lisah M. Frazier
Corporate Secretary
Ashland, Kentucky
____________, 2003
<page>
FIRST FEDERAL FINANCIAL BANCORP, INC.
NOTICE OF SPECIAL MEETING OF THE STOCKHOLDERS
To Be Held on [______________], 2003 at [__________]
At
415 Center Street
Ironton, Ohio 45638
To the Stockholders of First Federal Financial Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of First
Federal Financial Bancorp, Inc. will be held at __.m. on June ___, 2003 at 415
Center Street, Ironton, Ohio 45638 for the following purposes:
o to consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated December 30, 2002, between First Federal
Financial Bancorp, Inc. and Classic Bancshares, Inc., pursuant to which
First Federal will merge with and into Classic, as more fully described
in the attached joint proxy statement/prospectus; and
o to transact such other business as may properly come before the annual
meeting or any postponement or adjournment of the annual meeting. First
Federal management is not aware of any such other business.
As more fully explained in the joint proxy statement/prospectus that
accompanies this notice, only holders of record of First Federal common stock as
of the close of business on __________ are entitled to notice of and to vote at
the First Federal special meeting or any adjournment or postponements thereof.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING OF
STOCKHOLDERS. WHETHER OR NOT YOU PLAN TO ATTEND THE FIRST FEDERAL SPECIAL
MEETING IN PERSON, WE URGE YOU TO DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY PRIOR TO ITS
EXERCISE IN THE MANNER PROVIDED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS. IF YOUR SHARES ARE HELD IN "STREET NAME" BY YOUR BROKER OR
OTHER NOMINEE, ONLY THAT HOLDER CAN VOTE YOUR SHARES. YOU SHOULD FOLLOW THE
DIRECTIONS PROVIDED BY YOUR BROKER OR NOMINEE REGARDING HOW TO INSTRUCT THEM TO
VOTE YOUR SHARES.
By order of the Board of Directors
Edith M. Daniels
Corporate Secretary
Ironton, Ohio
_____________________, 2003
<page>
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER..........................................................1
SUMMARY.........................................................................................4
GENERAL......................................................................................4
THE MEETINGS.................................................................................5
THE MERGER...................................................................................6
THE MERGER AGREEMENT........................................................................10
RISK FACTORS...................................................................................13
A WARNING ABOUT FORWARD-LOOKING INFORMATION....................................................14
COMPARATIVE PER SHARE DATA.....................................................................16
SELECTED HISTORICAL FINANCIAL INFORMATION......................................................17
SELECTED HISTORICAL FINANCIAL INFORMATION FOR FIRST FEDERAL.................................19
SUMMARY SELECTED PRO FORMA COMBINED DATA.......................................................20
MARKET PRICE AND DIVIDEND INFORMATION..........................................................21
THE CLASSIC SPECIAL MEETING....................................................................22
General.....................................................................................22
Place, Date and Time........................................................................22
Purpose of the Meeting......................................................................22
Who Can Vote at the Meeting; Record Date....................................................22
Attending the Meeting.......................................................................22
Quorum and Vote Required....................................................................23
Shares Held by Classic Officers and Directors and by First Federal..........................23
Voting by Proxy.............................................................................23
Revocability of Proxies.....................................................................25
Participants in Classic's ESOP..............................................................25
THE FIRST FEDERAL SPECIAL MEETING..............................................................25
General.....................................................................................25
Place, Date and Time........................................................................25
Purpose of the Meeting......................................................................25
Who Can Vote at the Meeting; Record Date....................................................26
Attending the Meeting.......................................................................26
Quorum and Vote Required....................................................................26
Shares Held by First Federal Officers and Directors and by Classic..........................26
Voting by Proxy.............................................................................26
Revocability of Proxies.....................................................................27
Solicitation of Proxies.....................................................................27
Participants in First Federal's ESOP........................................................27
OWNERSHIP OF CLASSIC COMMON STOCK..............................................................28
OWNERSHIP OF FIRST FEDERAL COMMON STOCK........................................................30
The Parties to the Merger...................................................................31
Form of the Merger..........................................................................32
Conversion of First Federal Common Stock....................................................32
Cash or Stock Election......................................................................32
Election Procedures; Surrender of Stock Certificates........................................33
Treatment of First Federal Stock Options....................................................34
Treatment of First Federal Stock Awards.....................................................35
Background of the Merger....................................................................35
Reasons for the Merger......................................................................36
Effects of the Merger.......................................................................38
Opinion of Classic's Independent Financial Advisor..........................................39
Estimated Classic range of values assigned for strategic affiliation with First Federal.....46
Opinion of First Federal's Independent Financial Advisor....................................47
i
Interests of Certain First Federal Directors and Officers in the Merger.....................53
NASDAQ SmallCap Market Listing..............................................................55
Material Federal Income Tax Consequences of the Merger......................................55
Tax Consequences to Classic and its Stockholders............................................57
Accounting Treatment of the Merger..........................................................57
Resales of Classic Common Stock.............................................................58
Regulatory Approvals and Notices Required for the Merger....................................58
Requirement for Stockholder Approval........................................................59
Recommendations of the Boards of Directors..................................................59
Terms of the Merger.........................................................................60
When Will the Merger be Completed...........................................................60
Conditions to Completing the Merger.........................................................60
Conduct of Business Before the Merger.......................................................61
Covenants of First Federal and Classic in the Merger Agreement..............................64
Representations and Warranties Made by Classic and First Federal in the Merger Agreement....67
Terminating the Merger Agreement............................................................67
Termination Fee.............................................................................68
Expenses....................................................................................69
Changing the Terms of the Merger Agreement..................................................69
Bank Merger.................................................................................69
Board of Directors..........................................................................69
DESCRIPTION OF CLASSIC COMMON STOCK............................................................69
General.....................................................................................69
Common Stock................................................................................69
Preferred Stock.............................................................................70
MANAGEMENT FOLLOWING THE MERGER................................................................70
Classic.....................................................................................70
Directors' Compensation.....................................................................72
Executive Officers Who Are Not Directors....................................................72
PRO FORMA FINANCIAL INFORMATION................................................................73
Classic Bancshares, Inc. and First Federal Financial Bancorp, Inc...........................74
Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet...........................74
as of December 31, 2002.....................................................................74
Classic Bancshares, Inc. and First Federal Financial Bancorp, Inc...........................76
Unaudited Pro Forma Condensed Combined Consolidated Statement of Income.....................76
For the Nine Months Ended December 31, 2002.................................................76
Classic Bancshares, Inc. and First Federal Financial Bancorp, Inc...........................78
Unaudited Pro Forma Condensed Combined Consolidated Statement of Income.....................78
For the Year Ended March 31, 2002...........................................................78
Notes to the Unaudited Pro Forma Condensed Combined............................................80
Consolidated Financial Statements..............................................................80
Note 1. Basis of Presentation..............................................................80
Note 2. Calculation of the Purchase Price and Goodwill.....................................80
Note 3. First Federal Merger Related Charges...............................................81
Note 4. Classic Merger Related Charges....................................................81
Note 5. Stockholders' Equity...............................................................81
Note 6. Average Shares Outstanding.........................................................81
Note 7. Pro Forma Condensed Combined Statement of Operations Adjustments...................81
COMPARISON OF RIGHTS OF STOCKHOLDERS...........................................................82
FIRST FEDERAL..................................................................................87
SELECTED PROVISIONS IN THE CERTIFICATE OF INCORPORATION........................................88
Business Combinations with Interested Stockholders..........................................88
Limitation on Voting Rights.................................................................89
Evaluation of Offers........................................................................89
Board of Directors..........................................................................89
Stockholder Action by Written Consent; Special Meetings of Stockholders.....................90
ii
Advance Notice Provisions for Stockholder Nominations and Proposals.........................90
Preferred Stock.............................................................................90
Amendment of Certificate of Incorporation...................................................90
Delaware Corporate Law......................................................................91
LEGAL MATTERS..................................................................................91
EXPERTS........................................................................................91
WHERE YOU CAN FIND MORE INFORMATION............................................................92
Classic SEC Filings (File No. 0-27170)......................................................92
First Federal SEC Filings (File No. 0-28020)................................................92
STOCKHOLDER PROPOSALS..........................................................................93
ANNEXES
ANNEX A Agreement and Plan of Merger
ANNEX B Fairness Opinion of Keefe, Bruyette & Woods, Inc.
ANNEX C Fairness Opinion of Keller & Company
ANNEX D Section 262 of the Delaware General Corporation Law
ANNEX E Annual Report to Stockholders for 2002 and Quarterly Report on 10-QSB
for the nine months ended December 31, 2002 of Classic Bancshares, Inc.
ANNEX F Annual Report on Form 10-KSB for the year ended September 30, 2002, and
Quarterly Report on Form 10-QSB for the three months ended December 31,
2002 of First Federal Financial Bancorp, Inc.
iii
<page>
QUESTIONS AND ANSWERS ABOUT THE MERGER
WHY ARE FIRST FEDERAL AND CLASSIC MERGING?
Our companies are proposing to merge because we believe that the merger
will benefit our stockholders, customers and employees. We believe the merger
will create a stronger financial services company that will be better positioned
to compete in the financial services industry in the Ashland, Kentucky/Ironton,
Ohio/Huntington, West Virginia area through expanded operations and market
coverage.
WHAT AM I BEING ASKED TO VOTE ON AND HOW DOES MY BOARD RECOMMEND THAT I VOTE?
You are being asked to vote FOR the adoption of the Agreement and Plan
of Merger dated as of December 30, 2002 providing for the merger of First
Federal with and into Classic. The Classic and First Federal boards of directors
have determined that the proposed merger is in the best interests of the
stockholders of their respective companies, have approved the merger agreement
and recommends that the stockholders vote FOR the adoption of the merger
agreement.
WHAT VOTE IS REQUIRED TO ADOPT THE MERGER AGREEMENT?
The adoption of the merger agreement requires the affirmative vote of
at least a majority of the outstanding shares of common stock of each of Classic
and First Federal.
WHAT WILL I RECEIVE IN THE MERGER?
Under the merger agreement, at your election, each share of First
Federal common stock you own will be exchanged for either shares of Classic
common stock or $24.00 in cash. You may elect either of these options and, if
you desire, you may elect to exchange some of your First Federal shares for cash
and some of your First Federal shares for Classic shares. Under the terms of the
merger agreement, .9797 shares of Classic common stock will be exchanged for
each share of First Federal common stock.
Elections will be limited by, among other things, a requirement that
50% of the total number of outstanding shares of First Federal common stock be
exchanged for Classic common stock. Therefore, the form of consideration you
receive will depend in part on the elections of other First Federal
stockholders.
Classic will not issue fractional shares in the merger. Instead, First
Federal stockholders will receive a cash payment, without interest, for the
value of any fraction of a share of Classic common stock that they would
otherwise be entitled to receive.
HOW DO I ELECT TO RECEIVE CASH, STOCK OR A COMBINATION OF BOTH FOR MY FIRST
FEDERAL STOCK?
A form for making an election will be sent to you separately on or
about the date this joint proxy statement/prospectus is mailed. For your
election to be effective, your properly completed election form, along with your
First Federal stock certificates or an appropriate guarantee of delivery, must
be sent to and received by American Stock Transfer and Trust Company, Inc., the
exchange agent, on or before _:__ _.m., ___________ time, on __________ __,
2003. DO NOT SEND YOUR ELECTION FORM TOGETHER WITH YOUR PROXY CARD. Instead, use
the separate envelope specifically provided for the election form and your stock
certificates. If you do not make a timely election you will be allocated Classic
common stock and/or cash depending on the elections made by other stockholders.
1
WHAT RISKS SHOULD I CONSIDER BEFORE I VOTE ON THE MERGER AGREEMENT?
You should review "Risk Factors" on pages __ through __ of this
document.
WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
We are working to complete the merger during the second quarter of
2003. We must first obtain the necessary regulatory approvals and the approvals
of our respective stockholders at our stockholders' meetings. We cannot assure
you when or if all the conditions to the merger will be met, and it is possible
that we may not complete the merger.
HOW DO THE DIRECTORS PLAN TO VOTE?
All of the First Federal directors have signed an agreement with
Classic committing that they will vote all of the shares of First Federal common
stock that they beneficially own in favor of the merger agreement. Currently,
the First Federal directors collectively beneficially own __________ shares of
First Federal common stock, or approximately ___% of the outstanding First
Federal common stock.
We expect that all of the Classic directors will vote the shares of
Classic common stock that they beneficially own in favor of the merger
agreement. At __________, 2003, the Classic directors beneficially owned _____
shares of Classic common stock, or approximately ____% of the outstanding shares
of Classic common stock.
DO I HAVE APPRAISAL RIGHTS?
Both Classic's and First Federal's stockholders have appraisal rights
in connection with the transactions described in this joint proxy
statement/prospectus. However, there are certain specific procedures you must
follow in order to exercise your appraisal rights.
HOW DO I EXCHANGE MY FIRST FEDERAL STOCK CERTIFICATES?
If you make an election, you must return your First Federal stock
certificates or an appropriate guarantee of delivery with your election form.
Shortly after the merger, the exchange agent will allocate cash and Classic
common stock among First Federal stockholders, consistent with their elections
and the allocation and proration procedures in the merger agreement. If you do
not submit an election form, you will receive instructions on where to surrender
your First Federal stock certificates from the exchange agent after the merger
is completed. IN ANY EVENT, YOU SHOULD NOT FORWARD YOUR FIRST FEDERAL STOCK
CERTIFICATES WITH YOUR PROXY CARD.
WHAT SHOULD I DO NOW?
After you have read this document, please indicate on your proxy card
how you want to vote. Sign and mail the proxy card in the enclosed postage
prepaid envelope as soon as possible, so that your shares will be represented at
the special meeting.
IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, BANK OR NOMINEE, WILL MY
BROKER, BANK OR NOMINEE AUTOMATICALLY VOTE MY SHARES FOR ME?
No. Your broker, bank or nominee will not be able to vote your shares
of Classic or First Federal common stock unless you provide instructions on how
to vote. You should instruct your broker, bank or nominee how to vote your
shares by following the procedures your broker provides. If you do not provide
instructions to your broker, bank or nominee, your shares will not be voted, and
this will have the effect of voting against adoption of the merger agreement.
2
Please check the voting form used by your broker, bank or nominee to see if it
offers telephone or internet voting.
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You may change your vote at any time before your proxy is voted at
the meeting. You can do this in one of three ways. First, you can send a written
notice stating that you would like to revoke your proxy. Second, you can
complete and submit a new proxy card. If you choose either of these two methods
you must submit your notice of revocation or your new proxy card to your company
before its meeting. If you are a Classic shareholder, submit your notice of
revocation or new proxy card to Classic Bancshares, Inc., 344 Seventeenth
Street, Ashland, Kentucky 41101, attention Lisah Frazier, Corporate Secretary.
If you are a First Federal shareholder, submit your notice of revocation or new
proxy card to First Federal Financial Bancorp, Inc., 415 Center Street Ironton,
Ohio 45638, attention Edith Daniels, Secretary. Third, you may attend the
meeting and vote in person. Simply attending the meeting, however, will not
revoke your proxy. You must request a ballot and vote the ballot at the meeting.
If you have instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you want additional copies of this document, or if you want to ask
any questions about the merger, you should contact:
For Classic stockholders: For First Federal stockholders:
Lisah M. Frazier Jeffery W. Clark
Classic Bancshares, Inc. First Federal Financial Bancorp, Inc.
344 Seventeenth Street 415 Center Street
Ashland, Kentucky 41101 Ironton, Ohio 45638
Telephone: (606) 326-2800 Telephone: (740) 532-6845
Please also see "Where Can I Find More Information?" on page ___ to
find out where you can find additional important information about Classic and
First Federal.
3
SUMMARY
This summary highlights selected information included or incorporated
by reference in this joint proxy statement/prospectus and may not contain all of
the information that is important to you. For a more complete understanding of
the merger and for a more complete description of the legal terms of the merger,
you should read this entire joint proxy statement/prospectus carefully, as well
as the additional documents we refer you to, including the merger agreement,
which we have attached as Annex A. See "Where Can I Find More Information?" on
page ___.
GENERAL
This joint proxy statement/prospectus relates to the proposed
acquisition of First Federal by Classic through the merger of First Federal with
and into Classic. Following First Federal's merger with Classic, First Federal
Savings Bank of Ironton, a wholly owned subsidiary of First Federal, will merge
with and into Classic Bank, a wholly owned subsidiary of Classic. We expect to
complete the mergers during the second quarter of 2003.
CLASSIC BANCSHARES, INC.
344 Seventeenth Street
Ashland, Kentucky 41101
Telephone: (606) 326-2800
Classic Bancshares, Inc. is a Delaware business corporation and
registered financial holding company under Bank Holding Company Act of 1956.
Classic's principal operating subsidiary is Classic Bank, a Kentucky state
chartered commercial bank. Classic's principal executive office is located at
344 Seventeenth Street, Ashland, Kentucky 41101, and the telephone number is
(606) 326-2800. At December 31, 2002, Classic had, on a consolidated basis,
approximately $236.6 million in total assets, $176.0 million in total deposits,
$180.2 million in net loans receivable and stockholders' equity of $24.4
million.
Through Classic Bank, Classic serves clients predominantly in Eastern
Kentucky and in the Ashland, Kentucky/Ironton, Ohio/Huntington, West Virginia
area through eight offices and 20 ATMs.
FIRST FEDERAL FINANCIAL BANCORP, INC.
415 Center Street
Ironton, Ohio 45638
Telephone: (740) 532-6845
First Federal Financial Bancorp, Inc. is a Delaware corporation and
registered thrift holding company. First Federal operates First Federal Savings
Bank of Ironton, a federally chartered savings bank. At December 31, 2002, First
Federal had, on a consolidated basis, approximately $76.4 million in total
assets, $57.6 million in total deposits, $52.1 million in net loans receivable
and stockholders' equity of $9.2 million.
Through First Federal Savings Bank of Ironton, First Federal serves
clients primarily in Lawrence County, Ohio through three offices and three ATMs.
4
THE MEETINGS
TIME AND PLACE
Classic
Classic will hold its special meeting of stockholders at the Classic
Bank Annex located at __________________________________ , at ______ _.m. on
June __, 2003. At the special meeting, Classic stockholders will vote upon the
proposal to approve and adopt the merger agreement and the merger and any other
matters that properly come before the meeting.
First Federal
First Federal will hold its special meeting of stockholders at
_____________________________, at _____ _.m. on June __, 2003. At the special
meeting, holders of First Federal common stock will vote upon proposal to
approve and adopt the merger agreement and the merger and any other matters that
properly come before the meeting.
RECORD DATES (PAGES __ AND ___)
Classic
You are entitled to notice of and to vote at the Classic special
meeting if you were the record owner of shares of Classic common stock on ____,
2003, the Classic record date. As of that date, there were _______ shares of
Classic common stock issued and outstanding held by approximately _________
holders of record. Each holder of Classic common stock is entitled to one vote
per share on any matter that may properly come before the special meeting.
First Federal
You are entitled to notice of and to vote at the First Federal special
meeting if you were the record owner of shares of First Federal common stock on
_____________________, the First Federal record date. As of the First Federal
record date, there were 461,622 shares of First Federal common stock issued and
outstanding held by approximately __ holders of record. Each holder of First
Federal common stock is entitled to one vote per share on any matter that may
properly come before the special meeting.
VOTES REQUIRED (PAGES ___ AND ___)
Classic
Approval by the Classic stockholders of the proposal to approve and adopt
the merger agreement requires the affirmative vote of a majority of the
outstanding shares of Classic's common stock. See "The Merger - Requirement for
Classic Stockholder Approval" on page __.
First Federal
Approval by the First Federal stockholders of the proposal to approve and
adopt the merger agreement requires the affirmative vote of a majority of the
outstanding shares of First Federal common stock. See "The Merger - Requirement
for First Federal Stockholder Approval" on page __.
5
SHARE OWNERSHIP BY DIRECTORS AND OFFICERS (PAGES ___ AND ___)
On the Classic record date, the directors and officers of Classic
beneficially owned an aggregate of ________ shares of Classic common stock,
representing approximately ____ % of the shares of the Classic common stock then
outstanding.
On the First Federal record date, the directors and officers of First
Federal beneficially owned an aggregate of _____ shares of First Federal common
stock, representing approximately _______% of the shares of the First Federal
common stock then outstanding.
Each director of First Federal executed a voting agreement with Classic
that commits such director to vote the shares of First Federal common stock he
or she owns in favor of the proposal to approve and adopt the merger agreement.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS (PAGES __ THROUGH __)
To Classic Stockholders:
The Classic board of directors has approved and adopted the merger
agreement, and recommends a vote "FOR" approval of the issuance of shares of
Classic common stock in connection with the merger. You should refer to the
reasons that the Classic board of directors considered in determining whether to
approve the merger agreement and related transactions, which are discussed on
pages __ through __.
To First Federal Stockholders:
The First Federal board of directors has approved and adopted the
merger agreement, and recommends a vote "FOR" approval of the merger agreement
and the related transactions. You should refer to the reasons that the First
Federal board of directors considered in determining whether to approve and
adopt the merger agreement and the related transactions, which are discussed on
pages __ through __.
THE MERGER
EACH FIRST FEDERAL SHARE WILL BE EXCHANGED FOR EITHER SHARES OF CLASSIC OR
$24.00 IN CASH (PAGE __)
Upon the closing of the merger, each share of First Federal common
stock will automatically be converted into the right to receive either shares of
Classic common stock or $24.00 in cash. You may elect either of these options
and, if you desire, you may elect to exchange some of your First Federal shares
for cash and some of your First Federal shares for Classic shares. The number of
shares of Classic common stock to be exchanged for each share of First Federal
common stock will be .9797.
The amount of cash and/or stock that you receive may differ from the
amounts that you elect due to the allocation and proration procedures in the
merger agreement. The merger agreement generally provides that 50% of the First
Federal common stock will be converted into Classic common stock and 50% of the
First Federal common stock will be converted into cash. Because the tax
consequences of receiving cash will differ from the tax consequences of
receiving stock, you should carefully read the tax information beginning on page
___.
6
HOW TO ELECT TO RECEIVE CASH OR STOCK AND EXCHANGE YOUR FIRST FEDERAL STOCK
CERTIFICATES (PAGE __)
The exchange agent or, if your First Federal common stock is held in
"street name," your broker, bank or nominee, will send you a form for making the
election on or about the date this joint proxy statement/prospectus is being
mailed. The election form allows you to elect to receive cash, Classic common
stock, or a combination of cash and stock or to make no election.
For your election to be effective, you must return your properly
completed election form, along with your First Federal stock certificates or an
appropriate guarantee of delivery to:
American Stock Transfer and Trust Company, Inc.
59 Maiden Lane
New York, NY 10038
on or before __:__ _.m., __________ time, on _______ __, 2003. American Stock
Transfer and Trust Company, Inc. will act as exchange agent in the merger and in
that role will process the exchange of First Federal stock certificates for
either cash or Classic common stock. Shortly after the merger, the exchange
agent will allocate cash and Classic common stock among First Federal
stockholders, consistent with their elections and the allocation and proration
procedures in the merger agreement. If you do not submit an election form, you
will receive instructions on where to surrender your First Federal stock
certificates from the exchange agent after the merger is completed. In any
event, you should not forward your First Federal stock certificates with your
proxy cards.
If you have a preference for receiving either Classic stock or cash for
your First Federal stock, you should complete and return the election form. If
you do not make an election, you will be allocated Classic common stock and/or
cash depending on the elections made by other stockholders. Please remember,
however, that even if you do make an election, you might not receive the amount
of cash and/or stock that you elect due to the requirement that 50% of the
shares of First Federal common stock be exchanged for Classic common stock.
OPINION OF KEEFE, BRUYETTE & WOODS, INC., FINANCIAL ADVISOR TO CLASSIC (PAGES __
THROUGH __)
Keefe, Bruyette & Woods, Inc., the independent financial advisor to
Classic, rendered a written fairness opinion to the Classic board of directors,
dated as of December 27, 2002 and updated to _____, 2003, stating that as of
such dates, the proposed merger consideration to be paid to the stockholders of
First Federal is fair, from a financial point of view, to the stockholders of
Classic. A copy of the fairness opinion, setting forth the information reviewed,
assumptions made and matters considered by Keefe, Bruyette & Woods is attached
to this document as Annex B. Classic stockholders are encouraged to read the
fairness opinion in its entirety.
OPINION OF KELLER & COMPANY, FINANCIAL ADVISOR TO FIRST FEDERAL (PAGES __
THROUGH __)
Keller & Company, the independent financial advisor to First Federal,
rendered a written fairness opinion to the First Federal board of directors,
dated as of December 30, 2002 and updated to ______, 2003, stating that as of
such dates the merger consideration to be paid was fair, from a financial point
of view, to the First Federal stockholders. A copy of the fairness opinion,
setting forth the information reviewed, assumptions made and matters considered
by Keller & Company is attached to this document as Annex C. First Federal
stockholders should read the fairness opinion in its entirety.
7
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGES __ THROUGH __)
Some of First Federal's directors and officers have interests in the
merger that are different from, or are in addition to, their interests as
stockholders in First Federal. The members of First Federal's board of directors
knew about these additional interests, and considered them, when they approved
the merger. The interests of First Federal's directors and officers include:
o a severance payment to I. Vincent Rice, the President and Chief
Executive Officer of First Federal, under his existing employment
contract, and payments under a consulting agreement that he will enter
into with Classic upon completion of the merger;
o the vesting of unvested First Federal restricted stock and stock
options awards as a result of completion of the merger;
o Classic's offer of a three year employment contract to Jeffery Clark,
First Federal's Controller, upon the completion of the merger to
replace his current employment contract with First Federal;
o the provisions in the merger agreement relating to the indemnification
of directors and officers and insurance for directors and officers of
First Federal for events occurring before the merger; and
o the appointment of one director of First Federal to the board of
directors of Classic and one other First Federal director and the son
of another First Federal director to the Board of Classic Bank.
DIRECTORS AND OFFICERS OF CLASSIC AND CLASSIC BANK FOLLOWING THE MERGERS (PAGE
__)
Upon completion of the merger, the current directors and officers of
Classic will remain directors and officers of Classic. Upon completion of the
bank merger, the current directors and officers of Classic Bank will remain
directors and officers of Classic Bank.
The officers of First Federal and First Federal Savings Bank of
Ironton, other than I. Vincent Rice, who will retire, will serve as officers of
Classic or Classic Bank after completion of the merger. In addition, Steven C.
Milleson, who is a current member of the board of directors of First Federal,
will be appointed to the board of directors of Classic. Also, Edward R.
Rambacher, who is a current member of the board of directors of First Federal,
and David Phillips, who is the son of Thomas Phillips, a current director of
First Federal will be appointed to the board of directors of Classic Bank.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGES __ THROUGH __)
If you are a First Federal stockholder, the tax consequences of the
merger to you will depend upon the form of consideration you receive in the
merger.
If you receive solely shares of Classic common stock and cash in lieu
of a fractional share in exchange for your First Federal common stock, then you
generally will not recognize any gain or loss, except with respect to the
fractional share. If you receive solely cash, then you generally will recognize
gain and likely will be permitted to recognize loss equal to the difference
between the amount of cash you receive and your basis in your First Federal
common stock. The tax treatment of any gain will depend upon your individual
circumstances.
If you receive a combination of Classic common stock and cash other
than cash in lieu of a fractional share in exchange for your First Federal
common stock, then you will generally recognize gain in an amount equal to the
lesser of the total amount of cash received or the amount of gain realized on
8
the exchange, but you are not permitted to recognize a loss. Any gain recognized
may be treated as a dividend or capital gain, depending on your particular
circumstances.
The merger will not be taxable at the corporate level and there will be
no tax consequences to Classic stockholders.
This tax treatment may not apply to all First Federal's stockholders.
Determining the actual tax consequences of the merger to you can be complicated.
You should consult your own tax advisor for a full understanding of the merger's
tax consequences that are particular to you.
MARKET PRICE INFORMATION (PAGE __)
Classic common stock trades on the NASDAQ SmallCap Market under the
symbol "CLAS." The closing price for Classic's common stock on December 29,
2002, the last trading day before the public announcement of the merger, was
$25.00 per share. The closing price for Classic's common stock on April 7, 2003,
the last practicable trading date before the date of this document was $28.00
per share.
First Federal common stock trades on the OTC Bulletin Board under the
symbol "FFFB." The closing price for First Federal's common stock on December
__, 2002, the last day on which shares of its common stock were traded before
the public announcement of the merger, was $______ per share. The closing price
for First Federal's common stock on April 7, 2003, the last practicable trading
date before the date of this document was $26.00 per share.
ACCOUNTING TREATMENT (PAGE __)
The merger will be accounted for under the purchase method of
accounting. Under this method of accounting, Classic will record the fair market
value of First Federal's assets and liabilities on its financial statements. The
difference between the purchase price paid by Classic and the fair market value
of First Federal's tangible and identifiable intangible assets net of its
liabilities will be recorded on Classic's books as "goodwill."
REGULATORY APPROVALS (PAGE __)
Classic and Classic Bank must make certain filings with or obtain
approvals from the Federal Reserve Bank of Cleveland, which we refer to as the
Federal Reserve, the Federal Deposit Insurance Corporation, which we refer to as
the FDIC, the Office of Thrift Supervision, which we refer to as the OTS, and
the Kentucky Department of Financial Institutions, which we refer to as the
KDFI, in connection with the transactions contemplated by the merger agreement.
The parties have filed all necessary applications and notices with the
applicable regulatory authorities. We cannot predict, however, whether or when
we will obtain the required regulatory approvals or whether any such approvals
would have adverse conditions that would permit Classic to not consummate the
merger.
APPRAISAL RIGHTS (PAGE __)
Both Classic's and First Federal's stockholders have appraisal rights
in connection with the merger. Under Delaware law, First Federal stockholders
who do not wish to accept the merger consideration and Classic stockholders who
wish to exercise such appraisal rights can dissent from the transaction and have
the fair value of their shares judicially determined and paid in cash. However,
in order to exercise such rights, you must follow specific procedures. You
should carefully read "The Merger-Appraisal Rights" and Section 262 of the
Delaware Law which is attached as Annex D to this proxy statement.
9
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE ___)
Both Classic and First Federal are Delaware corporations. First Federal
stockholders who receive Classic common stock in the merger will become Classic
stockholders, and their rights will continue to be governed by Delaware law as
well as by Classic's certificate of incorporation and bylaws. However, there are
several differences between the rights of First Federal's stockholders and those
of Classic stockholders including the existence of a Stockholder Protection
Rights Agreement at First Federal and the absence of such an agreement at
Classic.
THE MERGER AGREEMENT
The merger agreement is attached to this joint proxy
statement/prospectus as Annex A. We encourage you to read the merger agreement
in its entirety. It is the legal document that governs the merger.
CONDITIONS TO THE MERGER (PAGE __)
Before we can complete the merger, each of the following conditions,
among others, must either be met or, unless prohibited by law, waived by the
party who was not obligated to meet such condition:
o The Classic and First Federal stockholders each must approve the merger
agreement;
o there must not be any outstanding or threatened judgments, decrees,
injunctions, orders or other proceedings by a governmental authority
that would prohibit the merger;
o Classic and First Federal and their respective subsidiaries must have
received all necessary authorizations, orders and consents of
governmental authorities for the merger, without the imposition of any
condition that is reasonably likely to have an adverse effect, and any
required waiting periods must have expired;
o the Securities and Exchange Commission must declare effective the
registration statement relating to the shares of Classic common stock
to be issued in the merger, of which this joint proxy
statement/prospectus is a part;
o Classic must receive approval from the NASDAQ SmallCap Market to list
the shares of Classic common stock that will be issued in the merger;
o all representations and warranties made by both Classic and First
Federal in the merger agreement must remain true and correct, except
for certain inaccuracies that would not have, or would not reasonably
be expected to have, a material adverse effect;
o Classic and First Federal must have performed their respective
obligations under the merger agreement in all material respects;
o the parties must have received all required consents;
o the parties must have received opinions from their counsel that the
merger qualifies as a tax free reorganization;
o Classic must have deposited sufficient cash to pay the cash portion of
the merger consideration with the exchange agent; and
10
o Classic must have received an opinion from First Federal's counsel as
to certain matters relating to its Shareholders Rights Agreement.
We cannot be certain when or if the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
TERMINATION (PAGE __)
Either First Federal or Classic may call off the merger under certain
circumstances, including the following:
o they both consent in writing;
o First Federal cannot obtain the requisite stockholder approval, subject
to certain limitations;
o a required regulatory approval is denied or a governmental authority
blocks the merger;
o we do not complete the merger by June 30, 2003;
o the other party makes a misrepresentation, breaches a warranty or fails
to satisfy or fulfill a covenant that would have a material adverse
effect on the party seeking to terminate the merger agreement;
o Classic may also terminate the merger agreement if First Federal's
board of directors withdraws or revises its recommendation to its
stockholders to approve the merger agreement or if any person or group
acquires 25% or more of the voting power of First Federal;
o First Federal may terminate the merger agreement prior to its
stockholder meeting under certain circumstances in order to accept a
superior proposal following notice from Classic that it does not intend
to make an offer that is as favorable as the superior proposal; or
o Classic may terminate the merger agreement if First Federal becomes
entitled to do so in order to accept a superior proposal under certain
circumstances.
TERMINATION FEES (PAGE __)
First Federal must pay Classic a termination fee of $450,000 if Classic
terminates the merger agreement due to (i) the failure of First Federal's board
of directors to recommend approval of the merger or withdraws, qualifies or
revises its recommendation to approve the merger, (ii) the acquisition by any
person of 25% or more of the voting power of First Federal, or one of its
subsidiaries, or (iii) First Federal's entrance into an acquisition or similar
agreement with a third party.
First Federal also must pay Classic a termination fee of $450,000, if
within 12 months after the merger agreement is terminated, First Federal
consummates or enters into any agreement with respect to an acquisition proposal
where the merger agreement was terminated under either of the following
circumstances:
o Classic terminates the merger agreement as a result of a breach of the
merger agreement by First Federal, and an acquisition proposal from a
third party had been publicly announced, disclosed or communicated or
made known to First Federal prior to the date of termination; or
11
o the merger agreement is terminated due to the failure of First
Federal's stockholders to approve the merger, and an acquisition
proposal from a third party had been publicly announced, disclosed or
communicated or made known to First Federal prior to the date of the
First Federal stockholders meeting.
Under no circumstances will First Federal be required to pay more than
$450,000 in the aggregate under the termination fee provisions.
PAYMENT OF EXPENSES (PAGE __)
Classic and First Federal will pay their own fees, costs and expenses
incurred in connection with the merger, except that expenses incurred in the
printing and mailing of these joint proxy statement prospectus shall be shared
by the parties.
COMPLETION OF THE MERGER (PAGE __)
The merger will become effective when we file a certificate of merger
with the Delaware Secretary of State. The bank merger will become effective at
the time and date specified in the certificate of merger issued by the KDFI. It
is anticipated that the merger will be completed in the second quarter of 2003.
AGREEMENT NOT TO SOLICIT OTHER PROPOSALS (PAGE __)
First Federal has agreed not to initiate, solicit, encourage,
facilitate, or discuss any acquisition proposal with a third party. Despite the
agreement of First Federal not to solicit other acquisition proposals, the board
of directors of First Federal may generally negotiate, have discussions with, or
provide certain information to a third party who makes an unsolicited, written,
bona fide acquisition proposal, provided that the First Federal board of
directors, after receipt of advice from outside legal counsel, in good faith
deems such action to be necessary for the proper discharge of its duties to
First Federal stockholders.
AMENDMENT (PAGE __)
We can agree to amend the merger agreement, and each of us can waive
our rights to require the other party to adhere to the terms and conditions of
the merger agreement, where the law allows. However, once First Federal
stockholders approve the merger agreement, Classic and First Federal may not
reduce or change the consideration to be received by First Federal stockholders
in the merger.
12
RISK FACTORS
In addition to the other information included in or incorporated by
reference into this joint proxy statement/prospectus, including the matters
addressed in "A Warning About Forward-Looking Information" beginning on page __,
you should consider the matters described below carefully in determining how to
vote on the merger.
IF YOU ARE A FIRST FEDERAL STOCKHOLDER, YOU MAY NOT RECEIVE THE FORM OF MERGER
CONSIDERATION THAT YOU INITIALLY ELECT.
The consideration to be received by First Federal stockholders in the
merger is subject to the requirement that 50% of the shares of First Federal
common stock be exchanged for Classic common stock and 50% be exchanged for
cash. The merger agreement contains proration and allocation methods to achieve
this desired result. If you elect all cash and the available cash is
oversubscribed, then you will receive a portion of the merger consideration in
Classic common stock. If you elect all stock and the available stock is
oversubscribed, then you will receive a portion of the merger consideration in
cash. The type of consideration you receive may also be affected by the
requirement that the value of the stock portion of the merger consideration be
equal to at least 45% of the merger consideration.
If you receive a different form of consideration than you elected, the
tax consequences to you may be different than they would have been had you
received the form of consideration you elected (including the possible
recognition of taxable gain to the extent cash is received. See "The
Merger--Material Federal Income Tax Consequences of the Merger."
BECAUSE THE MARKET PRICE OF CLASSIC COMMON STOCK MAY FLUCTUATE, YOU CANNOT BE
SURE OF THE MARKET VALUE OF THE CLASSIC COMMON STOCK THAT YOU MAY RECEIVE IN THE
MERGER.
Upon the closing of the merger, each of your shares of First Federal
common stock will automatically be converted into the right to receive either
shares of Classic common stock or $24.00 in cash. The number of shares of
Classic common stock to be exchanged for each share of First Federal common
stock will be .9797. Changes in the price of Classic common stock from the date
of the merger agreement and from the date of this proxy statement/prospectus may
affect the market value of Classic common stock that you will receive on the
date of the merger. Stock price changes may result from a variety of factors,
including general market and economic conditions, changes in Classic's
businesses, operations and prospects, and regulatory considerations. Many of
these factors are beyond Classic's control.
THE PRICE OF CLASSIC COMMON STOCK MIGHT DECREASE AFTER THE MERGER.
Following the merger, many holders of First Federal common stock will
become stockholders of Classic. Classic common stock could decline in value
after the merger. For example, during the twelve-month period ending on April 7,
2003 (the most recent practicable date prior to the printing of this joint proxy
statement/prospectus), the closing price of Classic common stock varied from a
low of $18.25 to a high of $29.66 and ended that period at $28.00. The market
value of Classic common stock fluctuates based upon general market economic
conditions, Classic's business and prospects and other factors.
The tax consequences of the merger for First Federal shareholders will
be dependent on the merger consideration received.
The tax consequences of the merger to you will be dependent on the
merger consideration received by you. You generally will not recognize any gain
or loss on the conversion of shares of First Federal common stock solely into
shares of Classic common stock; however, you generally will be taxed to the
extent you receive cash in exchange for your shares of First Federal common
stock or instead of any fractional share of Classic common stock that your would
otherwise be entitled to receive. For detailed discussion of the tax
consequences to you of the merger, see "The Merger -- Material Federal Income
Tax Consequences of the Merger."
13
DIRECTORS AND OFFICERS OF FIRST FEDERAL HAVE POTENTIAL CONFLICTS OF INTEREST IN
THE MERGER.
The directors and officers of First Federal have interests in the
merger that are different from, or in addition to, the interests of First
Federal stockholders generally. In addition, all First Federal directors have
entered into a voting agreement with Classic related to the merger. Among other
things, the First Federal directors have agreed to vote the approximately ____%
of the outstanding shares of First Federal common stock they beneficially own in
favor of the merger agreement.
THERE ARE UNCERTAINTIES IN INTEGRATING THE BUSINESS OPERATIONS OF FIRST FEDERAL
WITH CLASSIC AND IN REALIZING ENHANCED EARNINGS FOR THE COMBINED COMPANY.
The merger and the bank merger involve the integration of companies
that have previously operated independently. Successful integration of First
Federal's consolidated operations will depend primarily on Classic's ability to
consolidate operations, systems and procedures and to eliminate redundancies and
costs. No assurance can be given that Classic and First Federal will be able to
integrate their operations without encountering difficulties, including, without
limitation, the loss of key employees and customers, the disruption of their
respective ongoing businesses or possible inconsistencies in standards,
controls, procedures and policies.
The combined company's results may be affected if:
o the combination of the businesses of Classic and First Federal takes
longer, or is more difficult, time-consuming or costly to accomplish
than expected;
o the expected growth opportunities and cost savings from the merger are
not fully realized or take longer to realize than expected;
o economic conditions deteriorate in the Ashland, Kentucky/Ironton,
Ohio/Huntington, West Virginia area, the primary market area of both
Classic and First Federal; or
o operating costs, customer losses and business disruption following the
merger, including adverse effects on relationships with employees, are
greater than expected.
If any of these risks were to occur, the business, operations and/or
earnings of the combined company could be negatively affected.
UPON COMPLETION OF THE MERGER, THE CURRENT STOCKHOLDERS OF CLASSIC WILL HAVE
THEIR OWNERSHIP INTERESTS DILUTED.
The issuance of the shares of Classic common stock in the merger will
dilute the current ownership of the current Classic stockholders. In the merger,
Classic proposes to issue 226,615 shares of Classic common stock, which after
issuance will represent approximately 17.0% of the issued and outstanding shares
of Classic common stock (excluding stock options).
From time to time, Classic details other risks with respect to its
business and/or financial results in press releases and filings with the
Securities and Exchange Commission. We urge you to review the risks described in
such releases and filings before voting at your stockholders' meeting.
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Classic and First Federal each have made forward-looking statements in
this document, and in certain documents that we refer to in this document, that
are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of each respective company's management, and on
14
information currently available to them. Forward-looking statements include the
information concerning possible or assumed future results of operations of
Classic and/or First Federal are often preceded by, followed by or include the
words "will," "believes," "expects," "anticipates," "intends," "plans,"
"estimates" or similar expressions.
Among other things, Classic and First Federal each have made statements
in this document regarding statements of the benefit of the merger, including
future financial and operating results, cost savings, enhancements, revenues,
accretions and reported earnings that may be realized from the merger,
statements about Classic's and First Federal's plans, objections, expectations,
and intentions and other statements that are not historical facts. With respect
to estimated cost savings, Classic has made certain assumptions regarding, among
other things, the extent of operational overlap between Classic and First
Federal, the amount of general and administrative expense consolidation, costs
relating to converting First Federal's bank operations and data processing to
Classic's systems and the costs related to the merger. The realization of cost
savings are subject to the risk that the foregoing assumptions are not accurate.
Moreover, any statements in this document regarding the anticipated
effect of the merger and our anticipated performance in future periods are
subject to risks relating to, among other things, the following:
o the business of Classic and First Federal may not be combined
successfully, or the combination may take longer or be more difficult,
time consuming or costly to accomplish than expected;
o the expected growth opportunities and cost savings from the merger may
not be fully realized or may take longer to realize than expected;
o operating costs, customer losses and business disruption following the
merger, including adverse effects on relationships with employees, may
be greater than expected;
o the merger may not be consummated because of, among other things, a
failure to obtain required stockholder or governmental approvals, or
adverse regulatory conditions imposed in connection with governmental
approvals of the merger;
o adverse governmental or regulatory policies may be enacted;
o the interest rate environment may change, so as to compress margins and
adversely affect net interest income;
o Classic or First Federal may experience adverse changes to credit
quality;
o Classic or First Federal may experience increased competition from
other financial services companies in their market; and
o the concentration of Classic's and First Federal's operations in the
same market area may adversely affect asset quality, results of
operations and Classic's ability to grow if the local economy weakens.
Management of Classic and First Federal believe these forward-looking
statements are reasonable; however, you should not place undue reliance on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results and stockholder
values of Classic following completion of the merger may differ materially from
those expressed in these forward-looking statements. Many of the factors that
15
will determine these results and values are beyond Classic's and First Federal's
ability to control or predict. For those statements, Classic and First Federal
claim the protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
COMPARATIVE PER SHARE DATA
The following table shows information about our income per common
share, dividends per share and book value per share, and similar information as
if the merger had occurred on the date indicated (which we refer to as "pro
forma" information). In presenting the comparative pro forma information for
certain time periods, we assumed that we had been merged throughout those
periods and made certain other assumptions. See "Pro Forma Financial
Information."
The information listed as "per equivalent First Federal share" was
obtained by multiplying the pro forma amounts by an exchange ratio of .9797. We
present this information to reflect the fact that some First Federal
stockholders will receive shares of Classic common stock for each share of First
Federal common stock exchanged in the merger. We also anticipate that the
combined company will derive financial benefits from the merger that include
reduced operating expenses and the opportunity to earn more revenue. The pro
forma information, while helpful in illustrating the financial characteristics
of the new company under one set of assumptions, does not reflect these benefits
and, accordingly, does not attempt to predict or suggest future results. The pro
forma information also does not necessarily reflect what the historical results
of the combined company would have been had our companies been combined during
these periods.
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
this document. See "Pro Forma Financial Information."
PER EQUIVALENT
CLASSIC FIRST FEDERAL PRO FORMA FIRST FEDERAL
HISTORICAL HISTORICAL COMBINED SHARE(1)
---------- ------------- --------- ---------------
(unaudited)
BOOK VALUE PER SHARE:
at December 31, 2002 $ 22.08 $ 19.97 $ 22.84(2) $ 22.38
CASH DIVIDENDS DECLARED PER SHARE:
Nine months ended December 31, 2002 $ .24 $ .21 $ .24(3) $ .24
Year ended March 31, 2002 .32 .28 .32(3) .31
DILUTED NET INCOME PER SHARE:
Nine months ended December 31, 2002 $ 1.91 $ .82 $ 1.79 $ 1.75
Year ended March 31, 2002 1.94 .85 1.78 1.74
- ------------------------------
(1) The per equivalent First Federal share amounts are computed by multiplying
the pro forma combined amounts by a factor of .9797 to reflect the exchange
ratio in the merger.
(2) The pro forma combined book value per share of Classic common stock is
based upon the pro forma combined common stockholders' equity for Classic
and First Federal divided by total pro forma common shares of the combined
entity.
(3) Pro forma dividends per share represent Classic's historical dividends per
share.
16
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables show summarized historical financial data for
Classic and First Federal. You should read this summary financial information in
connection with Classic's and First Federal's historical financial information.
The audited financial statements of Classic are included in its Annual
Report on Form 10-KSB and the unaudited financial statements of Classic for the
nine months ended December 31, 2002 and 2001 are included in its Quarterly
Report on Form 10-QSB, both of which are included in Annex E. The audited
financial statements of First Federal are included in First Federal's Annual
Report on Form 10-KSB and the unaudited financial statements of First Federal
for the three months ended December 31, 2002 and 2001 are included in First
Federal's Quarterly Report on Form 10-QSB, both of which are included in
Annex F.
Unaudited financial statements for Classic for the nine months ended
December 31, 2002 and 2001 and for First Federal for the three months ended
December 31, 2002 and 2001 include normal, recurring adjustments necessary to
fairly present the data for those periods. The unaudited data are not
necessarily indicative of expected results of a full year's operation.
17
SELECTED HISTORICAL FINANCIAL INFORMATION FOR CLASSIC
AT OR FOR THE
NINE MONTHS ENDED
DECEMBER 31, AT OR FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL CONDITION DATA:
Total assets $236,626 $214,328 $215,447 $187,860 $175,254 $142,739 $131,121
Investment securities available-for-sale 27,219 26,879 27,283 26,188 25,135 26,526 19,474
Mortgage-backed securities available for 7,101 9,767 9,064 3,445 3,230 4,479 7,831
sale
Loans receivable, net 180,161 155,766 160,316 138,862 127,808 97,527 90,100
Deposits 175,988 164,928 158,874 145,430 134,897 117,732 104,927
FHLB advances 29,147 21,670 27,401 16,636 17,075 388
--------
Total equity, substantially restricted 24,414 21,377 21,981 20,460 18,999 20,289 20,407
OPERATING DATA:
Interest income $ 10,661 $ 10,310 $ 13,709 $ 13,697 $ 11,941 $ 9,822 $ 9,507
Interest expense 3,783 4,837 6,100 7,349 5,892 4,979 4,812
-------- -------- -------- -------- -------- -------- --------
Net interest income 6,878 5,473 7,609 6,348 6,049 4,843 4,695
Provision for loan losses 306 268 363 261 223 100 158
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 6,572 5,205 7,246 6,087 5,826 4,743 4,537
Noninterest income 1,220 1,097 1,454 1,085 895 675 873
Noninterest expense 4,802 4,175 5,726 5,794 5,359 4,295 3,994
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 2,990 2,127 2,974 1,378 1,362 1,123 1,416
Income taxes 818 547 774 330 292 238 396
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 2,172 $ 1,580 $ 2,200 $ 1,048 $ 1,070 $ 885 $ 1,020
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Basic income (loss) per share $ 2.07 $ 1.50 $ 2.08 $ .97 $ .94 $ .75 $ .87
Diluted income (loss) per share 1.91 1.45 1.94 .96 .92 .72 .83
Dividends per share .24 .24 .32 .32 .32 .31 .28
PERFORMANCE RATIOS:
Return on average assets (1) 1.3% 1.0% 1.1% .6% .6% .6% .8%
Return on average equity (2) 12.3 9.2 10.3 5.3 5.5 4.3 5.2
Net interest margin (3) 4.6 4.2 4.4 4.0 4.3 4.1 4.1
Operating (noninterest) expense to 3.2 2.8 2.9 3.2 3.2 3.1 3.0
average total assets
Efficiency ratio(4) 57.1 63.1 60.6 69.9 69.4 71.2 66.6
Dividend payout ratio (5) 11.6 16.0 15.4 33.0 34.0 41.3 32.2
ASSET QUALITY RATIOS:
Nonperforming loans to net loans (6) .8% .4% .4% .6% .6% .4% .4%
Allowance for loan losses to non- 139.1 281.6 248.2 179.1 168.9 212.1 249.6
performing loans
Allowance for loan losses to gross loans 1.1 1.0 1.0 1.0 1.0 .9 .9
- ------------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Net interest income (TE) as a percentage of average interest-earning assets.
(4) Noninterest expense divided by the sum of net interest income (TE) and
noninterest income.
(5) Dividends paid divided by net income per basic share.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis and
loans greater than 90 days delinquent.
18
SELECTED HISTORICAL FINANCIAL INFORMATION FOR FIRST FEDERAL
AT OR FOR THE
THREE MONTHS ENDED
DECEMBER 31, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
-------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL CONDITION DATA:
Total assets $76,450 $69,377 $68,967 $70,986 $67,620 $65,136 $62,396
Investment securities available-for sale 928 604 755 659 347 791 610
Investment securities held-to-maturity 6,479 3,517 4,879 2,880 2,179 2,317 3,310
Mortgage-backed securities available for 3,955 6,181 5,440 6,363 4,411 4,703 5,618
sale
Mortgage-backed securities held-to 3,256 4,060 3,379 4,296 3,876 4,443 5,269
maturity
Loans receivable, net 52,137 51,699 49,707 52,275 53,417 49,703 44,643
Deposits 57,557 50,095 49,750 51,116 46,366 47,743 45,437
FHLB advances 9,052 10,153 9,612 10,837 11,690 7,846 7,004
Total equity, substantially restricted 9,219 8,785 9,123 8,710 9,286 9,283 9,651
OPERATING DATA:
Interest income $ 1,143 $ 1,221 $ 4,625 $ 5,019 $ 4,748 $ 4,378 $ 4,239
Interest expense 514 701 2,362 3,166 2,873 2,663 2,620
------- ------- ------- ------- ------- ------- -------
Net interest income 629 520 2,263 1,853 1,875 1,715 1,619
Provision for loan losses . 15 16 81 55 23 17 12
------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 614 504 2,182 1,798 1,852 1,698 1,607
------- ------- ------- ------- ------- ------- -------
Noninterest income 58 26 124 128 106 101 145
Noninterest expense 531 406 1,555 1,537 1,440 1,455 1,421
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 141 124 751 389 518 344 331
Income taxes 49 40 249 121 162 104 79
Net income (loss) $ 92 $ 84 $ 502 $ 268 $ 356 $ 240 $ 252
======= ======= ======= ======= ======= ======= =======
PER SHARE DATA:
Basic income (loss) per share $ .21 $ .20 $ 1.17 $ .61 $ .70 $ .45 $ .44
Diluted income (loss) per share .20 .20 1.15 .61 .70 .45 .43
Dividends per share .07 .07 .28 .28 .28 .28 .28
PERFORMANCE RATIOS:
Return on average assets (1) .12% .12% .72% .39% .53% .37% .41%
Return on average equity (2) 1.06 .99 5.55 3.01 3.81 2.58 2.56
Net interest margin (3) .93 .78 3.38 2.79 2.90 2.75 2.72
Operating (noninterest) expense to .69 .57 2.23 2.23 2.15 2.24 2.30
average total assets
Efficiency ratio(4) 77.3 74.4 65.1 77.6 72.7 80.1 80.6
Dividend payout ratio (5) . 33.3 35.0 23.9 45.9 40.0 62.2 63.6
ASSET QUALITY RATIOS:
Nonperforming loans to net loans (6) .96% .37% .45% .40% .41% .30% .27%
Allowance for loan losses to non- 79.72 139.68 131.39 117.54 134.39 168.39 230.40
performing loans
Allowance for loan losses to gross loans .75 .51 .59 .47 .55 .59 .64
- --------------------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Noninterest expense divided by the sum of net interest income and
noninterest income.
(5) Dividends paid divided by net income per basic share.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis and
loans greater than 90 days delinquent.
19
SUMMARY SELECTED PRO FORMA COMBINED DATA
The following table shows selected financial information on a pro forma
combined basis giving effect to the merger as if the merger had become effective
at the end of the periods presented, in the case of balance sheet information,
and at the beginning of each period presented, in the case of income statement
information. The pro forma information reflects the purchase method of
accounting.
We anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses and opportunity to
earn more revenue. The pro forma information, while helpful in illustrating the
financial characteristics of the new company under one set of assumptions, does
not reflect these benefits and, accordingly, does not attempt to predict or
suggest future results. It also does not necessarily reflect what the historical
results of the new company would have been had our companies been combined
during these periods.
You should read this summary pro forma information in conjunction with
the information under "Pro Forma Financial Information" and with the historical
information in this document on which it is based.
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
2002 2002
------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED INCOME STATEMENT DATA:
Interest income $13,811 $18,274
Interest expense 5,217 8,763
Net interest income 8,594 9,511
Provision for loan losses 371 430
Net interest income after provision for loan losses 8,223 9,081
Non-interest income 1,345 1,590
Non-interest expense 6,181 7,368
Net income 2,435 2,425
PRO FORMA PER SHARE DATA:
Basic net income $ 1.92 $ 1.88
Diluted net income 1.79 1.78
DECEMBER 31,
2002
--------------
(IN THOUSANDS)
PRO FORMA COMBINED BALANCE SHEET DATA:
Total assets $310,215
Loans receivable, net 232,539
Deposits 233,743
Total stockholders' equity 30,193
20
MARKET PRICE AND DIVIDEND INFORMATION
Classic common stock is listed on the Nasdaq SmallCap Market under the
symbol "CLAS." First Federal common stock is listed on the OTC Bulletin Board
under the symbol "FFFB."
The following table lists the high and low closing prices per share for
Classic common stock and the high and low bid prices for First Federal common
stock and the cash dividends paid by Classic and First Federal for the periods
indicated.
CLASSIC COMMON STOCK FIRST FEDERAL COMMON STOCK
--------------------------------- -----------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------- ------- --------- -------- ------- ---------
2000
Quarter ended March 31, 2000 $ 11.81 $ 10.00 $ .08 $ 11.00 $ 6.75 $ .07
Quarter ended June 30, 2000 11.12 10.00 .08 7.00 6.75 .07
Quarter ended September 30, 2000 11.12 9.94 .08 11.75 9.12 .07
Quarter ended December 31, 2000 11.87 10.25 .08 11.50 10.81 .07
2001
Quarter ended March 31, 2001 13.94 11.06 .08 11.75 10.81 .07
Quarter ended June 30, 2001 15.50 12.51 .08 11.875 11.10 .07
Quarter ended September 30, 2001 15.42 11.75 .08 12.00 11.55 .07
Quarter ended December 31, 2001 17.24 12.99 .08 13.00 11.55 .07
2002
Quarter ended March 31, 2002 17.60 15.10 .08 15.25 13.25 .07
Quarter ended June 30, 2002 21.70 18.25 .08 15.50 14.11 .07
Quarter ended September 30, 2002 27.80 21.25 .08 15.75 14.35 .07
Quarter ended December 31, 2002 25.50 22.06 .08 23.75 15.00 .07
2003
Quarter ended March 31, 2003 29.66 26.35 .08 26.00 23.50 .07
You should obtain current market quotations for Classic and First
Federal common stock as the market price of these securities will fluctuate
between the date of this document and the date on which the merger is completed,
and thereafter. You can get these quotations from a newspaper, on the Internet
or by calling your broker.
As of ___________ __, 2003, there were approximately _____ holders of
record of Classic common stock. As of ___________ __, 2003, there were
approximately _____ holders of record of First Federal common stock. These
numbers do not reflect the number of persons or entities who may hold their
stock in nominee or "street" name through brokerage firms.
Applicable law limits the ability of First Federal and Classic Bank to
pay dividends to their holding companies. The merger agreement restricts cash
dividends payable on First Federal common stock pending consummation of the
merger. Also, the boards of directors anticipate coordinating the dividend
record and payment dates for the common stock of the two companies with the
intention that First Federal's stockholders do not receive two dividends, or
fail to receive one dividend, for any single quarter with respect to their
21
shares of First Federal stock or shares of Classic received in exchange for
First Federal Stock. See "The Merger Agreement--Conduct of Business Before the
Merger."
Following the merger, the declaration of dividends will be at the
discretion of Classic's board of directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of Classic, applicable state law and government regulations
and other factors deemed relevant by Classic's board of directors.
THE CLASSIC SPECIAL MEETING
GENERAL
This joint proxy statement/prospectus is being furnished to Classic
stockholders in connection with the solicitation of proxies by the Classic board
of directors to approve and adopt the merger agreement and the merger.
PLACE, DATE AND TIME
The meeting will be held at the Classic Bank Annex located at 340 17th
Street, Ashland, Kentucky 41101 on ___________ __, 2003, at __:__ _.m, local
time.
PURPOSE OF THE MEETING
The purpose of the meeting is to consider and vote on a proposal to
approve and adopt the merger agreement and to act on any other matters brought
before the meeting.
WHO CAN VOTE AT THE MEETING; RECORD DATE
You are entitled to vote your Classic common stock if the records of
Classic showed that you held your shares as of the close of business on
___________ __, 2003. As of the close of business on that date, a total of
__________ shares of Classic common stock were outstanding. Each share of common
stock has one vote.
ATTENDING THE MEETING
If you are a beneficial owner of Classic common stock held by a broker,
bank or other nominee (i.e., in "street name"), you will need proof of ownership
to be admitted to the meeting. A recent brokerage statement or letter from a
bank or broker are examples of proof of ownership. If you want to vote your
shares of Classic common stock held in street name in person at the meeting, you
will have to get a written proxy in your name from the broker, bank or other
nominee who holds your shares.
22
QUORUM AND VOTE REQUIRED
QUORUM. The special meeting will be held if one-third of the
outstanding shares of common stock entitled to vote is represented in person or
by proxy at the meeting. If you return valid proxy instructions or attend the
meeting in person, your shares will be counted for purposes of determining
whether there is a quorum, even if you abstain from voting. Broker non-votes
also will be counted for purposes for determining the existence of a quorum. A
broker non-vote occurs when a broker, bank or other nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner. Under applicable rules,
brokers, banks and other nominees may not exercise their voting discretion on
the proposal to approve and adopt the merger agreement and, for this reason, may
not vote shares held for beneficial owners without specific instructions from
the beneficial owners.
QUORUM. The special meeting will be held if one-third of the
outstanding shares of common stock entitled to vote is represented in person or
by proxy at the meeting. If you return valid proxy instructions or attend the
meeting in person, your shares will be counted for purposes of determining
whether there is a quorum, even if you abstain from voting. Broker non-votes
also will be counted for purposes for determining the existence of a quorum. A
broker non-vote occurs when a broker, bank or other nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner. Under applicable rules,
brokers, banks and other nominees may not exercise their voting discretion on
the proposal to approve and adopt the merger agreement and, for this reason, may
not vote shares held for beneficial owners without specific instructions from
the beneficial owners.
VOTE REQUIRED. Approval and adoption of the merger agreement requires
the affirmative vote of the holders of at least a majority of the outstanding
shares of Classic common stock entitled to vote at the meeting. FAILURE TO
RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT. Abstentions and broker non-votes
will have the same effect as a vote against the merger agreement.
SHARES HELD BY CLASSIC OFFICERS AND DIRECTORS AND BY FIRST FEDERAL
As of ___________ __, 2003, directors and executive officers of Classic
beneficially owned ________ shares of Classic common stock, not including shares
that may be acquired upon the exercise of stock options. This equals ____% of
the outstanding shares of Classic common stock. As of the same date, none of
First Federal, nor any of its directors and executive officers beneficially
owned any shares of Classic common stock except for the spouse of Mr. Rambacher
who owned 100 such shares.
VOTING BY PROXY
The board of directors of Classic is sending you this document for the
purpose of requesting that you allow your shares of Classic common stock to be
represented at the special meeting by the persons named in the enclosed proxy
card. All shares of Classic common stock represented at the meeting by properly
executed proxies will be voted in accordance with the instructions indicated on
the proxy card. If you sign and return a proxy card without giving voting
instructions, your shares will be voted as recommended by Classic's board of
directors. Classic's board of directors unanimously recommends a vote "FOR"
approval of the merger agreement.
If any matters not described in this document are properly presented at
the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares. This includes a motion to adjourn
or postpone the meeting in order to solicit additional proxies. However, no
23
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in favor
of the merger agreement. Classic does not know of any other matters to be
presented at the meeting.
If your Classic common stock is held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Your broker or bank may allow you to deliver
your voting instructions via the telephone or the Internet. Please see the
instruction form that accompanies this document.
24
REVOCABILITY OF PROXIES
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of Classic in
writing before your common stock has been voted at the special meeting, deliver
proxy instructions with a later date, or attend the meeting and vote your shares
in person. Attendance at the special meeting will not in itself constitute
revocation of your proxy.
SOLICITATION OF PROXIES
Classic will pay the cost of this proxy solicitation. In addition to
soliciting proxies by mail, directors, officers and employees of Classic may
solicit proxies personally and by telephone. None of these persons will receive
additional or special compensation for soliciting proxies. Classic will, upon
request, reimburse brokers, banks and other nominees for their expenses in
sending proxy materials to their customers who are beneficial owners and
obtaining their voting instructions.
PARTICIPANTS IN CLASSIC'S ESOP
If you participate in the Classic Bank Employee Stock Ownership Plan,
you will receive a voting instruction form that reflects all shares you may vote
under the plan. Under the terms of the employee stock ownership plan, all shares
held in the employee stock ownership plan are voted by the employee stock
ownership plan trustees, but each participant in the employee stock ownership
plan may direct the trustees how to vote the shares of Classic common stock
allocated to his or her employee stock ownership plan account. Unallocated
shares of Classic common stock held by the employee stock ownership plan trust
and allocated shares for which no timely voting instructions are received will
be voted by the trustees in the same proportion as shares for which the trustees
have received voting instructions, subject to the exercise of their fiduciary
duties. The deadline for returning your voting instructions to the trustees is
________________.
THE FIRST FEDERAL SPECIAL MEETING
GENERAL
This joint proxy statement/prospectus is being furnished to First
Federal stockholders in connection with the solicitation of proxies by the First
Federal board of directors to approve and adopt the merger agreement and the
merger.
SPECIAL MEETING OF FIRST FEDERAL STOCKHOLDERS
PLACE, DATE AND TIME
The special meeting of First Federal's stockholders will be held at
_______________________ on June __, 2003, at __:__ _.m, local time.
PURPOSE OF THE MEETING
The purpose of the meeting is to consider and vote on a proposal to
approve and adopt the merger agreement and to act on any other matters brought
before the meeting.
25
WHO CAN VOTE AT THE MEETING; RECORD DATE
You are entitled to vote your First Federal common stock if the records
of First Federal showed that you held your shares as of the close of business on
___________ __, 2003. As of the close of business on that date, a total of
__________ shares of First Federal common stock were outstanding. Each share of
common stock has one vote.
ATTENDING THE MEETING
If you are a beneficial owner of First Federal common stock held by a
broker, bank or other nominee (i.e., in "street name"), you will need proof of
ownership to be admitted to the meeting. A recent brokerage statement or letter
from a bank or broker are examples of proof of ownership. If you want to vote
your shares of First Federal common stock held in street name in person at the
meeting, you will have to get a written proxy in your name from the broker, bank
or other nominee who holds your shares.
QUORUM AND VOTE REQUIRED
QUORUM. The special meeting will be held if a majority of the
outstanding shares of common stock entitled to vote is represented in person or
by proxy at the meeting. If you return valid proxy instructions or attend the
meeting in person, your shares will be counted for purposes of determining
whether there is a quorum, even if you abstain from voting. Broker non-votes
also will be counted for purposes for determining the existence of a quorum. A
broker non-vote occurs when a broker, bank or other nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to that item and has not
received voting instructions from the beneficial owner. Under applicable rules,
brokers, banks and other nominees may not exercise their voting discretion on
the proposal to approve and adopt the merger agreement and, for this reason, may
not vote shares held for beneficial owners without specific instructions from
the beneficial owners.
VOTE REQUIRED. Approval and adoption of the merger agreement requires
the affirmative vote of the holders of at least a majority of the outstanding
shares of First Federal common stock entitled to vote at the meeting. FAILURE TO
RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT. Abstentions and broker non-votes
will have the same effect as a vote against the merger agreement.
SHARES HELD BY FIRST FEDERAL OFFICERS AND DIRECTORS AND BY CLASSIC
As of ___________ __, 2003, directors and executive officers of First
Federal beneficially owned ________ shares of First Federal common stock, not
including shares that may be acquired upon the exercise of stock options. This
equals ____% of the outstanding shares of First Federal common stock. As of the
same date, none of Classic or any of its directors and executive officers
beneficially owned any shares of First Federal common stock. All of the First
Federal directors entered into voting agreements with Classic to vote all shares
of First Federal common stock owned by them in favor of the proposal to approve
the merger agreement.
VOTING BY PROXY
The board of directors of First Federal is sending you this document
for the purpose of requesting that you allow your shares of First Federal common
stock to be represented at the special meeting by the persons named in the
enclosed proxy card. All shares of First Federal common stock represented at the
meeting by properly executed proxies will be voted in accordance with the
instructions indicated on the proxy card. If you sign and return a proxy card
without giving voting instructions, your shares will be voted as recommended by
First Federal's board of directors. First Federal's board of directors
unanimously recommends a vote "FOR" approval of the merger agreement.
26
If any matters not described in this document are properly presented at
the special meeting, the persons named in the proxy card will use their own
judgment to determine how to vote your shares. This includes a motion to adjourn
or postpone the meeting in order to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in favor
of the merger agreement. First Federal does not know of any other matters to be
presented at the meeting.
If your First Federal common stock is held in street name, you will
receive instructions from your broker, bank or other nominee that you must
follow in order to have your shares voted. Your broker or bank may allow you to
deliver your voting instructions via the telephone or the Internet. Please see
the instruction form that accompanies this document.
REVOCABILITY OF PROXIES
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of First
Federal in writing before your common stock has been voted at the special
meeting, deliver proxy instructions with a later date, or attend the meeting and
vote your shares in person. Attendance at the special meeting will not in itself
constitute revocation of your proxy.
SOLICITATION OF PROXIES
First Federal will pay the cost of this proxy solicitation. In addition
to soliciting proxies by mail, directors, officers and employees of First
Federal may solicit proxies personally and by telephone. None of these persons
will receive additional or special compensation for soliciting proxies. First
Federal will, upon request, reimburse brokers, banks and other nominees for
their expenses in sending proxy materials to their customers who are beneficial
owners and obtaining their voting instructions. First Federal has retained
__________________ to assist in soliciting proxies for a fee of $_________ plus
reimbursable expenses.
PARTICIPANTS IN FIRST FEDERAL'S ESOP
If you participate in the First Federal Savings Bank of Ironton
Employee Stock Ownership Plan, you will receive a voting instruction form that
reflects all shares you may vote under the plan. Under the terms of the employee
stock ownership plan, all shares held in the employee stock ownership plan are
voted by the employee stock ownership plan trustees, but each participant in the
employee stock ownership plan may direct the trustees how to vote the shares of
First Federal common stock allocated to his or her employee stock ownership plan
account. Unallocated shares of First Federal common stock held by the employee
stock ownership plan trust and allocated shares for which no timely voting
instructions are received will be voted by the trustees in the same proportion
as shares for which the trustees have received voting instructions, subject to
the exercise of their fiduciary duties. The deadline for returning your voting
instructions to the trustees is ________________.
27
OWNERSHIP OF CLASSIC COMMON STOCK
The following table provides information as of ___________ __, 2003
with respect to persons known to Classic to be the beneficial owners of more
than 5% of Classic's outstanding common stock. A person may be considered to
beneficially own any shares of common stock over which he or she has, directly
or indirectly, sole or shared voting or investing power.
PERCENT OF
NAME NUMBER OF COMMON STOCK
AND ADDRESS SHARES OWNED OUTSTANDING
- ---------------------- ------------ ------------
Classic Bancshares, Inc.
Employee Stock Ownership Plan _______(1) ______%
344 Seventeenth Street
Ashland, Kentucky 41101
National City Corp. 84,050(2) 7.6%
1900 East Ninth Street
Cleveland, Ohio 44114
Tontine Financial Partners, L.P 93,200(3) 8.4%
200 Park Avenue, Suite 3900
New York, NY 10166
- ---------------------------------------
(1) The amount reported represents shares held by Classic's Employee Stock
Ownership Plan ("ESOP"), _________ of which have been allocated to accounts
of participants. First Bankers Trust Company, N.A., Quincy, Illinois, the
trustee of the ESOP, may be deemed to beneficially own the shares held by
the ESOP which have not been allocated to accounts of participants.
Participants in the ESOP are entitled to instruct the trustee as to the
voting of shares allocated to their accounts under the ESOP. Unallocated
shares held by the ESOP are voted by the trustee in the same manner that the
trustee is instructed to vote by a majority of the plan participants who
instruct the trustee as to the manner of voting the shares allocated to
their plan accounts.
(2) As reported by National City Corp. in a statement as of January 29, 2003 on
Schedule 13G/A under the Exchange Act. National City Corp. reported shared
dispositive power over 84,050 shares.
(3) As reported by Tontine Financial Partners, L.P., Tontine Managements,
L.L.C., and Jeffrey L. Gendell in a statement as of February 4, 2003 on
Schedule 13G/A under the Exchange Act. Tontine Financial Partners, L.P.,
Tontine Management, L.L.C. and Jeffrey L. Gendell reported shared power to
vote or direct the vote of 93,200 shares.
28
The following table provides information about the shares of Classic
common stock beneficially owned by each director and by all directors and
executive officers of Classic as a group as of ___________ __, 2003
NUMBER OF SHARES THAT MAY PERCENT OF
NUMBER OF BE ACQUIRED WITHIN 60 COMMON STOCK
NAME SHARES OWNED(1) DAYS BY EXERCISING OPTIONS OUTSTANDING
- --------------------------------------- --------------- -------------------------- -------------
Robert B. Keifer, Jr. ______ ______ _____%
David A. Lang ______ ______ _____%
Robert L. Bayes ______ ______ _____%
Lisah M. Frazier ______ ______ _____%
E.B. Gevedon, Jr. ______ ______ _____%
Robert A. Moyer, Jr. ______ ______ _____%
John W. Clark ______ ______ _____%
C. Cyrus Reynolds ______ ______ _____%
David B. Barbour ______ ______ _____%
Jeffrey P. Lopez ______ ______ _____%
All directors and executive officers as ______ ______ _____%
a group (11 persons)
(1) Amount includes shares held directly as well as shares held jointly with
family members, shares held in retirement accounts, shares allocated to the
ESOP account, shares held in a fiduciary capacity and shares held by certain
family members with respect to which shares the persons listed above may be
deemed to have sole or shared voting and/or dispositive power. The amount
reported above does not include shares awarded as restricted stock under
Classic's 1996 Recognition and Retention Plan (the "RRP") that do not vest
within 60 days of __________, 2003.
29
OWNERSHIP OF FIRST FEDERAL COMMON STOCK
The following table provides information as of ___________ __, 2003
with respect to persons known to First Federal to be the beneficial owners of
more than 5% of First Federal's outstanding common stock. A person may be
considered to beneficially own any shares of common stock over which he or she
has, directly or indirectly, sole or shared voting or investing power.
PERCENT OF
NAME NUMBER OF COMMON STOCK
AND ADDRESS SHARES OWNED OUTSTANDING
----------- -------------- ---------------
First Federal Savings Bank of Ironton
Employee Stock Ownership Plan ________(1) _______%
415 Center Street
Ironton, Ohio 45638-1505
Estate of James E. Waldo
c/o First Federal Financial Bancorp, Inc.
415 Center Street
Ironton, Ohio 45638
Arnold and S. Bleichroeder, Inc.
Arnold and S. Bleichroeder Advisors, Inc.
1345 Avenue of the Americas
New York, NY 10105
Tontine Financial Partners, L.P.
Tontine Management, L.L.C.
Jeffrey L. Gendell
200 Park Avenue, Suite 3900
New York, NY 10166
- -----------------------
(1) As of __________ __, 2003, _______ shares have been allocated to
participants' accounts. The trustees of the employee stock ownership plan
are Messrs. Thomas D. Phillips, Edward R. Rambacher and I. Vincent Rice. See
"Special Meeting of First Federal Stockholders-Participants in ESOP" for a
discussion of the employee stock ownerships plan's voting procedures.
The following table provides information about the shares of First
Federal common stock beneficially owned by each director and by all directors
and executive officers of First Federal as a group as of ___________ __, 200_.
NUMBER OF SHARES THAT
MAY BE ACQUIRED WITHIN PERCENT OF
NUMBER OF 60 DAYS BY EXERCISING COMMON STOCK
NAME SHARES OWNED(1) OPTIONS OUTSTANDING
- --------------------------------------- --------------- ---------------------- ------------
Thomas D. Phillips ______ ______ _____%
I. Vincent Rice ______ ______ _____%
Edith M. Daniels ______ ______ _____%
Steven C. Milleson ______ ______ _____%
Edward R. Rambacher ______ ______ _____%
All directors and executive officers as ______ ______ _____%
a group (6 persons)
- -----------------------
(1) Amount includes shares held directly as well as shares held jointly with
family members, shares held in retirement accounts, shares allocated to the
named individual's ESOP accounts, shares held in a fiduciary capacity and
shares held by certain family members with respect to which shares the
persons listed above may be deemed to have sole or shared voting and/or
dispositive power.
30
THE MERGER
The detailed terms of the merger are contained in the merger agreement
attached as Annex A to this joint proxy statement/prospectus. The following
discussion and the discussion under "The Merger Agreement" describe certain
aspects of the merger and terms of the merger agreement. These descriptions are
qualified by reference to such merger agreement. We encourage you to read the
merger agreement carefully.
THE PARTIES TO THE MERGER
FIRST FEDERAL FINANCIAL BANCORP, INC. First Federal was organized as a
Delaware business corporation in 1996 to be the savings and loan holding company
for First Federal Savings Bank of Ironton in connection with the conversion of
First Federal from mutual to stock form of ownership. The conversion was
completed on June 3, 1996. As a savings and loan holding company, First Federal
is subject to regulation by the Office of Thrift Supervision. Since its
formation, First Federal's primary activity has been to direct and coordinate
the business of First Federal Savings Bank of Ironton.
First Federal Savings Bank of Ironton is a federally chartered savings
bank located in Ironton, Ohio. First Federal Savings Bank is regulated by the
OTS and its deposits are insured by the FDIC. First Federal Savings Bank
conducts business in Ohio from two offices in Ironton and one office in
Procterville, Ohio. First Federal Savings Bank is primarily engaged in
attracting deposits from the general public and using these funds to originate
loans secured by single family residences limited in Lawrence County and
surrounding counties in Southern Ohio and to invest in mortgage backed
securities and United States Government and federal agency securities. To a
lesser extent, First Federal Savings Bank also makes consumer loans and loans
secured by savings accounts. In October 2002, First Federal Savings Bank
completed the acquisition of Lincoln Savings and Loan Association.
For information on First Federal's business and financial statements
and a discussion of First Federal's recent results of operations, see its
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2002 and its
Annual Report on Form 10-KSB for the year ended September 30, 2002, all of which
are attached as Annex F.
CLASSIC BANCSHARES, INC. Classic was organized as a Delaware business
corporation in 1995 to be the holding company for Classic Bank in connection
with the conversion of Classic Bank from mutual to stock form of ownership. The
conversion was completed on December 28, 1995. As a financial holding company,
Classic is subject to regulation by the Federal Reserve. Since its formation,
Classic's principal activity has been to direct and coordinate the business of
Classic Bank.
Classic Bank is a Kentucky chartered commercial bank headquartered in
Ashland, Kentucky . Classic Bank is regulated by the KDFI and its deposits are
insured by the FDIC. Classic Bank conducts business from its main office in
Ashland, Kentucky and seven branch offices located in Boyd, Carter, Greenup and
Johnson Counties, Kentucky. Classic's business involves attracting deposits from
the general public and using such deposits, together with other funds, to
originate primarily consumer, commercial business, commercial real estate, one-
to four-family residential mortgages, and to a lesser extent multi-family and
construction loans primarily in its market area. Classic also invests in
mortgage-backed and related securities, taxable and tax-exmpt investment
securities and other permissible investments.
For financial statements of Classic and a discussion of Classic's
recent results of operations, see Classic's Quarterly Report on Form 10-QSB for
the quarter ended December 31, 2002, its Annual Report to stockholders for 2002
and its Proxy Statement for its 2002 Annual Meeting of Shareholders, all of
which are attached as Annex E.
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FORM OF THE MERGER
The First Federal and the Classic boards of directors each have
unanimously approved a merger agreement that provides for the merger of First
Federal with and into Classic. Classic will survive the merger. Upon completion
of the merger, each share of First Federal common stock will be converted into
the right to receive, at the election of the holder and subject to certain
restrictions, either $24.00 in cash or a number of shares of Classic common
stock established by a formula in the merger agreement. The common stock of
Classic will continue to trade on the Nasdaq SmallCap Market under the symbol
"CLAS" after completion of the merger.
CONVERSION OF FIRST FEDERAL COMMON STOCK
If the merger becomes effective, each share of First Federal common
stock issued and outstanding immediately prior to the completion of the merger
will automatically be converted into the right to receive, at the holder's
election and subject to certain restrictions, either (a) $24.00 in cash without
interest or (b) shares of Classic common stock and cash instead of fractional
shares. A First Federal stockholder's receipt of either cash and/or stock,
however, is subject to the allocation and proration procedures as well as other
provisions in the merger agreement. See "-Cash or Stock Election."
CASH OR STOCK ELECTION
Under the terms of the merger agreement, First Federal stockholders may
elect to convert their shares into cash, Classic common stock or a mixture of
cash and Classic common stock. All elections of First Federal stockholders are
further subject to the allocation and proration procedures described in the
merger agreement. These procedures provide that the number of shares of First
Federal common stock to be converted into Classic common stock in the merger
must be 50% of the total number of shares of First Federal common stock issued
and outstanding on the date of the merger and that the total value of the stock
portion of the merger consideration must be equal to at least 45% of the merger
consideration. We are not making any recommendation as to whether First Federal
stockholders should elect to receive cash or Classic common stock in the merger.
Each holder of First Federal common stock must make his or her own decision with
respect to such election.
It is unlikely that elections will be made in the exact proportions
provided for in the merger agreement. As a result, the merger agreement
describes procedures to be followed if First Federal stockholders in the
aggregate elect to receive more or less of the Classic common stock than Classic
has agreed to issue. These procedures are summarized below.
o IF STOCK IS OVERSUBSCRIBED: If First Federal stockholders elect to
receive more Classic common stock than Classic has agreed to issue
in the merger, then all First Federal stockholders who have elected
to receive cash or who have made no election will receive cash for
their First Federal shares and all stockholders who elected to
receive Classic common stock will receive a pro rata portion of the
available Classic shares plus cash for those shares not converted
into Classic common stock.
o IF STOCK IS UNDERSUBSCRIBED: If First Federal stockholders elect to
receive fewer shares of Classic common stock than Classic has
agreed to issue in the merger, then all First Federal stockholders
who have elected to receive Classic common stock will receive
Classic common stock and those stockholders who elected to receive
cash or who have made no election will be treated in the following
manner:
o If the number of shares held by First Federal stockholders
who have made no election is sufficient to make up the
shortfall in the number of Classic shares that Classic is
32
required to issue, then all First Federal stockholders who
elected cash will receive cash, and those stockholders who
made no election will receive both cash and Classic common
stock in whatever proportion is necessary to make up the
shortfall.
o If the number of shares held by First Federal stockholders
who have made no election is insufficient to make up the
shortfall, then all First Federal stockholders who made no
election will receive Classic common stock and those First
Federal stockholders who elected to receive cash will
receive cash and Classic common stock in whatever
proportion is necessary to make up the shortfall.
Notwithstanding these rules, as described under "--Tax Consequences for
First Federal Stockholders," it may be necessary for Classic to reduce the
number of shares of First Federal common stock that will be converted into the
right to receive cash and correspondingly increase the number of shares of First
Federal common stock that will be converted into Classic common stock. If this
adjustment is necessary, stockholders who elect to receive cash or a mixture of
cash and stock may be required on a pro rata basis to receive a greater amount
of Classic common stock than they otherwise would have received.
NO GUARANTEE CAN BE MADE THAT YOU WILL RECEIVE THE AMOUNTS OF CASH
AND/OR STOCK YOU ELECT. AS A RESULT OF THE ALLOCATION PROCEDURES AND OTHER
LIMITATIONS OUTLINED IN THIS DOCUMENT AND IN THE MERGER AGREEMENT, YOU MAY
RECEIVE CLASSIC COMMON STOCK OR CASH IN AMOUNTS THAT VARY FROM THE AMOUNTS YOU
ELECT TO RECEIVE.
ELECTION PROCEDURES; SURRENDER OF STOCK CERTIFICATES
An election form is being mailed separately from this joint proxy
statement/prospectus to holders of shares of First Federal common stock on or
about the date this joint proxy statement/prospectus is being mailed. Each
election form entitles the holder of the First Federal common stock to elect to
receive cash, Classic common stock, or a combination of cash and stock, or make
no election with respect to the merger consideration you wish to receive.
American Stock Transfer and Trust Company, Inc. will act as exchange
agent in the merger and in that role will process the exchange of First Federal
stock certificates for cash and/or Classic common stock. TO MAKE AN EFFECTIVE
ELECTION, YOU MUST SUBMIT A PROPERLY COMPLETED ELECTION FORM, ALONG WITH YOUR
FIRST FEDERAL STOCK CERTIFICATES REPRESENTING ALL SHARES OF FIRST FEDERAL COMMON
STOCK COVERED BY THE ELECTION FORM (OR AN APPROPRIATE GUARANTEE OF DELIVERY) TO
AMERICAN STOCK TRANSFER AND TRUST COMPANY, INC. ON OR BEFORE 5:00 P.M., EASTERN
STANDARD TIME, ON ____________, 2003. Shortly after the merger, the exchange
agent will allocate cash and stock among First Federal stockholders, consistent
with their elections and the allocation and proration procedures. If you do not
submit an election form, you will receive instructions from the exchange agent
on where to surrender your First Federal stock certificates after the merger is
completed. IN ANY EVENT, DO NOT FORWARD YOUR FIRST FEDERAL STOCK CERTIFICATES
WITH YOUR PROXY CARDS.
You may change your election at any time prior to the election deadline
by written notice accompanied by a properly completed and signed later dated
election form received by the exchange agent prior to the election deadline or
by withdrawal of your stock certificates by written notice prior to the election
deadline. All elections will be revoked automatically if the merger agreement is
terminated. If you have a preference for receiving either Classic stock and/or
cash for your First Federal stock, you should complete and return the election
form. If you do not make an election, you will be allocated Classic common stock
and/or cash depending on the elections made by other stockholders.
33
We make no recommendation as to whether you should elect to receive
cash, stock or a combination of cash and stock in the merger. You must make your
own decision with respect to your election. Generally, the merger will be a
tax-free transaction for First Federal stockholders to the extent they receive
Classic common stock. See "-Tax Consequences for First Federal Stockholders."
If certificates for First Federal common stock are not immediately
available or you are unable to send the election form and other required
documents to the exchange agent prior to the election deadline, First Federal
shares may be properly exchanged, and an election will be effective, if:
o such exchanges are made by or through a member firm of a registered
national securities exchange or of the National Association of
Securities Dealers, Inc., or by a commercial bank or trust company
having an office, branch or agency in the United States;
o the exchange agent receives, prior to the election deadline, a
properly completed and duly executed notice of guaranteed delivery
substantially in the form provided with the election form
(delivered by hand, mail, telegram, telex or facsimile
transmission); and
o the exchange agent receives, within three business days after the
election deadline, the certificates for all exchanged First Federal
shares, or confirmation of the delivery of all such certificates
into the exchange agent's account with The Depository Trust Company
in accordance with the proper procedures for such transfer,
together with a properly completed and duly executed election form
and any other documents required by the election form.
First Federal stockholders who do not submit a properly completed
election form or revoke their election form prior to the election deadline will
have their shares of First Federal common stock designated as non-election
shares. First Federal stock certificates represented by elections that have been
revoked will be promptly returned without charge to the First Federal
stockholder revoking the election upon written request.
After the completion of the merger, the exchange agent will mail to
First Federal stockholders who do not submit election forms or who have revoked
such forms a letter of transmittal, together with instructions for the exchange
of their First Federal common stock certificates for the merger consideration.
Until you surrender your First Federal stock certificates for exchange after
completion of the merger, you will not be paid dividends or other distributions
declared after the merger with respect to any Classic common stock into which
your First Federal shares have been converted. When you surrender your First
Federal stock certificates, Classic will pay any unpaid dividends or other
distributions, without interest. After the completion of the merger, there will
be no further transfers of First Federal common stock. First Federal stock
certificates presented for transfer after the completion of the merger will be
canceled and exchanged for the merger consideration.
If your First Federal stock certificates have been either lost, stolen
or destroyed, you will have to prove your ownership of these certificates and
that they were lost, stolen or destroyed before you receive any consideration
for your shares. Upon request, either American Stock Transfer and Trust Company,
Inc. or First Federal's transfer agent, Registrar and Transfer Company, will
send you instructions on how to provide evidence of ownership.
TREATMENT OF FIRST FEDERAL STOCK OPTIONS
At the effective time of the merger, each outstanding option to
purchase shares of First Federal common stock, whether or not vested, shall be
cancelled and cash holders shall be entitled to receive cash equal to the number
of his stock options times the excess of $24.00 over the applicable exercise
price per share.
34
TREATMENT OF FIRST FEDERAL STOCK AWARDS
At the effective time of the merger, each share of restricted stock
outstanding at the effective time and issued pursuant to the First Federal
Recognition and Retention Plan and Trust and its 2002 Director Stock Plan, to
the extent not already vested, will vest and will represent a right to receive
the merger consideration.
BACKGROUND OF THE MERGER
CLASSIC
Classic's board of directors meets regularly to review various
strategic options available to enhance the value of its franchise. Among the
items considered is the possible acquisition of other institutions. In
connection therewith, Classic from time to time uses a financial model to assess
the impact on Classic and its shareholders of acquisitions of other institutions
at various prices.
In view of the proximity of Ironton, Ohio to Ashland, Kentucky,
Classic's board of directors had long considered opening an office in Ironton
either through a de novo branch or the acquisition of another institution. For
this reason, the senior management at Classic had made a point of becoming
acquainted with the senior management of First Federal.
During the summer of 2002, as a part of Classic's continued expansion
strategy, the board of directors and management undertook a detailed analysis of
the impact of a merger with First Federal. In connection therewith, Classic's
President, David B. Barbour, had several informal discussions with Vince Rice,
the President of First Federal, during this period. On August 27, 2002, Classic
sent a letter of interest to First Federal proposing a merger between the two
institutions.
FIRST FEDERAL
Periodically, the First Federal board of directors has reviewed its
performance, compared its performance to other relatively comparable publicly
traded institutions in the banking and thrift industries, reviewed market
activity in First Federal's common stock, considered various business
opportunities and strategies available to First Federal and discussed the
general economic, regulatory, competitive and business pressures affecting First
Federal and First Federal Savings Bank of Ironton. In addition, the First
Federal board of directors, on an informal basis and during strategic planning
sessions, has periodically review merger and acquisition activity in the thrift
and banking industry.
David Barbour, President and Chief Executive Officer of Classic, sent a
letter, dated August 27, 2002, to I. Vincent Rice, President and Chief Executive
Officer of First Federal, which set forth a merger proposal whereby Classic
would acquire First Federal in exchange for cash and Classic common stock. In
late September 2002, Mr. Rice spoke with Mr. Barbour via telephone. At the
conclusion of the discussion, Mr. Rice and Mr. Barbour agreed there was a
mutuality of interest based on their conversation and that the parties should
continue to discuss the merits and acceptable terms of a possible. On September
12, 2002, the board of directors of First Federal met to discuss the proposed
merger transaction. After discussing the general terms of Classic's merger
proposal, First Federal's board of directors determined to engage Keller & Co.
to serve as financial advisor to First Federal in connection with the board's
evaluation of Classic's merger proposal.
On October 2, 2002, Keller presented its analysis of Classic's merger
offer and First Federal's valuation generally to First Federal's board of
directors. Based upon Keller's analysis that First Federal's valuation supported
an offering price higher than the price offered by Classic, the board of
directors authorized Keller to communicate its analysis to Mr. Barbour and
Keefe, Bruyette & Woods, Inc., Classic's financial advisor. Classic considered
the analysis prepared by Keller and responded by increasing its offering price,
35
subject to a due diligence review.
Classic completed its due diligence review in late October and
subsequently increased its offer price. On October 31, 2002, First Federal's
board of directors met to discuss the proposed merger and the increased merger
consideration offered by Classic. At the meeting, First Federal's board of
directors communicated its willingness to proceed with the negotiation of a
definitive merger agreement.
On November 18, 2002, a draft of the proposed merger agreement was
provided by Classic's legal counsel. First Federal's legal counsel reviewed the
proposed merger agreement with First Federal's board of directors on November 25
and 26, 2002. Additional negotiations between the parties ensued, with First
Federal holding board meetings to consider various business points under the
definitive merger agreement on December 10 and 19, 2002. On December 30, 2002,
Keller made a presentation to First Federal's board of directors with respect to
the financial analysis of the proposed merger, and delivered an oral opinion
that the merger consideration offered by Classic was fair from a financial point
of view to First Federal's shareholders, which was subsequently confirmed by
Keller in writing. The First Federal board of directors considered the terms of
the merger agreement, the potential advantages and risks associated with the
merger, and the financial analysis of Keller. Following the discussion, by the
unanimous vote of the directors, the First Federal board approved the merger
agreement. First Federal and Classic executed the merger agreement the evening
of December 30, 2002. A joint press release was issued on the morning of
December 31, 2002.
REASONS FOR THE MERGER
CLASSIC
The Classic board of directors believes that the merger agreement and
the merger are in the best interests of Classic and its stockholders.
Accordingly, the members of the Classic board of directors unanimously approved
and adopted the merger agreement and recommends approval of the issuance of
shares of Classic common stock in connection with the merger. In reaching its
decision, the board of directors consulted with Classic's management, legal
counsel and Keefe, Bruyette & Woods, Inc., Classic's financial advisor. The
Classic board of directors considered a number of factors, to which relative
weights were not assigned, including the following:
o the business, operations, financial condition and earnings of
Classic on a historical and a prospective basis and of the combined
company on a pro forma basis;
o an extensive analysis of the effect of the merger on the value of
Classic's common stock;
o the complementary nature of the businesses of Classic and First
Federal;
o the ability of the combined company to leverage expenses and to
achieve cost savings, operating efficiencies and opportunities for
revenue enhancement;
o the terms of the merger agreement including the provisions
protecting Classic against a termination of the agreement;
o the opinion of Keefe, Bruyette & Woods that the merger
consideration to be paid to the First Federal stockholders is fair,
from a financial point of view, to the holders of Classic common
stock;
o the value of First Federal based on various pricing ratios and
other data in comparison with the value of other thrift
institutions in recent merger deals;
36
o the results of the due diligence investigations of First Federal
conducted by management and Classic's financial and legal advisors;
o the familiarity of the Classic board with and review of First
Federal's business, operations, financial condition and earnings on
an historical and a prospective basis;
o the current and prospective economic and regulatory environment,
burdens and constraints affecting banking organizations such as
Classic and First Federal and the changing competitive environment
for banking services; and
o the probable impact of the merger on customers and employees and
the communities and business served by Classic and First Federal.
There are numerous factors other than the merger that could cause
Classic's results of operations, including, among other things, earnings per
share, to increase or decrease after the merger. Therefore, we cannot assure you
that the anticipated benefits of the merger discussed in the previous paragraphs
will happen. You should read "Risk Factors" on pages __ through __ and "A
Warning About Forward-Looking Statements" on pages __ through __ for a
discussion of the factors that could affect Classic's future operations and
financial condition.
Classic's board of directors has unanimously approved the merger
agreement and recommends that Classic stockholders vote "FOR" the approval of
the merger agreement.
FIRST FEDERAL
First Federal's board of directors believes that the terms of the
merger agreement, which are the product of arm's length negotiations between
First Federal and Classic, are in the best interests of First Federal's
stockholders. In the course of reaching its determination, First Federal's board
of directors considered the following factors, among others:
o the amount of the merger consideration to be paid to First Federal's
stockholders in relation to the market value, book value and earnings
per share of First Federal's common stock,
o information concerning First Federal's financial condition, results of
operations, capital levels, asset quality and prospects,
o industry and economic conditions,
o the form of the merger consideration offered by Classic which provides
First Federal's stockholders with the flexibility of choosing to
receive either cash or stock consideration, within certain limitations,
o the opinion of First Federal's financial advisor as to the fairness of
the merger consideration from a financial point of view to the holders
of First Federal's common stock,
o the general structure of the transaction and the compatibility of
management and business philosophy,
o the greater resources and product offerings that Classic will have
after the merger than First Federal currently has,
o the impact of the merger on the depositors, employees, customers and
communities served by First Federal through expanded commercial,
consumer and retail banking products and services,
37
o the results of First Federal's due diligence investigation of Classic,
including the likelihood of receiving the requisite regulatory
approvals in a timely manner,
o the ability of Classic after the merger to compete in relevant banking
and non-banking markets, and
o First Federal's strategic alternatives to the merger, including the
continued operation of First Federal as an independent financial
institution.
In making its determination, the First Federal board of directors did
not ascribe any relative or specific weights to the factors that it considered.
The foregoing discussion of the factors considered by the First Federal board of
directors is not intended to be exhaustive, but it does include the material
factors considered by the board.
First Federal's board of directors has unanimously approved the merger
agreement and recommends that First Federal stockholders vote "FOR" the approval
of the merger agreement.
EFFECTS OF THE MERGER
Among the reasons for the recommendation of the Classic and First
Federal boards that the stockholders approve the merger agreement and the merger
is their belief that, over the long-term, the merger will be beneficial to
Classic stockholders, including First Federal stockholders who may become
Classic stockholders following completion of the merger. Classic believes that
one of the potential benefits of the merger is that the cost savings that may be
realized by combining the two companies will enhance Classic's earnings.
Classic currently expects to reduce expenses by eliminating areas where
there are redundancies and by combining certain support and other functions
after the merger. Classic believes that it will achieve cost savings by:
o eliminating external data processing costs;
o reducing the ratio of professional fees to revenues;
o achieving economies of scale in advertising and marketing budgets; and
o eliminating certain duplicative "back office" functions.
The amount of any cost savings Classic may realize in 2003 will depend
upon how quickly and efficiently Classic is able to implement the processes
outlined above. However, there can be no assurance as to whether Classic will be
able to achieve any of the above.
Classic also anticipates that the merger will present significant
revenue enhancement opportunities for the combined entity. These opportunities
may result from, among other factors:
o an ability to offer a wider variety of banking products and services to
First Federal's customers; and
o the potential to increase overall market share in the communities
presently served by Classic and First Federal.
38
There can be no assurances that Classic will be able to achieve any of
the above revenue enhancements.
The companies have prepared financial statements that show the combined
operations and financial condition of the two companies as if the merger had
occurred on the date and at the beginning of the periods indicated. These are
known as "pro forma" financial statements. The full pro forma financial
statements are set forth beginning on page ___. However, the pro forma financial
statements do not reflect any anticipated costs savings or revenue enhancements
as we cannot assure you that we will achieve them.
OPINION OF CLASSIC'S INDEPENDENT FINANCIAL ADVISOR
On October 11, 2002, KBW was retained by Classic to evaluate Classic's
strategic alternatives as part of a shareholder enhancement program and to
specifically evaluate Classic's potential strategic affiliation with First
Federal. KBW, as part of its investment banking business, is regularly engaged
in the evaluation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, and distributions of listed and unlisted
securities. KBW is familiar with the market for common stocks of publicly traded
banks, thrifts and bank and thrift holding companies. The Classic Board selected
KBW on the basis of the firm's reputation and its experience and expertise in
transactions similar to the Merger and its prior consultative working
relationship with Classic.
Pursuant to its engagement, KBW was asked to render an opinion as to
the fairness to the Classic shareholders, from a financial point of view, of the
Merger Consideration paid to First Federal shareholders. KBW delivered its
opinion to the Classic Board that, as of December 27, 2002 and as updated to
__________ 2003, the Merger Consideration was fair, from a financial point of
view, to the shareholders of Classic. No limitations were imposed by the Classic
Board upon KBW with respect to the investigations made or procedures followed by
it in rendering its opinion. KBW has consented to the inclusion herein of the
summary of its opinion to the Classic Board and to the reference to the entire
opinion attached hereto as Annex B.
THE FULL TEXT OF THE OPINION OF KBW, WHICH IS ATTACHED AS ANNEX B TO
THIS JOINT PROXY STATEMENT/PROSPECTUS, SETS FORTH CERTAIN ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY KBW, AND SHOULD
BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF KBW SET FORTH IN THIS
JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE OPINION.
In rendering its opinion, KBW (i) reviewed the merger agreement, (ii)
reviewed publicly available information regarding First Federal and Classic that
it deemed relevant, (iii) discussed with senior management and the board of
directors of Classic the current position and prospective outlook for Classic,
(iv) discussed with senior management of First Federal their operations,
financial performance and future plans and prospects, (v) considered historical
quotations, levels of activity and prices of recorded transactions in Classic's
and First Federal's common stock, (vi) reviewed financial and stock market data
of other thrifts in a comparable asset range to First Federal, (vii) reviewed
financial and stock market data of other banks in a comparable asset range to
Classic, (viii) reviewed certain recent business combinations with thrifts as
the acquired company, which KBW deemed comparable in whole or in part, and (ix)
performed other analyses which KBW considered appropriate.
39
ANALYSIS OF RECENT COMPARABLE ACQUISITION TRANSACTIONS.
In rendering its opinion, KBW analyzed certain comparable merger and
acquisition transactions of both pending and completed thrift deals, comparing
the acquisition price relative to tangible book value, last twelve months
earnings, and premium to core deposits. The analysis included a comparison of
the median and mean of the above ratios for pending and completed acquisitions
since January 1 2001, where the seller was a thrift, based on the following
three comparable groups:
(i) to compare the First Federal acquisition to selling thrift
institutions with a similar asset size and transaction value, KBW
reviewed all pending and completed thrift transactions since January
1, 2001 with deal value below $25 million (51 deals). The selling
thrift institutions in this comparative group had a median asset size
and transaction value of $70 million and $10 million, respectively.
The following list details KBW's comparative group of transactions
with a deal value below $25 million:
PENDING DEALS COMPLETED DEALS (CONTINUED) COMPLETED DEALS (CONTINUED)
- ------------------------ ------------------------------ ------------------------------
Algiers Bancorp Inc. Findlay Savings Bank CF Bancshares, Inc.
SFSB Holding Co. Prestige Bancorp Inc. Montgomery Financial Corp.
CBES Bancorp Inc. Massachusetts Fincorp Inc. PS Financial Inc.
Tracy Federal Bank, FSB First American SB, FSB Westcoast S&LA
Family Savings Bank, FSB Bryan-College Station Finl HC Cumberland Mountain Bancshares
Wyman Park Bancorp. CBCT Bancshares Inc. Fed Svgs Bk, Evangeline Parish
Blue River FSB WHG Bancshares Corp. WSB Holding Co.
IBL Bancorp Inc. AmTrust Capital Corp. RFS Bancorp Inc. (MHC)
CFS Bancshares Inc. North Arkansas Bancshares Inc. Ohio State Financial Services
Valley Bancorp Inc. First Colony Bancshares, Inc. Foundation Bancorp Inc.
Morris Plan Savings Bank, SSB Hometown Bank
COMPLETED DEALS Rocky Ford Financial Inc. Perry County Financial Corp.
- ------------------------ Kenwood Bancorp Inc. First Lancaster Bancshares
PFSB Bancorp Inc. Franklin Bank, SSB SWVA Bancshares Inc.
USABancShares.com Inc. Peoples Financial Corp. Tri-County Bancorp Inc.
CGB&L Financial Group Potters Financial Corp. Market Financial Corp.
Lincoln S&LA Quitman Bancorp Inc. Delphos Citizens Bancorp Inc.
American Home Loan Corp. Carnegie Financial Corp. Hardin Bancorp Inc.
(ii) to compare the First Federal acquisition to selling thrift
institutions with a similar capital structure, KBW reviewed all
pending and completed thrift transactions since January 1, 2001 with
tangible equity to assets between 12 and 16% (22 deals). The selling
institutions in this comparative group had an average and median
tangible equity/assets ratio of 13.33% and 13.07%, respectively. The
following list details KBW's comparative group of transactions with
the target in the transaction having a tangible capital ratio between
12% and 16% :
40
PENDING DEALS COMPLETED DEALS (CONTINUED)
- --------------------------- ------------------------------
Algiers Bancorp Inc. CBCT Bancshares Inc.
Empire Federal Bancorp Inc. Community Savings Bankshares
SFSB Holding Co. Bohemian American FS&LA
CBES Bancorp Inc. Innes Street Financial Corp.
American Financial Holdings PS Financial Inc.
Big Foot Financial Corp. WSB Holding Co.
Wyman Park Bancorp. Industrial Bancorp Inc.
IBL Bancorp Inc. Jade Financial Corp.
Perry County Financial Corp.
COMPLETED DEALS FSL Holdings Inc.
- ------------------------------ GSB Financial Corp.
PFSB Bancorp Inc. Cameron Financial Corp.
CGB&L Financial Group
(iii) to compare the First Federal acquisition to selling thrift
institutions with a similar profitability profile, KBW reviewed all
pending and completed thrift transactions since January 1, 2001 with
return on average equity (ROAE) below 7% (50 deals) The selling
institutions in this comparative group had an average and median
return on equity for the trailing 12 month period ended September 30,
2002 of 3.93% and 3.86%, respectively. The following list details
KBW's comparative group of transactions with the target in the
transaction having a ROAE below 7% :
PENDING DEALS COMPLETED DEALS (CONTINUED) COMPLETED DEALS (CONTINUED)
- ------------- --------------------------- ---------------------------
SFSB Holding Co. Franklin Bank, SSB Ohio State Financial Services
Ashburton FS&LA Peoples Financial Corp. Foundation Bancorp Inc.
Big Foot Financial Corp. Quitman Bancorp Inc. First Coastal Corp.
Wyman Park Bancorp. Community Savings Bankshares Jade Financial Corp.
IBL Bancorp Inc. Ambanc Holding Co. First Lancaster Bancshares Inc.
Salt City Hospital FCU Bohemian American FS&LA First Deposit Bancshares Inc.
Valley Bancorp Inc. Carnegie Financial Corp. Augusta Federal Savings Bank
First Community Financial Corp. Century Bancorp Inc.
COMPLETED DEALS Montgomery Financial Corp. SWVA Bancshares Inc.
- --------------- Innes Street Financial Corp. Cohoes Bancorp Inc.
PFSB Bancorp Inc. PS Financial Inc. Money Management Associates
CGB&L Financial Group. Columbia Financial of Kentucky Tri-County Bancorp Inc.
Prestige Bancorp Inc. Ledger Capital Corp. Market Financial Corp.
CBCT Bancshares Inc.. Fed Svgs Bk, Evangeline Parish GSB Financial Corp
WHG Bancshares Corp. WSB Holding Co. Amesbury Co-operative Bank
North Arkansas Bancshares Inc. Ohio Central Savings Delphos Citizens Bancorp Inc.
Rocky Ford Financial Inc. Bank West Financial Corp. Litchfield Bancorp
Kenwood Bancorp Inc.
Cameron Financial Corp.
41
KBW summarized the results of comparative thrift merger and acquisition
transactions and compared the range of values to the consideration received by
First Federal shareholders. The comparative transaction analysis resulted in a
range of values for First Federal based upon comparable thrift merger and
acquisition transactions. KBW derived the average and median pricing metrics of
the three aforementioned comparable groups as stated below:
DEAL PRICE TO
-------------------------------------------------------------------------
TANGIBLE LTM(1) CORE DEPOSITS
BOOK EPS PREMIUM
M&A GROUP 1
Pending Deals with Deal Value between $0 and $25 Million
(# = 10) Average 131.6% 20.0x 5.2%
Median 131.1% 18.3x 5.0%
Completed Deals with Deal Value between $0 and $25 Million
(# = 41) Average 142.9% 29.7x 4.7%
Median 122.1% 25.0x 3.3%
M&A GROUP 2
Pending Deals with Target Equity to Assets between 12 and 16 %
(# = 8) Average 129.5% 24.lx 6.8%
Median 118.4% 25.2x 5.2%
Completed Deals with Target Equity to Assets between 12 and 16 %
(# = 14) Average 123.3% 25.5x 6.5%
Median 122.2% 24.7x 7.3%
M&A GROUP 3
Pending Deals with Target ROAE between 0 and 7 %
(# = 7) Average 126.5% 27.0x 6.2%
Median 131.8% 27.5x 5.6%
Completed Deals with Target ROAE between 0 and 7 %
(# = 43) Average 125.4% 32.6x 5.6%
Median 120.2% 27.6x 5.4%
Set forth below are the low, average, median and high implied values
based upon the above comparative transaction analysis:
Low Value 118.4% 18.4x 3.3%
Average Value 129.9% 26.5x 5.8%
Median Value 122.2% 25.1x 5.3%
High Value 142.9% 32.6x 6.8%
Consideration paid by Classic
$24.00 126.1 27.7x (2) 4.2%
(1) LTM = last twelve months
(2) Pro forma estimate to reflect acquisition of Lincoln Savings and Loan
Association for LTM ended September 30, 2002
42
KBW viewed the three aforementioned comparable groups as the most
appropriate in deriving a comparable transaction value based on First Federal's
size, capital base and earnings. KBW viewed the fact that, each resulting query
based on the above criteria produced in all cases at least 22 transactions with
reported pricing metrics in each comparable group, as being statistically
significant for the purposes of comparison. KBW viewed the three resulting
metrics (price to tangible book value, price to last twelve months earnings and
core deposit premium) from the three comparable groups on an average and median
basis, as the three key metrics used to evaluate the fairness, from a financial
point of view, of the transaction.
Given that the value of the consideration on an aggregate basis to be
paid in the merger, as of the date of the opinion, is with the range of
comparable thrift transactions on the basis of price to tangible book value,
price to last twelve months earnings, and core deposit premium, KBW believes
that this analysis supports the fairness, from a financial point of view, to
Classic and its stockholders of the consideration to be paid in the merger.
PRO FORMA ANALYSIS. KBW also performed an analysis of the combined
company to determine the pro forma impact to the combined balance sheet, income
statement, estimated GAAP and cash (which exclude the impact of the amortization
of intangible assets) earnings per share, estimated tangible book value per
share, return on average equity, and tangible equity to assets. In performing
its analysis, KBW relied on the following assumptions:
ASSUMPTIONS FOR CLASSIC:
1. September 30, 2002 balance sheet and income statement data for Classic
2. To arrive at an estimate of annual net income, KBW annualized the year
to date earnings for Classic for the six month period ended September
30, 2002
ASSUMPTIONS FOR FIRST FEDERAL:
1. September 30, 2002 balance sheet and income statement data for First
Federal
2. KBW assumed that the acquisition of Lincoln Savings and Loan had closed
on September 30, 2002
3. To arrive at an estimate of annual combined income for the combined
First Federal and Lincoln Savings and Loan franchise, KBW relied the
actual reported net income for First Federal for the 12 month period
ended September 30, 2002 and an estimate loss for the Lincoln Savings
franchise, which had reported a net loss year to date. KBW estimated
that the acquisition of Lincoln Savings and Loan would result in a
reduction of nearly $100,000 in pro forma net income for First Federal
had the two companies been operating on a combined basis for the prior
twelve months.
TRANSACTION ASSUMPTIONS:
1. 226,615 exchange shares issued and $24.00 per share to First Federal
stockholders that elect cash consideration in an aggregate
consideration mixture mix of 50%/50% stock/cash.
2. First Federal stock option holders paid the cash difference between
$24.00 and the exercise price of their option contract.
3. Estimated one -time merger charges of approximately $1 million and
merger transaction expenses of $400,000.
4. To pay the cash portion of the consideration, Classic would liquidate
existing investment securities earning a pre-tax yield of 5.29%.
5. Total intangible assets (goodwill and core deposit intangibles) created
in the transaction are estimated to be approximately $3.5 million.
6. Estimated reduction during the first year in First Federal non-interest
expenses of approximately $850,000 from the consolidation of
duplicative functions and realization of corporate synergies.
7. KBW did not factor in any potential revenue enhancements, although it
recognized that the opportunity for Classic to increase revenues
through offering additional products and services does clearly exist.
43
The results of this pro forma analysis are as follows:
CLASSIC FIRST * COMBINED PRO FORMA
FEDERAL
9/30/02 9/30/02 09/30/2002 PRO FORMA ADJUSTMENTS 09/30/2002
Balance Sheet (Dollars in Thousands)
Assets
Cash and securities $44,773 $16,919 $61,692 $0 a) $7,134 $54,558
Loans, net 174,477 54,647 229,124 0 0 229,124
Intangible assets 5,555 0 5,555 3,551 b) 0 9,106
Other assets 8,340 5,785 14,125 0 0 14,125
Total assets $233,145 $77,351 $310,496 $3,551 $7,134 $306,912
Liabilities
Deposits 173,420 57,900 231,320 0 0 231,320
FHLB advances 27,956 9,612 37,568 0 0 37,568
Other 7,772 716 8,488 0 0 8,488
Total liabilities 209,148 68,228 277,376 0 0 277,376
Total Equity 23,997 9,123 33,120 9,762 6,178 29,536
Total liabilities & equity $233,145 $77,351 $310,496 $9,762 $6,178 $306,912
Income Statement
Net interest income $9,076 $2,511 $11,587 $317 c) $0 $11,270
Provisions for loan losses 420 81 501 0 0 501
Net interest income 8,656 2,430 11,086 317 0 10,769
Noninterest income 1,512 268 1,780 0 0 1,780
Noninterest expense 6,376 2,059 8,435 90 d) 850 d) 7,675
Net income before taxes 3,792 639 4,431 407 850 4,874
Income tax expense 1,026 224 1,250 86 230 1,394
Net income $2,766 $415 $3,181 $321 $620 $3,480
Per Share Information
Diluted EPS $2.61 $0.95 $2.65 $2.70
Diluted cash EPS $2.61 $1.02 $2.70 $2.75
Financial Ratios
Equity to assets 10.29% 11.79% 9.62%
Tangible equity to tangible assets 8.10% 11.79% 6.86%
Notes:
*Includes First Federal 9/30/02 financial data and Lincoln Savings and Loan data
as of 10/4/02. Lincoln Savings and Loan Income Statement data includes the
trailing 12 month period ended June 30, 2002 and excludes many nonrecurring
merger charges.
a) Transaction expense, one-time merger charges and cash portion of deal value
b) Intangible asset and core deposit intangible adjustments
c) Interest income reduction from cash portion of consideration (5.29% pre-tax
yield)
d) Cost savings and CDI amortization
After conducting its analysis KBW concluded that the First Federal
acquisition would create a company with a higher return on equity, a broader
geographic reach and sufficient capital levels. That, combined with a
transaction that was accretive to diluted GAAP and cash EPS as well a book value
per share, further supported the fairness of the transaction to Classic
shareholders.
DISCOUNTED DIVIDEND ANALYSIS. KBW performed a discounted dividend
analysis to estimate a range of present values per share of Classic common stock
and the potential impact of (a) the strategic affiliation with First Federal or
(b) the estimated valuation impact to Classic of not doing the affiliation with
First Federal and remaining in its present form as a stand alone organization.
This range was determined by adding (1) the present value, which is a
representation of the current value of a sum that is to be received some time in
the future, of the estimated future dividends that Classic could generate
through the next five years and (2) the present value of the terminal value,
which is a representation of the ongoing value of an entity at a specified time
in the future of Classic common stock.
44
In calculating a terminal value of Classic common stock five years
forward, KBW applied a range of multiples between 9.4 and 14.4 times the
earnings forecasted for Classic in five years. The terminal multiple ranges are
based on the range of P/E multiples of publicly traded financial institutions
located in the Southeast Region of the United States and have an asset size
between $250 and $500 million In arriving at the five year earnings forecast for
both Classic and First Federal, KBW used the following assumptions: (1) for the
fiscal year ended March 31, 2003 for Classic, KBW annualized the net income
earned during the six month period ended September 30, 2002. To reconcile timing
differences between Classic's and First Federal's fiscal year end, KBW assumed
that First Federal's net income for the 12 month period ended September 30, 2002
would also be earned for the 12 month period ended March 31, 2003, (2) KBW also
estimated a future earning growth rate of 15.3% for Classic and 10.1% for First
Federal. This earnings growth assumption is viewed as being conservative by KBW
and represents one-half of the demonstrated average annual earnings growth
experienced by both Classic and First Federal during the 1997 through 2002
fiscal years, which were 30.6% and 20.1%, respectively, (3) KBW estimated that a
net annual loss of $90,000 for the Lincoln Savings franchise would continue for
the five year period going forward, (4) KBW estimated that the majority of the
$850,000 in pre-tax cost savings would achieved in the 2002 - 2003 fiscal year
with the balance of cost savings occurring in the 2003 - 2004 fiscal year, (5)
To arrive at an estimate of cash flow, KBW added back the amortization of core
deposit intangibles created in the transaction, and (6) KBW assumed that Classic
would pay out 13% of the combined company's earnings in the form of a cash
dividend to shareholders.
The combined dividend stream and terminal value were then discounted
back to the present using an assumed discount range in terms of the cost of
equity of 9.8% to 12.3%. This discount range was established by using the
estimated cost of equity capital for small capitalization financial institutions
of 11.3% published by Ibbotson Associates, a recognized statistical source. The
resulting discount rate was widened to a range of 9.8% to 12.3% to provide
flexibility in assessing the potential changes in the risk profile of equity
markets in general and small capitalization financial institutions in
particular. The results of KBW's analysis are set forth in the following tables:
ESTIMATED CLASSIC RANGE OF VALUES ASSIGNED FOR MAINTAINING PRESENT ORGANIZATION
DISCOUNT RATES 9.4X 10.4X 11.4X 12.4X 13.4X 14.4X
- -------------- ---- ----- ----- ----- ----- -----
9.8% $22.98 $25.22 $27.47 $29.72 $31.97 $34.21
10.3% $22.38 $24.57 $26.75 $28.94 $31.13 $33.31
10.8% $21.80 $23.93 $26.06 $28.18 $30.31 $32.44
11.3% $21.24 $23.31 $25.38 $27.45 $29.52 $31.60
11.8% $20.69 $22.71 $24.73 $26.74 $28.76 $30.78
12.3% $20.16 $22.13 $24.09 $26.05 $28.02 $29.98
45
ESTIMATED CLASSIC RANGE OF VALUES ASSIGNED FOR STRATEGIC AFFILIATION WITH
FIRST FEDERAL
DISCOUNT RATES 9.4X 10.4X 11.4X 12.4X 13.4X 14.4X
- -------------- ---- ----- ----- ----- ----- -----
9.8% $25.22 $27.69 $30.16 $32.63 $35.10 $37.57
10.3% $24.57 $26.97 $29.37 $31.78 $34.18 $36.58
10.8% $23.93 $26.27 $28.61 $30.95 $33.29 $35.63
11.3% $23.31 $25.59 $27.86 $30.14 $32.42 $34.70
11.8% $22.71 $24.93 $27.15 $29.36 $31.58 $33.80
12.3% $22.13 $24.29 $26.45 $28.61 $30.76 $32.92
Based on the foregoing criteria and assumptions, KBW estimated that the
present value of the Classic common stock as a result of the affiliation ranged
from $25.22 to $32.92 per share and that the present value of the Classic common
stock if they were to not make the strategic affiliation with First Federal
would result in a present value of range of $22.98 - $29.98 per share. Given
that the strategic affiliation with First Federal is estimated to support a
potential higher range of values for Classic shareholders, KBW believes that
this analysis supports the fairness, from a financial point of view, to Classic
and its stockholders of the consideration to be paid in the merger.
The discount dividend analyses of Classic do not necessarily indicate
actual values or actual future results and do not purport to reflect the prices
at which any securities may trade at the present or at any time in the future.
Dividend discount analysis is a widely used valuation methodology, but the
results of this methodology are highly dependent upon numerous assumptions that
must be made, including earnings growth rates, dividend payout rates, terminal
values, projected capital structure, and discount rates.
Based on the above analyses KBW concluded that the consideration was
fair, from a financial point of view, to Classic shareholders. This summary does
not purport to be a complete description of the analysis performed by KBW and
should not be construed independently of the other information considered by KBW
in rendering its opinion. Selecting portions of KBW's analysis or isolating
certain aspects of the comparable transactions without considering all analysis
and factors, could create an incomplete or potentially misleading view of the
evaluation process.
In rendering its opinion, KBW assumed and relied upon the accuracy and
completeness of the financial information provided to it by Classic and First
Federal. In its review, with the consent of the Classic Board, KBW did not
undertake any independent verification of the information provided to it, nor
did it make any independent appraisal or evaluation of the assets or liabilities
and potential or contingent liabilities of Classic or First Federal.
The fairness opinion of KBW is limited to the fairness as of its date,
from a financial point of view, of the consideration to be paid in the merger
and does not address the underlying business decision to effect the merger (or
alternatives thereto) nor does it constitute a recommendation to any stockholder
of Classic as to how such stockholder should vote with respect to the merger
proposal.
Furthermore, KBW expresses no opinion as to the price or trading range
at which shares of the pro forma entity will trade following the consummation of
the merger.
46
<page>
KBW is a nationally recognized investment banking firm and is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
In preparing its analysis, KBW made numerous assumptions with respect
to industry performance, business and economic conditions and other matters,
many of which are beyond the control of KBW and Classic. The analyses performed
by KBW are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses and
do not purport to be appraisals or reflect the prices at which a business may be
sold.
KBW will receive a fee of $100,000 from Classic for services rendered
in connection with advising and issuing a fairness opinion regarding the merger.
As of the date of this joint proxy statement/prospectus, KBW has received
$35,000 of such fee with the remainder of the fee due upon approval by
shareholders of the merger. Classic has also agreed to reimburse KBW for its
reasonable out-of-pocket expenses incurred in connection with its engagement and
to indemnify KBW and its affiliates and their respective partners, directors,
officers, employees, agents, and controlling persons against certain expenses
and liabilities, including liabilities under securities laws..
A copy of KBW's fairness opinion is attached to this joint proxy
statement/prospectus to stockholders as Annex B.
OPINION OF FIRST FEDERAL'S INDEPENDENT FINANCIAL ADVISOR
Pursuant to an engagement letter dated December 17, 2002, First Federal
formally retained Keller to provide financial advisory services to First Federal
in connection with the merger. At a meeting of the board of directors of First
Federal on December 30, 2002, Keller rendered its oral opinion that, as of that
date, the consideration to be received by First Federal shareholders in the
merger, was fair to the First Federal shareholders from a financial point of
view. Keller subsequently delivered its opinion in writing and updated such
opinion to _______________ _____ 2003.
Keller, as part of its financial institution valuation and consulting
practice, is regularly engaged in the valuation of financial institution
securities in connection with mergers and acquisitions of commercial banks and
thrift institutions, initial and secondary stock offerings, mutual-to-stock
conversions of thrift institutions and business valuations for other corporate
purposes for financial institutions. Keller is familiar with the market prices
of publicly-traded commercial banks and bank holding companies and
publicly-traded thrifts and thrift holding companies. As a specialist in the
securities of financial institutions, Keller has experience in, and knowledge
of, the Ohio and Midwest U.S. markets for bank and thrift securities and
financial institutions operating in Ohio.
In its capacity as First Federal's financial advisor, Keller did not
participate in the negotiations with respect to the determination of the final
consideration payable in the merger, with such final consideration and terms of
the merger ultimately made by the board of directors of First Federal. Further,
the board of directors of First Federal did not subject Keller to any
limitations in connection with its procedures followed and investigations
completed in connection with the rendering of its opinion. Keller has provided
its consent to the inclusion herein of a summary of its fairness opinion
provided to the board of directors of First Federal and to the reference to the
entire fairness opinion attached hereto as Annex C.
The full text of the Keller opinion, which sets forth assumptions made,
matters considered and any qualifications and limitations applied in connection
with the review undertaken by Keller is attached as Annex C to this joint proxy
statement/prospectus and is included in this document by reference. Shareholders
of First Federal are urged to read the Keller opinion in its entirety. The
Keller opinion is directed only to the fairness, from a financial point of view,
of the merger consideration and does not constitute a recommendation to any
First Federal shareholder as to how such shareholder should vote at the annual
meeting of First Federal. Keller qualifies the summary of the opinion in its
47
entirety by reference to the full text of the opinion. Keller does not address
any other aspect of the merger or any related transaction.
In rendering its opinion, Keller:
o Reviewed, among other things:
o the merger agreement and related documents;
o the joint proxy statement/prospectus;
o First Federal's and Classic's annual reports to shareholders;
o Classic's annual reports on Form 10-KSB for the years ended March 31,
2002, 2001 and 2000 and quarterly reports on Form 10-QSB for the
quarters ended June 30, 2002 and September 30, 2002, for Classic;
o First Federal's annual reports on Form 10-KSB for the years ended
September 30, 2002, 2001 and 2000 and quarterly reports on Form 10-QSB
for the quarters ended December 31, 2001, March 31, 2002 and June 30,
2002 for First Federal, and certain other internal financial analysis
considered relevant;
o First Federal Savings Bank's Quarterly Thrift Financial Reports to the
OTS and Classic's Quarterly Call Reports to the FDIC for the periods
ended March 31, 2002, June 30, 2002, and September 30, 2002.
o Held discussions with members of senior management of Classic and First
Federal and its subsidiary, First Federal Savings Bank regarding:
o past and current business operations;
o financial projections for First Federal;
o regulatory standing;
o financial condition; and
o future prospects of the respective companies, including potential
synergies arising from the merger;
o Reviewed the historical stock prices and trading volume of First Federal's
and of Classic's common stock;
o Reviewed the financial and stock market data of other thrifts in a
comparable asset range to First Federal;
o Reviewed the financial and stock market data of other banks in a comparable
asset range to Classic;
o Reviewed certain recent business combinations with thrifts as the
institution being acquired which Keller deemed comparable in whole or in
part to First Federal;
o Conducted other studies and analyses, inquiries and examinations as Keller
deemed appropriate;
o Compared the consideration to be paid to First Federal shareholders with
other similar transactions.
In connection with its review, Keller relied upon and assumed the
accuracy, completeness and fairness of the financial and other information
provided to it by First Federal and Classic and has not assumed any
responsibility for independently verifying such information nor did it make any
independent appraisal or evaluation of the assets or liabilities and potential
or contingent liabilities of First Federal and Classic. Keller is not an expert
in the evaluation of allowance for losses. Therefore, Keller does not assume any
responsibility for making an independent valuation of the adequacy of the
allowances for loan losses reflected in the balance sheets of First Federal and
of Classic. Keller assumed that the allowances were adequate and comply fully
with applicable law and regulatory policy.
48
In conducting its analysis and arriving at its opinion, Keller
considered financial and other factors that it deemed appropriate in the
circumstances. Keller assumed that, in the course of obtaining the necessary
regulatory approvals for the merger and the transactions contemplated by the
merger agreement, no restrictions will be imposed that will have a material
adverse effect on the contemplated benefits of the merger or the transactions
contemplated by the merger agreement to First Federal. Keller did not express
any opinion as to the price or price range at which shares of First Federal
common stock or shares of Classic common stock will trade following the
announcement of the merger or actual value of the shares of common stock of the
resulting corporation when issued in accordance with the merger, or the prices
at which the shares of common stock of the resulting corporation will trade
following the completion of the merger. The Keller opinion does not address the
relative merits of the merger and alternative business strategies. In that
regard, Keller was not asked to, and did not, solicit third party indications of
interest in acquiring First Federal or in engaging in a business combination or
any other strategic transaction with First Federal. Keller was asked only to
evaluate from a financial point of view the fairness of the merger with
consideration to be paid to shareholders of First Federal in connection with the
merger.
In rendering its opinion, Keller analyzed certain comparable Midwest
merger and acquisition transactions of both pending and completed thrift
transactions, comparing the acquisition price relative to book value and the
last twelve months earnings, price to assets and premium to core deposits with a
focus on price to book value and price to last twelve months earnings. The
analysis included a comparison of the average of the above ratios for
acquisitions with the seller's assets being between $30.0 million and $450.0
million based on the following comparable groups including: all Midwest thrift
acquisitions announced since December 1, 2000; all Midwest thrift acquisitions
announced since September 1, 2001; all Midwest bank acquisitions announced since
September 1, 2001; and all bank and thrift acquisitions announced since January
1, 2002.
49
The Midwest thrifts acquisitions announced since September 1, 2001, and
completed by December 1, 2002, consisted of twenty-one transactions. The
following is a list of the twenty-one Midwest thrift acquisitions transactions
reviewed identifying the buying institution/group and the selling institution.
BUYING INSTITUTION/GROUP SELLING INSTITUTION
------------------------ -------------------
MB Financial, Inc. FSB Holdings, Inc.
Private Investor Foundation Bancorp
Advance Financial Ohio State Financial
Chemical Financial Corporation Bank West Financial
Camco Financial Columbia Financial
Polish National Alliance PS Financial
Union Community Bancorp. Montgomery Financial
Peoples Community Bancorp Kenwood Bancorp, Inc.
United Community Financial Potters Financial
National Bancshares Peoples Financial
Peoples Bancorp First Colony Bancshares
CK Bancorp First Lancaster Bancshares
Robertson Holding Co. Cumberland Mountain Bancshares
ESB Financial Corp. WSB Holding Co.
Private Investor CGB&L
Fidelity Bancorp Carnegie Financial
Northwest Bancorp Prestige Bancorp, Inc.
Berkshire Financial USA Bancshares.com
MSB Capital Corp. Pendelton FSB
First Mutual Am Trust Cap. Corp.
Private Investor Findlay Savings Bank
Keller has reviewed pending Midwest thrift acquisition transactions
announced during this same period. There are three pending Midwest thrift
acquisitions, with all of them announced in the third or fourth quarter of 2002.
These three transactions are listed below.
BUYING INSTITUTION/GROUP SELLING INSTITUTION
------------------------ -------------------
Laurel Capital Group, Inc. SFSB Holding Co.
First Capital, Inc. Hometown Bancshares, Inc.
Sun Bancorp, Inc. Steelton Bancorp, Inc.
50
The following is a summary of the key pricing ratios of average price
to book ratio and median price to last twelve months earnings for Midwest thrift
acquisitions and all thrift acquisitions announced in the first three quarters
of 2002.
MIDWEST THRIFT ACQUISITIONS
---------------------------
FIRST QTR. SECOND QTR. THIRD QTR.
PRICING RATIO 2002 2002 2002
- --------------------------------------------------------------------------------
Average Price to book ratio N/A 115.0% 117.0%
Median price to last 12
months earnings N/M N/M 27.6X
ALL THRIFT ACQUISITIONS
-----------------------
- --------------------------------------------------------------------------------
Average price to book ratio 168.0% 164.0% 176.0%
Median price to last 12
months earnings N/M 19.9X 26.9X
N/A = Not available
N/M = Not meaningful
Keller completed an analysis of the above transactions as well as an
analysis of specific transactions in Ohio and the immediate area. Keller
reviewed the stock pricing levels and stock pricing ratios of First Federal
relative to other similar publicly-traded thrifts. Keller also completed a
review of bank pricing levels for banks similar in size and location to Classic.
The price of $24.00 per share for First Federal common stock represents a price
to book ratio of 122.7 percent and a price to earnings multiple of 21.1 times
earnings. Based on the previous information and the related analysis, Keller
concluded that the merger consideration of $24.00 per share, which is based on
an exchange ratio of 0.9797 tied to the average of the closing price of Classic
common stock of $24.50 per share on December 27, 2002, was fair, from a
financial point of view, to the shareholders of First Federal. The analysis of
the transaction by Keller cannot be isolated to only certain aspects of the
analysis but must take into consideration the entire analysis and all related
factors to avoid creating an incomplete or possibly misrepresenting evaluation
of the review process.
In its analyses, Keller made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Keller and
First Federal. Any estimates contained in the analyses are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by the analyses. Additionally, estimates of the
value of businesses or securities do not purport to be appraisals or to reflect
the prices at which the businesses or securities might actually be sold.
Keller has provided consulting, financial advisory and other services
to First Federal Savings Bank over the past eight years.
51
Pursuant to a letter of agreement, First Federal agreed to pay Keller a
retainer fee of $10,000, which has been paid, a fee of $10,000 to be paid at the
time of the mailing of this joint proxy statement/prospectus and rendering
Keller's fairness opinion and a fee of $20,000 to be paid when the merger with
Classic is completed. First Federal has also agreed to reimburse Keller for
certain expenses related to the services provided by Keller and to indemnify
Keller and any of its affiliates against certain liabilities under federal
securities laws, in connection with its engagement.
APPRAISAL RIGHTS
Any Classic or First Federal stockholder who strictly complies the
procedures specified in Section 262 of the Delaware General Corporation Law is
entitled to have such stockholder's shares of Classic or First Federal common
stock appraised by the Delaware Court of Chancery and to receive the "fair
value" of such shares as of the effective time of the merger, as determined by
the Chancery Court, in lieu of the merger consideration. The following is a
summary of Section 262 of the Delaware General Corporation Law and is qualified
in its entirety by reference to Section 262 of the Delaware General Corporation
Law, a copy of which is attached hereto as Annex D. Stockholders should
carefully review Section 262 of the Delaware General Corporation Law as well as
information discussed below to determine their rights to appraisal.
If a Classic or First Federal stockholder elects to exercise the right
to an appraisal under Section 262 of the Delaware General Corporation Law, such
stockholder must do ALL of the following:
o Classic stockholders must file with Lisah M. Frazier, Classic's
corporate secretary, at its main office at 344 Seventeenth Street,
Ashland, Kentucky 41101, and First Federal stockholders must file
with Edith M. Daniels, First Federal's corporate secretary, at its
main office at 415 Center Street, Ironton, Ohio 45638, a written
demand for appraisal of their common stock held (which demand must
identify the stockholder and expressly request an appraisal) before
the vote is taken on the merger agreement at the special meeting
(this written demand for appraisal must be in addition to and
separate from any proxy or vote against the merger agreement;
neither voting against, abstaining from voting nor failing to vote
on the merger agreement will constitute a demand for appraisal
within the meaning of Section 262 of the Delaware General
Corporation Law);
o the stockholder must not vote in favor of the merger agreement (a
failure to vote or abstaining from voting will satisfy this
requirement): a vote in favor of the merger agreement, by proxy or
in person, or the return of a signed proxy that does not specify a
vote against approval and adoption of the merger agreement, will
constitute a waiver of such stockholder's right of appraisal and
will nullify any previously filed written demand for appraisal; and
o the stockholder must continuously hold such shares of common stock
through the effective time of the merger.
Written demands for appraisal should be executed by, or on behalf of,
the holder of record. Such demands must indicate the identity of the stockholder
and that such stockholder is thereby demanding appraisal within the meaning of
Section 262 of the Delaware General Corporation Law.
Within 10 days after the effective time of the merger, Classic will
give written notice that the merger has become effective to each stockholder who
has satisfied the requirements of Section 262 of the Delaware General
Corporation Law and has not voted for, or consented to, the proposal to approve
and adopt the merger agreement. Within 120 days after the effective time,
Classic or any such dissenting stockholder may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of the shares of
common stock of all dissenting stockholders entitled to appraisal. Any
dissenting stockholder desiring the filing of such petition is advised to file
52
such petition on a timely basis unless such dissenting stockholder receives
notice that such a petition has been filed by Classic or another dissenting
stockholder.
If a petition for appraisal is timely filed, the Delaware Court of
Chancery will determine which stockholders are entitled to appraisal rights and
thereafter will determine the fair value of the common stock held by dissenting
stockholders, exclusive of any element of value arising from the accomplishment
or expectation of the merger, together with a fair rate of interest, if any, to
be paid on the amount determined to be the fair value. In determining such fair
value, the Delaware Court of Chancery shall take into account all relevant
factors. Such fair value may be determined by the Delaware Court of Chancery to
be more than, less than or equal to the merger consideration that such
dissenting stockholder would otherwise be entitled to receive pursuant to the
merger agreement.
If a petition for appraisal is not timely filed, then the right to an
appraisal will cease. The costs of the appraisal proceeding will be determined
by the Delaware Court of Chancery and taxed against the parties as the Delaware
Court of Chancery determines to be equitable under the circumstances. Upon the
application of any stockholder, the Delaware Court of Chancery may determine the
amount of interest, if any, to be paid upon the value of the stock of
stockholders entitled thereto. Upon application of a stockholder, the Delaware
Court of Chancery may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to appraisal.
After the effective time of the merger, no dissenting stockholder shall
have any rights of a stockholder with respect to such holder's common stock for
any purpose, except to receive payment of its fair value and to receive payment
of dividends or other distributions on such holder's common stock, if any,
payable to stockholders of record as of a date prior to the effective time. If a
dissenting stockholder delivers a written withdrawal of the demand for an
appraisal within 60 days after the effective time or thereafter with the written
approval of Classic, or if no petition for appraisal is filed within 120 days
after the effective time, then the right of such dissenting stockholder to an
appraisal will cease and such dissenting stockholder will be entitled to receive
only the merger consideration.
A STOCKHOLDER WHO FAILS TO COMPLY WITH SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW IS BOUND BY THE TERMS OF THE MERGER AGREEMENT.
ACCORDINGLY, STOCKHOLDERS WHO WISH TO DISSENT SHOULD REVIEW SECTION 262 VERY
CAREFULLY AND CONSULT THEIR LEGAL ADVISORS.
INTERESTS OF CERTAIN FIRST FEDERAL DIRECTORS AND OFFICERS IN THE MERGER
When considering the recommendations of the First Federal board of
directors regarding the merger, you should be aware that some of the employees
of First Federal and First Federal Savings Bank and members of the First Federal
board of directors and management have interests that differ from, and may
conflict with, your interests as a stockholder of First Federal. The First
Federal board of directors was aware of these interests when it approved the
merger and the merger agreement.
EMPLOYMENT AGREEMENT WITH I. VINCENT RICE. I. Vincent Rice, President
and Chief Executive Officer of First Federal and First Federal Savings Bank,
currently has an employment agreement with First Federal and First Federal
Savings Bank that provides Mr. Rice with a severance payment and continuation of
certain employee benefits if he is terminated following a change in control of
First Federal or First Federal Savings Bank. The merger with Classic will
constitute a change in control of First Federal and First Federal Savings Bank
for purposes of the employment agreement and, as a result of Mr. Rice's
termination of employment after completion of the merger, he will receive a cash
severance payment in the amount of approximately $232,000 and the continuation
of certain benefits.
EMPLOYMENT AGREEMENT WITH JEFFERY W. CLARK. Jeffery W. Clark, First
Federal's Controller, has agreed with Classic to terminate his three year
employment contract with First Federal effective as of the closing date of the
53
merger and has been offered the opportunity to enter into a new three year
employment contract with Classic.
CONSULTING AND NON-COMPETITION AGREEMENT WITH MR. RICE. Classic would
like to secure the assistance of Mr. Rice in the operation of the Ohio branches
following the completion of the merger. Consequently, Classic has offered and
Mr. Rice has indicated his intent to accept on the effective date of the merger,
a consulting and non-competition agreement with Classic. Under this agreement,
Mr. Rice will advise Classic with respect to deposit and lending activities in
First Federal's market area, as well as maintain and develop customer
relationships. The agreement will have a one-year term and will provide for Mr.
Rice to be paid $__________ on a monthly basis for his services as a consultant
and in consideration of certain non-competition requirements.
VESTING OF FIRST FEDERAL RESTRICTED STOCK. Under First Federal's 2002
Directors Stock Plan, restricted stock awards to directors vest over a period of
three years. Under the terms of the plan, all issued but unvested restricted
shares will become vested upon a change in control of First Federal. The merger
will constitute a change in control of First Federal. As of _________________,
the directors of First Federal held a total of _______ shares of unvested
restricted stock, which convert into the right to receive the same merger
consideration as all other shares of First Federal common stock. The following
table reflects, as of December 31, 2002, the number of shares of unvested
restricted stock held by each director and the value of the merger consideration
that each will receive in exchange for their shares, assuming a merger
consideration value of $24.00.
Total Merger
Number of Consideration Value
Name Unvested Shares of for Unvested Shares
and Title Restricted Stock of Restricted Stock
Thomas D. Phillips ___________________ $_________________
I. Vincent Rice ___________________ $_________________
Edith M. Daniels ___________________ $_________________
Steven C. Milleson ___________________ $_________________
Edward R. Rambacher ___________________ $_________________
FIRST FEDERAL STOCK OPTIONS. Under the terms of the merger agreement,
all outstanding options to purchase First Federal common stock under First
Federal's stock option plan will, upon completion of the merger, terminate and
will represent the right to receive a cash payment equal to the number of
options times the difference between the applicable exercise price and $24.00 As
of ________________, the directors and executive officers of First Federal held
options to purchase a total of __________ shares of First Federal common stock
with a weighted average exercise price of $________.
APPOINTMENTS TO THE CLASSIC AND FIRST FEDERAL BOARD OF DIRECTORS. Upon
completion of the merger, Classic will appoint Steven C. Milleson to the board
of directors of Classic and First Federal director Edward R. Rambacher and David
Phillips, the son of First Federal director Thomas Phillips, to the board of
directors of Classic Bank. These directors will be paid the same fees as are
paid to Classic's and Classic Bank's directors.
TERMINATION OF THE FIRST FEDERAL ESOP. First Federal will terminate its
employee stock ownership plan upon completion of the merger. The plan will repay
its existing loan from First Federal and will allocate the surplus cash and
Classic common stock to the accounts of the plan participants, in proportion to
54
their account balances, to the extent allowed under applicable law and the
governing documents of the plan.
PROTECTION OF FIRST FEDERAL DIRECTORS AND OFFICERS AGAINST CLAIMS.
Classic has agreed to indemnify and hold harmless each present and former
director and officer of First Federal for a period of six years from liability
and expenses arising out of matters existing or occurring at or before the
consummation of the merger to the fullest extent allowed under Delaware law as
in effect at the time of closing. This indemnification extends to liability
arising out of the transactions contemplated by the merger agreement. Classic
has also agreed to advance any related costs to each of these persons as they
are incurred. Classic has also agreed that it will maintain a policy of
directors' and officers' liability insurance coverage for the benefit of First
Federal's directors and officers for three years following consummation of the
merger, subject to certain limitations on the amount of premiums to be paid.
NASDAQ SMALLCAP MARKET LISTING
Classic will apply to list the shares of Classic common stock to be
issued in the merger on the NASDAQ SmallCap Market. The stock must be authorized
for listing on the NASDAQ SmallCap Market in order for the parties to complete
the merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion addresses the material United States federal
income tax consequences of the merger to holders of First Federal common stock.
This discussion applies only to First Federal stockholders that hold their First
Federal common stock as a capital asset within the meaning of Section 1221 of
the Internal Revenue Code. Further, this discussion does not address all aspects
of United States federal taxation that may be relevant to a particular
stockholder in light of its personal circumstances or to stockholders subject to
special treatment under the United States federal income tax laws including:
banks or trusts; tax-exempt organizations; insurance companies; dealers in
securities or foreign currency; traders in securities who elect to apply a
mark-to-market method of accounting; pass-through entities and investors in such
entities; foreign persons; stockholders who received their First Federal common
stock through the exercise of employee stock options, through a tax-qualified
retirement plan or otherwise as compensation; and stockholders who hold First
Federal common stock as part of a hedge, straddle, constructive sale, conversion
transaction or other integrated instrument.
This discussion is based on the Internal Revenue Code, Treasury
regulations, administrative rulings and judicial decisions, all as in effect as
of the date of this proxy statement/prospectus and all of which are subject to
change (possibly with retroactive effect) and to differing interpretations. Tax
considerations under state, local and foreign laws are not addressed in this
document. THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY VARY DEPENDING UPON YOUR
PARTICULAR CIRCUMSTANCES. THEREFORE, YOU SHOULD CONSULT YOUR TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THOSE
RELATING TO STATE AND/OR LOCAL TAXES.
It is a condition to the obligations of Classic and First Federal to
complete the merger that Classic receive an opinion of Jenkens & Gilchrist, P.C.
and that First Federal receive an opinion of Kelley Drye & Warren to the effect
that (1) the merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, (2) Classic and First Federal will each be a party to that reorganization
within the meaning of Section 368(b) of the Internal Revenue Code, and (3)
except to the extent of any cash received in lieu of a fractional share interest
in Classic common stock, no gain or loss will be recognized by stockholders of
First Federal who exchange their First Federal common stock for Classic common
stock in the merger.
In rendering their opinions, counsel may require and rely upon
representations contained in letters and certificates to be received from
officers of Classic, First Federal and others. Neither of these tax opinions
will be binding on the Internal Revenue Service or the courts, and we do not
55
intend to request any ruling from the Internal Revenue Service with respect to
the federal income tax consequences of the merger.
Although the merger agreement allows us to waive the condition that we
receive tax opinions from our respective counsel, we currently do not anticipate
doing so.
The federal income tax consequences of the merger to you will depend
primarily on whether you exchange your First Federal common stock for solely
Classic common stock (except for cash received instead of a fractional share of
Classic common stock), solely cash or a combination of stock and cash.
Regardless of whether you elect to receive Classic common stock, cash or a
combination of stock and cash, the federal income tax consequences will depend
on the actual merger consideration that you receive.
EXCHANGE SOLELY FOR CLASSIC COMMON STOCK. No gain or loss will be
recognized by a First Federal stockholder who receives solely shares of Classic
common stock (except for cash received in lieu of fractional shares, as
discussed below) in exchange for all of his or her shares of First Federal
common stock. The tax basis of the shares of Classic common stock received by a
First Federal stockholder in such exchange will be equal (except for the basis
attributable to any fractional shares of Classic common stock, as discussed
below) to the basis of the First Federal common stock surrendered in exchange
for the Classic common stock. The holding period of the Classic common stock
received will include the holding period of shares of First Federal common stock
surrendered in exchange for the Classic common stock, provided that such shares
were held as capital assets of the First Federal stockholder at the effective
time of the merger.
EXCHANGE SOLELY FOR CASH. A First Federal stockholder who receives
solely cash in exchange for all of his or her shares of First Federal common
stock (and is not treated as constructively owning Classic common stock after
the merger under the circumstances referred to below under "--Possible Dividend
Treatment") will recognize gain or loss for federal income tax purposes equal to
the difference between the cash received and such stockholder's tax basis in the
First Federal common stock surrendered in exchange for the cash. Such gain or
loss will be a capital gain or loss, provided that such shares were held as
capital assets of the First Federal stockholder at the effective time of the
merger. Such gain or loss will be long-term capital gain or loss if the First
Federal stockholder's holding period is more than one year. The Internal Revenue
Code contains limitations on the extent to which a taxpayer may deduct capital
losses from ordinary income.
EXCHANGE FOR CLASSIC COMMON STOCK AND CASH. A First Federal stockholder
who receives a combination of Classic common stock and cash in exchange for his
or her First Federal common stock will not be permitted to recognize any loss
for federal income tax purposes. Such a stockholder will recognize gain, if any,
equal to the lesser of (1) the amount of cash received or (2) the amount of gain
"realized" in the transaction. The amount of gain a First Federal stockholder
"realizes" will equal the amount by which (a) the cash plus the fair market
value at the effective time of the merger of the Classic common stock received
exceeds (b) the stockholders' basis in the First Federal common stock to be
surrendered in the exchange for the cash and Classic common stock. Any
recognized gain could be taxed as a capital gain or a dividend, as described
below. The tax basis of the shares of Classic common stock received by such
First Federal stockholder will be the same as the basis of the shares of First
Federal common stock surrendered in exchange for the shares of Classic common
stock, adjusted as provided in Section 358(a) of the Internal Revenue Code for
the cash received in exchange for such shares of First Federal common stock. The
holding period for shares of Classic common stock received by such First Federal
stockholder will include such stockholder's holding period for the First Federal
common stock surrendered in exchange for the Classic common stock, provided that
such shares were held as capital assets of the stockholder at the effective time
of the merger.
A First Federal stockholder's federal income tax consequences will also
depend on whether his or her shares of First Federal common stock were purchased
at different times at different prices. If they were, the First Federal
56
stockholder could realize gain with respect to some of the shares of First
Federal common stock and loss with respect to other shares. Such First Federal
stockholder would have to recognize such gain to the extent such stockholder
receives cash with respect to those shares in which the stockholder's adjusted
tax basis is less than the amount of cash plus the fair market value at the
effective time of the merger of the Classic common stock received, but could not
recognize loss with respect to those shares in which the First Federal
stockholder's adjusted tax basis is greater than the amount of cash plus the
fair market value at the effective time of the merger of the Classic common
stock received. Any disallowed loss would be included in the adjusted basis of
the Classic common stock. Such a First Federal stockholder is urged to consult
his or her own tax advisor respecting the tax consequences of the merger to that
stockholder.
POSSIBLE DIVIDEND TREATMENT. In certain circumstances, a First Federal
stockholder who receives solely cash or a combination of cash and Classic common
stock in the merger may receive ordinary income, rather than capital gain,
treatment on all or a portion of the gain recognized by that stockholder if the
receipt of cash "has the effect of the distribution of a dividend." The
determination of whether a cash payment has such effect is based on a comparison
of the First Federal stockholder's proportionate interest in Classic after the
merger with the proportionate interest the stockholder would have had if the
stockholder had received solely Classic common stock in the merger. This could
happen because of your purchase (or the purchase by a family member) of
additional Classic stock or a repurchase of shares by Classic. For purposes of
this comparison, the First Federal stockholder may be deemed to constructively
own shares of Classic common stock held by certain members of the stockholder's
family or certain entities in which the stockholder has an ownership or
beneficial interest and certain stock options may be aggregated with the
stockholder's shares of Classic common stock. The amount of the cash payment
that may be treated as a dividend is limited to the stockholder's ratable share
of the accumulated earnings and profits of First Federal at the effective time
of the merger. Any gain that is not treated as a dividend will be taxed as a
capital gain, provided that the stockholder's shares were held as capital assets
at the effective time of the merger. Because the determination of whether a cash
payment will be treated as having the effect of a dividend depends primarily
upon the facts and circumstances of each First Federal stockholder, stockholders
are urged to consult their own tax advisors regarding the tax treatment of any
cash received in the merger.
CASH IN LIEU OF FRACTIONAL SHARES. A First Federal stockholder who
holds First Federal common stock as a capital asset and who receives in the
merger, in exchange for such stock, solely Classic common stock and cash in lieu
of a fractional share interest in Classic common stock will be treated as having
received such cash in full payment for such fractional share of stock and as
capital gain or loss, notwithstanding the dividend rules discussed above.
TAX CONSEQUENCES TO CLASSIC AND ITS STOCKHOLDERS
Assuming, consistent with the above described tax opinion, the merger
qualifies as a reorganization within the meaning of section 368 of the Code,
neither Classic nor its stockholders will recognize gain or loss in connection
with the merger, although Classic will succeed to any tax liabilities of First
Federal.
ACCOUNTING TREATMENT OF THE MERGER
Classic will account for the merger as a purchase, as that term is used
under generally accepted accounting principles, for accounting and financial
reporting purposes. Under the purchase method of accounting, the assets and
liabilities of First Federal will be recorded on Classic's consolidated balance
sheet at their estimated fair value at the effective date of the merger. The
amount by which the purchase price paid by Classic exceeds the fair value of the
net tangible and identifiable intangible assets acquired by Classic through the
merger will be recorded as goodwill. Financial statements of Classic issued
after the effective date of the merger will reflect these values and will not be
restated retroactively to reflect the historical position or results of
operations of First Federal.
57
RESALES OF CLASSIC COMMON STOCK
The shares of Classic common stock to be issued to stockholders of
First Federal in the merger have been registered under the Securities Act of
1933. Shares of Classic common stock issued in the merger may be traded freely
and without restriction by those stockholders not deemed to be "affiliates" of
First Federal, as that term is defined in the rules under the Securities Act.
Classic common stock received by those stockholders of First Federal who are
deemed to be "affiliates" of First Federal at the time the merger is submitted
for vote of the stockholders of First Federal may be resold without registration
under the Securities Act only to the extent provided for by Rule 145 promulgated
under the Securities Act, which permits limited sales under certain
circumstances, or pursuant to another exemption from registration. An affiliate
of First Federal is an individual or entity that controls, is controlled by or
is under common control with, First Federal, and may include the executive
officers and directors of First Federal, as well as certain principal
stockholders of First Federal. The same restrictions apply to certain relatives
or the spouse of those persons and any trusts, estates, corporations or other
entities in which those persons have a 10% or greater beneficial interest.
First Federal has agreed in the merger agreement to use its
best efforts to cause each person who is an affiliate of First Federal for
purposes of Rule 145 under the Securities Act to deliver to Classic a written
agreement intended to ensure compliance with the Securities Act.
REGULATORY APPROVALS AND NOTICES REQUIRED FOR THE MERGER
Completion of the merger and the bank merger is subject to certain
regulatory approvals and consents. The bank merger is subject to the prior
approval of the FDIC under the Bank Merger Act. In reviewing applications under
the Bank Merger Act, the FDIC must consider, among other factors, the financial
and managerial resources and future prospects of the existing and proposed
institutions, and the convenience and needs of the communities to be served. The
FDIC will also consider the institutions' compliance with applicable laws and
regulations. Finally, the FDIC may not approve a transaction:
o that would tend to create or result in a monopoly or be in
furtherance of any combination, conspiracy or attempt to monopolize
the business of banking in any part of the United States; or
o if its effect in any section of the country may be to lessen
competition substantially or which in any other manner would be
restraint on trade;
unless the FDIC finds that the anti-competitive effects of the transaction are
clearly outweighed in the public interest by the probable effect of the
transaction on meeting the convenience and needs of the communities to be
served.
In addition, the bank merger is subject to the prior approval of the
KDFI. The application to the KDFI is substantially similar to the application
submitted to the FDIC.
Classic has filed a waiver request with the Federal Reserve with
respect to the requirement under Section 4(c)(8) of the Bank Holding Company Act
of 1958, as amended, that it file an application with the Federal Reserve in
connection with the brief moment in time in which it will own all of the stock
of First Federal Savings Bank of Ironton. In the absence of such waiver, Classic
would be required to file an application with the Federal Reserve for the
acquisition of such shares. In addition, First Federal filed with the OTS a
Notification of Intention to Convert or Combine with a Bank pursuant to 12
C.F.R. ss. 563.22(b)(1)(i).
58
A period of 15 to 30 days must expire following approval by the FDIC
before completion of the merger is allowed, within which period the United
States Department of Justice may file objections to the merger under the federal
antitrust laws. While we believe that the likelihood of objection by the
Department of Justice is remote in this case, there can be no assurance that the
Department of Justice will not initiate proceedings to block the merger, or that
the Attorney General of the State of Ohio will not challenge the merger, or if
any proceeding is instituted or challenge is made, as to the result of the
challenge.
The merger cannot proceed in the absence of the requisite regulatory
approvals. See "The Merger Agreement--Conditions to Completing the Merger" and
"--Terminating the Merger Agreement." There can be no assurance that the
requisite regulatory approvals will be obtained, and if obtained, there can be
no assurance as to the date of any approval. There can also be no assurance that
any regulatory approvals will not contain a condition or requirement that causes
the approvals to fail to satisfy the condition set forth in the merger agreement
and described under "The Merger Agreement--Conditions to Completing the Merger."
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the cash consideration or the exchange
ratio for converting First Federal common stock to Classic common stock.
Furthermore, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
REQUIREMENT FOR STOCKHOLDER APPROVAL
The merger is subject to the approval of the holders of a majority of
the outstanding common stock of each of Classic and First Federal. On
___________, the directors and executive officers of Classic beneficially owned
___ shares or ____% of the outstanding common stock of Classic while the
directors and executive officers of First Federal beneficially owned ____ shares
or ____% of the outstanding stock of First Federal.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Each of the Classic board of directors and the First Federal board of
directors believes the merger is in the best interests of their respective
institutions, stockholders and customers. Each board believes that the merger
will position Classic, on a consolidated basis, to achieve its strategic
objective of becoming a preeminent independent financial services provider in
Ashland, Kentucky/Ironton, Ohio/Huntington, West Virginia market and strengthen
Classic, on a consolidated basis, in terms of management, growth opportunities
and profitability. Furthermore, each board of directors believes that Classic,
as a larger independent financial institution, will be better able to compete
with major banks in the communities it serves.
The Classic board of directors recommends a vote "FOR" the merger
agreement and the related transactions and the First Federal board of directors
recommends a vote "FOR" the merger agreement and related transactions.
THE MERGER AGREEMENT
The following describes material provisions of the merger agreement.
This description does not purport to be complete and is qualified by reference
to the merger agreement, which is attached as Appendix A and is incorporated by
reference into this proxy statement/prospectus.
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TERMS OF THE MERGER
The merger agreement provides for a business combination in which First
Federal will merge with Classic. Classic will be the surviving corporation in
the merger.
As a result of the merger, except as noted below, each outstanding
share of First Federal common stock will be converted into the right to receive,
at the election of the holder and subject to certain restrictions, either shares
of Classic common stock or $24.00 in cash. First Federal stockholders will be
permitted to elect to exchange all of their First Federal shares for cash, all
of their First Federal shares for Classic stock, or some of their shares for
cash and some of their shares for Classic stock. See "The Merger-Conversion of
First Federal Common Stock." Classic will not issue fractions of shares of
Classic common stock, but instead will pay each holder of First Federal common
stock who would otherwise be entitled to a fraction of a share of Classic common
stock an amount in cash determined by multiplying that fraction by the average
closing price of Classic common stock over a measurement period prior to the
completion of the merger. If there is a change in the number or classification
of shares of Classic outstanding as a result of a stock split, stock dividend,
reclassification, recapitalization, or other similar transaction, the exchange
ratio will be equitably adjusted. Shares of First Federal common stock held
directly or indirectly by Classic will be canceled and retired upon completion
of the merger, and no payment will be made for them. Canceled shares will not
include shares held by either First Federal or Classic in a fiduciary capacity
or in satisfaction of a debt previously contracted. Holders of shares for which
appraisal rights have been validly exercised will be entitled only to the rights
granted by Delaware law.
WHEN WILL THE MERGER BE COMPLETED
The closing of the merger will take place on a date designated by
Classic that is no later than 30 days following the date on which all of the
conditions to the merger contained in the merger agreement are satisfied or
waived, unless we agree to a later date. See "--Conditions to Completing the
Merger." On the closing date, Classic will file a certificate of merger with the
Delaware Secretary of State merging First Federal into Classic. The merger will
become effective at the time stated in the certificate of merger.
Classic and First Federal expect to complete the merger in the second
calendar quarter of 2003. However, we cannot guarantee when or if the required
regulatory approvals will be obtained. See "The Merger--Regulatory Approvals
Needed to Complete the Merger." Furthermore, either company may terminate the
merger agreement if, among other reasons, the merger has not been completed on
or before June 30, 2003, unless failure to complete the merger by that time is
due to a misrepresentation, breach of warranty or failure to fulfill a covenant
by the party seeking to terminate the agreement. See "--Terminating the Merger
Agreement."
CONDITIONS TO COMPLETING THE MERGER
Classic's and First Federal's obligations to consummate the merger are
conditioned on the following:
o approval of the merger agreement by the Classic and First Federal
stockholders;
o receipt of all required regulatory approvals without any materially
adverse conditions and the expiration of all statutory waiting
periods;
o no party to the merger being subject to any legal order that
prohibits consummating any part of the transaction, no governmental
entity having instituted any proceeding for the purpose of blocking
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the transaction, and the absence of any statute, rule or regulation
that prohibits completion of any part of the transaction;
o the registration statement of which this joint proxy
statement/prospectus forms a part being declared effective by the
Securities and Exchange Commission, the absence of any pending or
threatened proceeding by the Securities and Exchange Commission to
suspend the effectiveness of the registration statement and the
receipt of all required state "blue sky" approvals;
o receipt by us of all consents and approvals from third parties
(other than those required from government agencies) required to
complete the merger, unless failure to obtain those consents or
approvals would not have a material adverse effect on Classic after
completion of the merger;
o receipt by each of us of opinions from our respective legal counsel
to the effect that the merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code; and
o the other party having performed in all material respects its
obligations under the merger agreement, the other party's
representations and warranties being true and correct as of the
date of the merger agreement and as of the closing date, and
receipt of a certificate signed by the other party's chief
executive officer and chief financial officer to that effect.
The obligation of First Federal to complete the merger is also
conditioned on Classic having deposited the cash portion of the merger
consideration with the exchange agent and the obligation of Classic to complete
the merger is also conditioned on the issuance by First Federal's counsel of a
legal opinion regarding the applicability of First Federal Stockholder's Rights
Agreement to the transaction.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so.
CONDUCT OF BUSINESS BEFORE THE MERGER
First Federal has agreed that, until completion of the merger and
unless permitted by Classic, neither it nor its subsidiaries will:
GENERAL BUSINESS
o conduct its business other than in the regular, ordinary and usual
course consistent with past practice;
o fail to maintain and preserve intact its business organization,
properties, leases, employees and advantageous business
relationships and retain the services of its officers and key
employees;
o take any action that would adversely affect or delay its ability to
perform its obligations under the merger agreement or to consummate
the transactions contemplated by the merger agreement;
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INDEBTEDNESS
o incur any indebtedness or become responsible for the obligations of
any person or entity, other than the creation of money market and
passbook accounts, borrowings from the Federal Home Loan Bank and
securities sold under an agreement to repurchase that mature within
one year and sales of certificates of deposit that mature within 37
months; provided, however, that in no event will such borrowings
exceed an aggregate of $1,000,000;
o prepay any such indebtedness so as to cause itself to incur a
prepayment penalty thereunder;
CAPITAL STOCK
o adjust, split, combine or reclassify its capital stock;
o pay any cash or stock dividends or make any other distribution on
its capital stock, other than regular quarterly cash dividends on
First Federal common stock not in excess of $0.07 per share and
dividends paid by First Federal's subsidiaries to First Federal;
o grant any stock appreciation rights or limited rights under any of
its benefit plans or grant any third party a right to acquire any
of its shares of capital stock;
o issue any securities convertible or exercisable for any shares of
its capital stock, except pursuant to the exercise of outstanding
stock options;
DISPOSITIONS
o dispose of any of its material assets or cancel or release any
indebtedness, other than in the ordinary course of business or
pursuant to commitments existing as of the date of the merger
agreement;
INVESTMENTS
o make any equity investment other than pursuant to commitments
existing as of the date of the merger agreement;
CONTRACTS
o enter into, renew, amend or terminate any contract or agreement, or
make any change in any of its leases or contracts, other than with
respect to those involving the payment of less than $30,000 per
year, and those specifically permitted by the merger agreement;
LOANS
o make, renew, increase, extend or purchase any loans, advances,
credit enhancements or extensions, other than existing loan
commitments as of the date of the merger agreement and those in
conformity with existing lending practices in amounts not to exceed
an aggregate of $100,000 with respect to any one borrower;
o make or increase any loan or extension of credit or commit to make
or increase any such loan or extension of credit to any director or
executive officer of First Federal or First Federal Savings Bank,
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except for loans or extensions of credit on terms made available to
the general public and other than renewals of existing loans or
commitments to loan;
EMPLOYEES
o increase the compensation or fringe benefits of any of its
employees or directors, except for annual salary increases of not
more than 2% consistent with past practice;
o pay any bonus, pension, retirement allowance or contribution not
required by any existing plan or agreement to any employees or
directors;
o become a party to, amend or commit to any benefit plan or
employment agreement;
o voluntarily accelerate the vesting or the lapsing of any
restrictions with respect to any stock options or other stock-based
compensation;
o elect any new executive officer or director;
o submit any stock option or similar plan to First Federal's
stockholders for approval;
o hire any employee;
o make any quarterly contributions to the First Federal ESOP in
excess of First Federal's average quarterly contribution over the
two years preceding the date of the merger agreement;
SETTLING CLAIMS
o settle any claim against it for more than $25,000 or impose or
agree to material restrictions on its operations;
GOVERNING DOCUMENTS
o amend its certificate of incorporation or bylaws;
INVESTMENT SECURITIES
o restructure or materially change its investment securities
portfolio through purchases, sales or otherwise, or the manner in
which the portfolio is classified or reported;
o make any investment in any debt security, including mortgage-backed
and mortgage-related securities, other than U.S. government and
U.S. government agency securities with final maturities not greater
than one year;
CAPITAL EXPENDITURES
o make any capital expenditures other than pursuant to binding
commitments existing on the date of the merger agreement necessary
to maintain existing assets in good repair or to make payment of
necessary taxes;
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BRANCHES
o establish or commit to establish any new branch or other office or
file an application to relocate or terminate the operation of an
existing banking office;
ACCOUNTING
o change its method of accounting, except as required by changes in
generally accepted accounting principles or regulatory guidelines;
MERGER AGREEMENT
o take any action that is intended or expected to result in any of
its representations and warranties under the merger agreement being
or becoming untrue in any material respect or in the conditions to
the merger not being satisfied or in a violation of a provision of
the merger agreement;
o knowingly take any action that would prevent or impede the merger
from qualifying as a reorganization under Section 368(a) of the
Internal Revenue Code; and
OTHER AGREEMENTS
o agree or commit to take, or adopt any resolutions in support of,
any of the foregoing actions.
Classic has agreed that, until the completion of the merger and unless
permitted to by First Federal, it will not:
o take any action that is intended or expected to result in any of
its representations and warranties under the merger agreement being
or becoming untrue in any material respect or in the conditions to
the merger not being satisfied or in a violation of a provision of
the merger agreement;
o knowingly take any action that would prevent or impede the merger
from qualifying as a reorganization under Section 368(a) of the
Internal Revenue Code;
o amend its certificate of incorporation or bylaws in a manner that
would materially and adversely effect the benefits of the merger to
First Federal stockholders; and
o agree or commit to take, or adopt any resolutions in support of,
any of the foregoing actions.
COVENANTS OF FIRST FEDERAL AND CLASSIC IN THE MERGER AGREEMENT
AGREEMENT NOT TO SOLICIT OTHER PROPOSALS. First Federal has agreed not
to initiate, solicit, knowingly encourage or facilitate any inquiries or
discussions that constitute or could reasonably lead to an acquisition proposal
or participate in any discussion or negotiations regarding an acquisition
proposal with a third party. An acquisition proposal includes the following:
o any merger, consolidation, share exchange, business combination, or
other similar transaction involving First Federal or its
subsidiaries;
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o any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of First Federal;
o any tender offer or exchange offer for 25% or more of the
outstanding shares of capital stock of First Federal; and
o any public announcement of a proposal, plan or intention to do any
of the foregoing or any agreement to engage in any of the
foregoing.
Despite the agreement of First Federal not to solicit other acquisition
proposals, the board of directors of First Federal may generally have
discussions with, and provide information to, a third party who makes an
unsolicited, written, bona fide acquisition proposal and recommend such proposal
to its stockholders, provided that the First Federal board of directors:
o after consultation with and receipt of advice from outside legal
counsel, in good faith deems such action to be necessary for the
proper discharge of its duties to First Federal stockholders under
applicable law; and
o after consultation with its financial advisor, determines in good
faith that the transaction presented by such unsolicited
acquisition proposal is a more favorable transaction from a
financial point of view than the transaction contemplated by the
merger agreement with Classic.
If First Federal receives a proposal or information request from a
third party or enters into negotiations with a third party regarding a superior
proposal, First Federal must notify Classic and provide Classic with information
about the third party and its proposal.
EMPLOYEE MATTERS. Each person who is an employee of First Federal as of
the closing of the merger (whose employment is not specifically terminated upon
the closing) will become an employee of Classic Bank. Classic will make
available employer provided health and other employee welfare benefit plans to
each continuing employee on the same basis that it provides such coverage to
Classic employees except that Classic will provide to continuing employees
certain additional health insurance and severance benefits in the first year
following the completion of the merger. Former employees of First Federal will
be treated as new employees for purposes of Classic's pension plan and employee
stock ownership plan; provided, however, that continuing employees will receive
credit for service with Classic Bank for purposes of vesting and determination
of eligibility to participate in Classic's pension plan, but not for the accrual
of benefits. Classic has also agreed to honor all vested benefits or other
vested amounts earned or accrued under First Federal employee benefit plans,
contracts and arrangements except that Jeffery Clark has agreed to terminate his
existing three year contract with First Federal effective the day of the merger
and has been offered the opportunity to enter into a new three year contract
with Classic.
INDEMNIFICATION OF FIRST FEDERAL OFFICERS AND DIRECTORS. Classic has
agreed to indemnify and hold harmless each present and former director and
officer of First Federal for a period of six years from liability and expenses
arising out of matters existing or occurring at or before the consummation of
the merger to the fullest extent allowed under First Federal's certificate of
incorporation as in effect at the time of closing. Classic has also agreed that
it will maintain a policy of directors' and officers' liability insurance
coverage, or provide a policy providing comparable coverage and amounts on terms
no less favorable than First Federal's current policy, for the benefit of First
Federal's directors and officers who are currently covered by insurance for
three years following consummation of the merger, subject to a cap on the amount
of annual premiums.
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CERTAIN OTHER COVENANTS. The merger agreement also contains other
agreements relating to our conduct before consummation of the merger, including
the following:
o After all requisite approvals necessary to consummate the merger
are obtained, First Federal Savings Bank will, at the request of
Classic, modify and change its loan, litigation, real estate
valuation and investment and asset/liability management policies
and practices so as to be more consistent with those of Classic
Bank and First Federal will recognize for financial reporting
purposes all of its expenses related to the merger.
o First Federal will give Classic reasonable access during normal
business hours to First Federal's property, books, records and
personnel and furnish all information Classic may reasonably
request.
o First Federal will promptly provide Classic with a copy of all
documents filed with the Securities and Exchange Commission, each
report filed with its banking regulators, each management report
provided to its board of directors, each public press release and
all other information concerning its business, properties and
personnel as requested by Classic.
o First Federal will meet with Classic on a regular basis to
facilitate the integration of the two companies and to discuss and
plan for the conversion of First Federal's data processing and
related electronic information systems.
o Classic and First Federal will use their reasonable best efforts to
submit all necessary applications, notices, and other filings with
any governmental entity, the approval of which is required to
complete the merger and related transactions.
o Classic and First Federal will use their reasonable best efforts to
obtain all third party consents necessary to consummate the merger.
o First Federal will take any necessary action to exempt Classic and
this transaction from any anti-takeover provisions contained in
First Federal's certificate of incorporation or bylaws or federal
or state law.
o Classic and First Federal will use all reasonable efforts to take
all actions necessary to consummate the merger and the transactions
contemplated by the merger agreement.
o First Federal and Classic will consult with each other regarding
any public statements about the merger and any filings with any
governmental entity or with any national securities exchange or
market.
o Classic will file a registration statement, of which this joint
proxy statement/prospectus forms a part, with the Securities and
Exchange Commission registering the shares of Classic common stock
to be issued in the merger to First Federal stockholders.
o First Federal will take all actions necessary to convene a meeting
of its stockholders to vote on the merger agreement. The First
Federal board of directors will recommend at the stockholder
meeting that the stockholders vote to approve the merger and will
use its reasonable best efforts to solicit stockholder approval,
unless it determines that such actions would not comply with its
fiduciary obligations to First Federal stockholders.
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o Classic will take all actions necessary to convene a meeting of its
stockholders to vote on the merger agreement. The Classic board of
directors will recommend at the stockholder meeting that the
stockholders vote to approve the merger and will use its reasonable
best efforts to solicit stockholder approval.
o Prior to completion of the merger, Classic will notify The Nasdaq
SmallCap Market of the additional shares of Classic common stock
that Classic will issue in exchange for shares of First Federal
common stock.
o First Federal will use its reasonable best efforts to cause each
person who is an affiliate of it under Rule 145 of the Securities
Act to deliver to Classic a letter to the effect that such person
will comply with Rule 145.
o Classic and First Federal will notify each other of any material
contract defaults and any events that would reasonably be likely to
result in a material adverse effect on the other. They also will
notify each other of any communication from a third party regarding
the need to obtain that party's consent in connection with the
merger.
o Classic and First Federal will take appropriate board action to
exempt First Federal directors and officers from short-swing profit
liability that could arise under the federal securities laws in
connection with the transactions being completed by the merger
agreement.
o First Federal will pay dividends on its common stock on a quarterly
basis and each of Classic and First Federal will coordinate with
the other the payment of dividends on Classic common stock and
First Federal common stock.
REPRESENTATIONS AND WARRANTIES MADE BY CLASSIC AND FIRST FEDERAL IN THE MERGER
AGREEMENT
Classic and First Federal have made certain customary representations
and warranties to each other in the merger agreement relating to our businesses.
For information on these representations and warranties, please refer to the
merger agreement attached as Appendix A. The representations and warranties
generally must be true in all material respects through the completion of the
merger unless the change does not have a material negative impact on our
business, financial condition or results of operations. See "--Conditions to
Completing the Merger."
TERMINATING THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the
completion of the merger, either before or after approval of the merger
agreement by First Federal stockholders, as follows:
o with the mutual consent of Classic and First Federal;
o by either party, if the stockholders of First Federal fail to
approve the merger agreement (provided that First Federal will only
be entitled to terminate for this reason if it has complied with
its obligations under the merger agreement with respect to its
stockholder meeting);
o by either party, if a required regulatory approval, consent or
waiver is denied or any governmental entity prohibits the
consummation of the merger or the transactions contemplated by the
merger agreement;
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o by either party, if the merger is not consummated by June 30, 2003,
unless failure to complete the merger by that time is due to a
misrepresentation, breach of a warranty or failure to fulfill a
covenant by the party seeking to terminate the agreement;
o by either party, if the other party makes a misrepresentation,
breaches a warranty or fails to fulfill a covenant that cannot be
cured within a specified time and that would have a material
adverse effect on the other party;
o by Classic, if the board of directors of First Federal does not
recommend approval of the merger in this joint proxy
statement/prospectus or withdraws or revises its recommendation in
a manner adverse to Classic;
o prior to the First Federal stockholder meeting, by First Federal in
order to enter into an unsolicited acquisition proposal which First
Federal's board of directors believes, after consultation with its
financial advisors, is more favorable to First Federal than the
merger provided that such termination can occur only after First
Federal notifies Classic of such offer and Classic determines not
to make a revised proposal;
o by Classic if any person shall have acquired 25% or more of the
voting power of First Federal; or
o by Classic if First Federal becomes entitled to terminate the
merger agreement as a result of its entrance into an acquisition
agreement with a third party.
TERMINATION FEE
The merger agreement requires First Federal to pay Classic a fee of
$450,000 if Classic terminates the merger agreement as a result of (i) the
failure of First Federal's board of directors to recommend approval of the
merger or the withdrawal, qualification or revision of its recommendation to
approve the merger, (ii) the acquisition by any person or group of 25% or more
of the voting power of First Federal or one of its subsidiaries or (iii) First
Federal's entrance into an acquisition agreement or similar agreement with a
third party.
The merger agreement also requires First Federal to pay Classic a fee
of $450,000 if, within 12 months after the merger agreement is terminated, First
Federal consummates or enters into any agreement with respect to an acquisition
proposal and if the merger agreement is terminated under either of the following
circumstances:
o if Classic terminates the merger agreement as a result of a breach
of the merger agreement by First Federal, and an acquisition
proposal from a third party had been publicly announced, disclosed
or communicated or made known to First Federal at any time after
the date of the merger agreement and prior to the date of
termination; or
o if either party terminates the merger agreement as a result of the
failure of First Federal's stockholders to approve the merger, and
an acquisition proposal from a third party had been publicly
announced, disclosed or communicated or made known to First Federal
at any time after the date of the merger agreement and prior to the
date of the First Federal stockholders meeting.
Under no circumstances will First Federal be required to pay more than
$450,000 in the aggregate under the termination fee provisions.
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EXPENSES
Each of Classic and First Federal will pay its own costs and expenses
incurred in connection with the merger, except that Classic and First Federal
will share equally the expense of filing, printing and mailing this proxy
statement/prospectus.
CHANGING THE TERMS OF THE MERGER AGREEMENT
Before the completion of the merger, Classic and First Federal may
agree to waive, amend or modify any provision of the merger agreement. However,
after the vote by First Federal stockholders, Classic and First Federal can make
no amendment or modification that would reduce the amount or alter the kind of
consideration to be received by First Federal's stockholders under the terms of
the merger.
BANK MERGER
Pursuant to the merger agreement, First Federal Savings Bank and
Classic Bank entered into the bank merger agreement. The bank merger agreement
provides for the merger of First Federal Savings Bank with and into Classic
Bank.
BOARD OF DIRECTORS
After completion of the merger, the board of directors of Classic will
consist of all of the current directors of Classic and Steven C. Milleson. The
board of directors of Classic Bank will consist all of the current directors of
Classic Bank and Edward R. Rambacher and David Phillips.
DESCRIPTION OF CLASSIC COMMON STOCK
Set forth below is a summary of the certain features of the Classic
common stock. This summary is not a complete discussion of the charter documents
and other instruments of Classic that create the rights of the security holders.
GENERAL
Classic is authorized to issue 1,700,000 shares of common stock having
a par value of $.01 per share and 100,000 shares of preferred stock having a par
value of $.01 per share. Each share of Classic's common stock has the same
relative rights as, and is identical in all respects with, each other share of
common stock.
COMMON STOCK
DIVIDENDS. Classic can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its board of directors. The
payment of dividends by Classic is subject to limitations that are imposed by
law and applicable regulation. The holders of common stock of Classic are
entitled to receive and share equally in any dividends as may be declared by the
board of directors of Classic out of funds legally available for the payment of
dividends. If Classic issues preferred stock, the holders of the preferred stock
may have a priority over the holders of the common stock with respect to
dividends.
VOTING RIGHTS. The holders of common stock of Classic currently possess
exclusive voting rights in Classic. They elect Classic's board of directors and
act on any other matters as are required to be presented to them under
applicable law or as are otherwise presented to them by the board of directors.
Each holder of common stock is entitled to one vote per share and does not have
any right to cumulate votes in the election of directors. Classic's certificate
of incorporation, however, provides that a holder of Classic common stock who
owns, together with certain affiliates or persons acting in concert, in excess
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of 10% of the then-outstanding shares of common stock cannot vote any shares in
excess of 10%. If Classic issues preferred stock, holders of preferred stock may
also possess voting rights.
LIQUIDATION. In the event of liquidation, dissolution or winding up of
Classic, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of Classic available for distribution. If Classic issues preferred stock,
the holders of the preferred stock may have a priority over the holders of the
common stock in the event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the common stock of Classic are not
entitled to preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
PREFERRED STOCK
Classic may issue preferred stock with such designations, powers,
preferences and rights as Classic's board of directors may from time to time
determine. The board of directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued in
connection with the merger and there are no plans to issue preferred stock.
MANAGEMENT FOLLOWING THE MERGER
Information regarding the expected composition of the board of
directors of Classic after the completion of the merger is provided below.
Unless otherwise stated, each individual has held his or her current occupation
for the last five years. The age indicated for each individual is as of March
31, 2003. The indicated period of service as a director includes the period of
service as a director of Classic, Classic Bank, First Federal or First Federal
Savings Bank.
CLASSIC
TERMS ENDING IN 2003:
EVERETT B. GEVEDON, JR. Mr. Gevedon, age 69, is Vice Chairman of the
Board of Classic, a position he has held since March 2001. Mr. Gevedon has
served as a real estate consultant to corporations and individuals throughout
the eastern United States for the past 28 years. Prior to serving as a real
estate consultant, he was a general real estate appraiser and involved in real
estate sales. Mr. Gevedon has been a director of Classic or its predecessors
since 1980.
ROBERT A. MOYER, JR. Mr. Moyer, age 57, is involved in real estate
development projects in the Naples, Florida area. Mr. Moyer previously served as
Chairman and Chief Executive Officer of Alltech Technologies, LLC until late
2001. Prior to joining Alltech in January 2000, Mr. Moyer served as Chairman and
Chief Executive Officer of RAM Technologies, Inc., an Ashland Kentucky based
multi-faceted communications and technology company which he founded in 1976.
Mr. Moyer has been a director of Classic or its predecessors since 1993.
JOHN W. CLARK. Mr. Clark, age 61, has been the President and Chief
Executive Officer of John W. Clark Oil Co., a company engaged in the
distribution and sale of petroleum products, since its founding in 1970. In
addition, he has been the President of JRB, Inc., a common carrier trucking
company, since 1977; Clark Airway, an airplane leasing company, since 1990; and
John W. Clark Enterprises, a real estate development and holding company, since
1987. Mr. Clark has been a director of Classic or its predecessors since 1995.
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LISAH M . FRAZIER. Ms. Frazier, age 34, is Chief Operating Officer,
Chief Financial Officer, Secretary and Treasurer of Classic, positions she has
held since November 2000. Ms. Frazier is also Chief Operating Officer and Chief
Financial Officer of Classic Bank, positions she has held since November 2000.
Prior to these positions, Ms. Frazier served as Senior Vice President and Chief
Financial Officer of the Company and Classic Bank since joining the Bank in
August 1995. Ms. Frazier, a Certified Public Accountant, prior to joining
Classic Bank, served as Investment Coordinator with Trust Company of Kentucky, a
subsidiary of Community Trust Bancorp, from June 1995 to August 1995. Prior to
that position, Ms. Frazier served as Audit Specialist in the internal audit
department of Community Trust Bancorp from 1993 to 1995. Ms. Frazier served as
Senior Auditor with the regional accounting firm of Kelley, Galloway & Company
from 1990 to 1993. Ms. Frazier is a member of the Kentucky Society of Certified
Public Accountants and serves on the Leadership Council for the Kentucky Society
of CPAs.
TERMS ENDING IN 2004:
C. CYRUS REYNOLDS. Mr. Reynolds, age 76, is Chairman of the Board of
Classic, a position he has held since September 1995. Until March 2001, Mr.
Reynolds also served as Chairman of the Board of Classic Bank. Mr. Reynolds
retired as property Valuation Administrator for Boyd County, Kentucky, an
elected office he held from 1977 until retirement. From 1960 to 1981, Mr.
Reynolds was the owner of Reynolds Insurance Agency, a general lines insurance
agency located in Ashland, Kentucky. Mr. Reynolds is a member and former officer
of the Ashland Lions Club, and has served on various state commissions,
including 18 years of service as Chairman of the Boyd County Democratic Party.
Mr. Reynolds has also served as Treasurer of the Westwood Christian Church for
40 years. Mr. Reynolds has been a director of Classic or its predecessors since
1960.
DAVID B. BARBOUR. Mr. Barbour, age 55, is President and Chief Executive
Officer of Classic and Chairman and Chief Executive Officer of Classic Bank,
positions he has held since September 1995 and March 2001, respectively. Prior
to joining Classic Bank in March of 1995, Mr. Barbour served as Senior Vice
President and Senior Lending Officer of First American bank, a commercial bank
located in Ashland, Kentucky with assets of $225 million. As Senior Vice
President and Senior Lending Officer, Mr. Barbour was responsible for First
American Bank's loan portfolio, including the commercial, consumer and real
estate lending divisions. Mr. Barbour had been employed by First American Bank
since 1977 and held a variety of management positions, including Senior Vice
President and Senior Lending Officer since 1989. Mr. Barbour holds the
designation of Certified Lender, Business Banking (C.L.B.B.). Mr. Barbour holds
a Graduate Banking Degree from the Graduate School of Banking at Louisiana State
University.
JEFFREY P. LOPEZ, M.D. Dr. Lopez, age 44, is President of Ashland
Radiation Oncology, Inc. and owner of Tri-State Regional Cancer Center located
in Ashland, Kentucky. A native of Madison, Indiana, Dr. Lopez is a graduate of
Indiana University, obtained his medical degree from Indiana School of Medicine
and served his residency in Radiation Oncology at the University of Illinois. He
serves on the Board of Directors of the Boyd County chapter of the American
Cancer Society, a position he has held since 1989. He is past President of the
Boyd County Medical Society, having served two terms as President. He is a
member of the Board of Directors for the Association of Free Standing Radiation
Oncology Centers, of which he also is a two-term past-President, and is a member
of the Board of Directors of King's Daughters' Medical Center in Ashland,
Kentucky. Mr. Lopez has been a director of Classic since 1996.
TERMS ENDING IN 2005:
ROBERT B. KEIFER, JR. Mr. Keifer, age 66, is a retired group
vice-president of Ashland Petroleum Company, an operating division of Ashland,
Inc., where he was employed from 1966 to 1992. From 1992 to 1994, Mr. Keifer
served as a consultant to Equal Opportunity Finance, a minority small business
investment company. Mr. Keifer previously served as President of the Board of
71
Directors of Community Hospice, Inc. and as a director of Area Education
Projects. Mr. Keifer has been a director of Classic or its predecessors since
1991.
DAVID A. LANG. Mr. Lang, age 59, is a retired executive of American
Electric Power, where he was employed from 1965 to 2000. During his tenure with
American Electric Power, Mr. Lang held a variety of positions including
Executive Assistant - Operations, Kentucky Region Director, and Manager of
National Accounts. Mr. Lang is a Registered Professional Engineer in the
Commonwealth of Kentucky. Mr. Lang is also a former director of the Chamber of
Commerce of Boyd and Greenup Counties and co-chair of the Conference Board's USA
Quality Council. Mr. Lang has been a director of Classic or its predecessors
since 1991.
ROBERT L. BAYES. Mr. Bayes, age 59, is Executive Vice President of
Classic and Paintsville Market Area President of Classic Bank. From 1983 to
2001, Mr. Bayes served as President of The First National Bank of Paintsville, a
subsidiary of the Company that was merged into Classic Bank in March 2001. A
Certified Public Accountant, Mr. Bayes holds a B.S. in Business Administration
from Berea College, attended Graduate School at the University of Kentucky and
holds a graduate banking degree from Stonier Graduate School of Banking at
Rutgers University. Mr. Bayes is a member of the American Institute of CPA's and
Kentucky Society of CPA's.
STEVEN C. MILLESON. Mr. Milleson, age 50, is a doctor of optometry and
owner and operator of the Ironton Vision Center, Inc. located in Ironton, Ohio.
Dr. Milleson has been a member and past President of the Ironton Lions Club, a
founding member and past Board member of The Tri-State Fair and Regatta, a past
Board member of the Hecla Water Association, and an original member of the Board
of the Ashland Youth Ballet Company and its current President of the Board and
Chairman of the Production Committee. Dr. Milleson is a member of the St. Joseph
Catholic Church. Mr. Milleson has been a director of First Federal since 1990.
DIRECTORS' COMPENSATION
The monthly fee for service on the Boards of Directors of Classic and
Classic Bank are $600 and $250, respectively. Directors of Classic Bank also
receive $50 for each committee meeting attended.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
After completion of the merger, the executive officers and key
employees of Classic and Classic Bank will consist of the current executive
officers and key employees of Classic and First Federal and Jeffery Clark,
Controller of First Federal. Mr. Clark will serve as Ohio Market Area President
of Classic Bank.
The following sets forth certain information regarding the executive
officers and key employees of Classic and First Federal who are not anticipated
to be directors of Classic after completion of the merger. The following
individuals are elected annually and hold office until their successors have
been elected and qualified or until they are removed or replaced. Ages are as of
March 31, 2003.
ROBERT S. CURTIS, age 53, is President and Director of Classic Bank, a
position he has held since March 2001. Prior to becoming President, Mr. Curtis
was Executive Vice President and Senior Lending Officer. Mr. Curtis is also
Executive Vice President of Classic, a position he has held since September
1995. Prior to joining Classic Bank in May 1995, Mr. Curtis served as Vice
President and Real Estate Lending Division Manager of Second National Bank,
Ashland, Kentucky from 1990 until May 1995. As Vice President and Real Estate
Lending Division Manager, Mr. Curtis was responsible for the bank's residential
real estate portfolio that totaled in excess of $35.0 million. Mr. Curtis began
his career with First American Bank in 1973.
72
JEFFERY W. CLARK, age 44, has been Controller of First Federal since
its formation in 1996 and of First Federal Savings Bank since 1986.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined consolidated
balance sheet as of December 31, 2002 and the unaudited pro forma condensed
combined consolidated statements of income for nine months ended December 31,
2002 and the year ended March 31, 2002 give effect to the pending merger,
accounted for as a purchase. Classic's fiscal year ends March 31 and First
Federal's fiscal year ends September 30. The historical Consolidated Statements
of Income of First Federal as presented in the unaudited pro forma condensed
combined statements of income for the nine months and full fiscal year periods
include information from more than one of its fiscal years.
The unaudited pro forma condensed combined consolidated financial
information is based on the historical consolidated financial statements of
Classic and First Federal under the assumptions and adjustments set forth in the
accompanying notes. The unaudited pro forma condensed combined consolidated
balance sheet gives effect to the merger as if the merger had been consummated
at the end of the period presented. The unaudited pro forma condensed combined
consolidated statements of income give effect to the merger as if the merger had
been consummated on April 1 of each of the periods presented. The unaudited pro
forma condensed combined consolidated financial statements do not give effect to
any anticipated cost savings or revenue enhancements in connection with the
merger.
You should read the unaudited pro forma condensed combined consolidated
financial statements in conjunction with the consolidated historical financial
statements of Classic and First Federal, including the respective notes to those
statements. The pro forma information is not necessarily indicative of the
combined financial position or the results of operations in the future or of the
combined financial position or the results of operations which would have been
realized had the merger been consummated during the periods or as of the dates
for which the pro forma information is presented. We anticipate that the merger
will provide the combined company with financial benefits that include reduced
operating expenses and opportunity to earn more revenue. In addition, Classic
will incur costs in acquiring First Federal. The pro forma information, while
helpful in illustrating the financial characteristics of the new company under
one set of assumptions, does not reflect these benefits and costs and,
accordingly, does not attempt to predict or suggest future results.
Pro forma per share amounts for the combined company are based on a
..9797 exchange ratio.
73
CLASSIC BANCSHARES, INC. AND FIRST FEDERAL FINANCIAL BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
ACTUAL (UNAUDITED) PRO FORMA PRO FORMA
CLASSIC FIRST FEDERAL ADJUSTMENTS COMBINED
------- -------------- ----------- ---------
ASSETS
Cash and cash equivalents $ 5,771 $ 6,789 (275)(b)
(218)(c)
(232)(g)
(5,975)(h) $ 5,860
Securities available-for-sale 36,250 4,882 -- 41,132
Securities held-to-maturity -- 9,735 48 (d) 9,783
Loans, net 180,161 52,137 741 (d)
(500)(f) 232,539
Real estate owned -- 237 -- 237
Premises and equipment 6,044 2,006 -- 8,050
Accrued interest receivable 1,289 398 -- 1,687
Other assets 1,556 183 -- 1,739
Core deposit intangible -- -- 495 (e) 495
Goodwill 5,555 83 3,055 (k) 8,693
-------- ------- --------- --------
Total assets $236,626 $76,450 $ (2,861) $310,215
======== ======= ========= ========
LIABILITIES
Deposits $175,988 $57,557 198 (d) $233,743
Federal Home Loan Bank Advances 29,147 9,052 -- 38,199
Other borrowings 5,131 -- -- 5,131
Accrued interest payable and other liabilities 1,946 622 12 (j)
-- -- 369 (d) 2,949
-------- ------- --------- --------
Total liabilities $212,212 $67,231 $ 579 $280,022
======== ======= ========= ========
STOCKHOLDERS' EQUITY
Common stock 13 5 (5)(a)
2 (i) 15
Additional paid-in capital 20,373 4,418 (4,418)(a)
5,777 (i) 26,150
Unearned ESOP (643) (175) 175 (a) (643)
Unearned stock awards (12) (379) 379 (a) (12)
Treasury stock (2,888) -- -- (2,888)
Retained earnings 7,056 5,308 (5,308)(a) 7,056
Other comprehensive income 515 42 (42)(a) 515
-------- ------- --------- --------
Total stockholders' equity 24,414 9,219 (3,440) 30,193
-------- ------- --------- --------
Total liabilities and equity $236,626 $76,450 $ (2,861) $310,215
======== ======= ========= ========
Book value per share $ 22.08 $ 19.97 -- $ 22.84
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements.
74
(a) To record the elimination of First Federal equity.
(b) To record the capitalization of Classic costs related to the acquisition.
(c) To record the payment of First Federal costs related to the acquisition..
(d) To record the adjustment of loans, deposits and securities at fair value,
including the related deferred taxes.
(e) To record indentifiable intangible assets acquired in the merger.
(f) To record an increase in the allowance for loan losses for First Federal.
(g) To record the payment of an employment agreement to a First Federal
employee.
(h) To record the cash payment in connection with the purchase of 50% of First
Federal outstanding stock at $24 per share and the payment of First Federal
stock options at $12 per share.
(i) To record the exchange of 50% of First Federal outstanding common stock for
.9797 shares of Classic common stock.
(j) To record the accrual of data processing termination fees, net of tax and
the related tax effect of other merger charges.
(k) To record goodwill resulting from the merger.
75
CLASSIC BANCSHARES, INC. AND FIRST FEDERAL FINANCIAL BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
ACTUAL (UNAUDITED) PRO FORMA PRO FORMA
CLASSIC FIRST FEDERAL ADJUSTMENTS COMBINED
------- ------------- ----------- ---------
INTEREST INCOME:
Loans $ 9,171 $ 2,890 $ (56) (a) $ 12,005
Securities 1,421 477 (176) (d)
(97) (f) 1,713
Other 69 24 -- 93
-------- ------- --------- --------
Total interest income 10,661 3,391 (241) 13,811
-------- ------- --------- --------
INTEREST EXPENSE:
Deposits 2,985 1,261 (149) (b) 4,097
Federal Home Loan Bank advances 750 322 -- 1,072
Other borrowings 48 -- -- 48
-------- ------- --------- --------
Total interest expense 3,783 1,583 (149) 5,217
-------- ------- --------- --------
Net interest income 6,878 1,808 (92) 8,594
Provision for loan losses 306 65 -- 371
-------- ------- --------- --------
Net interest income after provision for
loan losses 6,572 1,743 (92) 8,223
-------- ------- --------- --------
NON-INTEREST INCOME:
Service charges 1,028 59 -- 1,087
Other fee income -- 55 -- 55
Gain on sale of securities 11 -- -- 11
Other 181 11 -- 192
-------- ------- --------- --------
Total other income 1,220 125 -- 1,345
-------- ------- --------- --------
NON-INTEREST EXPENSE:
Compensation and benefits 2,395 603 -- 2,998
Occupancy and equipment 745 119 -- 864
Data processing -- 129 -- 129
Federal insurance premiums 20 6 -- 26
Advertising 229 53 -- 282
Professional fees 138 95 -- 233
Other 1,275 306 68 (c) 1,649
-------- ------- --------- --------
Total other expense 4,802 1,311 68 6,181
-------- ------- --------- --------
Income before income taxes 2,990 557 (160) 3,387
Income taxes 818 188 (54) (e) 952
-------- ------- --------- --------
Net income $ 2,172 $ 369 $ (106) $ 2,435
======== ======= ========= ========
Basic earnings per share $ 2.07 $ 0.85 -- $ 1.92
Diluted earnings per share $ 1.91 $ 0.82 -- $ 1.79
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements.
76
(a) To record the amortization of fair value adjustments to loans acquired.
(b) To record the amortization of fair value adjustments to deposits acquired.
(c) To record to amortization of core deposit intangible recorded at
acquisition.
(d) To record the lost interest cash paid.
(e) To record the tax effect of all other adjustments at 34%.
(f) To record the amortization of premium recorded on securities.
77
CLASSIC BANCSHARES, INC. AND FIRST FEDERAL FINANCIAL BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
ACTUAL (UNAUDITED) PRO FORMA PRO FORMA
CLASSIC FIRST FEDERAL ADJUSTMENTS COMBINED
------- ------------- ----------- ---------
INTEREST INCOME:
Loans $ 11,899 $ 4,104 $ (74)(a) $ 15,929
Securities 1,707 733 (235)(d)
(10)(f) 2,195
Other 103 47 -- (d) 150
-------- ------- --------- --------
Total interest income 13,709 4,884 (319) 18,274
-------- ------- --------- --------
INTEREST EXPENSE:
Deposits 5,266 2,370 (198)(b) 7,438
Federal Home Loan Bank advances 718 491 -- 1,209
Other borrowings 116 -- -- 116
-------- ------- --------- --------
Total interest expense 6,100 2,861 (198) 8,763
-------- ------- --------- --------
Net interest income 7,609 2,023 (121) 9,511
Provision for loan losses 363 67 -- 430
-------- ------- --------- --------
Net interest income after provision for
loan losses 7,246 1,956 (121) 9,081
-------- ------- --------- --------
OTHER INCOME:
Service charges 1,189 54 -- 1,243
Other fee income -- 62 -- 62
Gain on sale of securities 7 -- -- 7
Other 258 20 -- 278
-------- ------- --------- --------
Total other income 1,454 136 -- 1,590
-------- ------- --------- --------
OTHER EXPENSE:
Compensation and benefits 2,750 630 -- 3,380
Occupancy and equipment 964 144 -- 1,108
Data processing -- 138 -- 138
Federal insurance premiums 14 9 -- 23
Advertising 300 80 -- 380
Professional fees 153 145 -- 298
Other 1,545 406 90 (c) 2,041
-------- ------- --------- --------
Total other expense 5,726 1,552 90 7,368
-------- ------- --------- --------
Income before income taxes 2,974 540 (211) 3,303
Income taxes 774 176 (72)(e) 878
-------- ------- --------- --------
Net income $ 2,200 $ 364 $ (139) $ 2,425
======== ======= ========= ========
Basic earnings per share $ 2.08 $ 0.85 -- $ 1.88
Diluted earnings per share $ 1.94 $ 0.85 -- $ 1.78
See Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial
Statements.
78
(a) To record the amortization of fair value adjustments to loans acquired.
(b) To record the amortization of fair value adjustments to deposits acquired.
(c) To record the amortization of core deposit intangible recorded at
acquisition.
(d) To record the lost interest on cash paid.
(e) To record the tax effect of all other adjustments at 34%.
(f) To record the amortization of premium recorded on securities.
79
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited Pro Forma Condensed Combined Consolidated Financial Data
has been prepared assuming the merger will be accounted for under the purchase
method and is based on the historical consolidated financial statements of
Classic and the historical consolidated financial statements of First Federal,
which have been adjusted to reflect the historical cost of First Federal's
assets at their fair value. In addition, pro forma adjustments have been
included to give effect to events that are directly attributable to the merger
and expected to have a continuing impact on the combined company. Pro forma
adjustments for the Pro Forma Condensed Combined Consolidated Statements of
Income include amortization of core deposit intangible and other adjustments
based on the allocated purchase price of net assets acquired.
NOTE 2. CALCULATION OF THE PURCHASE PRICE AND GOODWILL
The preliminary calculation of the cost to acquire First Federal is
described in the table below (in thousands):
Cash payment to First Federal stockholders at $24 per share for 50% of the
461,622 shares of First Federal common stock outstanding $ 5,540
Cash payment for 36,224 First Federal stock options at $12 per share 435
Market value of Classic common stock to be issued assuming
that 50% of First Federal's common stock outstanding will be exchanged
for .9797 shares of Classic common stockassumed to be $25.50 per share) 5,779
Cost of acquisition incurred by Classic 275
--------
$ 12,029
========
Historical net assets of First Federal $ 9,219
Accrual of First Federal after-tax merger related charges, data processing
termination fees, and other adjustments (962)
Fair market value adjustments as of December 31, 2002:
Loans 741
Securities 48
Deposits (198)
Core deposit intangible 495
Goodwill 3,055
Deferred taxes on purchase accounting adjustments (369)
$ 12,029
========
80
NOTE 3. FIRST FEDERAL MERGER RELATED CHARGES
In connection with the merger, First Federal expects to incur pre-tax
merger related charges of approximately $700,000. These charges are expected to
include $282,000 in change-of-control, severance and other employee related
payments, $250,000 in data processing termination fees, and $168,000 in
investment banking, legal and accounting fees. An accrual for the merger related
charges and the related tax effect of $12,000 has been reflected in the
unaudited Pro Forma Condensed Combined Consolidated Balance Sheet as of December
31, 2002.
NOTE 4. CLASSIC MERGER RELATED CHARGES
In connection with the merger, Classic expects to incur pre-tax merger
related charges of approximately $275,000, consisting of investment banking,
legal and accounting fees. These fees have been reflected as a component of the
purchase price of First Federal.
NOTE 5. STOCKHOLDERS' EQUITY
Pursuant to the merger agreement, stockholders of First Federal will be
entitled to elect to receive, in exchange for each share of common stock held,
either $24.00 in cash or shares of Classic common stock. The election process,
however, is subject to limitations that will cause the aggregate purchase price
to be comprised of 50% Classic common stock and 50% cash. Based on the
outstanding number of shares of First Federal common stock at December 31, 2002,
in the aggregate, First Federal stockholders will receive $5.5 million in cash
($24.00 per share for 230,811 shares) and 226,615 shares of Classic common stock
(assuming an exchange ratio of .9797 shares of Classic common stock per share of
First Federal common stock). The 226,615 shares will be issued out of authorized
and unissued shares. Approximately 1,332,101 shares of Classic common stock will
be outstanding for the combined company after the merger.
NOTE 6. AVERAGE SHARES OUTSTANDING
The pro forma weighted average shares outstanding is based on the
historical Classic weighted average shares outstanding plus 226,615 shares of
Classic common stock to be issued to First Federal stockholders.
NOTE 7. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
For purposes of determining the pro forma effect of the First Federal
acquisition on the statement of income, the following pro forma adjustments have
been made as if the acquisition had occurred as of April 1 with respect to each
of the periods:
Nine Months Ended Year Ended
December 31, 2002 March 31, 2002
----------------- --------------
(In thousands)
Yield adjustment for interest income on securities $ (9) $ (10)
Yield adjustment for interest income on loans (56) (74)
Amortization of core deposit intangible (68) (90)
Yield adjustment for lost interest on cash paid (176) (235)
Yield adjustment for interest expense on deposits 149 198
----- -----
(160) (211)
Tax benefits of pro forma adjustments 54 72
----- -----
$ 106 $(139)
===== =====
81
The following assumptions were utilized for purposes of determining the
pro forma effect of the First Federal acquisition on the statement of income:
Weighted average Method of
Remaining Term Amortization/Accretion
Useful Life or Depreciation
---------------- ----------------------
Securities 5 years Straight line
Loans 10 years Straight line
Core deposit intangible 10 years Accelerated method
Deposits 12 months Straight line
In addition to the above assumptions, reductions in interest income on
cash balances as a result of the cash payment to the First Federal stockholders
are calculated based on a 3.50% interest rate. Income tax expense is adjusted
based on a combined federal and state tax rate of 34%.
In accordance with Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets goodwill will not be amortized, but will be reviewed for
impairment at least annually.
COMPARISON OF RIGHTS OF STOCKHOLDERS
The rights of stockholders of Classic and First Federal are currently
governed by their certificate of incorporation, bylaws and applicable provisions
of the Delaware General Corporation Law and the rules and regulations of the SEC
and the NASDAQ. The rights of stockholders of First Federal are also governed by
its Stockholders Protection Rights Agreement. See "The Merger - Stockholders
Protection Rights Agreement." If we complete the merger, First Federal
stockholders who receive Classic common stock will become Classic stockholders
and their rights will be governed by Classic's certificate of incorporation and
bylaws and the Delaware General Corporation Law.
The following is a summary of the material differences between the
rights of a First Federal stockholder and the rights of a Classic stockholder.
This summary is not a complete statement of the differences between the rights
of First Federal stockholders and the rights of Classic stockholders and is
qualified in its entirety by reference to the governing law of each corporation
and to the certificate or articles of incorporation and bylaws of each
corporation. Copies of Classic's and First Federal's certificate of
incorporation and bylaws are on file with the Securities and Exchange
Commission.
AUTHORIZED STOCK
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o The Classic certificate of o The First Federal articles of
incorporation authorizes incorporation authorize
1,800,000 shares of capital 1,500,000 shares of capital
stock, consisting of 1,700,000 stock, consisting of 1,000,000
shares of common stock, $.01 common stock, $.01 par value,
par value, and 100,000 shares and 500,000 shares of serial
of serial preferred stock, preferred stock, $.01 par
$.01 par value. value.
o As of December 31, 2002, there o As of December 31, 2002, there
were 1,105,486 shares of were 461,622 shares of First
Classic common stock issued Federal common stock issued
and outstanding. and outstanding.
o As of December 31, 2002, there o Same.
were no shares of preferred
stock issued or outstanding.
82
VOTING RIGHTS
- --------------------------------------------------------------------------------
Classic First Federal
- ---------------------------------- -----------------------------------
o The holders of the common o Same.
stock exclusively possess all
voting power, subject to the
authority of the board of
directors to offer voting
rights to the holders of
preferred stock.
o Each share of common stock is o No current limit.
entitled to one vote.
Beneficial owners of 10% or
more of the outstanding stock
are subject to voting
limitations.
o Holders of common stock may o Same.
not cumulate their votes for
the elections of directors.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
- --------------------------------------------------------------------------------
Classic First Federal
- ---------------------------------- -----------------------------------
o At least 80% of the o At least 50% of the
outstanding shares of voting outstanding shares of voting
stock must approve certain stock generally must approve
"business combinations" mergers under applicable
involving an "interested Delaware law.
stockholder" or any "affiliate
of an "interested
stockholder." See "Selected
Provisions In The Certificate
of Incorporation And Bylaws Of
Classic-- Business
Combinations with Related
Persons." However, if a
majority of directors not
affiliated with the interested
stockholder approves the
business combination and
certain pricing criteria are
satisfied, a majority vote of
the outstanding shares is
sufficient to approve a
business combination.
o The approval of the holders of o No similar provision.
at least 80% of voting shares
is required subject to certain
exceptions for any direct or
indirect purchase or other
acquisition of equity
securities from any interested
person other than certain
acquisitions made on the same
terms to all holders of such
securities.
DIVIDENDS
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o Holders of common stock are o Same.
entitled, when declared by the
Classic Board, to receive
dividends, subject to the
rights of holders of preferred
stock.
83
STOCKHOLDER'S MEETINGS
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o Classic must deliver notice of o Same.
the meeting and, in the case
of a special meeting, a
description of its purpose no
fewer than ten days and no
more than 60 days before the
meeting to each stockholder
entitled to vote.
o Only the board of directors o Same.
may call a special meeting.
o The holders of at least one o The holders of at least one
third of the voting stock half of the voting stock
constitutes a quorum for constitute a quorum for
stockholder meetings. stockholders meetings.
o The board of directors or any o Same.
stockholder entitled to vote
may nominate directors for
election or propose new
business.
o To nominate a director, o To nominate a director or
stockholders must give written propose new business,
notice to the Secretary of stockholders must give written
Classic not less than 70 days notice to the Secretary of
prior to the meeting. However, First Federal not less than 90
if Classic gives less than 80 days prior to the anniversary
days' notice or prior public date of the mailing of First
disclosure of the meeting, Federal's proxy materials for
written notice of the its immediately proceeding
nomination must be delivered annual meeting. Each notice
to the Secretary not later given by a stockholder with
than ten days following the respect to a nomination to the
date notice of the meeting was board of directors or proposal
mailed to stockholders or for new business must include
public disclosure of the certain information regarding
meeting was made. Each notice the nominee or proposal and
given by a stockholder with the stockholder making the
respect to a nomination to the nomination or proposal.
board of directors must
include certain information
regarding the nominee and the
stockholder making the
nomination.
o To propose new business,
stockholders must give written
notice to the Secretary of
Classic not less than 70 days
prior to the anniversary date
of the preceding year's annual
meeting. However, if the date
of the meeting is advanced by
more than 20 days or delayed
more than 60 days from the
anniversary date of the prior
year's annual meeting, written
notice of the nomination must
be delivered to the Secretary
on the later of (i) the 70th
day prior to the annual
meeting or (ii) the 10th day
following the date notice of
the meeting was mailed to
stockholders or public
disclosure of the date of the
meeting was made. Each notice
84
given by a stockholder with
respect to a proposal for new
business must include certain
information regarding the
proposal and the stockholders
making the proposal.
ACTION BY STOCKHOLDERS WITHOUT A MEETING
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o No action that requires the o Same.
approval of the stockholders
may be taken without a meeting
by the written consent of
stockholders.
BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o The certificate of o The bylaws provides that the
incorporation provides that number of directors shall be
the number of directors shall seven but that the number may
be fixed by resolution of the be increased or decreased by
board of directors. the Board provided that there
be no fewer than five nor more
than 15.
o The board of directors is o Same.
divided into three classes as
equal in number as possible
and approximately one-third of
the directors are elected at
each annual meeting.
o Vacancies on the board of o Same.
directors will be filled by
the remaining directors.
o Directors may be removed only o Directors may be removed only
for cause by the vote of at for cause by the vote of at
least 80% of the outstanding least a majority of the
shares entitled to vote for outstanding shares entitled to
directors. vote for directors.
o Other than persons serving on o No similar restrictions.
a board of directors as of the
date of the adoption of the
bylaws, no person shall be
eligible for election who is
70 years or older and no
person is eligible for board
service beyond the annual
meeting of stockholders in the
year such director turns 80.
o Directors are not personally o The personal liability of
liable to Classic or its directors and officers for
stockholders for monetary monetary damages shall be
damages for a breaches of eliminated by the fullest
their fiduciary duties except extent submitted by Delaware
for (i) breaches of the duty law as in effect on the date
of loyalty, (ii) acts or of the certificate of
omissions not in good faith incorporation or as such law
which involve intentional may thereafter be in effect.
misconduct, and (iii) any
transactions from which a
director derives improper
personal benefits. In
addition, if applicable law is
amended to further eliminate
or limit personal liability of
85
directors, then the liability
of directors shall be limited
to the fullest extent
permitted by law.
AMENDMENT OF THE BYLAWS
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o The bylaws may be amended or o The bylaws may be amended or
repealed only with the repealed with the approval of
approval of at least a the board of directors or a
majority of the board of majority of the stockholders,
directors or by the vote of at except that stockholders may
least 80% of the outstanding not amend without a 75% vote
shares. certain provisions regarding
the board of directors,
stockholders meetings,
directors and officers
liability, stockholder
proposals and nominations and
director and officer
indemnification.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o The certificate of o The certificate of
incorporation may be amended incorporation may be amended
or repealed upon approval of or repealed upon approval of
at least a majority of the at least a majority of the
board of directors and by a board of directors and by a
majority of shares entitled to majority of shares entitled to
vote on the matter, unless vote on the matter unless
otherwise provided in the otherwise provided in the
certificate of incorporation certificate of incorporation
or Delaware law. However, or Delaware law. However,
amendments to the certificate amendments to the certificate
of incorporation that would of incorporation that would
revise the provisions relating revise the provisions relating
to, among other things, the to the number, term and
number, terms and classification, election and
classification, election and removal procedures for
removal procedures for directors, meetings of
directors, the process for stockholders, and director
calling special meetings of liability, which are not
stockholders, voting approved by at least 80% of
restrictions applicable to the directors then in office
beneficial owners of 10% or require approval by at least
more of the voting stock, 75% of the outstanding shares.
stockholder approval of
business combinations with
interested stockholders, the
authority of the Board to
establish the terms of
authorized preferred stock,
the restrictions on stock
purchases from certain
interested parties,
consideration of social and
economic factors when
evaluating a proposed business
combination, indemnification
of directors, officers and
employees of Classic,
amendments of the bylaws and
amendment of the certificate
of incorporation require
approval by at least 80% of
the outstanding shares.
86
STOCKHOLDER PROTECTION RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
CLASSIC FIRST FEDERAL
- ---------------------------------- -----------------------------------
o None. o First Federal has a
Stockholder Protection Rights
Agreement permitting First
Federal stockholders to
purchase voting preferred or
common stock under certain
circumstances. Such agreement
may have an anti-takeover
effect.
FIRST FEDERAL
STOCKHOLDER PROTECTION RIGHTS PLAN
Each share of First Federal common stock has attached to it one right
issued pursuant to a stockholder protection rights agreement, dated March 22,
2001, between First Federal and Registrar and Transfer Company, as rights agent.
Each right entitles its holder to purchase one-hundredth of a share of
First Federal's participating preferred stock at an exercise price of $40,
subject to adjustment, after the separation time, which is after the close of
business on the earlier of:
o the tenth business day after commencement of a tender or exchange
offer that, if consummated, would result in a person becoming an
acquiring person, which is defined as a person who, under certain
circumstances, becomes the beneficial owner of 10% or more of the
outstanding shares of First Federal common stock, and
o the tenth business day after the first date of public announcement
that a person has become an acquiring person, which is also called
the flip-in date.
The rights will not be exercisable until the business day following the
separation time. The rights will expire on the earliest of:
o an exchange of the rights for First Federal common stock, as
described below,
o their redemption, as described below,
o May 23, 2011, or
First Federal's merger into another corporation pursuant to an agreement entered
into prior to a flip-in date.
The First Federal board of directors may, at any time between a flip-in
date and the time that an acquiring person becomes the beneficial owner of more
than 50% of the outstanding shares of First Federal common stock, elect to
exchange all of the outstanding rights (other than those held by an acquiring
person) for shares of First Federal common stock at an exchange ratio of one
share of First Federal common stock per right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction. First Federal may, at
its option, substitute shares of certain types of preferred stock, at a ratio of
one one-hundredth of a share of preferred stock for each share of common stock
issuable under the rights plan.
First Federal's board of directors may, at any time prior to the
occurrence of a flip-in date, redeem all the rights at a price of $0.01 per
right.
87
Under the rights agreement, the rights expire upon the merger of First
Federal into another corporation pursuant to an agreement entered into prior to
a flip in date.
Although the rights agreement was entered into to encourage potential
acquirors to negotiate with First Federal's board, it may have an anti-takeover
effect and discourage offers that might be in the best interests of or a
majority of First Federal's stockholders.
SELECTED PROVISIONS IN THE CERTIFICATE OF INCORPORATION
AND BYLAWS OF CLASSIC
Classic's certificate of incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of Classic by means of
a tender offer, proxy contest or otherwise. Certain provisions will also render
the removal of the incumbent board of directors or management of Classic more
difficult. These provisions may have the effect of deterring or defeating a
future takeover attempt that is not approved by Classic's board of directors,
but which Classic stockholders may deem to be in their best interests or in
which stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have the opportunity to do so. The following
description of these provisions is only a summary and does not provide all of
the information contained in Classic's certificate of incorporation and bylaws.
See "Where You Can Find More Information" as to where to obtain a copy of these
documents.
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
The certificate of incorporation requires the approval of the holders
of at least 80% of Classic's outstanding shares of voting stock entitled to vote
to approve certain "business combinations" with an "interested stockholder."
This supermajority voting requirement will not apply in cases where the proposed
transaction has been approved by a majority of those members of Classic's board
of directors who are unaffiliated with the interested stockholder and who were
directors before the time when the interested stockholder became an interested
stockholder or if the proposed transaction meets certain conditions that are
designed to afford the stockholders a fair price in consideration for their
shares. In each such case, where stockholder approval is required, the approval
of only a majority of the outstanding shares of voting stock is sufficient.
Under Delaware law, absent this provision, business combinations must be
approved by the vote of the holders of only a majority of the outstanding shares
of common stock of Classic and any other affected class of stock unless the
transaction is with a person who owns 15% or more of the corporation's voting
stock.
The term "interested stockholder" includes any individual, group acting
in concert, corporation, partnership, association or other entity (other than
Classic or its subsidiary) who or which is the beneficial owner, directly or
indirectly, of more than 10% of the outstanding shares of voting stock of
Classic.
A "business combination" includes:
o any merger or consolidation of Classic or any of its subsidiaries
with any interested stockholder, affiliate of an interested
stockholder or any corporation which is, or after such merger or
consolidation would be, an affiliate of an interested stockholder;
o any sale or other disposition to or with any interested stockholder
or its affiliate of 25% or more of the assets of Classic or
combined assets of Classic and its subsidiaries;
o the issuance or transfer to any interested stockholder or its
affiliate by Classic (or any subsidiary) of any securities of
Classic (or any subsidiary) in exchange for any cash, securities or
other property the value of which equals or exceeds 25% of the fair
market value of the common stock of Classic;
88
o the adoption of any plan for the liquidation or dissolution of
Classic proposed by or on behalf of any interested stockholder or
its affiliate; and
o any reclassification of securities, recapitalization, merger or
consolidation of Classic with any of its subsidiaries or any other
transaction which has the effect of increasing the proportionate
share of common stock or any class of equity or convertible
securities of Classic or subsidiary owned directly or indirectly,
by an interested stockholder or its affiliate.
LIMITATION ON VOTING RIGHTS
Classic's certificate of incorporation provides that no record owner of
any outstanding Classic common stock which is beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the then
outstanding shares of Classic common stock will be entitled or permitted to any
vote in respect of the shares held in excess of the 10% limit. Beneficial
ownership is determined pursuant to the federal securities laws and includes
shares beneficially owned by such person or any of his or her affiliates (as
defined in the certificate of incorporation), shares which such person or his or
her affiliates have the right to acquire upon the exercise of conversion rights
or options and shares as to which such person and his or her affiliates have or
share investment or voting power, but does not include shares beneficially owned
by directors, officers and employees of First Federal or Classic or shares that
are subject to a revocable proxy and that are not otherwise beneficially, or
deemed by Classic to be beneficially, owned by such person and his or her
affiliates.
EVALUATION OF OFFERS
The certificate of incorporation of Classic further provides that the
board of directors of Classic, when evaluating an offer to (1) make a tender or
exchange offer for any equity security of Classic, (2) merge or consolidate
Classic with another corporation or entity or (3) purchase or otherwise acquire
all or substantially all of the properties and assets of Classic, may, in
connection with the exercise of its judgment in determining what is in the best
interest of Classic and the stockholders of Classic, give consideration to the
social and economic effects of acceptance of such offer on: Classic's present
and future customers and employees and those of its subsidiaries (including
Classic Bank ); the communities in which Classic and Classic Bank operate or are
located; the ability of Classic to fulfill its corporate objectives as a
financial institution holding company; and the ability of Classic Bank to
fulfill the objectives of a financial institution under applicable statutes and
regulations. By having these standards in the certificate of incorporation of
Classic, the board of directors may be in a stronger position to oppose such a
transaction if the board concludes that the transaction would not be in the best
interest of Classic, even if the price offered is significantly greater than the
then market price of any equity security of Classic.
BOARD OF DIRECTORS
CLASSIFIED BOARD. The board of directors of Classic is divided into
three classes, each of which contains approximately one-third of the number of
directors. The stockholders elect one class of directors each year for a term of
three years. The classified board makes it more difficult and time consuming for
a stockholder group to fully use its voting power to gain control of the board
of directors without the consent of the incumbent board of directors of Classic.
FILLING OF VACANCIES; REMOVAL. Classic's certificate of incorporation
provides that any vacancy occurring in its board, including a vacancy created by
an increase in the number of directors, may be filled by a vote of a majority of
the directors then in office. A person appointed to fill a vacancy on the board
of directors will serve until the expiration of his or her term. The certificate
of incorporation of Classic provides that a director may be removed from the
board of directors prior to the expiration of his or her term only for cause and
only upon the vote of 80% of the outstanding shares of voting stock. These
89
provisions make it more difficult for stockholders to remove directors and
replace them with their own nominees.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS OF STOCKHOLDERS
Stockholders of Classic must act only through an annual or special
meeting. Stockholders cannot act by written consent in lieu of a meeting. The
certificate of incorporation provides that only a majority of the board of
directors of Classic may call special meetings of the stockholders of Classic.
Stockholders are not able to call a special meeting or require that the board do
so. At a special meeting, stockholders may consider only the business specified
in the notice of meeting given by Classic. The provisions of Classic's
certificate of incorporation prohibiting stockholder action by written consent
may have the effect of delaying consideration of a stockholder proposal until
the next annual meeting, unless a special meeting is called at the request of a
majority of the board of directors. These provisions also would prevent the
holders of a majority of common stock from unilaterally using the written
consent procedure to take stockholder action. Moreover, a stockholder could not
force stockholder consideration of a proposal between annual meetings over the
opposition of the board of directors by calling a special meeting of
stockholders.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
Classic's bylaws establish advance notice procedures for stockholders
to nominate directors or bring other business before an annual meeting of
stockholders of Classic. A person may not be nominated for election as a
director unless that person is nominated by or at the direction of Classic's
board of directors or by a stockholder who has given appropriate notice to
Classic before the meeting. Similarly, a stockholder may not bring business
before an annual meeting unless the stockholder has given Classic appropriate
notice of its intention to bring that business before the meeting. For more
information, see "- Comparison of Rights of Stockholders - Stockholder's
Meeting."
A stockholder who desires to raise new business must provide certain
information to Classic concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must
provide Classic with certain information concerning the nominee and the
proposing stockholder.
Advance notice of nominations or proposed business by stockholders
gives Classic's board of directors time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the board of directors, to inform stockholders and
make recommendations about those matters.
PREFERRED STOCK
The certificate of incorporation authorizes Classic's board of
directors to establish one or more series of preferred stock and, for any series
of preferred stock, to determine the terms and rights of the series, including
voting rights, conversion rates, and liquidation preferences. Although Classic's
board of directors has no intention at the present time of doing so, it could
issue a series of preferred stock that could, depending on its terms, impede a
merger, tender offer or other takeover attempt. Classic's board of directors
will make any determination to issue shares with those terms based on its
judgment as to the best interests of Classic and its stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION
Classic's certificate of incorporation requires the affirmative vote of
80% of the outstanding voting stock entitled to vote to amend or repeal certain
provisions of the certificate of incorporation, including the provision limiting
voting rights, the provisions relating to approval of business combinations with
90
related persons, acting by written consent, calling special meetings, the number
and classification of directors, director and officer indemnification by Classic
and amendment of Classic's bylaws and certificate of incorporation. These
supermajority voting requirements make it more difficult for the stockholders to
amend these provisions of the Classic certificate of incorporation.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The Delaware
takeover statute is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in certain transactions
with the target company.
In general, the statute provides that a "person" who owns 15% or more
of the outstanding voting stock of a Delaware corporation (an "interested
stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such person became an interested stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
the statute:
o any business combination if, before the date a person became an
interested stockholder, the board of directors approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
o any business combination involving a person who acquired at least
85% of the outstanding voting stock in the transaction in which he
became an interested stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and specific employee
stock plans;
o any business combination with an interested stockholder that is
approved by the board of directors and by a two-thirds vote of the
outstanding voting stock not owned by the interested stockholder;
and
o certain business combinations that are proposed after the
corporation had received other acquisition proposals and which are
approved or not opposed by a majority of certain continuing members
of the board of directors.
A corporation may exempt itself from the requirements of the statute by
adopting an amendment to its certificate of incorporation or bylaws electing not
to be governed by this statute. At the present time, Classic's board of
directors does not intend to propose any such amendment.
LEGAL MATTERS
The validity of the shares of Classic common stock to be issued in
connection with the merger will be passed upon for Classic by Jenkens &
Gilchrist, P.C., Washington, D.C.
EXPERTS
The financial statements of Classic as of March 31, 2002 and 2001 and
for the three fiscal years ended March 31, 2002 have been included in the Annual
Report to stockholders delivered together with this joint proxy
statement/prospectus in reliance upon the report of Smith, Goolsby, Artis and
91
Reams, P.S.C., independent certified public accountants, with respect to those
financial statements, and upon the authority of that firm as experts in
accounting and auditing.
The financial statements of First Federal as of September 30, 2002 and
2001 and for the two fiscal years ended September 30, 2002 and 2001 have been
included in the Annual Report on Form 10-KSB delivered together with this joint
proxy statement/prospectus in reliance upon the report of Kelley Galloway &
Company, PSC, independent certified public accountants, with respect to these
financial statements, and upon the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Classic has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the distribution
to First Federal stockholders of the shares of Classic common stock to be issued
in connection with the merger. The registration statement, including the
exhibits, contains additional relevant information about Classic and Classic
common stock. The rules and regulations of the SEC allow Classic to omit certain
information included in the registration statement from this proxy
statement/prospectus.
Classic and First Federal file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy any
reports, statements or other information that Classic and First Federal file at
the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.
Please call the SEC at 1-800-SEC-0330 for further information on the SEC's
public reference rooms. Classic's and First Federal's public filings are also
available to the public from commercial document retrieval services and at the
Internet World Wide Website maintained by the SEC at "http://www.sec.gov."
The SEC allows Classic and First Federal to "incorporate by reference"
information into this proxy statement/prospectus. This means that Classic and
First Federal can disclose important information to you by referring you to
another document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this document, except for any information
superseded by information contained directly in this document. This document
incorporates by reference the documents that are listed below that Classic and
First Federal have previously filed with the SEC. We also incorporate by
reference any other documents we file under the Securities Exchange Act of 1934
between the date of this joint proxy statement/prospectus and the later of the
dates of the two special meetings of stockholders. These documents contain
important information about Classic and First Federal.
CLASSIC SEC FILINGS (FILE NO. 0-27170)
o Annual Report on Form 10-KSB for the year ended March 31, 2002
o Quarterly Reports on Form 10-QSB for the quarters ended June 30,
September 30 and December 31, 2002, and
o Current Report on Form 8-K filed on December 31, 2002.
FIRST FEDERAL SEC FILINGS (FILE NO. 0-28020)
o Annual Report on Form 10-KSB for the year ended September 30, 2002,
o Quarterly Report on Form 10-QSB for the quarter ended December 31,
2002, and
o Current Report on Form 8-K filed on December 31, 2002.
Documents incorporated by reference are available from Classic without
charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain Classic
documents incorporated by reference in this document by requesting them in
writing or by telephone at the following address:
92
Classic Bancshares, Inc.
344 Seventeenth Street
Ashland, Kentucky 41101
Attention: Lisah M. Frazier, Corporate Secretary
Telephone No. (606) 326-2800
Documents incorporated by reference are available from First Federal
without charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain First
Federal documents incorporated by reference in this document by requesting them
in writing or by telephone at the following address:
First Federal Financial Bancorp, Inc.
415 Center Street
Ironton, Ohio 45638-1505
Attention: Jeffery W. Clark, Controller
Telephone: (740) 532-6845
If you would like to request documents from Classic or First Federal,
please do so by ______________ , 2003 in order to receive them before the
special meetings of stockholders. If you request any incorporated documents, we
will mail them to you by first-class mail, or other equally prompt means, within
one business day of our receipt of your request.
Classic has supplied all information contained in this joint proxy
statement/prospectus relating to Classic, and First Federal has supplied all
information relating to First Federal.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what is
contained or incorporated by reference in this document. This document is dated
__________, 2003. You should not assume that the information contained in this
document is accurate as of any date other than that date, and neither the
mailing of this document to stockholders nor the issuance of Classic's
securities in the merger shall create any implication to the contrary.
STOCKHOLDER PROPOSALS
FOR FIRST FEDERAL:
First Federal will hold an annual meeting for the year ending September
30, 2003 only if the merger is not completed. Any proposal which a stockholder
wishes to have included in the proxy materials of First Federal relating to the
next annual meeting of stockholders of First Federal, if it is held, must be
received at the principal executive offices of the Company, 415 Center Street,
Ironton, Ohio 45638, Attention: Edith M. Daniels, Secretary, no later than
August __, 2003.
Stockholder proposal which are not submitted for inclusion in First
Federal's proxy materials pursuant to Rule 14a-8 under the Exchange Act may be
brought before the annual meeting pursuant to Section 2.14 of First Federal's
Bylaws, which provides that business at an annual meeting of stockholders must
be (a) properly brought before the meeting by or at the direction of the Board
of Directors, or (b) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice in writing to the
Secretary of the Company. To be timely, a stockholder's notice must be delivered
93
to, or mailed and received at, the principal executive offices of First Federal
no later than 90 days prior to the anniversary date of the mailing of proxy
materials by First Federal in connection with the immediately preceding annual
meeting of stockholders of First Federal, or not later than ______________, 2003
in connection with the next annual meeting of stockholders of First Federal.
Such stockholder's notice is required to set forth as to each matter the
stockholder proposes to bring before an annual meeting certain information
specified in the Bylaws.
FOR CLASSIC:
As indicated in its last proxy statement, stockholder proposals
intended to be presented at Classic's next annual meeting must be received by
its Secretary at the executive office of Classic located at 344 Seventeenth
Street, Ashland, Kentucky 41101, no later than March 7, 2003 to be eligible for
inclusion in Classic's proxy statement and form of proxy relating to the next
annual meeting. Any such proposal will be subject to the requirements of the
proxy rules adopted under the Securities Exchange Act of 1934, as amended, and
as with any stockholder proposal (regardless of whether included in Classic's
proxy materials), Classic's certificate of incorporation and bylaws and Delaware
law.
To be considered for presentation at the next annual meeting, but not
for inclusion in Classic's proxy statement and form of proxy for that meeting,
proposals must be received by Classic no later than April 15, 2003. If however,
the date of the next annual meeting is before June 8, 2003 or after August 27,
2003, proposals must instead be received by Classic by the later of the 70th day
before the date of the next annual meeting or the tenth day following the day on
which public disclosure (by press release, in a publicly available filing with
the SEC, through a notice mailed to stockholders, or otherwise) of the date of
the next annual meeting is first made.
94
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF DECEMBER 30, 2002
BY AND BETWEEN
CLASSIC BANCSHARES, INC.
AND
FIRST FEDERAL FINANCIAL BANCORP, INC.
<page>
TABLE OF CONTENTS
Page No.
Introductory Statement.........................................................1
ARTICLE I - DEFINITIONS........................................................1
ARTICLE II - THE MERGER........................................................7
2.1 The Merger......................................................7
2.2 Closing.........................................................7
2.3 Effective Time..................................................8
2.4 Effects of the Merger...........................................8
2.5 Effect on Outstanding Shares of FFFB Common Stock...............8
2.6 Election and Proration Procedures...............................9
2.7 Exchange Procedures............................................11
2.8 Effect on Outstanding Shares of CLAS Common Stock..............13
2.9 Directors After Effective Time.................................14
2.10 Certificate of Incorporation and Bylaws........................14
2.11 Treatment of Stock Options and Restricted Stock................14
2.12 Dissenters' Rights.............................................14
2.13 Bank Merger....................................................15
2.14 Alternative Structure..........................................15
ARTICLE III - REPRESENTATIONS AND WARRANTIES..................................15
3.1 Disclosure Letters.............................................15
3.2 Representations and Warranties of FFFB.........................15
3.3 Representations and Warranties of CLAS.........................31
ARTICLE IV - CONDUCT PENDING THE MERGER.......................................38
4.1 Forbearances by FFFB...........................................38
4.2 Forbearances by CLAS...........................................41
ARTICLE V - COVENANTS.........................................................42
5.1 Acquisition Proposals..........................................42
5.2 Certain Policies and Actions of FFFB...........................43
5.3 Access and Information.........................................43
5.4 Applications; Consents.........................................44
5.5 Antitakeover Provisions........................................45
5.6 Additional Agreements..........................................45
5.7 Publicity......................................................45
5.8 Stockholder Meetings...........................................45
5.9 Registration of CLAS Common Stock..............................46
5.10 Affiliate Letters..............................................47
5.11 Notification of Certain Matters................................48
i
<page>
5.12 Employee Benefits Matters......................................48
5.13 Indemnification................................................50
5.14 Section 16 Matters.............................................51
5.15 Dividends......................................................51
5.16 Consulting Agreement...........................................52
ARTICLE VI - CONDITIONS TO CONSUMMATION.......................................52
6.1 Conditions to Each Party's Obligations.........................52
6.2 Conditions to the Obligations of CLAS..........................53
6.3 Conditions to the Obligations of FFFB..........................54
ARTICLE VII - TERMINATION.....................................................54
7.1 Termination....................................................54
7.2 Termination Fee................................................56
7.3 Effect of Termination..........................................56
ARTICLE VIII - CERTAIN OTHER MATTERS..........................................56
8.1 Interpretation.................................................56
8.2 Survival.......................................................57
8.3 Waiver; Amendment..............................................57
8.4 Counterparts...................................................57
8.5 Governing Law..................................................57
8.6 Expenses.......................................................57
8.7 Notices........................................................57
8.8 Entire Agreement; etc..........................................58
8.9 Successors and Assigns; Assignment.............................58
EXHIBITS
Exhibit A Form of Voting Agreement
Exhibit B Form of Plan of Bank Merger
Exhibit C Form of Affiliate Letter
Exhibit D Form of Employment Agreement with Jeffery W. Clark
Exhibit E Form of Consulting Agreement with I. Vincent Rice
ii
<page>
AGREEMENT AND PLAN OF MERGER
This is an AGREEMENT AND PLAN OF MERGER, dated as of the 30th day of December,
2002 ("AGREEMENT"), by and between CLASSIC BANCSHARES, INC., a Delaware
corporation ("CLAS"), and FIRST FEDERAL FINANCIAL BANCORP, INC., a Delaware
corporation ("FFFB").
INTRODUCTORY STATEMENT
The Board of Directors of each of CLAS and FFFB (i) has determined that this
Agreement and the business combination and related transactions contemplated
hereby are advisable and in the best interests of CLAS or FFFB, as the case may
be, and in the best long-term interests of the stockholders of CLAS or FFFB, as
the case may be, and (ii) has determined that this Agreement and the
transactions contemplated hereby are consistent with, and in furtherance of, its
respective business strategies.
The parties hereto intend that the Merger (as defined herein) shall qualify as a
reorganization under the provisions of Section 368(a) of the IRC for federal
income tax purposes.
CLAS and FFFB each desire to make certain representations, warranties and
agreements in connection with the business combination and related transactions
provided for herein and to prescribe various conditions to such transactions.
As a condition and inducement to CLAS's willingness to enter into this
Agreement, each of the members of the Board of Directors of FFFB has entered
into an agreement dated as of the date hereof in the form of EXHIBIT A pursuant
to which he will vote his shares of FFFB Common Stock in favor of this Agreement
and the transactions contemplated hereby.
In consideration of their mutual promises and obligations hereunder, the parties
hereto adopt and make this Agreement and prescribe the terms and conditions
hereof and the manner and basis of carrying it into effect, which shall be as
follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement:
"ACQUISITION PROPOSAL" means any proposal or offer with respect to any of the
following (other than the transactions contemplated hereunder): (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction involving FFFB or any of its Subsidiaries; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 25% or more of
FFFB's consolidated assets in a single transaction or series of transactions;
(iii) any tender offer or exchange offer for 25% or more of the outstanding
shares of FFFB's capital stock or the filing of a registration statement under
the Securities Act in connection therewith; or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in an any of the foregoing.
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"AGREEMENT" means this Agreement, as amended, modified or amended and restated
from time to time in accordance with its terms.
"BANK MERGER" shall have the meaning given to that term in SECTION 2.13.
"BANK MERGER ACT" means the Bank Merger Act, as amended.
"CASH CONSIDERATION" shall have the meaning given to that term in SECTION
2.5(a).
"CASH ELECTION" shall have the meaning given to that term in SECTION 2.6(b).
"CASH ELECTION SHARES" shall have the meaning given to that term in SECTION
2.6(b).
"CERTIFICATE" shall have the meaning given to that term in SECTION 2.6(c).
"CERTIFICATE OF MERGER" shall have the meaning given to that term in SECTION
2.3.
"CLAS" shall have the meaning given to that term in the preamble.
"CLAS COMMON STOCK" means the common stock, par value $.01 per share, of CLAS.
"CLAS PRICE" means the average of the closing sales price of CLAS Common Stock,
as reported on The Nasdaq Small Cap Market, for the twenty consecutive trading
days ending on December 27, 2002, whether or not the CLAS Common Stock was
traded on any particular trading day.
"CLAS RATIO" shall have the meaning given to that term in SECTION 7.1(g).
"CLAS'S REPORTS" shall have the meaning given to that term in SECTION 3.3(g).
"CLAS STOCKHOLDER MEETING" shall have the meaning given to that term on SECTION
5.8.
"CLOSING" shall have the meaning given to that term in SECTION 2.2.
"CLOSING DATE" shall have the meaning given to that term in SECTION 2.2.
"CONTINUING EMPLOYEE" shall have the meaning given to that term in SECTION
5.12(a).
"CRA" means the Community Reinvestment Act.
"DGCL" means the Delaware General Corporation Law.
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"DISCLOSURE LETTER" shall have the meaning given to that term in SECTION 3.1.
"DISSENTERS' SHARES" shall have the meaning given to that term in SECTION 2.12.
"EFFECTIVE TIME" shall have the meaning given to that term in SECTION 2.3.
"ELECTION DEADLINE" shall have the meaning given to that term in SECTION 2.6(c).
"ELECTION FORM" shall have the meaning given to that term in SECTION 2.6(a).
"ENVIRONMENTAL LAW" means any federal, state or local law, statute, ordinance,
rule, regulation, code, license, permit, authorization, approval, consent,
order, directive, executive or administrative order, judgment, decree,
injunction, or agreement with any Governmental Entity relating to (i) the
protection, preservation or restoration of the environment (which includes,
without limitation, air, water vapor, surface water, groundwater, drinking water
supply, soil, surface land, subsurface land, plant and animal life or any other
natural resource), or to human health or safety as it relates to Hazardous
Materials, or (ii) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of, Hazardous Materials, in each case as amended and as now in
effect. The term Environmental Law includes, without limitation, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Water
Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean
Water Act, the Federal Resource Conservation and Recovery Act of 1976, the
Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
Safety and Health Act of 1970 as it relates to Hazardous Materials, the Federal
Hazardous Substances Transportation Act, the Emergency Planning and Community
Right-To-Know Act, the Safe Drinking Water Act, the Endangered Species Act, the
National Environmental Policy Act, the Rivers and Harbors Appropriation Act or
any so-called "Superfund" or "Superlien" law, each as amended and as now in
effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA AFFILIATE" means any entity that is considered one employer with FFFB
under Section 4001(b)(1) of ERISA or Section 414(b), (c), (m) or (o) of the IRC.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE AGENT" shall have the meaning given to that term in SECTION 2.6(c).
"EXCHANGE RATIO" shall have the meaning given to that term in SECTION 2.5(a).
"EXCLUDED SHARES" shall consist of (i) Dissenters' Shares and (ii) shares held
directly or indirectly by CLAS (other than shares held in a fiduciary capacity
or in satisfaction of a debt previously contracted).
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"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"FFFB" shall have the meaning given to that term in the preamble and shall
include all predecessor entities of FFFB.
"FFFB COMMON STOCK" means the common stock, par value $.01 per share, of FFFB.
"FFFB EMPLOYEE PLANS" shall have the meaning given to that term in SECTION
3.2(r)(i).
"FFFB OPTION" shall have the meaning given to that term in SECTION 2.11(a).
"FFFB PENSION PLAN" shall have the meaning given to that term in SECTION
3.2(r)(iii).
"FFFB QUALIFIED PLAN" shall have the meaning given to that term in SECTION
3.2(r)(iv).
"FFFB'S REPORTS" shall have the meaning given to that term in SECTION 3.2(g).
"FFFB STOCKHOLDER MEETING" shall have the meaning given to that term in SECTION
5.8.
"FIRST FEDERAL" shall have the meaning given to that term in SECTION 2.13.
"FIRST FEDERAL ESOP" shall have the meaning given to that term in SECTION
5.12(d).
"FRB" mean the Board of Governors of the Federal Reserve System.
"GAAP" means generally accepted accounting principles.
"GOVERNMENT REGULATOR" means any federal or state governmental authority charged
with the supervision or regulation of depository institutions or depository
institution holding companies or engaged in the insurance of bank or savings
association deposits.
"GOVERNMENTAL ENTITY" means any court, administrative agency or commission or
other governmental authority or instrumentality.
"HAZARDOUS MATERIAL" means any substance (whether solid, liquid or gas) which is
or could be detrimental to human health or safety or to the environment,
currently or hereafter listed, defined, designated or classified as hazardous,
toxic, radioactive or dangerous, or otherwise regulated, under any Environmental
Law, whether by type or by quantity, including any substance containing any such
substance as a component. Hazardous Material includes, without limitation, any
toxic waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum, or any
derivative or by-product thereof, radon, radioactive
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material, asbestos, asbestos-containing material, urea formaldehyde foam
insulation, lead and polychlorinated biphenyl.
"HOLA" means the Home Owners' Loan Act, as amended.
"INDEMNIFIED PARTY" shall have the meaning given to that term in SECTION
5.13(a).
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE" means, with respect to a party hereto, actual knowledge of the
members of the Board of Directors of that party or any officer of that party
with the title ranking not less than senior vice president.
"LETTER OF TRANSMITTAL" shall have the meaning given to that term in SECTION
2.7(a).
"LIEN" means any charge, mortgage, pledge, security interest, claim, lien or
encumbrance.
"LOAN" means a loan, lease, advance, credit enhancement, guarantee or other
extension of credit.
"LOAN PROPERTY" means any property in which the applicable party (or a
subsidiary of it) holds a security interest and, where required by the context,
includes the owner or operator of such property, but only with respect to such
property.
"MAILING DATE" shall have the meaning given to that term in SECTION 2.6(a).
"MATERIAL ADVERSE EFFECT" means an effect which is material and adverse to the
business, financial condition or results of operations of FFFB or CLAS, as the
context may dictate, and its Subsidiaries taken as a whole; PROVIDED, HOWEVER,
that any such effect resulting from any (i) changes in laws, rules or
regulations or generally accepted accounting principles or regulatory accounting
requirements or interpretations thereof that apply to both CLAS and FFFB, or to
financial and/or depository institutions generally, (ii) changes in economic
conditions affecting financial institutions generally within the region in which
CLAS and FFFB operate, including but not limited to, changes in the general
level of market interest rates, (iii) actions and omissions of CLAS or FFFB
taken with the prior written consent of the other in contemplation of the
transactions contemplated hereby and (iv) direct effects of compliance with this
Agreement on the operating performance of the parties, including expenses
incurred by the parties in consummating the transactions contemplated by this
Agreement, shall not be considered in determining if a Material Adverse Effect
has occurred.
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"MAXIMUM INSURANCE AMOUNT" shall have the meaning given to that term in SECTION
5.13(c).
"MERGER" shall have the meaning given to that term in SECTION 2.1.
"MERGER CONSIDERATION" shall have the meaning given to that term in SECTION
2.5(a).
"MIXED ELECTION" shall have the meaning given to that term in SECTION 2.6(b).
"NASD" means the National Association of Securities Dealers, Inc.
"NON-ELECTION" shall have the meaning given to that term in SECTION 2.6(b).
"NON-ELECTION SHARES" shall have the meaning given to that term in SECTION
2.6(b).
"OTS" means the Office of Thrift Supervision.
"PARTICIPATION FACILITY" means any facility in which the applicable party (or a
Subsidiary of it) participates in the management (including all property held as
trustee or in any other fiduciary capacity) and, where required by the context,
includes the owner or operator of such property, but only with respect to such
property.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization or other entity.
"PROXY STATEMENT-PROSPECTUS" shall have the meaning given to that term in
SECTION 5.9(a).
"REGISTRATION STATEMENT" shall have the meaning given to that term in SECTION
5.9(a).
"REPRESENTATIVE" shall have the meaning given to that term in SECTION 2.6(b).
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"SHORTFALL NUMBER" shall have the meaning given to that term in SECTION
2.6(e)(ii).
"STOCK CONSIDERATION" shall have the meaning given to that term in SECTION
2.5(a).
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"STOCK CONVERSION NUMBER" shall have the meaning given to that term in SECTION
2.6(d).
"STOCK ELECTION" shall have the meaning given to that term in SECTION 2.6(b).
"STOCK ELECTION SHARES" shall have the meaning given to that term in SECTION
2.6(b).
"STOCK ELECTION NUMBER" shall have the meaning given to that term in SECTION
2.6(b).
"SUBSIDIARY" means a corporation, financial institution, partnership, joint
venture or other entity in which FFFB or CLAS, as the case may be, has, directly
or indirectly, an equity interest representing 50% or more of any class of the
capital stock thereof or other equity interests therein and includes all
predecessor entities thereof.
"SUPERIOR PROPOSAL" means an unsolicited, bona fide written offer made by a
third party to consummate an Acquisition Proposal that (i) FFFB's Board of
Directors determines in good faith, after consulting with its outside legal
counsel and its financial advisor, would, if accepted, be reasonably likely to
be consummated, (ii) is for 100% of the outstanding shares of FFFB Common Stock
and (iii) is, in the opinion of FFFB's Board of Directors after consultation
with its financial advisor, more favorable to the stockholders of FFFB from a
financial point of view than the transactions contemplated hereby.
"SURVIVING CORPORATION" shall have the meaning given to that term in SECTION
2.1.
"TAXES" means all income, franchise, gross receipts, real and personal property,
real property transfer and gains, wage and employment taxes and any applicable
interest and penalties related thereto.
ARTICLE II
THE MERGER
2.1 THE MERGER. Upon the terms and subject to the conditions set forth in this
Agreement, FFFB will merge with and into CLAS ("MERGER") at the Effective Time.
At the Effective Time, the separate corporate existence of FFFB shall cease.
CLAS shall be the surviving corporation (hereinafter sometimes referred to in
such capacity as the "SURVIVING CORPORATION") in the Merger and shall continue
to be governed by the DGCL and its name and separate corporate existence, with
all of its rights, privileges, immunities, powers and franchises, shall continue
unaffected by the Merger.
2.2 CLOSING. The closing of the Merger (the "CLOSING") will take place in the
offices of Jenkens & Gilchrist, P.C., 1919 Pennsylvania Avenue, N.W., #600,
Washington, DC 20006 at 2:00 p.m. on the date designated by CLAS on the fifth
day following satisfaction or waiver of the conditions to Closing set forth in
Article VI (other than those conditions that by their nature are to be satisfied
at the Closing), or such later date as the parties may otherwise agree (the
"CLOSING DATE").
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2.3 EFFECTIVE TIME. In connection with the Closing, CLAS shall duly execute and
deliver a certificate of merger (the "CERTIFICATE OF MERGER") to the Delaware
Secretary of State for filing pursuant to the DGCL. The parties will make all
other filings or recordings required under the DGCL and the DGCL. The Merger
shall become effective at such time as the Certificate of Merger is duly filed
with the Delaware Secretary of State or at such later date or time as CLAS and
FFFB agree and specify in the Certificate of Merger (the date and time the
Merger becomes effective being the "EFFECTIVE TIME").
2.4 EFFECTS OF THE MERGER. The Merger will have the effects set forth in the
DGCL. Without limiting the generality of the foregoing, and subject thereto,
from and after the Effective Time, CLAS shall possess all of the properties,
rights, privileges, powers and franchises of FFFB and be subject to all of the
debts, liabilities and obligations of FFFB.
2.5 EFFECT ON OUTSTANDING SHARES OF FFFB COMMON STOCK.
(a) Subject to the provisions of SECTION 2.6 hereof, by virtue of the Merger,
automatically and without any action on the part of the holder thereof, each
share of FFFB Common Stock issued and outstanding at the Effective Time, other
than Excluded Shares, shall become and be converted into, at the election of the
holder as provided in and subject to the limitations set forth in this
Agreement, either (i) the right to receive $24.00 in cash without interest (the
"CASH CONSIDERATION") or (ii) the number of shares of CLAS Common Stock equal to
the Exchange Ratio (as defined below) (the "STOCK CONSIDERATION"). The Cash
Consideration and the Stock Consideration are sometimes referred to herein
collectively as the "MERGER CONSIDERATION." The "EXCHANGE RATIO" shall be equal
to 0.9797, which represents the quotient of $24.00 divided by the CLAS Price.
(b) Notwithstanding any other provision of this Agreement, no fraction of a
share of CLAS Common Stock and no certificates or scrip therefor will be issued
in the Merger; instead, CLAS shall pay to each holder of FFFB Common Stock who
would otherwise be entitled to a fraction of a share of CLAS Common Stock an
amount in cash, rounded to the nearest cent, determined by multiplying such
fraction by the average of the closing sales price of CLAS Common Stock as
reported on The Nasdaq Small Cap Market during the twenty consecutive trading
days ending on the date of the Effective Time; provided, however, that in the
event CLAS Common Stock does not trade on one or more of the trading days in
such twenty day period, any such date shall be disregarded in computing the
average closing sales price and the average shall be based upon the closing
sales price and number of days on which CLAS Common Stock actually traded during
such twenty day period.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of CLAS Common Stock shall have been changed into a different
number of shares or into a different class by reason of any stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares, the Exchange Ratio shall be adjusted appropriately to provide the
holders of FFFB Common Stock the same economic effect as contemplated by this
Agreement prior to such event.
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(d) As of the Effective Time, each Excluded Share, other than Dissenters'
Shares, shall be canceled and retired and shall cease to exist, and no exchange
or payment shall be made with respect thereto. All shares of CLAS Common Stock
that are held by FFFB, if any, other than shares held in a fiduciary capacity or
in satisfaction of a debt previously contracted, shall be canceled and shall
constitute authorized but unissued shares. In addition, no Dissenters' Shares
shall be converted into shares of CLAS Common Stock pursuant to this SECTION 2.5
but instead shall be treated in accordance with the provisions set forth in
SECTION 2.12 of this Agreement.
2.6 ELECTION AND PRORATION PROCEDURES.
(a) An election form in such form as FFFB and CLAS shall mutually agree (an
"ELECTION Form") shall be mailed on the Mailing Date (as defined below) to each
holder of record of shares of FFFB Common Stock as of a record date which shall
be the same date as the record date for eligibility to vote on the Merger. The
"MAILING DATE" shall be the date on which proxy materials relating to the Merger
are mailed to holders of shares of FFFB Common Stock. CLAS shall make available
Election Forms as may be reasonably requested by all persons who become holders
of FFFB Common Stock after the record date for eligibility to vote on the Merger
and prior to the Election Deadline (as defined herein), and FFFB shall provide
to the Exchange Agent (as defined herein) all information reasonably necessary
for it to perform its obligations as specified herein.
(b) Each Election Form shall entitle the holder of shares of FFFB Common Stock
(or the beneficial owner through appropriate and customary documentation and
instructions) to (i) elect to receive the Cash Consideration for all of such
holder's shares (a "CASH ELECTION"), (ii) elect to receive the Stock
Consideration for all of such holder's shares (a "STOCK ELECTION"), (iii) elect
to receive the Cash Consideration with respect to some of such holder's shares
and the Stock Consideration with respect to such holder's remaining shares (a
"MIXED ELECTION") or (iv) make no election or to indicate that such holder has
no preference as to the receipt of the Cash Consideration or the Stock
Consideration (a "NON-ELECTION"). Holders of record of shares of FFFB Common
Stock who hold such shares as nominees, trustees or in other representative
capacities (a "REPRESENTATIVE") may submit multiple Election Forms, provided
that such Representative certifies that each such Election Form covers all the
shares of FFFB Common Stock held by that Representative for a particular
beneficial owner. Shares of FFFB Common Stock as to which a Cash Election has
been made (including pursuant to a Mixed Election) are referred to herein as
"CASH ELECTION SHARES." Shares of FFFB Common Stock as to which a Stock Election
has been made (including pursuant to a Mixed Election) are referred to herein as
"STOCK ELECTION SHARES." Shares of FFFB Common Stock as to which no election has
been made are referred to as "NON-ELECTION SHARES." The aggregate number of
shares of FFFB Common Stock with respect to which a Stock Election has been made
is referred to herein as the "STOCK ELECTION NUMBER."
(c) To be effective, a properly completed Election Form must be received by
CLAS's transfer agent (the "EXCHANGE AGENT") on or before 5:00 p.m. on the third
business day immediately preceding FFFB's Stockholder Meeting or on such other
time and date as FFFB and CLAS may mutually agree) (the "ELECTION DEADLINE"). An
election shall have been properly made only if the Exchange Agent shall have
actually received a properly completed Election Form by the
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Election Deadline. An Election Form shall be deemed properly completed only if
accompanied by one or more certificates representing FFFB Common Stock
("CERTIFICATES") (or customary affidavits and, if required by CLAS pursuant to
SECTION 2.7(i), indemnification regarding the loss or destruction of such
Certificates or the guaranteed delivery of such Certificates) representing all
shares of FFFB Common Stock covered by such Election Form, together with duly
executed transmittal materials included with the Election Form. Any FFFB
stockholder may at any time prior to the Election Deadline change his or her
election by written notice received by the Exchange Agent prior to the Election
Deadline accompanied by a properly completed and signed revised Election Form.
Any FFFB stockholder may, at any time prior to the Election Deadline, revoke his
or her election by written notice received by the Exchange Agent prior to the
Election Deadline or by withdrawal prior to the Election Deadline of his or her
Certificates, or of the guarantee of delivery of such Certificates, previously
deposited with the Exchange Agent. All elections shall be revoked automatically
if the Exchange Agent is notified in writing by CLAS and FFFB that this
Agreement has been terminated. If a stockholder either (i) does not submit a
properly completed Election Form by the Election Deadline or (ii) revokes its
Election Form prior to the Election Deadline and does not submit a new properly
executed Election Form prior to the Election Deadline, the shares of FFFB Common
Stock held by such stockholder shall be designated Non-Election Shares. CLAS
shall cause the Certificates representing FFFB Common Stock described in (ii) to
be promptly returned without charge to the person submitting the Election Form
upon written request to that effect from the person who submitted the Election
Form. Subject to the terms of this Agreement and of the Election Form, the
Exchange Agent shall have reasonable discretion to determine whether any
election, revocation or change has been properly or timely made and to disregard
immaterial defects in any Election Form, and any good faith decisions of the
Exchange Agent regarding such matters shall be binding and conclusive.
(d) Notwithstanding any other provision contained in this Agreement, 50% of the
total number of shares of FFFB Common Stock outstanding at the Effective Time
(the "STOCK CONVERSION NUMBER") shall be converted into the Stock Consideration
and the remaining outstanding shares of FFFB Common Stock (excluding shares of
FFFB Common Stock to be canceled as provided in SECTION 2.5(d) and Dissenters'
Shares) shall be converted into the Cash Consideration; PROVIDED, HOWEVER, that
for federal income tax purposes, it is intended that the Merger will qualify as
a reorganization under the provisions of Section 368(a) of the IRC and,
notwithstanding anything to the contrary contained herein, in order that the
Merger will not fail to satisfy continuity of interest requirements under
applicable federal income tax principles relating to reorganizations under
Section 368(a) of the IRC, CLAS shall increase the number of shares of FFFB
Common Stock that will be converted into the Stock Consideration and reduce the
number of shares of FFFB Common Stock that will be converted into the right to
receive the Cash Consideration to ensure that the Stock Consideration will
represent 45% of the value of the aggregate Merger Consideration, increased by
the value of any Excluded Shares, each as measured as of the Effective Time.
(e) Within three business days after the later to occur of the Election Deadline
or the Effective Time, CLAS shall cause the Exchange Agent to effect the
allocation among holders of FFFB Common Stock of rights to receive the Cash
Consideration and the Stock Consideration and to distribute such consideration
as follows:
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(i) If the Stock Election Number exceeds the Stock Conversion Number, then all
Cash Election Shares and all Non-Election Shares shall be converted into the
right to receive the Cash Consideration, and each holder of Stock Election
Shares will be entitled to receive (A) the Stock Consideration in respect of
that number of Stock Election Shares equal to the product obtained by
multiplying (1) the number of Stock Election Shares held by such holder by (2) a
fraction, the numerator of which is the Stock Conversion Number and the
denominator of which is the Stock Election Number and (B) the Cash Consideration
in respect of the remaining number of such holder's Stock Election Shares;
(ii) If the Stock Election Number is less than the Stock Conversion Number (the
amount by which the Stock Conversion Number exceeds the Stock Election Number
being referred to herein as the "SHORTFALL NUMBER"), then all Stock Election
Shares shall be converted into the right to receive the Stock Consideration and
the Non-Election Shares and Cash Election Shares shall be treated in the
following manner:
(A) if the Shortfall Number is less than or equal to the number of Non-Election
Shares, then all Cash Election Shares shall be converted into the right to
receive the Cash Consideration and each holder of Non-Election Shares shall
receive (1) the Stock Consideration in respect of that number of Non-Election
Shares equal to the product obtained by multiplying (x) the number of
Non-Election Shares held by such holder by (y) a fraction, the numerator of
which is the Shortfall Number and the denominator of which is the total number
of Non-Election Shares and (2) the Cash Consideration in respect of the
remaining number of such holder's Non-Election Shares; or
(B) if the Shortfall Number exceeds the number of Non-Election Shares, then all
Non-Election Shares shall be converted into the right to receive the Stock
Consideration, and each holder of Cash Election Shares shall receive (1) the
Stock Consideration in respect of that number of Cash Election Shares equal to
the product obtained by multiplying (x) the number of Cash Election Shares held
by such holder by (y) a fraction, the numerator of which is the amount by which
the Shortfall Number exceeds the total number of Non-Election Shares and the
denominator of which is the total number of Cash Election Shares and (2) the
Cash Consideration in respect of the remaining number of such holder's Cash
Election Shares.
For purposes of the foregoing calculations, Excluded Shares shall be deemed to
be Cash Election Shares. For purposes of this SECTION 2.6(e), if CLAS is
obligated to increase the number of shares of FFFB Common Stock to be converted
into shares of CLAS Common Stock as a result of the application of the last
clause of SECTION 2.6(d) above, then the higher number shall be substituted for
the Stock Conversion Number in the calculations set forth in this SECTION
2.6(e).
2.7 EXCHANGE PROCEDURES.
(a) Appropriate transmittal materials ("LETTER OF TRANSMITTAL") in a form
satisfactory to CLAS and FFFB shall be mailed as soon as practicable after the
Effective Time to each holder of record of FFFB Common Stock as of the Effective
Time who did not previously submit a
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completed Election Form. A Letter of Transmittal will be deemed properly
completed only if accompanied by certificates representing all shares of FFFB
Common Stock to be converted thereby.
(b) At and after the Effective Time, each Certificate (except as specifically
set forth in SECTION 2.5(d)) shall represent only the right to receive the
Merger Consideration.
(c) Prior to the Effective Time, CLAS shall (i) reserve for issuance with its
transfer agent and registrar a sufficient number of shares of CLAS Common Stock
to provide for payment of the aggregate Stock Consideration and (ii) deposit, or
cause to be deposited, with the Exchange Agent, for the benefit of the holders
of shares of FFFB Common Stock, an amount of cash sufficient to pay the
aggregate Cash Consideration.
(d) The Letter of Transmittal shall (i) specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Exchange Agent, (ii) be in a form and contain any other
provisions as CLAS may reasonably determine and (iii) include instructions for
use in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon the proper surrender of the Certificates to the Exchange
Agent, together with a properly completed and duly executed Letter of
Transmittal, the holder of such Certificates shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of CLAS
Common Stock that such holder has the right to receive pursuant to SECTION 2.5,
if any, and a check in the amount equal to the cash that such holder has the
right to receive pursuant to SECTION 2.5, if any, (including any cash in lieu of
fractional shares, if any, that such holder has the right to receive pursuant to
SECTION 2.5, and any dividends or other distributions to which such holder is
entitled pursuant to SECTION 2.5). Certificates so surrendered shall forthwith
be canceled. As soon as practicable following receipt of the properly completed
Letter of Transmittal and any necessary accompanying documentation, the Exchange
Agent shall distribute CLAS Common Stock and cash as provided herein. The
Exchange Agent shall not be entitled to vote or exercise any rights of ownership
with respect to the shares of CLAS Common Stock held by it from time to time
hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto. If there is a transfer of ownership of any shares
of FFFB Common Stock not registered in the transfer records of FFFB, the Merger
Consideration shall be issued to the transferee thereof if the Certificates
representing such FFFB Common Stock are presented to the Exchange Agent,
accompanied by all documents required, in the reasonable judgment of CLAS and
the Exchange Agent, to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid.
(e) No dividends or other distributions declared or made after the Effective
Time with respect to CLAS Common Stock issued pursuant to this Agreement shall
be remitted to any person entitled to receive shares of CLAS Common Stock
hereunder until such person surrenders his or her Certificates in accordance
with this SECTION 2.7. Upon the surrender of such person's Certificates, such
person shall be entitled to receive any dividends or other distributions,
without interest thereon, which subsequent to the Effective Time had become
payable but not paid with respect to shares of CLAS Common Stock represented by
such person's Certificates.
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(f) The stock transfer books of FFFB shall be closed immediately upon the
Effective Time and from and after the Effective Time there shall be no transfers
on the stock transfer records of FFFB of any shares of FFFB Common Stock. If,
after the Effective Time, Certificates are presented to CLAS, they shall be
canceled and exchanged for the Merger Consideration deliverable in respect
thereof pursuant to this Agreement in accordance with the procedures set forth
in this SECTION 2.7.
(g) Any portion of the aggregate amount of cash to be paid pursuant to SECTION
2.5, any dividends or other distributions to be paid pursuant to this SECTION
2.7 or any proceeds from any investments thereof that remains unclaimed by the
stockholders of FFFB for six months after the Effective Time shall be repaid by
the Exchange Agent to CLAS upon the written request of CLAS. After such request
is made, any stockholders of FFFB who have not theretofore complied with this
SECTION 2.7 shall look only to CLAS for the Merger Consideration deliverable in
respect of each share of FFFB Common Stock such stockholder holds, as determined
pursuant to SECTION 2.5 of this Agreement, without any interest thereon. If
outstanding Certificates are not surrendered prior to the date on which such
payments would otherwise escheat to or become the property of any governmental
unit or agency, the unclaimed items shall, to the extent permitted by any
abandoned property, escheat or other applicable laws, become the property of
CLAS (and, to the extent not in its possession, shall be paid over to it), free
and clear of all claims or interest of any person previously entitled to such
claims. Notwithstanding the foregoing, neither the Exchange Agent nor any party
to this Agreement (or any affiliate thereof) shall be liable to any former
holder of FFFB Common Stock for any amount delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(h) CLAS and the Exchange Agent shall be entitled to rely upon FFFB's stock
transfer books to establish the identity of those persons entitled to receive
the Merger Consideration, which books shall be conclusive with respect thereto.
In the event of a dispute with respect to ownership of stock represented by any
Certificate, CLAS and the Exchange Agent shall be entitled to deposit any Merger
Consideration deliverable in respect thereof in escrow with an independent third
party and thereafter be relieved with respect to any claims thereto.
(i) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Exchange Agent or CLAS, the
posting by such person of a bond in such amount as the Exchange Agent may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Merger Consideration deliverable in respect thereof
pursuant to SECTION 2.5.
2.8 EFFECT ON OUTSTANDING SHARES OF CLAS COMMON STOCK. At and after the
Effective Time, each share of CLAS Common Stock issued and outstanding
immediately prior to the Effective Time shall remain an issued and outstanding
share of common stock of the Surviving Corporation and shall not be affected by
the Merger.
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2.9 DIRECTORS AFTER EFFECTIVE TIME. Immediately after the Effective Time, until
their respective successors are duly elected or appointed and qualified, the
directors of the Surviving Corporation shall consist of the directors of CLAS
serving immediately prior to the Effective Time and the directors of Classic
Bank shall consist of the current directors of Classic Bank serving at the
Effective Time; provided however that CLAS shall offer to Steven V. Milleson the
opportunity to serve on its Board of Directors and Classic Bank shall offer to
David Phillips and Edward R. Rambacher the opportunity to serve on its board of
directors.
2.10 CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of incorporation
of CLAS, as in effect immediately prior to the Effective Time, shall be the
certificate of incorporation of the Surviving Corporation until thereafter
amended in accordance with applicable law. The bylaws of CLAS, as in effect
immediately prior to the Effective Time, shall be the bylaws of the Surviving
Corporation until thereafter amended in accordance with applicable law.
2.11 TREATMENT OF STOCK OPTIONS AND RESTRICTED STOCK.
(a) Each option to purchase shares of FFFB Common Stock issued by FFFB and
outstanding at the Effective Time (a "FFFB OPTION") pursuant to any stock option
plan approved by FFFB's stockholder's prior to the date hereof, whether or nor
then vested or exercisable, shall be cancelled and all rights thereunder shall
be extinguished. As consideration for such cancellation, FFFB shall make payment
immediately prior to the Effective Time to each holder of a FFFB Option of an
amount determined by multiplying (x) the number of shares of FFFB Common Stock
subject to such holder's FFFB Option by (y) an amount equal to the excess (if
any) of (i) the value of $24 over (ii) the exercise price per share of such FFFB
Option, PROVIDED, HOWEVER, that no such payment shall be made to such holder
unless and until such holder has executed and delivered to FFFB an instrument in
such form prescribed by CLAS and reasonably satisfactory to FFFB accepting such
payment in full settlement of his or her rights relative to FFFB Option.
(b) At the Effective Time, each share of restricted stock outstanding as of the
Effective Time and issued pursuant to FFFB's Recognition and Retention Plan and
Trust and 2002 Directors Stock Plan, to the extent not already vested, shall
vest and shall represent the right to receive the same rights provided to other
holders of FFFB Common Stock pursuant to SECTION 2.5 above.
2.12 DISSENTERS' RIGHTS. Notwithstanding any other provision of this Agreement
to the contrary, shares of FFFB Common Stock that are outstanding immediately
prior to the Effective Time and which are held by stockholders who shall have
not voted in favor of the Merger and who have filed with FFFB a written
objection to the Merger (collectively, the "DISSENTERS' SHARES") shall not be
converted into or represent the right to receive the Merger Consideration. Such
stockholders instead shall be entitled only to such rights as are granted by
applicable law, except that all Dissenters' Shares held by stockholders who
shall have failed to perfect or who effectively shall have withdrawn or
otherwise lost their rights to payment of the fair value of their shares under
the DGCL shall thereupon be deemed to have been converted into and to have
become exchangeable for, as of the Effective Time, the right to receive, without
any interest thereon, the Merger Consideration upon surrender in the manner
provided in SECTION 2.7 of the FFFB Certificate or FFFB Certificates that,
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immediately prior to the Effective Time, evidenced such shares. FFFB shall give
CLAS (i) prompt notice of any written objections to the Merger and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
demands under the DGCL consistent with the obligations of FFFB thereunder. FFFB
shall not, except with the prior written consent of CLAS, (x) make any payment
with respect to such demand, (y) offer to settle or settle any demand for
payment or (z) waive any failure to timely deliver a written demand for payment
or timely take any other action in accordance with the DGCL.
2.13 BANK MERGER. Concurrently with or as soon as practicable after the
execution and delivery of this Agreement, Classic Bank, a wholly owned
subsidiary of CLAS, and First Federal Savings Bank of Ironton ("FIRST FEDERAL"),
a wholly owned subsidiary of FFFB, shall enter into the Plan of Bank Merger, in
the form attached hereto as EXHIBIT B, pursuant to which First Federal will
merge with and into Classic Bank (the "BANK MERGER"). The parties intend that
the Bank Merger will become effective simultaneously with or immediately
following the Effective Time.
2.14 ALTERNATIVE STRUCTURE. Notwithstanding anything to the contrary contained
in this Agreement, prior to the Effective Time, CLAS may specify that the
structure of the transactions contemplated by this Agreement be revised and the
parties shall enter into such alternative transactions as CLAS may reasonably
determine to effect the purposes of this Agreement; PROVIDED, HOWEVER, that such
revised structure shall not (i) alter or change the amount or kind of the Merger
Consideration, (ii) change the intended federal income tax consequences of the
transactions contemplated by this Agreement or (iii) materially impede or delay
the receipt of any regulatory approval referred to in, or the consummation of
the transactions contemplated by, this Agreement. In the event that CLAS elects
to make such a revision, the parties agree to execute appropriate documents to
reflect the revised structure.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 DISCLOSURE LETTERS. Prior to the execution and delivery of this Agreement,
CLAS and FFFB have each delivered to the other a letter (each, its "DISCLOSURE
LETTER") setting forth, among other things, facts, circumstances and events the
disclosure of which is required or appropriate in relation to any or all of
their respective representations and warranties (and making specific reference
to the Section of this Agreement to which they relate); provided, that no such
fact, circumstance or event is required to be set forth in the Disclosure Letter
as an exception to a representation or warranty if its absence is not reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect under the standards of SECTION 6.2(a) or SECTION 6.3(a) as
applicable. The mere inclusion of a fact, circumstance or event in a Disclosure
Letter shall not be deemed an admission by a party that such item represents a
material exception or that such item is reasonably likely to result in a
Material Adverse Effect. Any matter disclosed pursuant to one section of a
party's Disclosure Letter shall be deemed disclosed for all purposes of such
party's Disclosure Letter.
3.2 REPRESENTATIONS AND WARRANTIES OF FFFB. FFFB represents and warrants to CLAS
that, except as disclosed in FFFB's Disclosure Letter:
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(a) ORGANIZATION AND QUALIFICATION. FFFB is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is registered with the OTS as a savings and loan holding company. FFFB has
all requisite corporate power and authority to own, lease and operate its
properties and to conduct the business currently being conducted by it. FFFB is
duly qualified or licensed as a foreign corporation to transact business and is
in good standing in each jurisdiction in which the character of the properties
owned or leased by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed and in good standing would not have a Material Adverse
Affect on FFFB.
(b) SUBSIDIARIES.
(i) FFFB's Disclosure Letter sets forth with respect to each of FFFB's
Subsidiaries its name, its jurisdiction of incorporation, FFFB's percentage
ownership, the number of shares of stock owned or controlled by FFFB and the
name and number of shares held by any other person who owns any stock of the
Subsidiary. FFFB owns of record and beneficially, directly or indirectly, all
the capital stock of each of its Subsidiaries free and clear of any Liens. There
are no contracts, commitments, agreements or understandings relating to FFFB's
right to vote or dispose of any equity securities of its Subsidiaries. FFFB's
ownership interest in each of its Subsidiaries is in compliance with all
applicable laws, rules and regulations relating to equity investments by savings
and loan holding companies or federally chartered savings associations.
(ii) Each of FFFB's Subsidiaries is a corporation or issued depository
institution duly organized and validly existing under the laws of its
jurisdiction of incorporation or organization, has all requisite corporate power
and authority to own, lease and operate its properties and to conduct the
business currently being conducted by it and is duly qualified or licensed as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed and in good
standing would not have a Material Adverse Affect on such Subsidiary.
(iii) The outstanding shares of capital stock of each Subsidiary have been
validly authorized and are validly issued, fully paid and nonassessable. No
shares of capital stock of any Subsidiary of FFFB are or may be required to be
issued by virtue of any options, warrants or other rights, no securities exist
that are convertible into or exchangeable for shares of such capital stock or
any other debt or equity security of any Subsidiary, and there are no contracts,
commitments, agreements or understandings of any kind for the issuance of
additional shares of capital stock or other debt or equity security of any
Subsidiary or options, warrants or other rights with respect to such securities.
(iv) No Subsidiary of FFFB other than First Federal is an "insured depository
institution" as defined in the FDIA and the applicable regulations thereunder.
First Federal is a qualified thrift lender pursuant to Section 10(m) of the HOLA
and its deposits are insured by the FDIC through the Savings Association
Insurance Fund to the fullest extent permitted by law. First Federal is a member
in good standing of the Federal Home Loan Bank of Cincinnati.
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(c) CAPITAL STRUCTURE.
(i) The authorized capital stock of FFFB consists of:
(A) 1,000,000 shares of FFFB Common Stock; and
(B) 500,000 shares of preferred stock, par value $.01 per share.
(ii) As of the date of this Agreement:
(A) 461,622 shares of FFFB Common Stock are issued and outstanding, all of which
are validly issued, fully paid and nonassessable and were issued in full
compliance with all applicable laws including 21,996 shares of unvested
restricted stock and no unallocated shares under the Recognition and Retention
Plan and Trust;
(B) no shares of FFFB preferred stock are issued and outstanding; and
(C) no shares of FFFB Common Stock are reserved for issuance under any director
or employee benefit plan other than:
(1) 49,790 shares held in the FFFB Employee Stock Ownership Plan;
(2) 10,993 shares are unallocated under the FFFB Recognition and Retention Plan
and Trust and there are no unvested awards under such plan;
(3) 67,178 shares reserved for issuance under the FFFB Stock Option Plan of
which 36,224 shares are subject to outstanding awards; and
(4) there were no shares reserved for issuance under the 2002 Directors Stock
Plan which are not subject to outstanding awards.
(iii) Set forth in FFFB's Disclosure Letter is a complete and accurate list of
all outstanding FFFB Options, including the names of the optionees, dates of
grant, exercise prices, dates of vesting, dates of termination, shares subject
to each grant and whether stock appreciation, limited or other similar rights
were granted in connection with such options.
(iv) No bonds, debentures, notes or other indebtedness having the right to vote
on any matters on which stockholders of FFFB may vote are issued or outstanding.
(v) Except as set forth in this Section 3.2(c) and the FFFB Disclosure Letter
and except for rights (the "Rights") which have been distributed to stockholders
of FFFB pursuant to FFFB's Stockholder Protection Rights Agreement dated March
22, 2001 between FFFB and the Registrar and Transfer Company, Cransford, New
Jersey, (the "FFFB Rights Agreement"),
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as of the date of this Agreement, (A) no shares of capital stock or other voting
securities of FFFB or any of its Subsidiaries are issued, reserved for issuance
or outstanding and (B) neither FFFB nor any of its Subsidiaries has or is bound
by any outstanding subscriptions, options, warrants, calls, rights, convertible
securities, commitments or agreements of any character obligating FFFB or any of
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of capital stock of FFFB or obligating FFFB or any
of its Subsidiaries to grant, extend or enter into any such option, warrant,
call, right, convertible security, commitment or agreement. As of the date
hereof, there are no outstanding contractual obligations of FFFB or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of FFFB or any of its Subsidiaries.
(d) AUTHORITY.
(i) FFFB has all requisite corporate power and authority to enter into this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate actions on the
part of FFFB's Board of Directors, and no other corporate proceedings on the
part of FFFB are necessary to authorize this Agreement or to consummate the
transactions contemplated by this Agreement other than the approval and adoption
of this Agreement by the affirmative vote of the holders of a majority of the
outstanding shares of FFFB Common Stock. This Agreement has been duly and
validly executed and delivered by FFFB and constitutes a valid and binding
obligation of FFFB, enforceable against FFFB in accordance with its terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and to general principles of equity,
whether applied in a court of law or a court of equity.
(ii) Effective prior to execution of this Agreement, FFFB has taken all action
necessary under the FFFB Rights Agreement so that execution of this Agreement
and consummation of the transactions contemplated herein shall not result in the
grant of any Rights to any person or enable or require any of the Rights to be
exercised, transferred or triggered.
(e) NO VIOLATIONS. The execution, delivery and performance of this Agreement by
FFFB do not, and the consummation of the transactions contemplated by this
Agreement will not, (i) assuming all required governmental approvals have been
obtained and the applicable waiting periods have expired, violate any law, rule
or regulation or any judgment, decree, order, governmental permit or license to
which FFFB or any of its Subsidiaries (or any of their respective properties) is
subject, (ii) violate the certificate of incorporation or bylaws of FFFB or the
similar organizational documents of any of its Subsidiaries or (iii) constitute
a breach or violation of, or a default under (or an event which, with due notice
or lapse of time or both, would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any Lien upon any of the properties or assets of FFFB or any of its
Subsidiaries under, any of the terms, conditions or provisions of any note,
bond, indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which FFFB or any of its Subsidiaries is a party, or to which any
of their respective properties or assets may be subject except, in the case of
(iii), for any such
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breaches, violations or defaults that would not, individually or in the
aggregate, have a Material Adverse Effect on FFFB.
(f) CONSENTS AND APPROVALS. No consents or approvals of, or filings or
registrations with, any Governmental Entity or any third party are required to
be made or obtained in connection with the execution and delivery by FFFB of
this Agreement or the consummation by FFFB of the Merger and the other
transactions contemplated by this Agreement, including the Bank Merger, except
for (i) filings of applications and notices with, receipt of approvals or
nonobjections from, and expiration of the related waiting period required by,
federal and state banking authorities, (ii) filing of the Registration Statement
with the SEC and declaration by the SEC of the Registration Statement's
effectiveness under the Securities Act, (iii) the registration or qualification
of the shares of CLAS Common Stock to be issued in exchange for shares of FFFB
Common Stock under state securities or "blue sky" laws and (iv) the listing of
the shares of CLAS Common Stock to be issued in exchange for shares of FFFB
Common Stock on The Nasdaq Small Cap Market. As of the date hereof, FFFB knows
of no reason pertaining to FFFB why any of the approvals referred to in this
SECTION 3.2(f) should not be obtained without the imposition of any material
condition or restriction described in SECTION 6.1(b).
(g) SECURITIES FILINGS. Since October 1, 1999, FFFB has filed with the SEC all
reports, schedules, registration statements, definitive proxy statements and
other documents that it has been required to file under the Securities Act or
the Exchange Act (collectively, "FFFB'S REPORTS"). FFFB has made available to
CLAS an accurate and complete copy of (i) each of FFFB's Reports and (ii) each
communication mailed by FFFB to its stockholders prior to the date hereof. None
of FFFB's Reports or such communications contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. As of their respective dates, all of
FFFB's Reports complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder. Each of the
financial statements (including, in each case, any notes thereto) of FFFB
included in FFFB's Reports complied as to form, as of their respective dates of
filing with the SEC, in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto.
(h) FINANCIAL STATEMENTS. FFFB has previously made available to CLAS copies of
(i) the consolidated balance sheets of FFFB and its Subsidiaries as of September
30, 2001 and 2000 and related consolidated statements of income, cash flows and
changes in stockholders' equity for each of the years in the two-year period
ended September 30, 2001, together with the notes thereto, accompanied by the
audit report of FFFB's independent public auditors, as reported in FFFB's Annual
Report on Form 10-KSB for the year ended September 30, 2001 filed with the SEC,
(ii) the unaudited consolidated balance sheet of FFFB and its Subsidiaries as of
June 30, 2002 and the related consolidated statements of income and cash flows
for the nine months ended June 30, 2002 and 2001, as reported in FFFB's
Quarterly Report on Form 10-QSB for the period ended June 30, 2002 filed with
the SEC and (iii) the unaudited condensed consolidated balance sheet of FFFB and
its Subsidiaries as of September 30, 2002 and the related unaudited consolidated
statements of income and cash flows for the three and twelve month periods ended
September 30, 2001 and 2002 as
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reported in FFFB's Reports. Such financial statements were prepared from the
books and records of FFFB and its Subsidiaries, fairly present the consolidated
financial position of FFFB and its Subsidiaries in each case at and as of the
dates indicated and the consolidated results of operations, retained earnings
and cash flows of FFFB and its Subsidiaries for the periods indicated, and,
except as otherwise set forth in the notes thereto, were prepared in accordance
with GAAP consistently applied throughout the periods covered thereby; PROVIDED,
HOWEVER, that the unaudited financial statements for interim periods are subject
to normal year-end adjustments (which will not be material individually or in
the aggregate) and lack footnotes to the extent permitted under applicable
regulations. The books and records of FFFB and its Subsidiaries have been, and
are being, maintained in all respects in accordance with GAAP and any other
legal and accounting requirements and reflect only actual transactions.
(i) UNDISCLOSED LIABILITIES. Except as set forth on the FFFB Disclosure Letter,
neither FFFB nor any of its Subsidiaries has incurred any debt, liability or
obligation of any nature whatsoever (whether accrued, contingent, absolute or
otherwise and whether due or to become due) other than liabilities reflected on
or reserved against in the consolidated balance sheet of FFFB as of June 30,
2002 as included in FFFB's Quarterly Report on Form 10-QSB for the period ended
June 30, 2002, except for (i) liabilities incurred since June 30, 2002 in the
ordinary course of business consistent with past practice that, either alone or
when combined with all similar liabilities, have not had, and would not
reasonably be expected to have, a Material Adverse Effect on FFFB and (ii)
liabilities incurred for legal, accounting, financial advising fees and
out-of-pocket expenses in connection with the transactions contemplated by this
Agreement.
(j) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in FFFB's Reports
filed with the SEC prior to the date of this Agreement, and except for actions
and omissions of FFFB taken with the prior written consent of CLAS in
contemplation of the transactions contemplated hereby and for direct effects of
compliance with this Agreement on the operating performance of FFFB, including
expenses incurred by FFFB in consummating the transactions contemplated by this
Agreement, since June 30, 2002, (i) FFFB and its Subsidiaries have conducted
their respective businesses only in the ordinary and usual course of such
businesses consistent with their past practices, (ii) there has not been any
event or occurrence that has had, or is reasonably expected to have, a Material
Adverse Effect on FFFB or on the ability of FFFB to complete the transactions
contemplated by this Agreement, (iii) there has been no increase in the salary,
compensation, pension or other benefits payable or to become payable by FFFB or
any of its Subsidiaries to any of their respective directors, officers or
employees, other than in conformity with the policies and practices of such
entity in the usual and ordinary course of its business, (iv) neither FFFB nor
any of its Subsidiaries has paid or made any accrual or arrangement for payment
of bonuses or special compensation of any kind or any severance or termination
pay to any of their directors, officers or employees and (v) there has been no
change in any accounting principles, practices or methods of FFFB or any of its
Subsidiaries other than as required by GAAP.
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(k) LITIGATION. There are no suits, actions or legal, administrative or
arbitration proceedings pending or, to the knowledge of FFFB, threatened against
or affecting FFFB or any of its Subsidiaries or any property or asset of FFFB or
any of its Subsidiaries that (i) individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on FFFB or (ii)
challenge the validity or propriety of the transactions contemplated by this
Agreement. To the knowledge of FFFB, there are no investigations, reviews or
inquiries by any court or Governmental Entity pending or threatened against FFFB
or any of its Subsidiaries. There are no judgments, decrees, injunctions, orders
or rulings of any Governmental Entity or arbitrator outstanding against FFFB or
any of its Subsidiaries that, individually or in the aggregate, would reasonably
be expected to have a Material Adverse Effect on FFFB.
(l) ABSENCE OF REGULATORY ACTIONS. Since December 31, 1997, neither FFFB nor any
of its Subsidiaries has been a party to any cease and desist order, written
agreement or memorandum of understanding with, or any commitment letter or
similar undertaking to, or has been subject to any action, proceeding, order or
directive by any Government Regulator, or has adopted any board resolutions at
the request of any Government Regulator, or has been advised by any Government
Regulator that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such action, proceeding, order,
directive, written agreement, memorandum of understanding, commitment letter,
board resolutions or similar undertaking. There are no unresolved violations,
criticisms or exceptions by any Government Regulator with respect to any report
or statement relating to any examinations of FFFB or its Subsidiaries.
(m) COMPLIANCE WITH LAWS. FFFB and each of its Subsidiaries conducts its
business in compliance in all material requests with all statutes, laws,
regulations, ordinances, rules, judgements, orders or decrees applicable to it
or the employees conducting such business. FFFB and each of its Subsidiaries has
all material permits, licenses, certificates of authority, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Entities that are required in order to permit it to carry on its
business as it is presently conducted; all such permits, licenses, certificates
of authority, orders and approvals are in full force and effect, and to the
knowledge of FFFB, no suspension or cancellation of any of them is threatened.
Neither FFFB nor any of its Subsidiaries has been given notice or been charged
with any violation of, any law, ordinance, regulation, order, writ, rule, decree
or condition to approval of any Governmental Entity which, individually or in
the aggregate, would reasonably be expected to have a Material Adverse Effect on
FFFB.
(n) TAXES. All federal, state, local and foreign tax returns required to be
filed by or on behalf of FFFB or any of its Subsidiaries have been timely filed
or requests for extensions have been timely filed and any such extension shall
have been granted and not have expired, and all such filed returns are complete
and accurate in all material respects. All taxes shown on such returns, all
taxes required to be shown on returns for which extensions have been granted and
all other taxes required to be paid by FFFB or any of its Subsidiaries have been
paid in full or adequate provision has been made for any such taxes on FFFB's
balance sheet (in accordance with GAAP). There is no audit examination,
deficiency assessment, tax investigation or refund litigation with respect to
any taxes of FFFB or any of its Subsidiaries, and no claim has been made in
writing by any authority in
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a jurisdiction where FFFB or any of its Subsidiaries do not file tax returns
that FFFB or any such Subsidiary is subject to taxation in that jurisdiction.
All taxes, interest, additions and penalties due with respect to completed and
settled examinations or concluded litigation relating to FFFB or any of its
Subsidiaries have been paid in full or adequate provision has been made for any
such taxes on FFFB's balance sheet (in accordance with GAAP). FFFB and its
Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any tax due that is currently in
effect. FFFB and each of its Subsidiaries has withheld and paid all taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or other third
party, and FFFB and each of its Subsidiaries has timely complied with all
applicable information reporting requirements under Part III, Subchapter A of
Chapter 61 of the IRC and similar applicable state and local information
reporting requirements. Except as set forth in the FFFB Disclosure Letter,
neither FFFB nor any of its Subsidiaries is a party to any agreement, contract,
arrangement or plan that has resulted or would result, individually or in the
aggregate, in connection with this Agreement, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the IRC and neither
FFFB nor any of its Subsidiaries has made any payments and is not a party to any
agreement, and does not maintain any plan, program or arrangement, that could
require it to make any payments (including any deemed payment of compensation
upon the exercise of a FFFB Option or upon the issuance of any FFFB Common
Stock), that would not be fully deductible by reason of Section 162(m) of the
IRC.
(o) AGREEMENTS.
(i) FFFB and its Subsidiaries are not bound by any material contract (as defined
in Item 601(b)(10) of Regulation S-K promulgated by the SEC) to be performed
after the date hereof that has not been filed with FFFB's Reports.
(ii) FFFB's Disclosure Letter lists any contract, arrangement, commitment or
understanding (whether written or oral) not filed with FFFB's Reports to which
FFFB or any of its Subsidiaries is a party or is bound:
(A) with any executive officer or other key employee of FFFB or any of its
Subsidiaries the benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction involving FFFB or any
of its Subsidiaries of the nature contemplated by this Agreement;
(B) with respect to the employment of any directors, officers, employees or
consultants;
(C) any of the benefits of which will be increased, or the vesting or payment of
the benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement, or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement (including any stock option plan, phantom stock or stock
appreciation rights plan, restricted stock plan or stock purchase plan);
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(D) containing covenants that limit the ability of FFFB or any of its
Subsidiaries to compete in any line of business or with any person, or that
involve any restriction on the geographic area in which, or method by which,
FFFB (including any successor thereof) or any of its Subsidiaries may carry on
its business (other than as may be required by law or any regulatory agency);
(E) pursuant to which FFFB or any of its Subsidiaries may become obligated to
invest in or contribute capital to any entity;
(F) not fully disclosed in FFFB's Reports that relates to borrowings of money
(or guarantees thereof) by FFFB or any of its Subsidiaries in excess of $50,000;
or
(G) which is a lease or license with respect to any property, real or personal,
whether as landlord, tenant, licensor or licensee, involving a liability or
obligation as obligor in excess of $25,000 on an annual basis.
(iii) Except as set forth on the FFFB Disclosure Letter, FFFB nor any of its
Subsidiaries is in default under (and no event has occurred which, with due
notice or lapse of time or both, would constitute a default under) or is in
violation of any provision of any note, bond, indenture, mortgage, deed of
trust, loan agreement, lease or other agreement to which it is a party or by
which it is bound or to which any of its respective properties or assets is
subject and, to the knowledge of FFFB, no other party to any such agreement
(excluding any loan or extension of credit made by FFFB or any of its
Subsidiaries) is in default in any respect thereunder, except for such defaults
or violations that would not, individually or in the aggregate, have a Material
Adverse Effect on FFFB.
(p) INTELLECTUAL PROPERTY. FFFB and each of its Subsidiaries owns or possesses
valid and binding licenses and other rights to use without payment all patents,
copyrights, trade secrets, trade names, service marks and trademarks material to
its businesses, and neither FFFB nor any of its Subsidiaries has received any
notice of conflict with respect thereto that asserts the right of others. Each
of FFFB and its Subsidiaries has performed all the obligations required to be
performed by it and are not in default under any contact, agreement, arrangement
or commitment relating to any of the foregoing.
(q) LABOR MATTERS. FFFB and its Subsidiaries are in material compliance with all
applicable laws respecting employment, retention of independent contractors,
employment practices, terms and conditions of employment, and wages and hours.
Neither FFFB nor any of its Subsidiaries is or has ever been a party to, or is
or has ever been bound by, any collective bargaining agreement, contract or
other agreement or understanding with a labor union or labor organization with
respect to its employees, nor is FFFB or any of its Subsidiaries the subject of
any proceeding asserting that it has committed an unfair labor practice or
seeking to compel it or any such Subsidiary to bargain with any labor
organization as to wages and conditions of employment nor, to the knowledge of
FFFB, has any such proceeding been threatened, nor is there any strike, other
labor dispute or organizational effort involving FFFB or any of its Subsidiaries
pending or, to the knowledge of FFFB, threatened.
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(r) EMPLOYEE BENEFIT PLANS.
(i) FFFB's Disclosure Letter contains a complete and accurate list of all
pension, retirement, stock option, stock purchase, stock ownership, recognition
and retention, savings, stock appreciation right, profit sharing, deferred
compensation, consulting, bonus, group insurance, severance and other benefit
plans, contracts, agreements and arrangements, including, but not limited to,
"employee benefit plans," as defined in Section 3(3) of ERISA, incentive and
welfare policies, contracts, plans and arrangements and all trust agreements
related thereto with respect to any present or former directors, officers or
other employees of FFFB or any of its Subsidiaries (hereinafter referred to
collectively as the "FFFB EMPLOYEE PLANS"). True and complete copies of each
agreement, plan and other documents referenced in FFFB's Disclosure Letter have
been made available to CLAS. There has been no announcement or commitment by
FFFB or any of its Subsidiaries to create an additional FFFB Employee Plan, or
to amend any FFFB Employee Plan, except for amendments required by applicable
law which do not materially increase the cost of such FFFB Employee Plan.
(ii) There is no pending or threatened litigation, administrative action or
proceeding relating to any FFFB Employee Plan. All of the FFFB Employee Plans
comply in all material respects with all applicable requirements of ERISA, the
IRC and other applicable laws. There has occurred no "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the IRC) with respect to
the FFFB Employee Plans which is likely to result in the imposition of any
penalties or taxes upon FFFB or any of its Subsidiaries under Section 502(i) of
ERISA or Section 4975 of the IRC.
(iii) No liability to the Pension Benefit Guarantee Corporation has been or is
expected by FFFB or any of its Subsidiaries to be incurred with respect to any
FFFB Employee Plan which is subject to Title IV of ERISA ("FFFB PENSION PLAN"),
or with respect to any "single-employer plan" (as defined in Section 4001(a) of
ERISA) currently or formerly maintained by FFFB or any ERISA Affiliate. No FFFB
Pension Plan had an "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, as of the last day of the end of the most
recent plan year ending prior to the date hereof; the fair market value of the
assets of each FFFB Pension Plan exceeds the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) under such FFFB
Pension Plan as of the end of the most recent plan year with respect to the
respective FFFB Pension Plan ending prior to the date hereof, calculated on the
basis of the actuarial assumptions used in the most recent actuarial valuation
for such FFFB Pension Plan as of the date hereof; and no notice of a "reportable
event" (as defined in Section 4043 of ERISA) for which the 30-day reporting
requirement has not been waived has been required to be filed for any FFFB
Pension Plan within the 12-month period ending on the date hereof. Neither FFFB
nor any of its Subsidiaries has provided, or is required to provide, security to
any FFFB Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the IRC. Neither FFFB, its Subsidiaries, nor
any ERISA Affiliate has contributed to any "multiemployer plan," as defined in
Section 3(37) of ERISA, on or after September 26, 1980.
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(iv) Each FFFB Employee Plan that is an "employee pension benefit plan" (as
defined in Section 3(2) of ERISA) and which is intended to be qualified under
Section 401(a) of the IRC (a "FFFB QUALIFIED PLAN") has received a favorable
determination letter from the IRS, and FFFB and its Subsidiaries are not aware
of any circumstances likely to result in revocation of any such favorable
determination letter. Each FFFB Qualified Plan that is an "employee stock
ownership plan" (as defined in Section 4975(e)(7) of the IRC) has satisfied all
of the applicable requirements of Sections 409 and 4975(e)(7) of the IRC and the
regulations thereunder in all material respects and any assets of any such FFFB
Qualified Plan that, as of the end of the plan year, are not allocated to
participants' individual accounts are pledged as security for, and may be
applied to satisfy, any securities acquisition indebtedness.
(v) Neither FFFB nor any of its Subsidiaries has any obligations for
post-retirement or post-employment benefits under any FFFB Employee Plan that
cannot be amended or terminated upon 60 days' notice or less without incurring
any liability thereunder, except for coverage required by Part 6 of Title I of
ERISA or Section 4980B of the IRC, or similar state laws, the cost of which is
borne by the insured individuals.
(s) PROPERTIES.
(i) A description of each parcel of real property owned by FFFB or a Subsidiary
of FFFB is set forth in FFFB's Disclosure Letter. FFFB and each of its
Subsidiaries has good and marketable title to all real property owned by it
(including any property acquired in a judicial foreclosure proceeding or by way
of a deed in lieu of foreclosure or similar transfer), in each case free and
clear of any Liens except (A) liens for taxes not yet due and payable, (B) such
easements, restrictions and encumbrances, if any, as are not material in
character, amount or extent, and do not materially detract from the value, or
materially interfere with the present use of the properties subject thereto or
affected thereby and (C) as reflected on the consolidated balance sheet of FFFB
as of June 30, 2003 included in FFFB's Reports. All real property and fixtures
of FFFB and each of its Subsidiaries are in a good state of maintenance and
repair (normal wear and tear excepted), conform in all material respects with
all applicable ordinances, regulations and zoning laws and are considered by
FFFB to be adequate for the current business of FFFB and its Subsidiaries. To
the knowledge of FFFB, none of the buildings, structures or other improvements
located on its real property encroaches upon or over any adjoining parcel or
real estate or any easement or right-of-way.
(ii) FFFB and each of its Subsidiaries has good and marketable title to all
tangible personal property owned by it, free and clear of all Liens except such
encumbrances, if any, as are not material in character, amount or extent, and do
not materially detract from the value, or materially interfere with the present
use of the properties subject thereto or affected thereby. With respect to
personal property used in the business of FFFB and its Subsidiaries that is
leased rather than owned, neither FFFB nor any of its Subsidiaries is in default
under the terms of any such lease except where any such default would not result
in a Material Adverse Effect on FFFB.
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(iii) A description of all real property leased by FFFB or a Subsidiary of FFFB
is set forth in FFFB's Disclosure Letter. Each lease pursuant to which FFFB or
any of its Subsidiaries as lessee, leases real or personal property, is valid
and in full force and effect and neither FFFB nor any of its Subsidiaries, nor,
to FFFB's knowledge, any other party to any such lease, is in default or in
violation of any material provisions of any such lease except where any such
default would not result in a Material Adverse Effect on FFFB.
(t) FAIRNESS OPINION. FFFB has received the opinion of Keller & Co. to the
effect that, as of the date hereof, the Merger Consideration is fair, from a
financial point of view, to FFFB's stockholders.
(u) FEES. Other than financial advisory services performed for FFFB by Keller &
Company, Inc. pursuant to an agreement dated December 17, 2002, a true and
complete copy of which is set forth in FFFB's Disclosure Letter, neither FFFB
nor any of its Subsidiaries, nor any of their respective officers, directors,
employees or agents, has employed any broker or finder or incurred any liability
for any financial advisory fees, brokerage fees, commissions or finder's fees,
and no broker or finder has acted directly or indirectly for FFFB or any of its
Subsidiaries in connection with this Agreement or the transactions contemplated
hereby.
(v) ENVIRONMENTAL MATTERS.
(i) Each of FFFB and its Subsidiaries, the Participation Facilities, and, to the
knowledge of FFFB, the Loan Properties are, and have been, in substantial
compliance with all Environmental Laws except where such failure to be in
compliance with any Environmental Laws would not, individually or in the
aggregate, have a Material Adverse Effect on FFFB.
(ii) There is no suit, claim, action, demand, executive or administrative order,
directive, investigation or proceeding pending or, to the knowledge of FFFB,
threatened, before any court, governmental agency or board or other forum
against FFFB or any of its Subsidiaries or any Participation Facility (A) for
alleged noncompliance (including by any predecessor) with, or liability under,
any Environmental Law or (B) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at or on a site
owned, leased or operated by FFFB or any of its Subsidiaries or any
Participation Facility.
(iii) To the knowledge of FFFB, there is no suit, claim, action, demand,
executive or administrative order, directive, investigation or proceeding
pending or threatened before any court, governmental agency or board or other
forum relating to or against any Loan Property (or FFFB or any of its
Subsidiaries in respect of such Loan Property) (A) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (B) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at a Loan
Property.
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(iv) Neither FFFB nor any of its Subsidiaries, has received any notice, demand
letter, executive or administrative order, directive or request for information
from any Governmental Entity or any third party indicating that it may be in
violation of, or liable under, any Environmental Law.
(v) To the knowledge of FFFB and its Subsidiaries, there are no underground
storage tanks at any properties owned or operated by FFFB or any of its
Subsidiaries or any Participation Facility and no underground storage tanks have
been closed or removed from any properties owned or operated by FFFB or any of
its Subsidiaries or any Participation Facility.
(vi) To the knowledge of FFFB and its Subsidiaries during the period of (A)
FFFB's or its Subsidiary's ownership or operation of any of their respective
current properties or (B) FFFB's or its Subsidiary's participation in the
management of any Participation Facility, there has been no release of Hazardous
Materials in, on, under or affecting such properties. To the knowledge of FFFB,
prior to the period of (A) FFFB's or its Subsidiary's ownership or operation of
any of their respective current properties or (B) FFFB's or its Subsidiary's
participation in the management of any Participation Facility, there was no
contamination by or release of Hazardous Material in, on, under or affecting
such properties.
(w) LOAN PORTFOLIO; ALLOWANCE FOR LOAN LOSSES.
(i) With respect to each Loan owned by FFFB or its Subsidiaries in whole or in
part:
(A) The note and the related security documents are each legal, valid and
binding obligations of the maker or obligor thereof, enforceable against such
maker or obligor in accordance with their terms subject to bankruptcy,
insolvency, and other laws of general applicability relating to or affecting
creditor's rights and general equity principles;
(B) neither FFFB nor any of its Subsidiaries, nor to the knowledge of FFFB and
its Subsidiaries, any prior holder of a Loan, has modified the note or any of
the related security documents in any material respect or satisfied, canceled or
subordinated the note or any of the related security documents except as
otherwise disclosed by documents in the applicable Loan file;
(C) FFFB or a Subsidiary of FFFB is the sole holder of legal and beneficial
title to each Loan (or FFFB's or its Subsidiary's applicable participation
interest, as applicable), except as otherwise referenced on the books and
records of FFFB or a Subsidiary of FFFB;
(D) the original note and the related security documents are included in the
Loan files, and copies of any documents in the Loan files are true and correct
copies of the documents they purport to be and have not been suspended, amended,
modified, canceled or otherwise changed except as otherwise disclosed by
documents in the applicable Loan file; and
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(E) with respect to a Loan held in the form of a participation, the
participation documentation is legal, valid, binding and enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(ii) The allowance for loan losses amounts reflected in FFFB's balance sheets at
September 30, 2001, June 30, 2002, September 30, 2002 and the date hereof, were,
and the allowance for loan losses shown on the balance sheets in FFFB's Reports
for periods ending after September 30, 2002, in the opinion of management, were
or will be adequate, as of the dates thereof, under GAAP.
(iii) The FFFB Disclosure Letter sets forth every FFFB loan, lease or other
extension of credit as of November 30, 2002 (A) which is 90 days or more
delinquent, (B) has been classified as "special mention", "substandard",
"doubtful", "loss", "non-performing", or "of concern", or (C) involves a
borrower or collateral in bankruptcy, reorganization or similar proceeding.
Since November 30, 2002, there has been no material adverse change in the items
listed in parts (A), (B) and (C) of this paragraph.
(x) DEPOSITS. Except as set forth in the FFFB Disclosure Letter, none of the
deposits of First Federal is a "brokered" deposit, as such terms is defined at
12 C.F.R. Section 337.6(a)(2).
(y) ANTI-TAKEOVER PROVISIONS INAPPLICABLE. Assuming the accuracy of the
representations contained in Section 3.3(f) hereof, the Agreement, the Plan of
Bank Merger, the Merger and the Bank Merger are not subject to any provisions of
an antitakeover nature contained in FFFB's or its Subsidiaries' organizational
documents, the Stockholder Protection Rights Agreement, and the provisions of
any federal or state "anti-takeover," "fair price," "moratorium," "control share
acquisition" or similar laws or regulations. To the best of FFFB's knowledge,
the FFFB Rights Agreement has not been amended since adoption; as of the
Effective Time, the Rights will not be, nor will they have ever been,
exercisable or transferable separately from the FFFB Common Stock; and upon the
completion the Merger, the Rights will expire and no person shall have any
rights with respect to the FFFB Rights Agreement.
(z) MATERIAL INTERESTS OF CERTAIN PERSONS. No officer or director of FFFB, or
any "associate" (as such term is defined in Rule 12b-2 under the Exchange Act)
of any such officer or director, has any material interest in any material
contract or property (real or personal), tangible or intangible, used in or
pertaining to the business of FFFB or any of its subsidiaries.
(aa) INSURANCE. In the opinion of management, FFFB and its Subsidiaries are
presently insured for amounts deemed reasonable by management against such risks
as companies engaged in a similar business would, in accordance with good
business practice, customarily be insured. All of the insurance policies and
bonds maintained by FFFB and its Subsidiaries are in full force and effect, FFFB
and its Subsidiaries are not in default thereunder and all material claims
thereunder have been filed in due and timely fashion.
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(bb) INVESTMENT SECURITIES; DERIVATIVES.
(i) Except as indicated in the FFFB Disclosure Letter and except for (A)
restrictions that exist for securities that are classified as "held to maturity"
and (B) securities which are pledged with respect to certain borrowings of FFFB,
none of the investment securities held by FFFB or any of its Subsidiaries is
subject to any restriction (contractual or statutory) that would materially
impair the ability of the entity holding such investment freely to dispose of
such investment at any time.
(ii) Except as set forth in the FFFB Disclosure Letter neither FFFB nor any of
its Subsidiaries is a party to or has agreed to enter into an exchange-traded or
over-the-counter equity, interest rate, foreign exchange or other swap, forward,
future, option, cap, floor or collar or any other contract that is a derivative
contract (including various combinations thereof) or owns securities that are
referred to generically as "structured notes," "high risk mortgage derivatives,"
"capped floating rate notes" or "capped floating rate mortgage derivatives."
(cc) INDEMNIFICATION. Except as provided in the certificate of incorporation or
bylaws of FFFB and the similar organizational documents of its Subsidiaries and
except as set forth in FFFB's Disclosure Letter, neither FFFB nor any of its
Subsidiaries is a party to any agreement that provides for the indemnification
of any of its present or former directors, officers or employees, or other
persons who serve or served as a director, officer or employee of another
corporation, partnership or other enterprise at the request of FFFB and, to the
knowledge of FFFB, there are no claims for which any such person would be
entitled to indemnification under the certificate of incorporation or bylaws of
FFFB or the similar organizational documents of any of its Subsidiaries, under
any applicable law or regulation or under any indemnification agreement.
(dd) CORPORATE DOCUMENTS. FFFB has previously furnished or made available to
CLAS a complete and correct copy of the certificate of incorporation, bylaws and
similar organizational documents of FFFB and each of FFFB's Subsidiaries, as in
effect as of the date of this Agreement. Neither FFFB nor any of FFFB's
Subsidiaries is in violation of its certificate of incorporation, bylaws or
similar organizational documents. The minute books of FFFB and each of FFFB's
Subsidiaries constitute a complete and correct record of all material actions
taken by their respective boards of directors (and each committee thereof) and
their stockholders.
(ee) FFFB INFORMATION. The information regarding FFFB and its Subsidiaries to be
supplied by FFFB for inclusion in the Registration Statement, any filings or
approvals under applicable state securities laws, or any filing pursuant to Rule
165 or Rule 425 under the Securities Act or Rule 14a-12 under the Exchange Act
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement-Prospectus (except for such portions thereof as
relate only to CLAS or any of its Subsidiaries) will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
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(ff) COMMUNITY REINVESTMENT ACT COMPLIANCE. First Federal is in material
compliance with the applicable provisions of the CRA and the regulations
promulgated thereunder except where the failure to be in compliance would not
have a Material Adverse Effect of FFFB, and First Federal currently has a CRA
rating of satisfactory or better. To the knowledge of FFFB, there is no fact or
circumstance or set of facts or circumstances that would cause First Federal to
fail to comply with such provisions or cause the CRA rating of First Federal to
fall below satisfactory.
(gg) TAX TREATMENT OF THE MERGER. FFFB has no knowledge of any fact or
circumstance relating to it that would prevent the transactions contemplated by
this Agreement from qualifying as a reorganization under Section 368 of the IRC.
(hh) MERGER WITH LINCOLN SAVINGS AND LOAN ASSOCIATION.
(i) The merger between First Federal and Lincoln Savings and Loan Association
(the "Lincoln Merger") was completed on October 4, 2002 (the "Lincoln Closing
Date").
(ii) As of the Lincoln Closing Date, the representation and warranties contained
in the Agreement and Plan of Reorganization between Lincoln Savings and Loan
Association ("Lincoln") and First Federal (the "Lincoln Merger Agreement") dated
April 25, 2002 were true and complete in every respect as if made on such date.
(iii) All documentation related to the Lincoln Merger (including the disclosure
letter to the Lincoln Merger Agreement) is attached to the FFFB Disclosure
Letter.
(iv) All of the conditions to closing set forth in the Lincoln Merger Agreement
were complied with as of the Lincoln Closing Date and there were no waivers by
any party of any such condition.
(v) All material accounting adjustments made or to be made in connection with
the Lincoln Merger and all non depository obligations in excess of $10,000
assumed in connection with the Lincoln Merger, regardless of whether or not paid
as of the date hereof, are set forth in the FFFB Disclosure Letter. For the
purpose of the preceding sentence, "non-depository obligations" shall include
but not be limited to any obligations to (x) pay additional amounts to former
Lincoln shareholders, (y) redeem Lincoln securities or (z) make any termination
or similar payment in connection with any Lincoln item or data processing or
similar contract.
(ii) VOTING REQUIREMENTS.
The affirmative vote at the FFFB Stockholders Meeting of the holders of a
majority of the outstanding shares of FFFB Common Stock to approve and adopt
this Agreement is the only vote of the holders of any class or series of the
FFFB's capital stock necessary to approve and adopt this Agreement and the
transactions contemplated hereby, including the Merger.
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3.3 REPRESENTATIONS AND WARRANTIES OF CLAS. CLAS REPRESENTS AND WARRANTS TO FFFB
THAT, EXCEPT AS SET FORTH IN CLAS'S DISCLOSURE LETTER:
(a) ORGANIZATION AND QUALIFICATION. CLAS is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is registered with the FRB as a financial holding company. CLAS has all
requisite corporate power and authority to own, lease and operate its properties
and to conduct the business currently being conducted by it. CLAS is duly
qualified or licensed as a foreign corporation to transact business and is in
good standing in each jurisdiction in which the character of the properties
owned or leased by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed and in good standing would not have a Material Adverse
Effect on CLAS.
(b) SUBSIDIARIES.
(i) CLAS owns of record and beneficially all the capital stock of each of its
Subsidiaries free and clear of any Liens. There are no contracts, commitments,
agreements or understandings relating to CLAS's right to vote or dispose of any
equity securities of its Subsidiaries. CLAS's ownership interest in each of its
Subsidiaries is in compliance with all applicable laws, rules and regulations.
(ii) Each of CLAS's Subsidiaries is a corporation or insured depository
institution duly organized and validly existing under the laws of its
jurisdiction of incorporation or organization, has all requisite corporate power
and authority to own, lease and operate its properties and to conduct the
business currently being conducted by it and is duly qualified or licensed as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
the nature of the business conducted by it makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed and in good
standing would not have a Material Adverse Affect on CLAS.
(iii) The outstanding shares of capital stock of each Subsidiary have been
validly authorized and are validly issued, fully paid and nonassessable. Except
as set forth in the Disclosure Letter, no shares of capital stock of any
Subsidiary are or may be required to be issued by virtue of any options,
warrants or other rights, no securities exist that are convertible into or
exchangeable for shares of such capital stock or any other debt or equity
security of any Subsidiary, and there are no contracts, commitments, agreements
or understandings of any kind for the issuance of additional shares of capital
stock or other debt or equity security of any Subsidiary or options, warrants or
other rights with respect to such securities.
(iv) No Subsidiary of CLAS other than Classic Bank is an "insured depository
institution" as defined in the FDIA and the applicable regulations thereunder.
Classic Bank's deposits are insured by the FDIC to the fullest extent permitted
by law. Classic Bank is a member in good standing of the Federal Home Loan Bank
of Cincinnati.
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(c) CAPITAL STRUCTURE.
(i) The authorized capital stock of CLAS consists of:
(A) 1,700,000 shares of CLAS Common Stock; and
(B) 100,000 shares of preferred stock, par value $.01 per share.
(ii) As of the date of this Agreement:
(A) 1,105,486 shares of CLAS Common Stock are issued and outstanding, all of
which are validly issued, fully paid and nonassessable and were issued in full
compliance with all applicable laws;
(B) no shares of CLAS preferred stock are issued and outstanding; and
(C) 285,150 shares of CLAS Common Stock are reserved for issuance under CLAS's
stock-based benefit plans and awards covering 240,636 shares are currently
outstanding thereunder.
(iii) No bonds, debentures, notes or other indebtedness having the right to vote
on any matters on which stockholders of CLAS may vote are issued or outstanding.
(iv) Except as set forth in its Disclosure Letter, as of the date of this
Agreement, (A) no shares of capital stock or other voting securities of CLAS are
issued, reserved for issuance or outstanding and (B) neither CLAS nor any of its
Subsidiaries has or is bound by any outstanding subscriptions, options,
warrants, calls, rights, convertible securities, commitments or agreements of
any character obligating CLAS or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, any additional shares of capital
stock of CLAS or obligating CLAS or any of its Subsidiaries to grant, extend or
enter into any such option, warrant, call, right, convertible security,
commitment or agreement. As of the date hereof, there are no outstanding
contractual obligations of CLAS or any of its Subsidiaries to repurchase, redeem
or otherwise acquire any shares of capital stock of CLAS or any of its
Subsidiaries.
(v) The shares of CLAS Common Stock to be issued in exchange for shares of FFFB
Common Stock upon consummation of the Merger in accordance with this Agreement
have been duly authorized and when issued in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable and subject to
no preemptive rights.
(d) AUTHORITY. CLAS has all requisite corporate power and authority to enter
into this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate actions on the
part of CLAS's Board of Directors, and no other corporate
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proceedings (other than the approval and adoption of this Agreement by CLAS's
stockholders) on the part of CLAS are necessary to authorize this Agreement or
to consummate the transactions contemplated by this Agreement. This Agreement
has been duly and validly executed and delivered by CLAS and constitutes a valid
and binding obligation of CLAS, enforceable against CLAS in accordance with its
terms, subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally and to general principles of equity,
whether applied in a court of law or a court of equity.
(e) NO VIOLATIONS. The execution, delivery and performance of this Agreement by
CLAS do not, and the consummation of the transactions contemplated by this
Agreement will not, (i) assuming all required governmental approvals have been
obtained and the applicable waiting periods have expired, violate any law, rule
or regulation or any judgment, decree, order, governmental permit or license to
which CLAS or any of its Subsidiaries (or any of their respective properties) is
subject, (ii) violate the certificate of incorporation or bylaws of CLAS or the
similar organizational documents of any of its Subsidiaries or (iii) constitute
a breach or violation of, or a default under (or an event which, with due notice
or lapse of time or both, would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any Lien upon any of the properties or assets of CLAS or any of its
Subsidiaries under, any of the terms, conditions or provisions of any note,
bond, indenture, deed of trust, loan agreement or other agreement, instrument or
obligation to which CLAS or any of its Subsidiaries is a party, or to which any
of their respective properties or assets may be subject except, in the case of
(iii), for any such breaches, violations or defaults that would not,
individually or in the aggregate, have a Material Adverse Effect on CLAS.
(f) CONSENTS AND APPROVALS. No consents or approvals of, or filings or
registrations with, any Governmental Entity or any third party are required to
be made or obtained in connection with the execution and delivery by CLAS of
this Agreement or the consummation by CLAS of the Merger and the other
transactions contemplated by this Agreement, including the Bank Merger, except
for (i) filings of applications and notices with, receipt of approvals or
nonobjections from, and expiration of the related waiting period required by,
federal and state banking authorities, (ii) filing of the Registration Statement
with the SEC and declaration by the SEC of the Registration Statement's
effectiveness under the Securities Act, (iii) the registration or qualification
of the shares of CLAS Common Stock to be issued in exchange for shares of CLAS
Common Stock under state securities or "blue sky" laws and (iv) the listing of
the shares of CLAS Common Stock to be issued in exchange for shares of FFFB
Common Stock on The Nasdaq Small Cap Market. As of the date hereof, CLAS knows
of no reason pertaining to CLAS why any of the approvals referred to in this
SECTION 3.3(f) should not be obtained without the imposition of any material
condition or restriction described in SECTION 6.1(b).
(g) SECURITIES FILINGS. Since October 1, 1999, CLAS has filed with the SEC all
reports, schedules, registration statements, definitive proxy statements and
other documents that it has been required to file under the Securities Act or
the Exchange Act (collectively, "CLAS'S REPORTS"). CLAS has made available to
FFFB an accurate and complete copy of (i) each of CLAS's
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Reports and (ii) each communication mailed by CLAS to its stockholders prior to
the date hereof. None of CLAS's Reports or such communications contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading. As of their
respective dates, all of CLAS's Reports complied in all material respects with
the applicable requirements of the Securities Act or the Exchange Act, as the
case may be, and the rules and regulations of the SEC promulgated thereunder.
Each of the financial statements (including, in each case, any notes thereto) of
CLAS included in CLAS's Reports complied as to form, as of their respective
dates of filing with the SEC, in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto.
(h) FINANCIAL STATEMENTS. CLAS has previously made available to FFFB copies of
(i) the consolidated balance sheets of CLAS and its Subsidiaries as of March 31,
2002 and 2001 and related consolidated statements of income, cash flows and
changes in stockholders' equity for the two years ended March 31, 2002, together
with the notes thereto, accompanied by the audit report of CLAS's independent
public auditors, as reported in CLAS's Annual Report on Form 10-KSB for the year
ended March 31, 2002 filed with the SEC and (ii) the unaudited consolidated
balance sheet of CLAS and its Subsidiaries as of September 30, 2002 and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for the six months ended September 30, 2002 and 2001, as
reported in CLAS's Quarterly Report on Form 10-Q for the period ended September
30, 2002 filed with the SEC. Such financial statements were prepared from the
books and records of CLAS and its Subsidiaries, fairly present the consolidated
financial position of CLAS and its Subsidiaries in each case at and as of the
dates indicated and the consolidated results of operations, retained earnings
and cash flows of CLAS and its Subsidiaries for the periods indicated, and,
except as otherwise set forth in the notes thereto, were prepared in accordance
with GAAP consistently applied throughout the periods covered thereby; PROVIDED,
HOWEVER, that the unaudited financial statements for interim periods are subject
to normal year-end adjustments (which will not be material individually or in
the aggregate) and lack footnotes to the extent permitted under applicable
regulations. The books and records of CLAS and its Subsidiaries have been, and
are being, maintained in all respects in accordance with GAAP and any other
legal and accounting requirements and reflect only actual transactions.
(i) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in CLAS's Reports
filed with the SEC prior to the date of this Agreement, since September 30, 2002
there has not been any event or occurrence that has had, or is reasonably
expected to have, a Material Adverse Effect on CLAS or on the ability of CLAS to
complete the transactions contemplated by this Agreement.
(j) LITIGATION. There are no suits, actions or legal, administrative or
arbitration proceedings pending or, to the knowledge of CLAS, threatened against
or affecting CLAS or any of its Subsidiaries or any property or asset of CLAS or
any of its Subsidiaries that (i) individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on CLAS or (ii)
challenge the validity or propriety of the transactions contemplated by this
Agreement. To the
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knowledge of CLAS, there are no investigations, reviews or inquires by any court
or Governmental Entity pending or threatened against CLAS or any of its
Subsidiaries. There are no judgments, decrees, injunctions, orders or rulings of
any Governmental Entity or arbitrator outstanding against CLAS or any of its
Subsidiaries that, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on CLAS.
(k) ABSENCE OF REGULATORY ACTIONS. Since December 31, 1997, neither CLAS nor any
of its Subsidiaries has been a party to any cease and desist order, written
agreement or memorandum of understanding with, or any commitment letter or
similar undertaking to, or has been subject to any action, proceeding, order or
directive by any Government Regulator, or has adopted any board resolutions at
the request of any Government Regulator, or has been advised by any Government
Regulator that it is contemplating issuing or requesting any such action,
proceeding, order, directive, written agreement, memorandum of understanding,
commitment letter, board resolutions or similar undertaking. There are no
unresolved violations, criticisms or exceptions by any Government Regulator with
respect to any report or statement relating to any examinations of CLAS or its
Subsidiaries.
(l) COMPLIANCE WITH LAWS. CLAS and each of its Subsidiaries conducts its
business in compliance with all statutes, laws, regulations, ordinances, rules,
judgements, orders or decrees applicable to it or the employees conducting such
business. CLAS and each of its Subsidiaries has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, all Governmental Entities that are required
in order to permit it to carry on its business as it is presently conducted; all
such permits, licenses, certificates of authority, orders and approvals are in
full force and effect, and, to the knowledge of CLAS, no suspension or
cancellation of any of them is threatened. Neither CLAS nor any of its
Subsidiaries has been given notice or been charged with any violation of, any
law, ordinance, regulation, order, writ, rule, decree or condition to approval
of any Governmental Entity which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on CLAS.
(m) TAXES. All federal, state, local and foreign tax returns required to be
filed by or on behalf of CLAS or any of its Subsidiaries have been timely filed
or requests for extensions have been timely filed and any such extension shall
have been granted and not have expired, and all such filed returns are complete
and accurate in all material respects. All taxes shown on such returns, all
taxes required to be shown on returns for which extensions have been granted and
all other taxes required to be paid by CLAS or any of its Subsidiaries have been
paid in full or adequate provision has been made for any such taxes on CLAS's
balance sheet (in accordance with GAAP). There is no audit examination,
deficiency assessment, tax investigation or refund litigation with respect to
any taxes of CLAS or any of its Subsidiaries, and no claim has been made in
writing by any authority in a jurisdiction where CLAS or any of its Subsidiaries
do not file tax returns that CLAS or any such Subsidiary is subject to taxation
in that jurisdiction. All taxes, interest, additions and penalties due with
respect to completed and settled examinations or concluded litigation relating
to CLAS or any of its Subsidiaries have been paid in full or adequate provision
has been made for any such taxes on CLAS's balance sheet (in accordance with
GAAP). CLAS and its Subsidiaries have not executed an
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extension or waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect. CLAS and each of its
Subsidiaries has withheld and paid all taxes required to have been withheld and
paid in connection with amounts paid or owing to any employee, independent
contractor, creditor, stockholder or other third party, and CLAS and each of its
Subsidiaries has timely complied with all applicable information reporting
requirements under Part III, Subchapter A of Chapter 61 of the IRC and similar
applicable state and local information reporting requirements.
(n) AGREEMENTS.
(i) CLAS and its Subsidiaries are not bound by any material contract (as defined
in Item 601(b)(10) of Regulation S-K promulgated by the SEC), to be performed
after the date hereof that has not been filed with CLAS's Reports.
(ii) Neither CLAS nor any of its Subsidiaries is in default under (and no event
has occurred which, with due notice or lapse of time or both, would constitute a
default under) or is in violation of any provision of any note, bond, indenture,
mortgage, deed of trust, loan agreement, lease or other agreement to which it is
a party or by which it is bound or to which any of its respective properties or
assets is subject and, to the knowledge of CLAS, no other party to any such
agreement (excluding any loan or extension of credit made by CLAS or any of its
Subsidiaries) is in default in any respect thereunder, except for such defaults
or violations that would not, individually or in the aggregate, have a Material
Adverse Effect on CLAS.
(o) CLAS INFORMATION. The information regarding CLAS and its Subsidiaries to be
supplied by CLAS for inclusion in the Registration Statement, any filings or
approvals under applicable state securities laws, or any filing pursuant to Rule
165 or Rule 425 under the Securities Act or Rule 14a-12 under the Exchange Act
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement-Prospectus (except for such portions thereof
that relate only to FFFB or any of its Subsidiaries) will comply as to form in
all material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. The Registration Statement will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations thereunder.
(p) COMMUNITY REINVESTMENT ACT COMPLIANCE. Classic Bank is in material
compliance with the applicable provisions of the CRA and the regulations
promulgated thereunder, except where such failure to be in compliance would not
reasonably be expected to have a Material Adverse Effect on CLAS. Classic Bank
currently has a CRA rating of satisfactory or better. To the knowledge of CLAS,
there is no fact or circumstance or set of facts or circumstances that would
cause Classic Bank to fail to comply with such provisions or cause the CRA
rating of Classic Bank to fall below satisfactory.
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(q) TAX TREATMENT OF THE MERGER. CLAS has no knowledge of any fact or
circumstance relating to it that would prevent the transactions contemplated by
this Agreement from qualifying as a reorganization under Section 368 of the IRC.
(r) AVAILABILITY OF FUNDS. CLAS has and will have available to it at the
Effective Time, sources of capital sufficient to pay the aggregate Cash
Consideration and to pay any other amounts payable pursuant to this Agreement
and to effect the transactions contemplated hereby. Classic Bank is, and
immediately following the Merger and the Bank Merger will be, in compliance with
all applicable capital requirements.
(s) ENVIRONMENTAL MATTERS.
(i) Each of CLAS and its Subsidiaries, the Participation Facilities, and, to the
knowledge of CLAS, the Loan Properties are, and have been, in substantial
compliance with all Environmental Laws, except where any failure to be in
compliance with any Environmental Laws would not, individually or in aggregate,
have a Material Adverse Effect on CLAS.
(ii) There is no suit, claim, action, demand, executive or administrative order,
directive, investigation or proceeding pending or, to the knowledge of CLAS,
threatened, before any court, governmental agency or board or other forum
against CLAS or any of its Subsidiaries or any Participation Facility (A) for
alleged noncompliance (including by any predecessor) with, or liability under,
any Environmental Law or (B) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at or on a site
owned, leased or operated by CLAS or any of its Subsidiaries or any
Participation Facility.
(iii) To the knowledge of CLAS, there is no suit, claim, action, demand,
executive or administrative order, directive, investigation or proceeding
pending or threatened before any court, governmental agency or board or other
forum relating to or against any Loan Property (or CLAS or any of its
Subsidiaries in respect of such Loan Property) (A) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (B) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at a Loan
Property.
(iv) Neither CLAS nor any of its Subsidiaries has received any notice, demand
letter, executive or administrative order, directive or request for information
from any Governmental Entity or any third party indicating that it may be in
violation of, or liable under, any Environmental Law.
(v) There are no underground storage tanks at any properties owned or operated
by CLAS or any of its Subsidiaries or any Participation Facility and no
underground storage tanks have been closed or removed from any properties owned
or operated by CLAS or any of its Subsidiaries or any Participation Facility.
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(vi) During the period of (A) CLAS's or its Subsidiary's ownership or operation
of any of their respective current properties or (B) CLAS's or its Subsidiary's
participation in the management of any Participation Facility, there has been no
release of Hazardous Materials in, on, under or affecting such properties. To
the knowledge of CLAS, prior to the period of (A) CLAS's or its Subsidiary's
ownership or operation of any of their respective current properties or (B)
CLAS's or its Subsidiary's participation in the management of any Participation
Facility, there was no contamination by or release of Hazardous Material in, on,
under or affecting such properties.
(t) OWNERSHIP OF FFFB COMMON STOCK. As of the date hereof, none of CLAS or any
of its Subsidiaries, or to CLAS's knowledge, any of its other affiliates or
associates (as such terms are defined under the Exchange Act), owns beneficially
or of record, directly or indirectly, or is a party to any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of, shares of FFFB Common Stock (other than shares held in a fiduciary
capacity that are beneficially owned by third parties or as a result of debts
previously contracted).
(w) STOCKHOLDER APPROVAL. The approval of this Agreement by the holders of the
CLAS Common Stock is the only vote of the holders of any class or series of
CLAS's capital stock necessary to approve and adopt this Agreement and the
transactions contemplated hereby, including the Merger, and such approval does
not require the vote of more than a majority of the outstanding shares of the
CLAS Common Stock.
ARTICLE IV
CONDUCT PENDING THE MERGER
4.1 FORBEARANCES BY FFFB. Except as expressly contemplated or permitted by this
Agreement and to the extent required by law or regulation, during the period
from the date of this Agreement to the Effective Time, FFFB shall not, nor shall
FFFB permit any of its Subsidiaries to, without the prior written consent of
CLAS, which consent shall not be unreasonably withheld:
(a) conduct its business other than in the regular, ordinary and usual course
consistent with past practice; fail to maintain and preserve intact its business
organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees; or take
any action that would adversely affect or delay its ability to perform its
obligations under this Agreement or to consummate the transactions contemplated
hereby;
(b) (i) incur, modify, extend or renegotiate any indebtedness for borrowed
money, or assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual, corporation or other
entity, other than (i) NOW, money market and passbook deposit accounts, (ii)
securities sold with an agreement to repurchase within one year, federal funds
purchases with terms of one year or less, and borrowings from a Federal Home
Loan Bank that mature within one year and (iii) certificates of deposit that
mature within 37 months; PROVIDED, HOWEVER, that in no event shall any new
borrowings under Section (ii) above exceed an aggregate of $1,000,000;
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(ii) prepay any indebtedness or other similar arrangements so as to cause FFFB
to incur any prepayment penalty thereunder;
(c) (i) adjust, split, combine or reclassify any capital stock;
(ii) make, declare or pay any dividend, or make any other distribution on its
capital stock, except for regular quarterly cash dividends at a rate not in
excess of $.07 per share of FFFB Common Stock and dividends paid by any of
FFFB's Subsidiaries for the purpose of enabling FFFB to pay such dividends;
(iii) grant any stock awards under the FFFB Employee Plans (other than the ESOP)
or grant any individual, corporation or other entity any right to acquire any
shares of its capital stock; or
(iv) issue any additional shares of capital stock or any securities or
obligations convertible or exercisable for any shares of its capital stock
except pursuant to the exercise of stock options outstanding and approved by
FFFB's stockholders as of the date hereof;
(d) sell, transfer, mortgage, encumber or otherwise dispose of any of its
material properties or assets to any individual, corporation or other entity
other than a Subsidiary, or cancel, release or assign any indebtedness to any
such person or any claims held by any such person, except in the ordinary course
of business consistent with past practice or pursuant to contracts or agreements
in force at the date of this Agreement;
(e) except pursuant to contracts or agreements in force at the date of or
permitted by this Agreement, make any equity investment, either by purchase of
stock or securities, contributions to capital, property transfers, or purchase
of any property or assets of any other individual, corporation or other entity;
(f) enter into, renew, amend or terminate any contract or agreement, or make any
change in any of its leases or contracts, other than with respect to those
contracts or agreements individually involving aggregate payments of less than,
or the provision of goods or services with a market value of less than, $30,000
per annum and other than contracts or agreements covered by SECTION 4.1(g);
(g) make, renegotiate, renew, increase, extend, modify or purchase any loan,
lease (credit equivalent), advance, credit enhancement or other extension of
credit, or make any commitment in respect of any of the foregoing, except (i) in
conformity with existing lending practices in amounts not to exceed an aggregate
of $100,000 per borrower with respect to any individual borrower or (ii) loans
or advances as to which FFFB has a binding obligation to make such loans or
advances as of the date hereof;
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(h) except for loans or extensions of credit made on terms generally available
to the public, make or increase any loan or other extension of credit, or commit
to make or increase any such loan or extension of credit, to any director or
executive officer of FFFB or First Federal, or any entity controlled, directly
or indirectly, by any of the foregoing, other than renewals of existing loans or
commitments to loan;
(i) increase in any manner the compensation or fringe benefits of any of its
employees or directors, or pay or make any stock award, cash or stock bonus,
pension, retirement allowance or contribution to any such employees or directors
not required by any binding agreement in effect as of the date hereof, except
for annual employee salary increases of not more than 2% consistent with past
practice;
(ii) become a party to, amend (except as may be required by law) or commit
itself to any pension, retirement, profit-sharing or welfare benefit plan or
agreement or employment agreement with or for the benefit of any employee or
director;
(iii) voluntarily accelerate the vesting of, or the lapsing of restrictions with
respect to, any stock options or other stock-based compensation;
(iv) elect to any senior executive office any person who is not a member of its
senior executive officer team as of the date of this Agreement or elect to its
Board of Directors any person who is not a member of its Board of Directors as
of the date of this Agreement, or hire any employee;
(v) submit for approval or ratification any stock option or similar plan to its
stockholders; or
(vi) make any quarterly contribution to the First Federal ESOP in excess of the
First Federal's average quarterly contributions to the First Federal ESOP over
the last two years; or
(j) settle any claim, action or proceeding involving payment by it of money
damages in excess of $25,000 or impose any material restriction on its
operations or the operations of any of its Subsidiaries;
(k) amend its certificate of incorporation or bylaws, or similar governing
documents;
(l) restructure or materially change its investment securities portfolio through
purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported;
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(m) make any investment in any debt security, including mortgage-backed and
mortgage-related securities, other than U.S. government and U.S. government
agency securities with final maturities not greater than one year;
(n) make any capital expenditures other than pursuant to binding commitments
existing on the date hereof, expenditures necessary to maintain existing assets
in good repair, to make payment of necessary taxes;
(o) establish or commit to the establishment of any new branch or other office
facilities or file any application to relocate or terminate the operation of any
banking office;
(p) take any action that is intended or expected to result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time prior to the Effective Time, or in
any of the conditions to the Merger set forth in Article VI not being satisfied
or in a violation of any provision of this Agreement;
(q) implement or adopt any change in its accounting principles, practices or
methods, other than as may be required by GAAP or regulatory guidelines;
(r) knowingly take any action that would prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368 of the IRC; or
(s) agree to take, make any commitment to take, or adopt any resolutions of its
board of directors in support of, any of the actions prohibited by this SECTION
4.1.
Any request by FFFB or response thereto by CLAS shall be made in accordance with
the notice provisions of SECTION 8.7 and shall note that it is a request
pursuant to this SECTION 4.1.
4.2 FORBEARANCES BY CLAS. Except as expressly contemplated or permitted by this
Agreement, and except to the extent required by law or regulation or any
Governmental Entity, during the period from the date of this Agreement to the
Effective Time, CLAS shall not, nor shall CLAS permit any of its Subsidiaries
to, without the prior written consent of FFFB, which shall not unreasonably be
withheld:
(a) take any action that is intended to or expected to result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time prior to the Effective Time, or in
any of the conditions to the Merger set forth in Article VI not being satisfied
or in a violation of any provision of this Agreement;
(b) knowingly take any action that would prevent or impede the Merger from
qualifying as a reorganization withing the meaning of Section 368 of the IRC;
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(c) amend its certificate of incorporation or bylaws in a manner that would
materially and adversely effect the benefits of the Merger to the stockholders
of FFFB; or
(d) agree to take, make any commitment to take, or adopt any resolutions of its
Board of Directors in support of, any of the actions prohibited by this SECTION
4.2.
ARTICLE V
COVENANTS
5.1 ACQUISITION PROPOSALS.
(a) Except as permitted by this Agreement, FFFB shall not, and shall not
authorize or permit any of its Subsidiaries or any of its Subsidiaries'
officers, directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by FFFB or any of its
Subsidiaries to, directly or indirectly, (i) solicit, initiate or knowingly
encourage (including by way of furnishing non-public information), or take any
other action to facilitate, any inquiries, discussions or the making of any
proposal that constitutes or could reasonably be expected to lead to an
Acquisition Proposal or (ii) participate in any discussions or negotiations, or
otherwise communicate in any way with any person (other than CLAS), regarding an
Acquisition Proposal. Notwithstanding the foregoing, FFFB may, in response to a
Superior Proposal that has not been withdrawn and that did not otherwise result
from a breach of this SECTION 5.1, (x) furnish non-public information with
respect to FFFB to the person who made such Superior Proposal (y) participate in
discussions or negotiations with such person regarding such Superior Proposal
and (z) recommend such Superior Proposal to the stockholders of FFFB, if and so
long as FFFB's Board of Directors determines in good faith, after consultation
with and based upon the advice of its outside legal counsel, that such action is
legally necessary for the proper discharge of its fiduciary duties under
applicable law.
(b) Nothing contained in this SECTION 5.1 shall prohibit FFFB from at any time
taking and disclosing to its stockholders a position contemplated by Rule 14d-9
or Rule 14e-2 promulgated under the Exchange Act or making any disclosure
required by Rule 14a-9 promulgated under the Exchange Act.
(c) FFFB will notify CLAS immediately orally (within one day) and in writing
(within three days) of any Acquisition Proposal, any request for non-public
information that could reasonably be expected to lead to an Acquisition
Proposal, or any inquiry with respect to or that could reasonably be expected to
lead to an Acquisition Proposal, including, in each case, the identity of the
person making such Acquisition Proposal, request or inquiry and the terms and
conditions thereof, and shall provide to CLAS any written materials received by
FFFB or any of its Subsidiaries in connection therewith. FFFB will keep CLAS
informed of any developments with respect to any such Acquisition Proposal,
request or inquiry immediately upon the occurrence thereof. FFFB will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. FFFB will take the necessary
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steps to inform the appropriate individuals or entities referred to in the first
sentence of SECTION 5.1(a) of the obligations undertaken in this SECTION 5.1.
FFFB will promptly request each person (other than CLAS) that has executed a
confidentiality agreement prior to the date hereof in connection with its
consideration of a business combination with FFFB or any of its Subsidiaries to
return or destroy all confidential information previously furnished to such
person by or on behalf of FFFB or any of its Subsidiaries. FFFB shall not
release any third party from, or waive any provisions of, any confidentiality
agreements or standstill agreement to which it or any of its Subsidiaries is a
party.
5.2 CERTAIN POLICIES AND ACTIONS OF FFFB. At the request of CLAS, FFFB shall (i)
cause First Federal to modify and change its loan, litigation and real estate
valuation policies and practices (including loan classifications and levels of
reserves) and investment and asset/liability management policies and practices
so as to be consistent with those of Classic Bank and (ii) recognize for
financial reporting purposes of all its expenses related to the Merger;
PROVIDED, HOWEVER, that FFFB shall not be required to take such actions prior to
the date on which all regulatory and stockholder approvals required to
consummate the transactions contemplated hereby are received, and until after
receipt of written confirmation from CLAS that it is not aware of any fact or
circumstance that would prevent completion of the Merger, and PROVIDED FURTHER,
that such policies and procedures are not prohibited by GAAP or any applicable
laws and regulations. FFFB's representations, warranties and covenants contained
in this Agreement shall not be deemed to be untrue or breached in any respect
for any purpose as a consequence of any modifications or changes undertaken
solely on account of this SECTION 5.2.
5.3 ACCESS AND INFORMATION.
(a) Upon reasonable notice, FFFB shall (and shall cause FFFB's Subsidiaries to)
afford CLAS and its representatives (including, without limitation, directors,
officers and employees of CLAS and its affiliates and counsel, accountants and
other professionals retained by CLAS) such reasonable access during normal
business hours throughout the period prior to the Effective Time to the books,
records (including, without limitation, tax returns and work papers of
independent auditors), contracts, properties, personnel and to such other
information relating to FFFB and FFFB's Subsidiaries as CLAS may reasonably
request. Upon reasonable notice, CLAS shall (and shall cause Classic Bank to)
afford FFFB and its representatives (including, without limitation, directors,
officers and employees of FFFB and its affiliates and counsel, accountants and
other professionals retained by FFFB) such reasonable access during normal
business hours throughout the period prior to the Effective Time to the
executive officers of CLAS and Classic Bank and to such information regarding
CLAS and its Subsidiaries as FFFB may reasonably request. No investigation by
any party pursuant to this SECTION 5.3 shall affect or be deemed to modify any
representation or warranty made by the other party in this Agreement.
(b) From the date hereof until the Effective Time, FFFB shall, and shall cause
FFFB's Subsidiaries to, promptly provide CLAS with (i) a copy of each report,
schedule, registration statement and other document filed or received by it
pursuant to the requirements of the Securities Act or the Exchange Act, (ii) a
copy of each report filed with federal or state banking regulators, (iii)
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a copy of each periodic report to its senior management and all materials
relating to its business or operations furnished to its Board of Directors, (iv)
a copy of each press release made available to the public and (iv) all other
information concerning its business, properties and personnel as CLAS may
reasonably request. Notwithstanding the foregoing, neither FFFB nor its
Subsidiaries shall be required to provide access to or to disclose information
where such access or disclosure relates to any party's compliance with this
Agreement or would violate the rights of such entity's customers, jeopardize the
attorney-client privilege of the entity in possession or control of such
information, or contravene any law, rule, regulation, order, judgment, decree or
binding agreement entered into prior to the date of this Agreement. The parties
hereto will make appropriate substitute disclosure arrangements under
circumstances in which the restrictions of the previous sentence apply.
(c) FFFB and CLAS will not, and will cause its representatives not to, use any
information obtained pursuant to this SECTION 5.3 for any purpose unrelated to
the consummation of the transactions contemplated by this Agreement. Subject to
the requirements of applicable law, FFFB and CLAS will keep confidential, and
will cause its representatives to keep confidential, all information and
documents obtained pursuant to this SECTION 5.3 unless such information (i) was
already known to such party or an affiliate, other than pursuant to a
confidentiality agreement or other confidential relationship, (ii) becomes
available to such party or an affiliate from other sources not known by such
party to be bound by a confidentiality agreement or other obligation of secrecy,
(iii) is disclosed with the prior written approval of the other party or (iv) is
or becomes readily ascertainable from published information or trade sources.
(d) From and after the date hereof, representatives of CLAS and FFFB shall meet
on a regular basis to discuss and plan for the conversion of FFFB's and its
Subsidiaries' data processing and related electronic informational systems to
those used by CLAS and its Subsidiaries with the goal of conducting such
conversion simultaneously with the consummation of the Bank Merger.
5.4 APPLICATIONS; CONSENTS; TRANSITION.
(a) The parties hereto shall cooperate with each other and shall use their
reasonable best efforts to prepare and file as soon as practicable after the
date hereof all necessary applications, notices and filings to obtain all
permits, consents, approvals and authorizations of all Governmental Entities
that are necessary or advisable to consummate the transactions contemplated by
this Agreement. FFFB and CLAS shall furnish each other with all information
concerning themselves, their respective Subsidiaries, and their respective
Subsidiaries' directors, officers and stockholders and such other matters as may
be reasonably necessary or advisable in connection with any application, notice
or filing made by or on behalf of CLAS, FFFB or any of their respective
Subsidiaries to any Governmental Entity in connection with the transactions
contemplated by this Agreement and the Plan of Bank Merger. CLAS and FFFB shall
have the right to review in advance, and to the extent practicable each will
consult with the other on, all the information relating to CLAS and FFFB, as the
case may be, and any of their respective Subsidiaries, that appears in any
filing made with, or written materials submitted to, any Governmental Entity
pursuant to this SECTION 5.4(a).
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(b) As soon as practicable after the date hereof, each of the parties hereto
shall, and they shall cause their respective Subsidiaries to, use its best
efforts to obtain any consent, authorization or approval of any third party that
is required to be obtained in connection with the transactions contemplated by
this Agreement and the Plan of Bank Merger.
(c) CLAS and FFFB shall, and shall cause their respective Subsidiaries to, use
their reasonable best efforts to facilitate the integration of the FFFB and its
Subsidiaries, with the businesses of CLAS and its Subsidiaries to be effective
as of the Effective Time. Without limiting the generality of the foregoing, from
the date hereof through the Effective Time and consistent with the performance
of their day-to-day operations and the continuous operation of the FFFB and its
Subsidiaries in the ordinary course of business, FFFB and its Subsidiaries shall
cause their employees to use their reasonable best efforts to provide support
and assistance to CLAS on such tasks as may be reasonably required to result in
a successful integration at the Effective Time.
5.5 ANTITAKEOVER PROVISIONS. FFFB and its Subsidiaries shall take all steps
required by any relevant federal or state law or regulation or under any
relevant agreement or other document to exempt or continue to exempt CLAS,
Classic Bank, the Agreement, the Plan of Bank Merger and the Merger from any
provisions of an antitakeover nature in FFFB's or its Subsidiaries' certificate
of incorporation and bylaws, or similar organizational documents, and the
provisions of any federal or state antitakeover laws.
5.6 ADDITIONAL AGREEMENTS. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all reasonable efforts to take
promptly, or cause to be taken promptly, all actions and to do promptly, or
cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement as expeditiously as possible,
including using efforts to obtain all necessary actions or non-actions,
extensions, waivers, consents and approvals from all applicable Governmental
Entities, effecting all necessary registrations, applications and filings
(including, without limitation, filings under any applicable state securities
laws) and obtaining any required contractual consents and regulatory approvals.
5.7 PUBLICITY. The initial press release announcing this Agreement shall be a
joint press release and thereafter FFFB and CLAS shall consult with each other
prior to issuing any press releases or otherwise making public statements with
respect to the Merger and any other transaction contemplated hereby and in
making any filings with any Governmental Entity or with any national securities
exchange or market with respect thereto; PROVIDED, HOWEVER, that nothing in this
SECTION 5.7 shall be deemed to prohibit any party from making any disclosure
which its counsel deems necessary in order to satisfy such party's disclosure
obligations imposed by law.
5.8 STOCKHOLDER MEETINGS.
(a) FFFB will submit to its stockholders this Agreement and any other matters
required to be approved or adopted by stockholders in order to carry out the
intentions of this
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Agreement. In furtherance of that obligation, FFFB will take, in accordance with
applicable law and its certificate of incorporation and bylaws, all action
necessary to call, give notice of, convene and hold a meeting of its
stockholders (the "FFFB STOCKHOLDER MEETING") as promptly as practicable for the
purpose of considering and voting on approval and adoption of this Agreement and
the transactions provided for in this Agreement. FFFB's Board of Directors will
use all reasonable best efforts to obtain from FFFB's stockholders a vote
approving this Agreement. Except as otherwise provided in Section 5.1(a) of this
Agreement, (i) FFFB's Board of Directors shall recommend to FFFB's stockholders
approval of this Agreement, (ii) the Proxy Statement-Prospectus shall include a
statement to the effect that FFFB's Board of Directors has recommended that
FFFB's stockholders vote in favor of the approval of this Agreement and (iii)
neither FFFB's Board of Directors nor any committee thereof shall withdraw,
amend or modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to CLAS, the recommendation of FFFB's Board of Directors that FFFB's
stockholders vote in favor of approval of this Agreement or make any statement
in connection with the FFFB Stockholder Meeting inconsistent with such
recommendation provided that nothing in this Agreement shall prevent FFFB's
Board of Directors from withholding, withdrawing, amending or modifying its
recommendation if FFFB's Board of Directors determines, after consultation with
its outside counsel, that such action is legally required in order for the
directors to comply with their fiduciary duties to FFFB's shareholders under
applicable law; provided, further, that Section 5.1 shall govern withholding,
withdrawing, amending or modifying of such recommendation in the circumstances
described therein.
(b) If required by applicable law or regulation or by the rules and regulations
of the Nasdaq Small Cap Market, CLAS will submit to its stockholders this
Agreement and any other matters required to be approved or adopted by
stockholders in connection with this Agreement. In furtherance of that
obligation, CLAS will take, in accordance with applicable law and its
certificate of incorporation and bylaws, all action necessary to call, give
notice of, convene and hold a meeting of its stockholders (the "CLAS STOCKHOLDER
MEETING") as promptly as practicable for the purpose of considering and voting
on approval and adoption of this Agreement and the transactions provided for in
this Agreement. CLAS's Board of Directors will use all reasonable best efforts
to obtain from CLAS's stockholders a vote approving this Agreement. In
connection therewith, (i) CLAS's Board of Directors shall recommend to CLAS's
stockholders approval of this Agreement, (ii) the Proxy Statement-Prospectus
shall include a statement to the effect that CLAS's Board of Directors has
recommended that CLAS's stockholders vote in favor of the approval of this
Agreement and (iii) neither CLAS's Board of Directors nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to withdraw, amend or
modify in a manner adverse to CLAS, the recommendation of CLAS's Board of
Directors that CLAS's stockholders vote in favor of approval of this Agreement
or make any statement in connection with the CLAS Stockholder Meeting
inconsistent with such recommendation.
5.9 REGISTRATION OF CLAS COMMON STOCK.
(a) As promptly as reasonably practicable following the date hereof, CLAS shall
prepare and file with the SEC a registration statement on Form S-4 with respect
to the issuance of
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CLAS Common Stock in the Merger (such Form S-4, and any amendments or
supplements thereto, the "REGISTRATION STATEMENT"). The Registration Statement
shall contain proxy materials relating to the matters to be submitted to the
FFFB stockholders at the FFFB Stockholders Meeting and the CLAS stockholders at
the CLAS Stockholders Meeting which shall also constitute the prospectus
relating to the shares of CLAS Common Stock to be issued in the Merger (such
proxy statement/prospectus, and any amendments or supplements thereto, the
"PROXY STATEMENT-PROSPECTUS"). FFFB will furnish to CLAS the information
required to be included in the Registration Statement with respect to its
business and affairs and shall have the right to review and consult with CLAS
and approve the form of, and any characterizations of such information included
in, the Registration Statement prior to its being filed with the SEC. CLAS shall
use reasonable best efforts to have the Registration Statement declared
effective by the SEC and to keep the Registration Statement effective as long as
is necessary to consummate the Merger and the transactions contemplated hereby.
FFFB will use its best efforts to cause the Proxy Statement-Prospectus to be
mailed to FFFB's stockholders and CLAS shall use its best efforts to cause the
Proxy Statement - Prospectus to be mailed to its stockholders, in each instance,
promptly as practicable after the Registration Statement is declared effective
under the Securities Act. CLAS will advise FFFB, promptly after it receives
notice thereof, of the time when the Registration Statement has become
effective, the issuance of any stop order, the suspension of the qualification
of the CLAS Common Stock issuable in connection with the Merger for offering or
sale in any jurisdiction, or any request by the SEC for amendment of the Proxy
Statement-Prospectus or the Registration Statement. If at any time prior to the
Effective Time, any information relating to CLAS or FFFB, or any of their
respective affiliates, officers or directors, is discovered by CLAS or FFFB
which should be set forth in an amendment or supplement to any of the
Registration Statement or the Proxy Statement-Prospectus so that any of such
documents would not include any misstatement of a material fact or omit to state
any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other party hereto and, to
the extent required by law, rules or regulations, an appropriate amendment or
supplement describing such information shall be promptly filed by CLAS with the
SEC and disseminated by FFFB to the stockholders of FFFB and disseminated by
CLAS to the stockholders of CLAS.
(b) CLAS shall also take any action required to be taken under any applicable
state securities laws in connection with the Merger and each of FFFB and CLAS
shall furnish all information concerning it and the holders of FFFB Common Stock
as may be reasonably requested in connection with any such action.
(c) Prior to the Effective Time, CLAS shall list on The Nasdaq Small Cap Market
the shares of CLAS Common Stock to be issued by CLAS in exchange for the shares
of FFFB Common Stock.
5.10 AFFILIATE LETTERS. FFFB shall use its best efforts to cause each director,
executive officer and other person who is an "affiliate" of FFFB under Rule 145
of the Securities Act to deliver to CLAS as soon as practicable and prior to the
mailing of the Proxy Statement-Prospectus executed
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letter agreements, each substantially in the form attached hereto as EXHIBIT C,
providing that such person will comply with Rule 145.
5.11 NOTIFICATION OF CERTAIN MATTERS. Each party shall give prompt notice to the
other of: (i) any event or notice of, or other communication relating to, a
default or event that, with notice or lapse of time or both, would become a
default, received by it or any of its Subsidiaries subsequent to the date of
this Agreement and prior to the Effective Time, under any contract material to
the financial condition, properties, businesses or results of operations of each
party and its Subsidiaries taken as a whole to which each party or any
Subsidiary is a party or is subject; and (ii) any event, condition, change or
occurrence which individually or in the aggregate has, or which is reasonably
likely to result in a Material Adverse Effect. Each of FFFB and CLAS shall give
prompt notice to the other party of any notice or other communication from any
third party alleging that the consent of such third party is or may be required
in connection with any of the transactions contemplated by this Agreement.
5.12 EMPLOYEE BENEFITS MATTERS.
(a) All persons who are employees of First Federal immediately prior to the
Effective Time and whose employment is not specifically terminated at or prior
to the Effective Time (a "CONTINUING EMPLOYEE") shall, at the Effective Time,
become employees of Classic Bank; PROVIDED, HOWEVER, that in no event shall any
of First Federal's employees be officers of Classic Bank, or have or exercise
any power or duty conferred upon such an officer, unless and until duly elected
or appointed to such position in accordance with the bylaws of Classic Bank and
that CLAS shall use reasonable efforts to offer a position to all employees of
First Federal. Except for Continuing Employees who enter into employment
contracts with CLAS or Classic Bank, all of the Continuing Employees shall be
employed at the will of Classic Bank and no contractual right to employment
shall inure to such employees because of this Agreement. In the event any
Continuing Employee without an employment contact is terminated without cause
within one year following the Effective Time, he or she shall be entitled to
receive, within 60 days of such termination, a cash severance payment equal to
three weeks salary for each full year of continuous service he or she has with
FFFB, or First Federal, Classic Bank or CLAS, up to a maximum of 30 weeks
salary.
(b) As of the Effective Time, CLAS shall make available employer-provided health
and other employee welfare benefit plans to each Continuing Employee on the same
basis as it provides such coverage to CLAS employees, except that any
eligibility waiting period otherwise applicable under such plans to new
employees shall not apply to a Continuing Employee or their covered dependents
who were covered under a similar FFFB Employee Plan at the Effective Time and
provided that, for the first year following the Effective Time, CLAS shall
reimburse Continuing Employees to the extent necessary so that their out of
pocket cost for maintaining health insurance through Classic Bank's group plan
is not higher than their out of pocket cost for maintaining health insurance
through the FFFB Employee Plans as of the Effective Time.
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(c) With respect to accrued but unused vacation time to which any Continuing
Employee is entitled pursuant to the vacation policy applicable to such
Continuing Employee immediately prior to the Effective Time, CLAS and its
Subsidiaries shall assume the liability only for any vacation time accrued in
2003 and will allow such Continuing Employee to use such accrued 2003 vacation
time in accordance with the provisions of CLAS's vacation policy as in effect at
the Effective Time as if such vacation time accrued in 2003 were accrued while
in the employ of CLAS or one of its Subsidiaries.
(d) Each Continuing Employee shall be treated as a new employee of CLAS for
purposes of participation in CLAS's employee stock ownership plan and any tax
qualified pension plan of CLAS or in which CLAS participates (other than its
defined benefit plan which is frozen as to new entrants), provided, however,
that Continuing Employees will receive credit for service with FFFB for purposes
of vesting and determination of eligibility to participate, but not for accrual
of benefits and provided further that continuing Employees shall not be entitled
to commence participation in the Classic Bank ESOP until the beginning of the
first new plan year following the Effective Time.
(e) (i) Each participant in the FFFB Employee Stock Ownership Plan ("FFFB ESOP")
not fully vested will become fully vested in his or her FFFB ESOP account as of
the Effective Time. As soon as practicable after the execution of this
Agreement, FFFB, First Federal and CLAS will corporate to cause the FFFB ESOP to
be amended in a manner reasonably acceptable to FFFB and Classic to provide that
the FFFB ESOP will terminate upon the Effective Time. Upon the repayment of the
FFFB ESOP loan, the remaining shares in the loan suspense account will be
allocated (to the extent permitted by Sections 401(a), 415 or 4975 of the Code
and the applicable laws and regulations including, without limitation, the
applicable provisions of ERISA) to FFFB ESOP participants (as determined under
the terms of the FFFB ESOP). Between the date hereof and the Effective Time, the
existing FFFB ESOP indebtedness shall continue to be repaid in quarterly
installments pursuant to the terms of the ESOP Loan Agreement dated as of June
3, 1996 by and between the FFFB Employee Stock Ownership Plan Trust and FFFB,
and FFFB or First Federal shall make only such contributions to the FFFB ESOP as
necessary to fund such payments. Any indebtedness of the FFFB ESOP remaining as
of the Effective Time shall be repaid from the trust associated with the FFFB
ESOP through application of the Merger Consideration received by the FFFB ESOP.
FFFB and CLAS agree that, subject to the conditions described herein, as soon as
possible after the Effective Time and repayment of the FFFB ESOP loan and
subject to applicable law, participants in the FFFB ESOP will receive lump sum
distributions of their FFFB ESOP accounts.
(ii) The actions relating to the termination of the FFFB ESOP will be adopted
conditioned upon the consummation of the Merger and upon receiving a favorable
determination letter from the IRS with regard to the continued qualification of
the FFFB ESOP after any required amendments. FFFB and CLAS will cooperate in
submitting appropriate requests for any such determination letter to the IRS and
will use their best efforts to seek the issuance of such letter as soon as
possible following the date hereof. FFFB and CLAS will adopt such additional
amendments
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to the FFFB ESOP as may be reasonably required by the IRS as a condition to
granting such determination letter, provided that such amendments do not
substantially change the terms outlined herein or would result in a Material
Adverse Effect on FFFB or result in an additional material liability to CLAS.
(iii) As of and following the Effective Time, CLAS shall cause the FFFB ESOP to
be maintained for the exclusive benefit of employees and other persons who were
participants or beneficiaries therein prior to the Effective Time and proceed
with termination of the FFFB ESOP through distribution of its assets in
accordance with its terms, subject to the amendments described herein and as
otherwise may be required to comply with applicable law or to obtain a favorable
determination letter from the IRS as to the continuing qualified status of the
FFFB ESOP, provided, however, that no such distributions of the FFFB ESOP shall
occur until a favorable termination ruling has been received from the IRS.
(f) Subject to the foregoing paragraphs, CLAS agrees to honor in accordance with
their terms all benefits vested as of the Effective Time under the FFFB Employee
Plans and all vested benefits or other vested amounts earned or accrued through
such time under contracts, arrangement commitments or understandings described
in FFFB's Disclosure Letter, including benefits which vest or are otherwise
accrued as a result of the consummation of the transactions contemplated by this
Agreement.
(g) Prior to the Effective Time, Jeffery W. Clark shall have terminated his
employment agreement set forth in the FFFB Disclosure Letter and shall have been
offered the opportunity to enter into an employment agreement with Classic Bank
in the form attached as Exhibit D hereto.
5.13 INDEMNIFICATION.
(a) From and after the Effective Time through the sixth anniversary of the
Effective Time, CLAS agrees to indemnify and hold harmless each present and
former director, officer and employee of FFFB and its Subsidiaries and each
director, officer or employee of FFFB and its Subsidiaries that is serving or
has served as a director, officer, employee, representative or agent of another
entity expressly at FFFB's request or direction (each, an "INDEMNIFIED PARTY"),
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, amounts paid in settlement, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement), whether asserted or
claimed prior to, at or after the Effective Time, as they are from time to time
incurred, in each case to the fullest extent such person would have been
indemnified or have the right to advancement of expenses pursuant to FFFB's
certificate of incorporation and bylaws and, to the extent applicable, any
agreement between FFFB and First Federal and such Indemnified Party which are
included in the FFFB Disclosure Letter, as in effect on the date of this
Agreement, and to the fullest extent permitted by law.
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(b) Any Indemnified Party wishing to claim indemnification under
SECTION 5.13(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify CLAS thereof, but the failure to so notify
shall not relieve CLAS of any liability it may have hereunder to such
Indemnified Party if such failure does not materially and substantially
prejudice CLAS.
(c) CLAS shall maintain FFFB's existing directors' and officers' liability
insurance policy (or provide a policy providing comparable coverage and amounts
on terms no less favorable to the persons currently covered by FFFB's existing
policy, including CLAS's existing policy if it meets the foregoing standard)
covering persons who are currently covered by such insurance for a period of
three years after the Effective Time; PROVIDED, HOWEVER, that in no event shall
CLAS be obligated to expend, in order to maintain or provide insurance coverage
pursuant to this SECTION 5.13(c), an amount per annum in excess of 125% of the
annual premiums paid by FFFB as of the date hereof for such insurance ("MAXIMUM
INSURANCE AMOUNT"); PROVIDED FURTHER, that if the amount of the annual premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Insurance Amount, CLAS shall obtain the most advantageous coverage obtainable
for an annual premium equal to the Maximum Insurance Amount.
(d) In the event CLAS or any of its successors or assigns (i) consolidates with
or merges into any other person or entity and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers or conveys all or substantially all of its properties and assets to
any person or entity, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of CLAS assume
the obligations set forth in this SECTION 5.13.
(e) The provisions of this SECTION 5.13 are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and his or her
representatives.
5.14 SECTION 16 MATTERS. Prior to the Effective Time, FFFB and CLAS shall take
all such steps as may be required to cause any dispositions of FFFB Common Stock
(including derivative securities with respect to FFFB Common Stock) or
acquisitions of CLAS Common Stock resulting from the transactions contemplated
by this Agreement by each individual who is subject to the reporting
requirements of Section 16(a) of the Exchange Act with respect to FFFB to be
exempt under Rule 16b-3 promulgated under the Exchange Act. FFFB agrees to
promptly furnish CLAS with all requisite information necessary for CLAS to take
the actions contemplated by this SECTION 5.14.
5.15 DIVIDENDS. After the date of this Agreement, FFFB shall declare and pay
dividends on the FFFB Common Stock on a quarterly basis and each of CLAS and
FFFB shall coordinate with the other the payment of dividends with respect to
the CLAS Common Stock and the FFFB Common Stock and the record dates and payment
dates relating thereto, it being the intention of the parties hereto that
holders of CLAS Common Stock and FFFB Common Stock shall not receive two
dividends, or fail to receive one dividend, for any single calendar quarter with
respect to their shares
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of CLAS Common Stock and/or FFFB Common Stock or any shares of CLAS Common Stock
that any such holder receives in exchange for such shares of FFFB Common Stock
in the Merger.
5.16 CONSULTING AGREEMENT. Simultaneous with the signing of the Agreement, CLAS
will offer Vincent Rice the opportunity to enter into the Consulting Agreement
the form of which is set forth in Exhibit E of this Agreement.
ARTICLE VI
CONDITIONS TO CONSUMMATION
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each
party to effect the Merger shall be subject to the satisfaction of the following
conditions:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been approved by the
requisite vote of FFFB's and CLAS stockholders in accordance with applicable
laws and regulations.
(b) REGULATORY APPROVALS. All approvals, consents or waivers of any Governmental
Entity and the NASDAQ required to permit consummation of the transactions
contemplated by this Agreement shall have been obtained and shall remain in full
force and effect, and all statutory waiting periods shall have expired;
PROVIDED, HOWEVER, that none of such approvals, consents or waivers shall
contain any condition or requirement that would reasonably be likely to have or
result in a Material Adverse Effect on CLAS and its Subsidiaries after the
Effective Time.
(c) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No party hereto shall be subject
to any order, decree or injunction of a court or agency of competent
jurisdiction that enjoins or prohibits the consummation of the Merger or the
Bank Merger and no Governmental Entity shall have instituted any proceeding for
the purpose of enjoining or prohibiting the consummation of the Merger or the
Bank Merger or any transactions contemplated by this Agreement. No statute, rule
or regulation shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits or makes illegal consummation of the Merger.
(d) REGISTRATION STATEMENT; BLUE SKY LAWS. The Registration Statement shall have
been declared effective by the SEC and no proceedings shall be pending or
threatened by the SEC to suspend the effectiveness of the Registration
Statement, and CLAS shall have received all required approvals by state
securities or "blue sky" authorities with respect to the transactions
contemplated by this Agreement.
(e) THIRD PARTY CONSENTS. CLAS and FFFB shall have obtained the consent or
approval of each person (other than the governmental approvals or consents
referred to in SECTION 6.1(b)) whose consent or approval shall be required to
consummate the transactions contemplated by this Agreement, except those for
which failure to obtain such consents and approvals would not, individually or
in the aggregate, have a Material Adverse Effect on CLAS (after giving effect to
the consummation of the transactions contemplated hereby).
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(f) TAX OPINIONS. CLAS and FFFB shall have received opinions of Jenkens &
Gilchrist, A Professional Corporation, and Kelley, Drye & Warren L.L.P.,
respectively, dated as of the Closing Date, in form and substance customary in
transactions of the type contemplated hereby, and reasonably satisfactory to
FFFB and CLAS, as the case may be, substantially to the effect that on the basis
of the facts, representations and assumptions set forth in such opinions which
are consistent with the state of facts existing at the Effective Time, (i) the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the IRC, (ii) CLAS and FFFB will each be
a party to that reorganization within the meaning of Section 368(b) of the IRC
and (iii) except to the extent of any cash received in lieu of a fractional
share interest in CLAS Common Stock and cash consideration received in the
Merger, no gain or loss will be recognized by the stockholders of FFFB who
exchange their FFFB Common Stock for CLAS Common Stock pursuant to the Merger.
Such opinions may be based on, in addition to the review of such matters of fact
and law as counsel considers appropriate, representations contained in
certificates of officers of CLAS, FFFB and others.
6.2 CONDITIONS TO THE OBLIGATIONS OF CLAS. The obligations of CLAS to effect the
Merger shall be further subject to the satisfaction of the following additional
conditions, any one or more of which may be waived by CLAS in accordance with
SECTION 8.3 hereof:
(a) FFFB'S REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of FFFB contained in SECTIONS 3.2(a) (except as relates to
qualification), (b) (except as relates to qualification), (c), (d), (e)(i) and
(ii), (i), (m), (o), (y) and (gg) of this Agreement shall be true and correct
(except for inaccuracies that are de minimis) as of the date of this Agreement
and as of the Closing Date as though made at and as of the Closing Date except
(i) to the extent such representations and warranties are by their express
provisions made as of a specific time or date and (ii) for the effect of the
transactions contemplated by this Agreement, and there shall not exist any
inaccuracies in the representations and warranties of FFFB contained in this
Agreement (including the representations and warranties set forth in the
Sections designated above) such that the effect of such inaccuracies
individually or in the aggregate has, or is reasonably likely to have, a
Material Adverse Effect on FFFB.
(b) PERFORMANCE OF FFFB's OBLIGATIONS. FFFB shall have performed in all material
respects all obligations required to be performed by it under this Agreement at
or prior to the Effective Time.
(c) OFFICERS' CERTIFICATE. CLAS shall have received a certificate signed by the
chief executive officer and the chief financial or principal accounting officer
of FFFB to the effect that the conditions set forth in SECTIONS 6.2(a) and (b)
have been satisfied.
(d) OPINION OF COUNSEL. FFFB shall have caused to be delivered to CLAS an
opinion dated as of the Effective Time from the law firm of Kelly, Drye &
Warren, LLP, counsel to FFFB, concerning the following matters to the best of
their knowledge:
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(i) the FFFB Rights Agreement has not been amended since adoption; and
(ii) as of the Effective Time, the Rights will not be, nor will they have ever
been, exercisable or transferrable separately from the FFFB Common Stock; and
(iii) upon the completion of the Merger, the Rights shall expire and no persons
shall have any rights with respect to the FFFB Rights Agreement.
6.3 CONDITIONS TO THE OBLIGATIONS OF FFFB. The obligations of FFFB to effect the
Merger shall be further subject to the satisfaction of the following additional
conditions, any one or more of which may be waived by FFFB:
(a) CLAS's REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of CLAS contained in SECTIONS 3.3(a) (except as relates to
qualification), (b), (i), (ii) AND (iv) (except as relates to qualification),
(c), e(i) AND (ii) AND (l) of this Agreement shall be true and correct (except
for inaccuracies that are de minimis) as of the date of this Agreement and as of
the Closing Date (as though made at and as of the Closing Date except (i) to the
extent such representations and warranties are by their express provisions made
as of a specific time or date and (ii) for the effect of the transactions
contemplated by this Agreement), and there shall not exist any inaccuracies in
the representations and warranties of CLAS contained in this Agreement
(including the representations and warranties set forth in the Sections
designated above) such that the effect of such inaccuracies individually or in
the aggregate has, or is reasonably likely to have, a Material Adverse Effect on
CLAS.
(b) PERFORMANCE OF CLAS's OBLIGATIONS. CLAS shall have performed in all material
respects all obligations required to be performed by it under this Agreement at
or prior to the Effective Time.
(c) OFFICERS' CERTIFICATE. FFFB shall have received a certificate signed by the
chief executive officer and the chief financial or principal accounting officer
of CLAS to the effect that the conditions set forth in SECTIONS 6.3(a) and (b)
have been satisfied.
(d) DEPOSIT OF MERGER CONSIDERATION. CLAS shall have deposited with the Exchange
Agent sufficient cash to pay the aggregate Cash Consideration.
ARTICLE VII
TERMINATION
7.1 TERMINATION. This Agreement may be terminated, and the Merger abandoned, at
any time prior to the Effective Time, by action taken or authorized by the Board
of Directors of the terminating party, either before or after any requisite
stockholder approval:
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(a) by the mutual written consent of CLAS and FFFB; or
(b) by either CLAS or FFFB, in the event of the failure of FFFB's stockholders
to approve the Agreement at the FFFB Stockholder Meeting; PROVIDED, HOWEVER,
that FFFB shall only be entitled to terminate the Agreement pursuant to this
clause if it has complied in all material respects with its obligations under
SECTION 5.8; or
(c) by either CLAS or FFFB, upon written notice to the other, if either (i) any
approval, consent or waiver of a Governmental Entity required to permit
consummation of the transactions contemplated by this Agreement shall have been
denied or (ii) any Governmental Entity of competent jurisdiction shall have
issued a final, unappealable order enjoining or otherwise prohibiting
consummation of the transactions contemplated by this Agreement; or
(d) by either CLAS or FFFB, in the event that the Merger is not consummated by
June 30, 2003, unless the failure to so consummate by such time is due to the
failure of the party seeking to terminate this Agreement to perform or observe
the covenants and agreements of such party set forth herein; or
(e) by either CLAS or FFFB, upon written notice to the other, (provided that the
party seeking termination is not then in material breach of any representation,
warranty, covenant or other agreement contained herein), in the event of a
breach of any covenant or agreement on the part of the other party set forth in
this Agreement, or if any representation or warranty of the other party shall
have become untrue, in either case such that the conditions set forth in
SECTIONS 6.2(a) and (b) or SECTIONS 6.3(a) and (b), as the case may be, would
not be satisfied and such breach or untrue representation or warranty has not
been or cannot be cured within thirty (30) days following written notice to the
party committing such breach or making such untrue representation or warranty;
(f) by CLAS, if the Board of Directors of FFFB does not publicly recommend in
the Proxy Statement-Prospectus that stockholders approve and adopt this
Agreement or if, after recommending in the Proxy Statement-Prospectus that
stockholders approve and adopt this Agreement, the Board of Directors of FFFB
withdraws, qualifies or revises such recommendation in any respect materially
adverse to CLAS; or
(g) at any time prior to the FFFB Stockholder Meeting, by FFFB in order to
concurrently enter into an acquisition agreement or similar agreement (each an
"Acquisition Agreement") with respect to a Superior Proposal which has been
received and considered by FFFB and FFFB's Board of Directors in compliance with
Section 5.1 hereof, provided, however, that this Agreement may be terminated by
FFFB pursuant to this Section 7.1(g) only after the fifth business day following
the receipt by CLAS of written notice from FFFB advising CLAS that FFFB is
prepared to enter into an Acquisition Agreement with respect to a Superior
Proposal, and describing in reasonable detail such proposal and only if, during
such five business day period, CLAS does not, in its sole discretion, make an
offer to FFFB that FFFB's Board of Directors determines in good faith, after
consultation with its financial and legal advisors, is at least as favorable as
the Superior Proposal.
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(h) by CLAS, if any person or group (as those terms are defined in the Exchange
Act), other than CLAS or any Subsidiary, shall have acquired beneficial
ownership of 25% or more of the voting power of FFFB or any of its significant
Subsidiaries.
(i) by CLAS at any time after FFFB becomes entitled to terminate the Agreement
under paragraph (g) above.
7.2 TERMINATION FEE.
(a) If CLAS terminates this Agreement pursuant to SECTION 7.1(f), (h) or (i)
FFFB terminates this Agreement pursuant to Section 7.1(g), then FFFB shall make
payment to CLAS of a termination fee in the amount of $450,000. Such amount
shall be paid by wire transfer of immediately available funds within two
business days following such termination.
(b) If this Agreement is terminated by (i) CLAS pursuant to SECTION 7.1(c) or
(ii) either party pursuant to SECTION 7.1(b), and in any such case an
Acquisition Proposal has been publicly announced, disclosed or communicated or
made known to the senior management or Board of Directors of FFFB at any time
after the date of this Agreement and prior to the date of the Stockholders
Meeting, in the case of clause (ii), or the date of termination, in the case of
clause (i), then FFFB shall make payment to CLAS of a termination fee in the
amount of $450,000 if within 12 months after such termination, FFFB shall
consummate or enter into any agreement with respect to such Acquisition
Proposal. Such amount shall be paid by wire transfer of immediately available
funds on the date of such execution or consummation.
(c) Notwithstanding anything herein to the contrary, in no event shall the
aggregate amount that FFFB must pay to CLAS pursuant to SECTIONS 7.2(a) and (b)
exceed $450,000.
7.3 EFFECT OF TERMINATION. In the event of termination of this Agreement by
either CLAS or FFFB as provided in SECTION 7.1, this Agreement shall forthwith
become void and, subject to SECTION 7.2, have no effect, and there shall be no
liability on the part of any party hereto or their respective officers and
directors, except that (i) SECTIONS 5.3(c), 7.2, and 8.6, shall survive any
termination of this Agreement, and (ii) notwithstanding anything to the contrary
contained in this Agreement, no party shall be relieved or released from any
liabilities or damages arising out of its willful breach of any provision of
this Agreement.
ARTICLE VIII
CERTAIN OTHER MATTERS
8.1 INTERPRETATION. When a reference is made in this Agreement to Sections or
Exhibits such reference shall be to a Section of, or Exhibit to, this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for ease of reference only and shall not affect the meaning or
interpretation of this Agreement. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed followed by the
words "without
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limitation." Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Any reference to gender in this
Agreement shall be deemed to include any other gender.
8.2 SURVIVAL. Only those agreements and covenants of the parties that are by
their terms applicable in whole or in part after the Effective Time, including
SECTION 5.13 of this Agreement, shall survive the Effective Time. All other
representations, warranties, agreements and covenants shall be deemed to be
conditions of the Agreement and shall not survive the Effective Time.
8.3 WAIVER; AMENDMENT. Prior to the Effective Time, any provision of this
Agreement may be: (i) waived in writing by the party benefitted by the provision
or (ii) amended or modified at any time (including the structure of the
transaction) by an agreement in writing between the parties hereto except that,
after the vote by the stockholders of FFFB, no amendment or modification may be
made that would reduce the amount or alter or change the kind of consideration
to be received by holders of FFFB Common Stock or contravene any provision of
the DGCL, the federal and state securities and banking laws, or any of the rules
and regulations thereunder.
8.4 COUNTERPARTS. This Agreement may be executed in counterparts each of which
shall be deemed to constitute an original, but all of which together shall
constitute one and the same instrument.
8.5 GOVERNING LAW. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of Delaware, without regard to conflicts
of laws principles.
8.6 EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby, except
that expenses incurred in connection with the printing and mailing of the Proxy
Statement-Prospectus and Registration Statement shall be shared equally by CLAS
and FFFB.
8.7 NOTICES. All notices, requests, acknowledgments and other communications
hereunder to a party shall be in writing and shall be deemed to have been duly
given when delivered by hand, overnight courier or facsimile transmission to
such party at its address or facsimile number set forth below or such other
address or facsimile transmission as such party may specify by notice (in
accordance with this provision) to the other party hereto.
IF TO CLAS, TO:
Classic Bancshares, Inc.
344 Seventeenth Street
Ashland, Kentucky 41105
Facsimile: (606) 326-2801
Attention: David B. Barbour
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With a copy to:
Jenkens & Gilchrist, PC 1919 Pennsylvania Avenue, N.W., #600 Washington, D.C.
20006 Facsimile: (202) 326-1555 Attention: Kip A. Weissman, Esq.
IF TO FFFB, TO:
FIRST FEDERAL FINANCIAL BANCORP, INC.
415 CENTER STREET
IRONTON, OHIO 45638-1505
Facsimile: (740) 532-6845
Attention: I. Vincent Rice
With a copy to:
Kelley, Drye & Warren 8000 Towers Crescent Drive, #1200 Vienna, Virginia 22182
Facsimile: (703) 918-2450 Attention: Norman B. Antin, Esq.
Jeffrey D. Haas, Esq.
8.8 ENTIRE AGREEMENT; ETC. This Agreement, together with the Disclosure Letters,
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and supersedes any and all other oral or
written agreements heretofore made. All terms and provisions of this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and assigns. Except for SECTION 5.13, which confers
rights on the parties described therein, nothing in this Agreement is intended
to confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
8.9 SUCCESSORS AND ASSIGNS; ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement may not be assigned by either
party hereto without the written consent of the other party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
CLASSIC BANCSHARES, INC.
By: /s/ David B. Barbour
-------------------------------------
David B. Barbour
President and Chief Executive Officer
FIRST FEDERAL FINANCIAL BANCORP, INC.
By: /s/ I. Vincent Rice
-------------------------------------
I. Vincent Rice
President
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ANNEX B
{{Date of Proxy Statement}}
Board of Directors
Classic Bancshares, Inc.
344 Seventeenth Street
Ashland, Kentucky 41101
Dear Board of Directors:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders of
Classic Bancshares, Inc. ("CLAS" or the "Company"), of the consideration to be
paid by CLAS in the merger (the "Merger") between the Company and First Federal
Financial Bancorp, Inc. ("FFFB"). We have not been requested to opine as to, and
our opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Merger.
Pursuant to the Agreement and Plan of Merger dated December 30, 2002 between
CLAS and FFFB (the "Agreement"), at the effective time of the Merger, CLAS will
acquire all of Hometown's issued and outstanding shares of common stock. The
holders of the FFFB common stock will receive consideration of $24.00 in cash or
they will have the opportunity to elect .9797 shares of CLAS stock or a
combination of cash and stock, subject to overall limitation that 50% of the
deal value be in cash and 50% in stock. The complete terms of the proposed
transaction are described in the Agreement, and this summary is qualified in its
entirety by reference thereto.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business, is
regularly engaged in the evaluation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, and distributions of
listed and unlisted securities. We are familiar with the market for common
stocks of publicly traded banks, savings institutions and bank and savings
institution holding companies.
In connection with this opinion, we reviewed publicly-available financial data
relating to CLAS including: the Annual Report, Proxy Statement, and Form 10-K
for the years ended March 31, 2002, 2001 & 2000; unaudited quarterly results
through September, 2002; and other information we deemed relevant. We discussed
with senior management of CLAS the current position and prospective outlook for
the Company. We considered historical quotations and the prices of recorded
transactions in the Company's common stock since its initial public offering. We
reviewed financial and stock market data of other savings institutions,
particularly in the Midwestern and Southeastern regions of the United States,
and the financial and structural terms of several other recent transactions
involving mergers and acquisitions where the seller was a savings institution.
<page>
Board of Directors
Classic Bancshares, Inc.
{{Date of Proxy Statement}}
Page 2
For FFFB, we reviewed financial data including: the Annual Reports and Proxy
Statements, for the years ended September 30, 2002, 2001, and 2000; and other
information we deemed relevant. For purposes of this opinion we have relied,
without independent verification, on the accuracy and completeness of the
material furnished to us by FFFB, including information from published sources,
and we have not made any independent effort to verify such data. With respect to
the financial information, including projections and asset valuations we
received from FFFB, we assumed that they had been reasonably prepared reflecting
the best currently available estimates and judgment of FFFB management. In
addition, we have not made or obtained any independent appraisals or evaluations
of the assets or liabilities, and potential and/or contingent liabilities of
FFFB. We have further relied on the assurances of management of FFFB that they
are not aware of any facts that would make such information inaccurate or
misleading. We express no opinion on matters of a legal, regulatory, tax, or
accounting nature; or the ability of the Merger, as set forth in the Agreement,
to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to the Company or the ability to consummate the Merger. Our
opinion is based on the market, economic, and other relevant considerations as
they exist and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to the Company in connection with the Merger and will receive a fee for
such services. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement by the Company in connection with the
Merger.
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the consideration to be paid by the Company in the
Merger is fair, from a financial point of view, to the stockholders of the
Company.
This opinion may not be summarized, excerpted from, or otherwise publicly
referred to without our prior written consent, although this opinion may be
included in its entirety in the proxy statement of the Company used to solicit
stockholder approval of the Merger, if such a proxy is required. It is
understood that this letter is directed to the Board of Directors of the Company
in its consideration of the Agreement, and is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote with respect to the Merger.
Very truly yours,
Keefe, Bruyette & Woods, Inc.
<page>
ANNEX C
KELLER & COMPANY, INC.
FINANCIAL INSTITUTION CONSULTANTS
INVESTMENT AND FINANCIAL ADVISORS
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426 (614) 766-1459 FAX
keller@ee.net
________________, 2003
Board of Directors
First Federal Financial Bancorp, Inc.
415 Center Street
Ironton, Ohio 45638-1505
Ladies and Gentlemen:
First Federal Financial Bancorp, Inc. ("FFFB") and Classic Bancshares
("Classic") and their respective subsidiaries have entered into an Agreement and
Plan of Merger, dated as of December 30, 2002, (the "Agreement"), pursuant to
which FFFB will be merged with and into Classic (the "Merger"). Upon
consummation of the Merger, each share of FFFB common stock, par value $.01 per
share, issued and outstanding immediately prior to the Merger (the "FFFB
Shares"), other than certain shares of stock specified in the Agreement, will be
converted into the right to receive $24.00 in cash without interest or a number
of shares of Classic common stock, par value of $.01 per share, determined by
dividing $24.00 by the average of the closing sale prices of Classic common
stock as reported on The Nasdaq Small Cap Market for the twenty consecutive
trading days ending on December 27, 2002, with this ratio referred to as the
"Exchange Ratio." The average of the closing prices for Classic common stock for
this twenty day period was $24.50, referred to as the "Classic Price." The
Exchange Ratio shall be equal to 0.9797, which represents the quotient of $24.00
divided by the Classic Price. The Effective Date shall be the date Classic
executes and delivers a certificate of merger to the Delaware Secretary of State
or at such later date or time agreed to by FFFB and Classic and specified in the
certificate of merger. The terms and conditions of the Merger are more fully set
forth in the Agreement. You have requested our opinion as to the fairness, from
a financial point of view, of the cash consideration or stock consideration
based on the Exchange Ratio to the holders of FFFB Shares.
Keller & Company, Inc. ("Keller"), as part of its financial institution
consulting and advisory business, is regularly engaged in the valuation of
financial institutions and their securities in connection with mergers and
acquisitions and other corporate transactions. In connection with this opinion,
we have reviewed, among other things: (i) the Agreement and exhibits thereto;
(ii) certain publicly-available financial statements of FFFB and other
historical financial information provided by FFFB that we deemed relevant; (iii)
certain publicly-available financial statements of Classic and other historical
financial information provided by Classic that we deemed relevant; (iv) certain
internal financial analyses and forecasts of FFFB prepared by and reviewed with
management of FFFB and the views of senior management of FFFB based on certain
discussions with certain
<page>
Board of Directors
First Federal Financial Bancorp, Inc.
_____________, 2003
Page 2
members of senior management, regarding FFFB's past and current business,
financial condition, results of operations and future prospects; (v) certain
internal financial analyses of Classic prepared by and reviewed with management
of Classic and the views of senior management of Classic based on certain
limited discussions with certain members of senior management, regarding
Classic's past and current business, financial condition, results of operations
and future prospects; (vi) the pro forma impact of the Merger; (vii) the
publicly-reported historical price and trading activity for FFFB's and Classic's
common stock, including a comparison of certain financial and stock market
information for FFFB and Classic with similar publicly-available information for
certain other companies the securities of which are publicly-traded; (viii) the
financial terms of recent business combinations in the savings institution
industry, to the extent publicly-available; (ix) the current market environment
generally and the banking environment in particular; and (x) such other
information, financial studies, analyses and investigations and financial,
economic and market criteria as we considered relevant. In connection with our
engagement, we were not asked to, and did not, solicit indications of interest
in a potential transaction from other third parties.
During the completion of our review, we have assumed and relied upon the
accuracy and completeness of all the financial information, analyses and other
information that was publicly-available or otherwise furnished to, reviewed by
or discussed with us, and we do not assume any responsibility or liability for
independently verifying the accuracy or completeness thereof. We did not make an
independent evaluation or appraisal of the specific assets, the collateral
securing assets or the liabilities (contingent or otherwise) of FFFB or Classic
or any of their subsidiaries, or the collectibility of any such assets, nor have
we been furnished with any such evaluations or appraisals. We did not make an
independent evaluation of the adequacy of the allowance for loan losses of FFFB
or Classic nor have we reviewed any individual credit files relating to FFFB or
Classic and, we have assumed that the respective allowances for loan losses for
both FFFB and Classic are adequate to cover such losses and will be adequate on
a pro forma basis for the combined entity. With respect to the financial
projections reviewed with management, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective managements of the respective future financial
performance of FFFB and Classic and that such performances will be achieved, and
we express no opinion as to such financial projections or the assumptions on
which they are based. We have also assumed that there has been no material
change in FFFB's or Classic's assets, financial condition, results of
operations, business or prospects since the date of the most recent financial
statements made available to us. We have assumed in all respects material to our
analysis that FFFB and Classic will remain as going concerns for all periods
relevant to our analyses, that all of the representations and warranties
contained in the Agreement and all related agreements are true and correct, that
each party to such agreements will perform all of the covenants required to be
performed by such party under such agreements, that the conditions precedent in
the Agreement are not waived and that the Merger will be accounted for as a
pooling of interests and will qualify as a tax-free reorganization for federal
income taxes purposes to the extent the stockholders of FFFB exchange their FFFB
common stock for Classic common stock pursuant to the Merger in lieu of cash.
<page>
Board of Directors
First Federal Financial Bancorp, Inc.
_____________, 2003
Page 3
This opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect this
opinion. We have not undertaken to update, revise or reaffirm this opinion or
otherwise comment upon events occurring after the date hereof. We are expressing
no opinion herein as to what the value of Classic common stock will be if
exchanged to FFFB's stockholders pursuant to the Agreement or the prices at
which FFFB's or Classic's common stock will trade at any time.
Keller has served as FFFB's financial advisor in connection with the Merger and
will receive a fee for our services, a portion of which is contingent upon
consummation of the Merger. In the past, we have also provided certain other
consulting and advisory services for FFFB and have received compensation for
such services.
The opinion of Keller is directed to the Board of Directors of FFFB in
connection with its consideration of the Merger and does not constitute a
recommendation to any stockholder of FFFB as to how a stockholder should vote at
any meeting of stockholders called to consider and vote upon the Merger. The
opinion of Keller is not to be quoted or referred to, in whole or in part, in a
registration statement prospectus, proxy statement or in any other document, nor
shall this opinion be used for any other purposes, without Keller's prior
written consent provided; however, that we hereby consent to the inclusion of
this opinion as an annex to FFFB's and Classic's Proxy Statement/Prospectus
dated accordingly and to the references to this opinion therein.
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, that the cash consideration and stock consideration defined in the
Exchange Ratio is fair, from a financial point of view, to the holders of FFFB
stock.
Very truly yours,
Keller & Company, Inc.
<page>
ANNEX D
DELAWARE GENERAL CORPORATION LAW SECTION 262
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock"
and"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt"mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of ss.
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such mergeror consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
<page>
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall include in
such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to
ss. 228 or ss. 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent
<page>
corporation that are entitled to appraisal rights. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements
<page>
as to the value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such a duly verified
list. The Register in Chancery, if so ordered by the Court, shall give notice of
the time and place fixed for the hearing of such petition by registered or
certified mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the hearing,
in a newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding,
<page>
including, without limitation, reasonable attorney's fees and the fees and
expenses of experts, to be charged pro rata against the value of all the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
<page>
ANNEX E PART 1
ANNUAL REPORT TO STOCKHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Classic Bancshares, Inc. (the "Company"), a Delaware corporation, was organized
in 1995 for the purpose of becoming the savings and loan holding company of
Classic Bank in connection with Classic Bank's conversion from mutual to stock
form of organization on December 28, 1995. The Company acquired First
Paintsville Bancshares, Inc., the former holding company of The First National
Bank of Paintsville ("First National"), on September 30, 1996. The Company
completed the acquisition of Citizen's Bank, Grayson on May 14, 1999 which was
merged into Classic Bank at the time of acquisition. The Company maintained
Classic Bank and First National as separate subsidiaries until March 2001 at
which time the Company merged the two subsidiaries into one banking subsidiary
known as Classic Bank.
Originally a federally chartered stock savings bank, Classic Bank converted on
June 30, 2000 to a Kentucky chartered commercial bank. Classic Bank is
headquartered in Ashland, Kentucky and currently serves the financial needs of
communities in its market area through its office located at 344 Seventeenth
Street, Ashland, Kentucky 41101 and seven branch offices located in Boyd,
Carter, Greenup and Johnson Counties. The deposits of Classic Bank are insured
up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Company's business involves attracting deposits from the general public and
using such deposits, together with other funds, to originate primarily consumer,
commercial business, commercial real estate, one- to four-family residential
mortgages, and to a lesser extent multi-family and construction loans primarily
in the market area of Classic Bank. The Company also invests in mortgage-backed
and related securities, taxable and tax-exempt investment securities and other
permissible investments.
Classic Bank's primary market area includes the Kentucky counties of Boyd,
Carter, Greenup and Johnson Counties and portions of Martin, Floyd, Magoffin and
Lawrence Counties also located in Kentucky. The economic base in Boyd, Carter
and Greenup counties has primarily been industrial in nature and previously
relied upon a small number of large employers particularly in the steel and
petroleum industries. Over the last several years, diversification of the
employment base to a more retail and service based economy has resulted in a
slowing of previously experienced declines in population. Per capita income in
these counties remains below the national average. Boyd County exceeds the state
average of per capita income while Carter and Greenup Counties remain below the
state average. Unemployment has continued to decline as a result of a continued
shifting of the local employment base to the retail and service sectors,
although the unemployment rate for these counties continues to exceed the
national and state unemployment rates.
The economy in Johnson, Martin, Floyd, Magoffin and Lawrence Counties has
historically been based on the manufacturing and coal mining related industries,
but now also includes retail, medical, and government sectors and, to a lesser
extent, manufacturing. Per capita income for these counties is below the
national average and the state average. The unemployment rate exceeds the
national and state unemployment rates.
The Company's revenues are derived principally from interest earned on loans
and, to a lesser extent, from interest earned on investments and mortgage-backed
and related securities. The operations of the Company are influenced
significantly by general economic conditions and by policies of financial
institution regulatory agencies, including the Kentucky Department of Financial
Institutions, the Federal Reserve and the FDIC. The Company's cost of funds is
influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for
1
financing of real estate and other types of loans, which in turn is affected by
the interest rates at which such financings may be offered.
The Company's net interest income is dependent primarily upon the difference or
spread between the average yield earned on loans receivable, net and investments
and the average rate paid on deposits and borrowings, as well as the relative
amounts of such assets and liabilities. The Company is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
Management's discussion and analysis of financial condition and results of
operations are intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the financial statements and accompanying
notes contained elsewhere herein.
FORWARD-LOOKING STATEMENTS
When used in this report, 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, changes in economic
conditions in the Company's market area, 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
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.
BUSINESS STRATEGY
The Board's primary vision is the enhancement of shareholder value and earnings
growth. The Company has strategically positioned itself to become a high
performing, independent, community-focused financial services organization. This
strategic direction will continue as long as the Board believes, following its
regular strategic reviews, that it is in the best interest of shareholder value.
The Company will continue to maintain a focus on internal growth while exploring
acquisition opportunities that are accretive to earnings and strategically
located so as to create greater franchise and shareholder value. Management
believes that its recently executed strategy of consolidating the Company's two
bank charters to a Kentucky-chartered commercial bank contributed to the
Company's increase in net income.
The Company's focus is the continuation of improvements in net interest income
derived from a balance sheet structure utilizing variable rate assets funded by
the most cost effective funding sources available to the Company, whether in the
form of deposits or borrowings. While market share increases remain a strategic
goal, management is steadfast in the belief that profitability is paramount to
asset growth. As a result of this philosophy, management remains focused on
pricing assets to maximize net interest income rather than for market share
growth. Furthermore, management may continue to utilize
2
borrowings to fund asset growth, rather than deposits, when the cost of
borrowings is more attractive than the cost of deposits.
Management has revamped its compensation programs to incentive based
compensation that rewards employees for attaining production and customer
service levels and believes this strategy will assist in profitable growth while
containing salary expense levels commensurate with profitability increases.
Under the program, loan officers are rewarded for loan volume above an
established production level. The program also includes incentives for loan fees
and other products sold in connection with loans and penalizes for delinquencies
and declines in loan quality. Other front-line staff, such as customer service
representatives and tellers are rewarded for sales efforts, accuracy and
superior customer service. The operations staff is compensated for efficient
back room operations and delivering accurate and timely services to the
Company's customer base. The implementation of the incentive program has served
as a catalyst for creating profitable growth for the Company, improving
operational efficiencies and delivering superior customer service.
Technology innovation that increases operating efficiencies remains a major
strategy for the Company. In order to keep pace with the changes in banking
technology, the Company plans to convert to check imaging in November 2002.
While a small increase in expenses may result in the short term, this will
streamline the statement rendering process and reduce the need for additional
staff as deposit accounts increase in the future.
While acquisitions of other institutions or branch offices remain a
consideration and opportunity for growth, management continues to seek
opportunities for internal growth within its existing franchise area. In order
to facilitate internal growth, management has announced plans to open a banking
office in the city of Greenup, Kentucky that will represent the eighth banking
office for the Company and the second banking office in Greenup County.
In order to meet internal growth targets, management has undertaken an
aggressive advertising campaign focusing on image and name recognition utilizing
the endorsement of national celebrity and Ashland, Kentucky native, Naomi Judd.
The goal of the campaign is to stress the importance of hometown values,
convenience, and banking with people that you know and trust. The campaign has
resulted in increased account openings in the markets we serve.
FINANCIAL CONDITION
MARCH 31, 2002 COMPARED TO MARCH 31, 2001. Total assets increased approximately
$27.5 million, or 14.6%, from $187.9 million at March 31, 2001 to $215.4 million
at March 31, 2002. The increase was due primarily to an increase in loans of
$21.4 million, an increase in investment securities of $1.0 million, an increase
in mortgage-backed securities of approximately $5.6 million offset primarily by
a decrease in cash and cash equivalents of approximately $200,000, a decrease in
other real estate owned of $100,000 and a decrease in premises and equipment of
approximately $200,000.
Loans increased $21.4 million, or 15.4%, from $138.9 million at March 31, 2001
to $160.3 million at March 31, 2002. In compliance with the Company's strategic
plan, the increase in loans was primarily in the consumer, commercial business
and commercial real estate portfolios with less emphasis on residential mortgage
loans. The growth in loans reflected an increase in consumer loans of $6.7
million, an increase in commercial business loans of $6.7 million, an increase
in commercial real estate loans of $6.2 million, an increase in construction
loans of $1.5 million, and an increase in one-to-four family mortgage loans of
$600,000 offset by a decrease in multi-family loans $300,000. The implementation
of an incentive-based compensation program fueled the loan growth for the fiscal
year.
Investment securities increased $1.0 million, or 4.0%, from $24.8 million at
March 31, 2001 to $25.8 million at March 31, 2002. The increase was due
primarily to purchases of $2.5 million offset by
3
sales, maturities and calls of $1.3 million and a decline in the market value of
theses available for sale securities of approximately $200,000. Mortgage-backed
securities increased approximately $5.6 million primarily due to purchases of
$7.0 million offset by principal repayments of approximately $1.3 million and a
decline in the market value of these available for sale securities.
Deposits increased $13.5 million from $145.4 million at March 31, 2001 to $158.9
million at March 31, 2002. The increase in deposits reflected an increase in
noninterest-bearing demand deposits of $3.3 million, an increase in savings, NOW
and money market accounts of $8.6 million and an increase in certificates of
deposit of $1.6 million. Federal Home Loan Bank borrowings increased $10.8
million from $16.6 million at March 31, 2001 to $27.4 million at March 31, 2002.
The increase in deposits and borrowings was used to fund the increase in loans.
Borrowings were utilized during the fiscal year to fund loan growth when the
cost of borrowings was more attractive than the cost of deposits.
The allowance for loan losses increased approximately $200,000 from $1.4 million
at March 31, 2001 to $1.6 million at March 31, 2002 as a result of a provision
for fiscal 2002 of $363,000, offset by net charge-offs of $142,000.
Stockholder's equity increased $1.5 million to $22.0 million at March 31, 2002
as compared to $20.5 million at March 31, 2001 as a result of net income for the
period of approximately $2.2 million, and the release of ESOP shares and RRP
shares earned during the fiscal year of approximately $100,000 offset by a
decrease in the market value of available for sale securities of $200,000, stock
repurchases of approximately $300,000 and dividends paid of approximately
$300,000. Management intends to repurchase shares of its outstanding common
stock in the open market at prevailing market prices from time to time depending
on market conditions. The reacquired shares will be held as treasury shares and
will be used for general corporate purposes including the issuance of shares in
connection with the exercise of options.
MARCH 31, 2001 COMPARED TO MARCH 31, 2000. Total assets increased approximately
$12.6 million, or 7.2%, from $175.3 million at March 31, 2000 to $187.9 million
at March 31, 2001. The increase was due primarily to an increase in cash and
cash equivalents of approximately $300,000, an increase in loans of $11.1
million, an increase in investment securities of $1.1 million, an increase in
mortgage-backed securities of approximately $200,000, and an increase in
premises and equipment of approximately $600,000 offset by a decrease in
goodwill of approximately $300,000 and a decrease in other assets of
approximately $400,000.
Loans increased $11.1 million, or 8.7%, from $127.8 million at March 31, 2000 to
$138.9 million at March 31, 2001. The growth in loans reflected an increase in
consumer loans of $4.2 million, an increase in commercial business loans of $3.2
million, an increase in one-to-four family mortgage loans of $2.0 million and an
increase in commercial real estate loans of $1.7 million.
Investment securities increased $1.1 million, or 4.2%, from $25.1 million at
March 31, 2000 to $26.2 million at March 31, 2001. The increase was due
primarily to an increase of $1.6 million in the market value of these available
for sale securities offset by net sales of $500,000. Mortgage-backed securities
increased $200,000 primarily due to purchases of approximately $700,000 offset
by principal repayments of approximately $500,000.
Premises and equipment increased approximately $600,000 primarily as a result of
the construction of an additional banking office in the Paintsville market
offset by depreciation expense recorded during the fiscal year.
Deposits increased $10.5 million from $134.9 million at March 31, 2000 to $145.5
million at March 31, 2001. The increase in deposits reflected an increase in
noninterest-bearing demand deposits of $2.4 million,
4
an increase in NOW and money market accounts of $3.8 million and an increase in
certificates of deposits of $5.0 million offset by a decrease in savings
accounts of approximately $800,000. The increase in deposits was used to fund
the increase in loans.
The allowance for loan losses increased approximately $100,000 from $1.3 million
at March 31, 2000 to $1.4 million at March 31, 2001 as a result of a provision
for fiscal 2001 of $261,000, offset by net charge-offs of $143,000.
Stockholder's equity increased $1.5 million to $20.5 million at March 31, 2001
as compared to $19.0 million at March 31, 2000 as a result of net income for the
period of approximately $1.0 million, an increase in the market value of
available for sale securities of $1.1 million and the release of ESOP shares and
RRP shares earned during the fiscal year of approximately $300,000 offset by
stock repurchases of approximately $500,000 and dividends paid of approximately
$400,000.
RESULTS OF OPERATIONS
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
noninterest income, including fee income and service charges, and affected by
the level of its noninterest 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 rate earned or paid on them,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2002 AND MARCH 31,
2001
NET INCOME. Net income increased by approximately $1.2 million from $1.0 million
for the fiscal year ended March 31, 2001 to $2.2 million for the fiscal year
ended March 31, 2002. The increase was due to an increase in net interest income
of $1.3 million, an increase in noninterest income of $369,000 and a decrease in
noninterest expenses of $68,000 offset by an increase in the provision for loan
losses of $102,000, and an increase in income tax expense of $445,000.
NET INTEREST INCOME. Net interest income increased $1.3 million from $6.3
million for the fiscal year ended March 31, 2001 to $7.6 million for the fiscal
year ended March 31, 2002 due to an increase in interest income of $11,000 and a
decrease in interest expense of $1.3 million. The increase in interest income
was due to an increase in the average balance of interest-earning assets offset
primarily by a decrease in the yield earned on interest-earning assets. The
average balance of interest-earning assets increased $16.6 million from $166.1
million for fiscal 2001 to $182.7 million for fiscal 2002. Interest-earning
assets increased primarily due to an increase in the average balance of loans of
$14.5 million, and an increase in investment and mortgage-backed securities of
$2.1 million. The average tax equivalent yield on interest-earning assets was
8.5% for the fiscal year ending March 31, 2001 compared to 7.7% for the fiscal
year ending March 31, 2002. The decrease in the yield was due primarily to a
decline in market interest rates during the fiscal year. Despite the significant
decline in interest rates during the fiscal year, the Company was able to
sustain interest income levels as a result of the growth in loans.
Interest expense decreased approximately $1.3 million from $7.4 million for
fiscal 2001 to $6.1 million for fiscal 2002 primarily as a result of a decrease
in the average rate paid on interest-bearing liabilities. The average rate paid
on interest-bearing liabilities decreased from 5.1% for the fiscal year ending
March 31, 2001 to 3.9% for the fiscal year ending March 31, 2002. The reduction
in the cost of interest-bearing liabilities was due to a decline in market
interest rates during the fiscal year. The
5
average balance of interest-bearing liabilities increased $13.3 million from
$145.0 million for fiscal 2001 to $158.3 million for fiscal 2002. The increase
in the average balance of interest-bearing liabilities was due primarily to an
increase in the average balance of interest-bearing deposits and borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by $102,000
from $261,000 for fiscal 2001 to $363,000 for fiscal 2002 based on management's
overall assessment of probable incurred losses in the loan portfolio. The
increase in the provision was due primarily to overall growth of the loan
portfolio and continued diversification of the loan portfolio into consumer and
commercial loans. Management maintains the allowance for loan losses based on
the analysis of various factors, including the market value of the underlying
collateral, growth and composition of the loan portfolio, the relationship of
the allowance for loan losses to outstanding loans, historical loss experience,
delinquency trends and prevailing and projected economic conditions. Although
the Company maintains its allowance for loan losses at a level it considers
adequate to provide for losses, there can be no assurance that such losses will
not exceed the estimated amounts or that additional substantial provisions for
loan losses will not be required in future periods. At March 31, 2002, the
allowance for loan losses totaled $1.6 million, or 1.0% of net loans and 248.0%
of non-performing loans. Non-performing loans decreased $130,000 from $786,000
at March 31, 2001 to $656,000 at March 31, 2002.
NONINTEREST INCOME. Noninterest income increased approximately $369,000 from
$1.1 million for fiscal 2001 to $1.5 million for fiscal 2002 due to an increase
in service charges and other fees on deposits of $275,000, an increase in other
income of $119,000 offset by a decrease in gain on sale of securities of
$25,000. The increase in service charges and other fees on deposits was the
result of an increased deposit base and a continual adherence to charging fees
in accordance with the established fee schedule. Other income increased
primarily due to an increase in the fees earned from the origination of
secondary market loans and commissions earned from the sale of credit life and
accident and health insurance on consumer loans. The increase in these fees was
fueled by the implementation of an incentive-based compensation program. The
incentive program includes fees earned on the origination of secondary market
loans and credit life and accident and health insurance whereby loan officers
are compensated for the level of fees generated.
Noninterest Expense. Noninterest expenses decreased approximately $68,000 from
approximately $5.8 million for the year ended March 31, 2001 to approximately
$5.7 million for the year ended March 31, 2002. The decrease in noninterest
expenses was due to a decrease in federal deposit insurance premiums of $13,000,
a decrease in franchise and deposit taxes of $57,000, a decrease in directors
fees of $18,000, a decrease in the amortization of goodwill of $254,000 and a
decrease in other operating expenses of $98,000 offset by an increase in
employee compensation and benefits of $131,000, an increase in occupancy and
equipment expense of $77,000, an increase in advertising expense of $78,000, an
increase in communications expense of $72,000 and an increase in stationary and
supplies of $14,000.
The decrease in franchise and deposit taxes, directors fees and other operating
expenses was due primarily to the consolidation of the Company's two
subsidiaries in March 2001. The decrease in the amortization of goodwill was due
to the implementation of the Financial Accounting Standards Board Statement No.
142, Goodwill and Other Intangibles. Because the Company has a fiscal year end
in March, the statement was applied effective April 1, 2001 and resulted in the
discontinuance of the amortization of goodwill.
Compensation and benefit expenses increased $131,000 due to the implementation
of an incentive compensation program, the payment of bonuses for the fiscal year
and an increase in ESOP expense due to an increase in the average market value
of the Company's stock.
Occupancy and equipment expense increased approximately $77,000. The increase
was due primarily to the opening of an additional banking office in the
Paintsville market in March 2001. Advertising expense increased approximately
$78,000 due to the launching of an aggressive advertising
6
campaign that utilized the endorsement of a national celebrity. Communications
expense increased $72,000 as a result of the installation of a state-of-the-art
telephone and communication system that allows voice and data to be carried
simultaneously over frame relay enabling a central operator to answer calls
originating from any of the Company's market areas.
INCOME TAX EXPENSE. Income tax expense increased $445,000 due to a higher income
before income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2001 AND MARCH 31,
2000
NET INCOME. Net income decreased by approximately $22,000 from $1.1 million for
the fiscal year ended March 31, 2000 to $1.0 million for the fiscal year ended
March 31, 2001. The decrease was due to an increase in net interest income of
$299,000, an increase in noninterest income of $191,000 offset by an increase in
the provision for loan losses of $38,000, an increase in noninterest expense of
$436,000 and an increase in income tax expense of $38,000.
NET INTEREST INCOME. Net interest income increased $299,000 from $6.0 million
for the fiscal year ended March 31, 2000 to $6.3 million for the fiscal year
ended March 31, 2001 due to an increase in interest income of $1.8 million
offset by an increase in interest expense of $1.5 million. The increase in
interest income was due to an increase in the average balance of
interest-earning assets, as well as an increase in the yield earned on
interest-earning assets. The average balance of interest-earning assets
increased from $151.4 million for fiscal 2000 to $166.1 million for fiscal 2001.
Interest-earning assets increased primarily due to an increase in the average
balance of loans. The average tax equivalent yield on interest-earning assets
was 8.2% at March 31, 2000 compared to 8.5% at March 31, 2001. The increase in
the yield was due to the continued diversification of the loan portfolio to
higher yielding commercial and consumer loans.
Interest expense increased approximately $1.5 million from $5.8 million for
fiscal 2000 to $7.3 million for fiscal 2001 primarily as a result of an increase
in the average balance of interest-bearing liabilities. The average balance of
interest-bearing liabilities increased from $134.0 million at March 31, 2000 to
$145.0 million at March 31, 2001. The increase in the average balance of
interest-bearing liabilities was due primarily to an increase in the average
balance of interest-bearing demand accounts and an increase in the average
balance of FHLB borrowings. The average rate paid on interest-bearing
liabilities increased from 4.4% at March 31, 2000 to 5.1% at March 31, 2001. The
increase in the average rate paid on interest-bearing liabilities was due to
rising interest rates during the first half of the Company's fiscal year.
Although interest rates dropped during the last quarter of the Company's fiscal
year, longer term deposits which repriced in the higher rate environment have
not repriced since the reduction in rates. However, due to the short maturities
of the majority of these deposits, repricing in this lower rate environment is
occurring. The Company's FHLB borrowings have repriced as rates have decreased.
However, the rate paid on FHLB borrowings was higher during the majority of the
fiscal year resulting in an increase on the rate paid in fiscal 2001 compared to
fiscal 2000.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by $38,000
from $223,000 for fiscal 2000 to $261,000 for fiscal 2001 based on management's
overall assessment of probable incurred losses in the loan portfolio. The
increase in the provision was due primarily to an increase in net charge-offs
during fiscal 2001 compared to fiscal 2000, overall growth of the loan portfolio
and continued diversification of the loan portfolio into consumer and commercial
loans. Management maintains the allowance for loan losses based on the analysis
of various factors, including the market value of the underlying collateral,
growth and composition of the loan portfolio, the relationship of the allowance
for loan losses to outstanding loans, historical loss experience, delinquency
trends and prevailing and projected economic conditions. Although the Company
maintains its allowance for loan losses at a level it considers adequate to
provide for losses, there can be no assurance that such losses
7
will not exceed the estimated amounts or that additional substantial provisions
for loan losses will not be required in future periods. At March 31, 2001, the
allowance for loan losses totaled $1.4 million, or 1.0% of net loans and 179.1%
of non-performing loans. The ratio of the allowance for loan losses to
non-performing loans increased at March 31, 2001 from the level of March 31,
2000 due to the fact that the level of non-performing loans remained constant
and the balance of the allowance increased from March 31, 2000 to March 31,
2001.
NONINTEREST INCOME. Noninterest income increased approximately $191,000 from
$895,000 for fiscal 2000 to $1.1 million for fiscal 2001 due to an increase in
service charges and other fees on deposits of $212,000, an increase in the gain
on sale of securities of $34,000 offset by a decrease in other income of
$55,000. The increase in service charges and other fees on deposits was the
result of an increased deposit base and aggressive pricing strategies. The
Company adheres to a very strict waiver policy and during the fiscal year waived
fees of only 3.9% of total charges. The increase in the gain on the sale of
securities during the current fiscal year was due to a gain on the sale of
securities of approximately $32,000 being recorded during fiscal 2001 as
compared to a loss on the sale of securities of $2,500 in the previous fiscal
year. Other income decreased primarily due to a loss that was recorded during
fiscal 2001 on the disposal of fixed assets of approximately $31,000 compared to
a gain on the disposal of fixed assets of $28,000 that was recorded during the
fiscal year ended March 31, 2000. The loss recorded during the current fiscal
year on the disposal of fixed assets was primarily due to assets no longer in
service as a result of the consolidation of the two subsidiaries of the Company.
NONINTEREST EXPENSE. Noninterest expense increased approximately $436,000 or
8.1%, from approximately $5.4 million for the year ended March 31, 2000 to
approximately $5.8 million for the year ended March 31, 2001. Compensation and
benefit expenses increased $193,000 from $2.4 million for the year ended March
31, 2000 to $2.6 million for the year ended March 31, 2001 due to severance
packages of approximately $23,000 paid in connection with the consolidation of
the Company' subsidiaries and a net increase in the number of employees prior to
the consolidation in order to facilitate the growth of the Company. Compensation
and benefit expenses also increased due to a slight increase in the amount
allocated to employees under the cafeteria plan. The cafeteria plan was put in
place to mitigate rising costs associated with medical insurance premiums.
Although costs under the cafeteria plan did increase slightly from the previous
year, the costs did not increase as much as they would have had the plan not
been in place.
Occupancy and equipment expense increased approximately $125,000 from $761,000
for 2000 to $886,000 for 2001. The increase was due to additional repairs
required during the fiscal year to existing facilities and equipment and an
increase in depreciation expense. The increase was also due to costs associated
with a land lease in the Paintsville market where the new banking office was
constructed and opened in March 2001. Although, the facility was not completed
until March 2001, the land lease began in August 2000.
Advertising expense increased approximately $17,000 due to intensified marketing
efforts within the Company's market area. Franchise and deposit taxes increased
$75,000 due to the conversion of the charter of Classic Bank. Classic Bank is
now subject to a franchise and deposit tax in the state of Kentucky that was not
required under the thrift charter. Amortization of goodwill increased $16,000
due to a full twelve months of the amortization of the goodwill recorded in
connection with the Citizens acquisition as compared to only ten months in the
previous fiscal year.
Noninterest expenses also increased due to restructuring charges of
approximately $93,000 recorded in connection with the consolidation which
consisted primarily of legal fees, data processing costs, additional advertising
costs and employee relocations. All of these increases were offset by reductions
in the amortization of software in connection with the Company's data processing
system of $29,000, a reduction in federal deposit insurance premiums of $14,000
and a reduction in other general
8
and administrative expenses of $40,000 due to management's efforts to reduce
overhead expenses and improve efficiency.
INCOME TAX EXPENSE. Income tax expense increased $38,000 due to a higher income
before income taxes.
9
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. All average balances are monthly average
balances. Yields are reported on a tax equivalent basis. Non-accruing loans have
been included in the table as loans carrying a zero yield. Included in interest
income on loans are loan fees and other charges on loans totaling $261,000,
$193,000, and $182,000 for the years ended March 31, 2002, 2001 and 2000,
respectively.
Year Ended March 31,
2002 2001 2000
Average Interest Yield/Rate Average Interest Yield/Rate Average Interest Yield/Rate
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Balance Paid Balance Paid
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1) $ 149,979 $ 11,899 7.9% $ 135,627 $ 11,904 8.8% $ 121,274 $ 10,099 8.3%
Mortgage-backed securities 5,124 281 5.5 3,258 216 6.6 3,764 223 5.9
Investment securities 25,511 1,815 7.1 25,300 1,800 7.1 24,407 1,917 7.9
Interest-earning deposits 185 6 3.2 125 6 4.8 128 6 4.7
Federal funds sold 464 10 2.2 311 14 4.5 446 25 5.6
FHLB stock and FRB stock 1,438 87 6.1 1,512 109 7.2 1,420 98 6.9
Total interest-earning
assets(1) $ 182,701 14,098 7.7 $ 166,133 14,049 8.5 $ 151,439 12,368 8.2
Interest-Bearing Liabilities:
Savings accounts and
interest-bearing demand $ 36,380 815 2.2 $ 34,431 1,233 3.6 $ 33,549 1,081 3.2
Money market deposits 15,274 417 2.7 10,892 366 3.4 10,596 318 3.0
Certificate accounts 82,062 4,034 4.9 77,054 4,343 5.6 77,312 3,857 5.0
FHLB advances 19,753 718 3.6 19,124 1,193 6.2 8,930 421 4.7
Other short-term borrowings 4,869 116 2.4 3,540 214 6.0 3,930 215 5.5
Total interest-bearing
liabilities $ 158,338 6,100 3.9 $ 145,041 7,349 5.1 $ 134,317 5,892 4.4
Net interest income $ 7,998 $ 6,700 $ 6,476
Net interest rate spread 3.8% 3.4% 3.8%
Net earning assets $ 24,363 $ 21,092 $ 17,122
Net yield on average
interest-earning assets 4.4% 4.0% 4.3%
Average interest-earning
assets to average interest -
bearing liabilities 1.15x 1.15x 1.13x
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
10
<page>
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume ( i.e.
, changes in volume multiplied by old rate) and (ii) changes in rate ( i.e. ,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended March 31,
2002 vs. 2001 2001 vs. 2000
Increase Total Increase Total
(Decrease) Increase (Decrease) Increase
Due to (Decrease) Due to (Decrease)
Volume Rate Volume Rate
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 1,239 $ (1,244) $ (5) $ 1,196 $ 609 $ 1,805
Mortgage-backed securities 106 (41) 65 (32) 25 (7)
Investment securities 15 -- 15 73 (190) (117)
Other 8 (34) (26) (2) 2 --
Total interest-earning assets $ 1,368 $ (1,319) $ 49 $ 1,235 $ 446 $ 1,681
Interest-bearing liabilities:
Savings accounts and interest bearing
demand $ 67 $ (646) $ (579) $ 26 $ 126 $ 152
Money market accounts 134 (83) 51 8 40 48
Certificate accounts 261 (410) (149) (10) 496 486
FHLB advances 38 (513) (475) 603 169 772
Other short-term borrowings 60 (157) (97) (21) 20 (1)
Total interest-bearing liabilities $ 560 $ (1,809) $ (1,249) $ 606 $ 851 $ 1,457
Net interest income $ 1,298 $ 224
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
given period, a significant increase in market rates of interest could adversely
affect net interest income. Similarly, when interest-earning assets mature or
reprice more quickly than interest-bearing liabilities, falling interest rates
could result in a decrease in net interest income. Finally, a flattening of the
"yield curve" ( i.e. , a decline in the difference between long- and short-term
interest rates) could adversely impact net interest income to the extent that
the Company's assets have a longer average term than its liabilities.
The Company is also subject to interest rate risk to the extent that the value
of its net assets fluctuates with interest rates. In general, the value of a
portion of the Company's assets will decline in the event of an increase in
interest rates. Historically, the Company's lending activity consisted primarily
of one-to four-family mortgages with long terms and fixed rates. These assets
are not interest rate
11
<page>
sensitive and therefore decline in value during a period of rising interest
rates. Conversely, these assets can increase in value during a period of
decreasing interest rates. As part of the Company's business strategy and
asset/liability management policy, a primary focus of lending activity is the
acquisition of variable rate and/or shorter term loans thereby now decreasing
interest rate risk and fluctuations in the value of the Company's assets.
The Company has an asset/liability management policy. The principal goals of
this policy are to enhance the Company's net interest margin while managing its
interest rate position. Depending upon market conditions, the Company may place
more emphasis on enhancing the net interest margin rather than matching the
interest rate sensitivity of the Company's assets and liabilities. Management
strives to meet the goals of the policy by continually enhancing the net
interest margin while still trying to effectively manage interest rate
sensitivity. Nonetheless, the Company's results of operations and the economic
value of its equity remain vulnerable to increases in interest rates and
declines in the difference between long- and short-term interest rates.
Asset/Liability management is monitored at the bank level by a committee that is
comprised of the Company's chief executive officer, chief financial officer, the
president and senior lending officer of the bank and a minimum of two
non-employee directors of the bank. The committee meets periodically to review
the Company's interest rate risk position and product mix and to make
recommendations for adjustments to the Company's Board of Directors. Management
also monitors the Company's interest rate risk position on a monthly basis,
reviews the Company's portfolio, earnings, liquidity, asset quality, formulates
investment strategies and oversees the timing and implementation of transactions
to assure attainment of the Board's objectives in a most effective manner.
The principal elements of the Company's asset/liability management policy are as
follows. First, the Company requires that one-to-four family ARM loans be
indexed to changes in rates paid on U.S. Treasury securities and all other
adjustable rate loans be indexed to the Prime rate as published in the Wall
Street Journal. Management believes that U.S. Treasury securities and the Prime
rate are significantly more interest rate sensitive than other indices and
provides a better opportunity to manage interest rate risk in a changing rate
environment. Second, management has and intends to continue to increase the
Company's commercial business, consumer and commercial real estate loans,
subject to market conditions. In general, such loans carry shorter terms to
maturity and/or repricing, and are more interest rate sensitive than most of the
Company's other assets. Third, management has used marketing and other
initiatives to increase the Company's transaction and other non-certificate
deposit accounts and believes that such accounts generally carry lower interest
costs and are more interest rate resistant than the certificates of deposit. The
Company also utilizes FHLB borrowings in funding assets when the cost of these
borrowing is more attractive than the cost of deposits. There can be no
assurance as to whether or when any or all of the elements of the
asset/liability management program will be successfully implemented.
Economic Value of Equity ("EVE") analysis provides a quantitative measure of
interest rate risk. In essence, this approach calculates the difference between
the market value of assets and liabilities under different interest rate
environments. The degree of change between interest rate shock levels is a
measure of the volatility of value risk. The following table sets forth, as of
March 31, 2002, the estimated changes in the Company's EVE in the event of the
specified instantaneous changes in interest rates.
12
<page>
Economic Value of Equity
Change in Estimated EVE Amount of Percent
Interest Rates Change Change
(Basis Points)
(Dollars in Thousands)
+300$ 11,239 (8,493) (43)
+200 13,790 (5,942) (30)
+100 16,790 (2,942) (15)
0 19,732
-100 21,767 2,035 10
-200 23,495 3,763 19
-300 25,163 5,431 28
Certain assumptions were employed by the Company in preparing the previous
table. These assumptions relate to interest rates, loan prepayment rates varied
by categories and rate environment, deposit decay rates varied by categories and
rate environment and the market values of certain assets under the various
interest rate scenarios. It was also assumed that delinquency rates will not
change as a result of changes in interest rates although there can be no
assurance that this will be the case. In the event that interest rates do change
in the designated amounts, there can be no assurance that the Company's assets
and liabilities would perform as set forth above. In addition, a change in
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the EVE
than indicated above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities of investment securities and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, floors and caps
on loan rates, general economic conditions and competition. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships, but has from time to time decided not to pay deposit
rates that are as high as those of its competitors and, when necessary, to
supplement deposits with less expensive alternative sources of funds, such as
FHLB borrowings.
The primary investing activities of the Company are originating loans and, to a
much lesser extent, purchasing mortgage-backed and investment securities. During
fiscal years ended March 31, 2002, 2001, and 2000, the Company had loan
originations net of principal repayments of $22.1 million, $11.3 million and
$22.1 million, respectively. A substantial portion of loan originations were
funded by proceeds of loan repayments, the maturity or sale of securities,
deposits and FHLB advances.
The primary financing activities of the Company are deposits and borrowings.
During the fiscal years ended March 31, 2002, 2001, and 2000, the Company
experienced an increase in deposits of $13.5 million, $10.5 million, and $5.1
million. Certificates of deposits as of March 31, 2002 maturing within one year
total $63.1 million. Management expects most of these deposits to remain with
the Bank. During the fiscal years ended March 31, 2002, 2001 and 2000, the
Company's net financing activity (proceeds less repayments) with the FHLB
totaled $10.8 million, $0, and $16.7 million, respectively.
The Company's most liquid assets are cash and cash equivalents, which consist of
short-term highly liquid investments with original maturities of less than three
months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At March 31, 2002, cash and cash equivalents totaled $5.4 million.
Liquidity management is both a daily and long-term responsibility of management.
The Company adjusts its investments in liquid assets based upon management's
assessment of (i) expected loan demand,
13
<page>
(ii) expected deposit flows, (iii) yields available on interest-earning deposits
and investment securities, and (iv) the objectives of its asset/liability
management program. Excess liquidity is invested generally in interest-earning
overnight deposits and short- and intermediate-term U.S. Government and agency
obligations and mortgage-backed securities of short duration. If the Company
requires funds beyond its ability to generate them internally, Classic Bank has
additional borrowing capacity with the FHLB of Cincinnati which is, in the
opinion of management, adequate to provide any funds needed.
The Company anticipates that it will have sufficient funds available to meet
current loan commitments. At March 31, 2002, the Company had outstanding loan
commitments totaling $15.3 million.
Both the Company and Classic Bank are required to maintain minimum levels of
regulatory capital. At March 31, 2002, both the Company and Classic Bank
exceeded all of their capital requirements.
IMPACT OF NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to the Consolidated Financial Statements included herein
for information regarding the effect of implementing new accounting standards.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's Consolidated Financial Statements and Notes 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 consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation can be found in the
increased cost of the Company's operations. Nearly all the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. Changes in
interest rates do not necessarily move to the same extent as changes in the
price of goods and services.
14
<page>
R. MILTON GOOLSBY, C.P.A.
JOHN W. ARTIS, C.P.A.
LARRY J. WITHERS, C.P.A.
STEPHEN W. KANOUSE, C.P.A.
DELMAR H. FRALEY, C.P.A.
RODNEY M. ROBINETTE, C.P.A.
G. DALE SWENTZEL, C.P.A.
STUART T. BLEVINS, C.P.A.
DAVID K. WHALEY, C.P.A.
SHARON K. KRETZER, C.P.A.
THERESA C. LYONS, C.P.A.
SMITH, GOOLSBY, ARTIS & Reams, P.S.C.
CERTIFIED PUBLIC ACCOUNTANTS
P.O. BOX 551 1330 CARTER AVE.
ASHLAND, KENTUCKY 41105-0551
(606) 329-1171 FAX (606) 325-0590
Board of Directors
Classic Bancshares, Inc.
Ashland, Kentucky
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated statements of financial condition
of Classic Bancshares, Inc. and Subsidiary as of March 31, 2002 and 2001, and
the related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 2002. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Classic Bancshares,
Inc. and Subsidiary, as of March 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2002, in conformity with accounting principles generally accepted in
the United States of America.
/S/ SMITH, GOOLSBY, ARTIS & Reams, P.S.C.
Ashland, Kentucky
June 11, 2002
15
<page>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
MARCH 31, 2002 AND 2001
-----------------------
2002 2001
ASSETS
- ------
Cash and due from banks $ 4,952,009 $ 5,442,712
Interest-bearing deposits with banks 448,037 113,188
Federal funds sold and securities purchased under agreements to resell -- 50,491
Cash and cash equivalents 5,400,046 5,606,391
Securities available for sale 25,803,491 24,794,369
Mortgage-backed and related securities available for sale 9,063,617 3,444,603
Loans, net of allowance for loan losses of $1,628,242 in 2002 and $1,406,908 in 2001. 160,315,663 138,861,807
Real estate acquired in the settlement of loans 77,622 210,745
Accrued interest receivable 1,158,144 1,187,242
Federal Home Loan Bank stock 1,480,300 1,394,000
Premises and equipment, net 5,366,126 5,620,934
Goodwill net of accumulated amortization of $864,636 5,554,549 5,554,549
Other assets 1,227,518 1,185,734
TOTAL ASSETS $ 215,447,076 $ 187,860,374
LIABILITIES
- -----------
Non-interest bearing demand deposits $ 20,404,210 $ 17,186,398
Savings, NOW, and money market demand deposits 57,433,787 48,805,047
Other time deposits 81,036,439 79,438,470
Total deposits 158,874,436 145,429,915
Federal funds purchased and securities sold under agreements to repurchase 5,395,941 3,179,589
Advances from Federal Home Loan Bank 27,401,157 16,635,590
Other short-term borrowings 445,806 234,319
Accrued expenses and other liabilities 501,744 736,676
Accrued interest payable 374,276 593,353
Accrued income taxes -- 57,919
Deferred income taxes 472,761 532,706
TOTAL LIABILITIES 193,466,121 167,400,067
Commitments
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock $.01 par value; authorized, 100,000 shares - none issued -- --
Common stock $.01 par value; authorized 1,700,000 shares; issued and
outstanding, 1,322,500 shares 13,225 13,225
Additional paid-in capital 20,373,556 20,317,385
Retained earnings, substantially restricted 5,136,114 3,275,716
Accumulated other comprehensive income (loss) (325,896) (171,073)
Unearned ESOP shares (643,310) (689,320)
Unearned RRP shares (18,812) (58,434)
Treasury stock, at cost (201,914 at 2002 and 178,164 shares at 2001) (2,553,922) (2,227,192)
TOTAL STOCKHOLDERS' EQUITY 21,980,955 20,460,307
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 215,447,076 $ 187,860,374
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
16
<page>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
-----------------------------------------
2002 2001 2000
INTEREST AND DIVIDEND INCOME
- ----------------------------
Loans, including fees $ 11,898,779 $ 11,903,366 $ 10,099,028
Securities:
Taxable 601,770 622,063 658,106
Tax exempt 824,196 825,893 831,256
Mortgage-backed securities 281,119 215,871 223,325
Federal funds sold and securities purchased under agreements to resell 10,414 14,236 25,543
Dividends 86,500 109,186 97,793
Other interest 5,754 6,453 5,749
TOTAL INTEREST AND DIVIDEND INCOME 13,708,532 13,697,068 11,940,800
INTEREST EXPENSE
- ----------------
Deposits 5,265,668 5,935,475 5,256,203
Federal Home Loan Bank advances 718,011 1,199,312 421,172
Federal funds purchased and securities sold under repurchase agreements 107,816 182,559 180,504
Other short-term borrowings 8,365 31,786 34,067
TOTAL INTEREST EXPENSE 6,099,860 7,349,132 5,891,946
NET INTEREST INCOME 7,608,672 6,347,936 6,048,854
Provision for loss on loans (363,000) (261,000) (222,500)
NET INTEREST INCOME AFTER PROVISION FOR LOSS ON LOANS 7,245,672 6,086,936 5,826,354
NONINTEREST INCOME
- ------------------
Service charges 1,188,699 915,129 702,570
Gain (loss) on sale of securities 7,015 31,520 (2,500)
Other income 258,693 139,383 194,706
TOTAL NONINTEREST INCOME 1,454,407 1,086,032 894,776
NONINTEREST EXPENSES
- --------------------
Employee compensation and benefits 2,750,305 2,619,021 2,425,898
Occupancy and equipment expense 963,814 886,365 760,911
Federal deposit insurance premiums 14,168 27,420 41,674
Advertising 299,693 221,767 204,895
Communications 191,048 119,299 116,009
Franchise and deposit taxes 185,221 242,173 167,076
Directors fees and benefits 96,068 114,050 110,450
Amortization of goodwill -- 254,225 238,226
Stationary and supplies 188,515 174,427 167,648
Other operating expenses 1,037,827 1,135,986 1,126,321
TOTAL NONINTEREST EXPENSE 5,726,659 5,794,733 5,359,108
INCOME BEFORE INCOME TAXES 2,973,420 1,378,235 1,362,022
- ---------------------------
Income tax expense 773,533 329,990 292,340
NET INCOME $ 2,199,887 $ 1,048,245 $ 1,069,682
- -----------
Basic earnings per share $ 2.08 $ .97 $ .94
Diluted earnings per share $ 1.94 $ .96 $ .92
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
17
<page>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
-----------------------------------------
2002 2001 2000
NET INCOME $ 2,199,887 $ 1,048,245 $ 1,069,682
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains (losses) on securities during the period, net of tax (150,193) 1,129,254 (1,365,151)
Reclassification adjustments for realized gains (losses) included in earnings, net (4,630) (20,803) 1,650
of tax of $2,385, $10,717, and ($850), for 2002, 2001, and 2000, respectively
COMPREHENSIVE INCOME (LOSS) $ 2,045,064 $ 2,156,696 $ (293,819)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) $ (325,896) $ (171,073) $(1,279,524)
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
18
<page>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
-------------------------------------------------
SET
COMMON ADDITIONAL RETAINED UNEARNED UNEARNED TREASURY UNREALISED TOTAL
STOCK PAID-IN EARNINGS ESOP RRP STOCK GAIN (LOSS) ON
CAPITAL SHARES SHARES SECURITIES
AVAILABLE
FOR SALE
BALANCES, MARCH $ 13,225 $12,806,544 $ 9,362,668 $ (785,150) $ (294,332) $ (897,952) $ 83,977 $ 20,288,980
31, 1999 , as
previously
reported
To reclassify to 7,486,987 (7,486,987)
paid-in-capital,
the retained
earnings of
subsidiary
(Classic Bank) as
of the date of
its acquisition
BALANCES, MARCH 13,225 20,293,531 1,875,681 (785,150) (294,332) (897,952) 83,977 20,288,980
31, 1999, as
reclassified
Net income for 1,069,682 1,069,682
the year ended
March 31, 2000
Cash dividends (369,632) (369,632)
paid ($.32 per
share)
ESOP shares 14,468 48,550 63,018
earned
RRP shares earned 116,255
RRP shares 365 116,255 2,360 --
granted
RRP shares (264) (2,725) (6,392) --
forfeited
Tax benefit from 8,631 6,656 8,631
RRP
Purchased 66,106 (814,787) (814,787)
treasury shares
Change in (1,363,501) (1,363,501)
unrealized gain
(loss) on
available for
sale securities
net of applicable
deferred income
taxes of $702,410
BALANCES, MARCH 13,225 20,316,731 2,575,731 (736,600) (174,146) (1,716,771) (1,279,524) 18,998,646
31, 2000
Net income for 1,048,245 1,048,245
the year ended
March 31, 2001
Cash dividends (348,260) (348,260)
paid ($.32 per
share)
ESOP shares 4,797 47,280 52,077
earned
RRP shares earned 117,167 117,167
RRP shares (450) (3,075) 3,525 --
granted
RRP shares (210) 1,620 (1,410) --
forfeited
Tax expense from (3,483) (3,483)
RRP
Purchased 47,800 (512,536) (512,536)
treasury shares
Change in 1,108,451 1,108,451
unrealized gain
(loss) on
available for
sale securities
net of applicable
deferred income
taxes of $571,019
BALANCES, MARCH 13,225 20,317,385 3,275,716 (689,320) (58,434) (2,227,192) (171,073) 20,460,307
31, 2001
Net income for 2,199,887 2,199,887
the year ended
March 31, 2002
Cash dividends (339,489) (339,489)
paid ($.32 per
share)
ESOP shares 22,519 46,010 68,529
earned
RRP shares earned 43,810 43,810
RRP shares 1,230 (4,188) 2,938 --
granted
Tax (expense) 32,402 32,402
benefit from RRP
Purchased 24,000 (329,668) (329,668)
treasury shares
Change in (154,823) (154,823)
unrealized gain
(loss) on
available for
sale securities
net of applicable
deferred income
taxes of $79,757
BALANCES, MARCH $ 13,225 $20,373,556 $ 5,136,114 $ (643,310) $ (18,812) $(2,553,922) $ (325,896) $ 21,980,955
31, 2002
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
19
<page>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
-------------------------------------------------
2002 2001 2000
OPERATING ACTIVITIES
- --------------------
Net income $ 2,199,887 $ 1,048,245 $ 1,069,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 459,900 511,561 522,654
Provision for loan losses 363,000 261,000 222,500
Loss (gain) on sale of investment securities (7,015) (31,520) 2,500
Net amortization (accretion) of mortgage-backed and investment securities 53,873 34,951 76,345
Federal Home Loan Bank stock dividend (86,300) (95,300) (77,900)
Deferred income tax expense (benefit) 19,812 6,221 42,012
Loss (gain) on sale of foreclosed real estate (2,934) (1,477) (2,600)
Loss (gain) on disposal of equipment and software (9,513) 30,308 (26,821)
ESOP shares earned 68,529 52,900 63,018
RRP shares earned 43,810 117,167 116,255
Amortization of goodwill -- 254,225 238,226
Decrease (increase) in:
Accrued interest receivable 29,098 (48,230) (86,334)
Other assets (31,488) 276,904 (252,238)
Increase (decrease) in:
Accrued interest payable (219,077) 41,888 51,249
Accrued income taxes (57,919) 15,500 (2,715)
Other liabilities (234,932) 308,626 (226,429)
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,588,731 2,782,969 1,729,404
INVESTING ACTIVITIES
- --------------------
Investment securities:
Available for sale:
Proceeds from sales, maturities and calls 1,292,300 6,798,717 527,500
Purchased (2,516,975) (6,251,155) --
Mortgage-backed securities:
Available for sale:
Principal payments 1,306,397 548,677 1,175,825
Purchased (6,991,295) (756,694) --
Purchased Federal Home Loan Bank stock -- (142,600) --
Purchased Federal Reserve Bank stock -- (10,550) --
Redemption of Federal Reserve Bank stock -- 316,800 45,000
Loan originations and principal payments, net (22,104,949) (11,349,482) (22,063,403)
Certificates of deposit with other banks:
Proceeds from maturities 424,150 -- --
Proceeds from sale of foreclosed real estate (190,596) 80,978 55,500
Purchased premises and equipment (1,035,170) (306,326)
Proceeds from sale of equipment and fixtures 24,885 1,622 241,700
Purchased software (7,763) (16,218) (47,415)
Cash paid-in excess of cash and cash equivalents
acquired in purchase of Bank subsidiary -- -- (1,574,538)
NET CASH USED BY INVESTING ACTIVITIES (28,763,846) (11,815,075) (21,946,157)
20
<page>
2002 2001 2000
FINANCING ACTIVITIES
- --------------------
Net change in deposits $ 13,444,521 $ 10,533,119 $ 5,121,163
Federal Home Loan Bank borrowings 137,955,000 130,326,000 102,765,000
Repayment of Federal Home Loan Bank borrowings (127,189,433) (130,765,790) (86,077,359)
Increase (decrease) in federal funds purchased and securities sold under 2,216,352 491,875 (129,440)
agreements to repurchase
Increase (decrease) in short term borrowings 211,487 (339,432) 489,173
Dividends paid (339,489) (348,260) (369,632)
Treasury shares purchased (329,668) (512,536) (814,787)
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,968,770 9,384,976 20,984,118
NET CHANGE IN CASH AND CASH EQUIVALENTS (206,345) 352,870 767,365
Cash and Cash Equivalents, Beginning of Year 5,606,391 5,253,521 4,486,156
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,400,046 $ 5,606,391 $ 5,253,521
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 1,828,913 $ 2,430,009 $ 2,019,736
Income taxes $ 828,481 $ 310,982 $ 254,899
Assets acquired in settlement of loans $ 288,093 $ 35,000 $ 127,556
Net unrealized gain (loss) on securities available-for-sale $ (154,823) $ 1,108,451 $ (1,363,501)
Liabilities assumed and cash paid in acquisition of Citizens Bank $ -- $ -- $ 17,017,497
Fair value of assets received $ -- $ -- $ 13,749,846
Amount assigned to goodwill $ -- $ -- $ 3,267,651
NOTE: The accompanying notes are an integral part of these consolidated
financial statements.
21
<page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------- ------------------------------------------
ORGANIZATION
Classic Bancshares, Inc. (the "Corporation") was organized as a savings and loan
holding company primarily for the purpose of acquiring and owning all of the
outstanding common stock of Classic Bank (formerly Ashland Federal Savings
Bank). Effective September 30, 1996, Classic Bancshares, Inc. became a bank
holding company upon its acquisition of 100% of the outstanding common stock of
First National Bank of Paintsville (First National).
As more fully described in Note 3, on May 14, 1999, Classic Bank acquired 100%
of the outstanding common stock of Citizens Bank, Grayson, Kentucky. Citizens
Bank was dissolved upon consummation of the merger and it assets and liabilities
merged into Classic Bank with the former Citizens Bank continuing in operations
as a branch of Classic Bank.
Effective June 30, 2000, Classic Bank converted from a federal savings bank to a
Kentucky chartered state commercial bank.
Effective March 16, 2001, First National Bank was merged into Classic Bank in a
consolidation of subsidiaries accounted for in a manner similar to a
pooling-of-interest. The former First National Bank continues in operation as a
branch of Classic Bank. Restructuring charges related to the merger and charged
to operations during the fiscal year 2001 totaled $112,834 ($74,470 net of tax)
consisting of employee related charges of $19,643 and other charges of $93,191.
Classic Bank (the "Bank") conducts a general commercial banking business in
eastern Kentucky which consists of attracting deposits from the general public
and using those funds, together with other funds, to originate residential,
consumer and nonresidential loans, primarily in its market area.
The Bank's revenues are derived principally from interest earned on loans and to
a lesser extent, from interest earned on investments and service fees on loans
and deposit accounts. The operations of the Bank is influenced significantly by
general economic conditions and by policies of financial institutions regulatory
agencies. The Bank's cost of funds are influenced by interest rates on competing
investments and general market rates. Lending activities are affected by the
demand for financing real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered.
The Bank's net interest income is dependent primarily upon the difference or
spread between the average yield earned on loans and investments and the average
rate paid on deposits, as well as the relative amounts of such assets and
liabilities. The Bank, like most
22
<page>
financial institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest earning assets.
The consolidated financial information presented herein has been prepared in
accordance with accounting principles generally accepted in the United States of
America and general accounting practices within the financial services industry.
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particulary susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of foreclosed real estate and deferred tax assets.
The following is a summary of the Corporation's significant accounting policies
which have been consistently applied in the preparation of the accompanying
consolidated financial statements.
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and the Banks. All significant intercompany balances and transactions have been
eliminated.
B. INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED SECURITIES
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investment securities be categorized as held-to-maturity, trading,
or available-for-sale. Securities classified as held-to-maturity are carried at
amortized cost only if the Corporation has the positive intent and ability to
hold these securities to maturity. Trading securities and securities
available-for-sale are carried at fair value with resulting unrealized gains or
losses recorded to operations or stockholders' equity, respectively. Investment
and mortgage-backed securities are classified according to management's intent
upon acquisition. The Corporation's stockholders' equity reflected net
unrealized losses of $325,896 and $171,073 at March 31, 2002, and 2001,
respectively. Realized gains and losses on sales of securities are recognized
using the specific identification method.
23
<page>
C. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable, net are stated at unpaid principal balances, less the
allowance for loan losses, plus or minus net deferred loan origination costs or
fees, and the undisbursed portion of loans in process.
Interest is accrued as earned unless the collectibility of the loan is in doubt.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status.
It is the Corporation's policy to establish an allowance for loan losses for the
purpose of absorbing losses associated with the loan portfolio. All actual loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors, including the market value of the
underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, historical
loss experience, delinquency trends and prevailing and projected economic
conditions. Management evaluates the carrying value of loans periodically in
order to evaluate the adequacy of the allowance. While management uses the best
information available to make these evaluations, future adjustments to the
allowance may be necessary if the assumptions used in making the evaluations
require material revision.
The Corporation accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loans observable market price or fair value of the collateral.
Under SFAS No. 114, a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Corporation considers its
investment in one-to-four-family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Corporation's investment in
multi-family and nonresidential loans, and its evaluation of any impairment
thereon, such loans are collateral dependent and as a result are carried as a
24
<page>
practical expedient at the lower of cost or fair value.
At March 31, 2002 and 2001, the Corporation had no loans that would be defined
as impaired under SFAS No. 114.
D. LOAN ORIGINATION FEES
Loan fees are accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 91. SFAS No. 91 requires loan origination fees and
certain related direct loan origination costs be offset and the resulting net
amount be deferred and amortized over the contractual life of the related loans
as an adjustment to the yield on such loans, using the level yield method.
E. FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at the lower of the loan's unpaid principal
balance (cost) or fair value at the date of foreclosure less estimated selling
expenses.
Real estate loss provisions are recorded if the fair value declines below the
fair value initially determined at the acquisition date. Revenue and expenses
from operations and changes in the valuation allowance are included in loss on
foreclosed real estate. The historical average holding period for such
properties is six months.
F. PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and amortization
computed principally by the straight-line method over estimated useful lives of
the assets, estimated to be ten to fifty years for buildings and five to ten
years for furniture, fixtures and equipment. An accelerated method of computing
depreciation is primarily used for tax reporting purposes.
G. GOODWILL AND OTHER INTANGIBLES
Prior to April 1, 2001, goodwill resulting from the acquisition of First
National and Citizens Bank totaling approximately $6.4 million was being
amortized over a twenty-five year period using the straight-line method.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Intangible Assets," which prescribes accounting for all purchased
goodwill and intangible assets. Pursuant to SFAS No. 142, acquired goodwill is
not amortized, but is tested for impairment at the reporting unit level on an
annual basis and between annual
25
<page>
tests whenever an impairment indicator arises. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. The
annual goodwill impairment test may be performed any time during the fiscal year
provided the test is performed at the same time every year.
The corporation adopted SFAS No. 142 effective April 1, 2001 as permitted, and
the transitional goodwill impairment tests of the Corporation's Banking segment
was performed in the second quarter of the Company's 2002 fiscal year end. As a
result of the adoption of this Statement, the Corporation will discontinue the
amortization of goodwill and will record impairment losses only when required by
the application of SFAS No. 142. The impact of the adoption of Statement No. 142
on net income for the Corporation is as follows:
FOR THE YEARS ENDED MARCH 31,
2002 2001 2000
(In thousands, except for per share amounts)
Reported net income $ 2,200 $ 1,048 $ 1,070
Add back: Goodwill amortization 0 254 238
Adjusted net income $ 2,200 $ 1,302 $ 1,308
BASIC EARNINGS PER SHARE:
Reported net income $ 2.08 $ 0.97 $ 0.94
Goodwill amortization 0 .24 .21
Adjusted net income $ 2.08 $ 1.21 $ 1.15
DILUTED EARNINGS PER SHARE:
Reported net income $ 1.94 $ 0.96 $ 0.92
Goodwill amortization 0 .23 .21
Adjusted net income $ 1.94 $ 1.19 $ 1.13
The changes in the carrying amount of goodwill for the fiscal year ended March
31, 2002 were as follows:
BANKING SEGMENT
(In thousands)
Balance, April 1, 2001 $ 5,555
Goodwill acquired 0
Impairment losses 0
Goodwill written off related to disposal of reporting unit 0
Balance, March 31, 2002 $ 5,555
26
<page>
The fair value of the reporting unit was estimated using a multiple of earnings
as determined by current industry information. The testing indicated that the
fair value of the reporting unit exceeded the carrying amount of the net assets
(including goodwill).
H. FEDERAL INCOME TAXES
The Corporation accounts for federal income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109,
a deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements that will result in taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, the general loan loss allowance, and certain components of retirement
expense. A temporary difference is also recognized for depreciation expense
computed using accelerated methods for federal income tax purposes.
I. EARNINGS PER SHARE
Basic earnings per share is calculated based on 1,056,882, 1,080,469, and
27
<page>
1,132,025, weighted average number of common shares outstanding for the years
ended March 31, 2002, 2001, and 2000, respectively.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under the
Corporation's stock option and recognition and retention plan. Weighted average
common shares deemed outstanding for purpose of computing diluted earnings per
share totaled 1,132,974, 1,087,788, and 1,157,567, for the years ended March 31,
2002, 2001, and 2000, respectively. There were 76,092, 1,915, and 17,830,
incremental shares related to the assumed exercise of stock options, and 0,
5,404, and 7,712, incremental shares related to the assumed issuance of
recognition and retention plan shares for the years ended March 31, 2002, 2001,
and 2000, respectively.
Options to purchase 400 and 75,476 shares of common stock with a
weighted-average exercise price of $16.75 and $13.02 per share were outstanding
at March 31, 2002 and 2001, respectively, but were not included in the
computation of diluted earnings per share for those years because the exercise
price was greater than the average market price of the common shares. These
options expire between February 1, 2007 and February 15, 2012.
J. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of the provisions of SFAS No. 125 without reconsideration. SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of SFAS No. 140 did not have a material effect
on the Corporation's financial position or results of operations.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations,"
which requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. The pooling-of-interests method of
accounting is prohibited except for combinations initiated before June 30, 2001.
28
<page>
The remaining provisions of SFAS No. 141 relating to business combinations
accounted for by the purchase method, including identification of intangible
assets, accounting for negative goodwill, financial statement presentation and
disclosure, are effective for combinations completed after June 30, 2001.
Management adopted SFAS No. 141 effective July 1, 2001, as required, without
material effect on the Corporation's financial position or results of
operations.
K. FINANCIAL INSTRUMENTS
Other off-balance-sheet instruments . In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit-card arrangements, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
L. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Corporation disclose estimated fair values for its financial
instruments. In accordance with SFAS No. 107, fair values are based on estimates
using present value and other valuation techniques in instances where quoted
prices are not available. These techniques are significantly affected by the
assumptions used, including discount rates and estimates of future cash flows.
As such, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, further, may not be realizable in an immediate
settlement of the instruments. SFAS No. 107 also excludes certain items from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent, and should not be construed to represent, the underlying value
of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments.
Cash and cash equivalents - The carrying amounts of cash and short-term
instruments approximate their fair value.
Securities available for sale - Fair values for investment securities, excluding
restricted equity securities, are based on quoted market prices. The carrying
values of restricted equity securities (Federal Home Loan Bank stock) represents
redemption value and approximates fair value.
29
<page>
Mortgage-backed and related securities available for sale - Fair values for
mortgage-backed and related securities are based on quoted market prices or
dealer quotes.
Loans - The fair values for loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable.
Accrued interest receivable and payable - The carrying amounts of accrued
interest approximate their fair values.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amount of variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Federal Home Loan Bank advances - The fair value of FHLB advances was estimated
by discounting the expected future cash flows using current interest rates for
advances with similar terms and remaining maturities.
Short-term borrowings - The carrying amounts of borrowings under repurchase
agreements and other short-term borrowings approximates their fair value.
Off-balance-sheet instruments - Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties credit standing. The fair value of such off-balance-sheet
instruments are immaterial and, therefore, not disclosed.
Based on the methods and assumptions set forth above, the estimated fair value
of the Corporation's financial instruments as of March 31, 2002 and 2001 are as
follows:
30
<page>
2002 2001
CARRYING FAIR VALUE CARRYING FAIR VALUE
VALUE VALUE
(In thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 5,400 $ 5,400 $ 5,556 $ 5,556
Federal funds sold and securities purchased
under agreements to resell -- -- 50 50
Securities available-for-sale 25,803 25,803 24,794 24,794
Mortgage-backed securities available-for-sale 9,064 9,064 3,445 3,445
Federal Home Loan Bank stock 1,480 1,480 1,394 1,394
Loans receivable, net 160,316 168,221 138,862 140,949
Accrued interest receivable 1,158 1,158 1,187 1,187
Financial Liabilities:
Certificates of deposit $ 81,036 $ 81,329 $ 79,438 $ 79,734
Other deposit accounts 77,731 77,731 65,992 65,992
Federal funds purchased and securities sold
under agreements to repurchase 5,396 5,398 3,180 3,180
Advances from the Federal Home Loan Bank 27,401 27,071 16,636 16,661
Other short-term borrowings 446 446 234 234
Accrued interest payable 374 374 593 593
M. CASH AND CASH EQUIVALENTS
For the purposes of reporting consolidated cash flows, the Corporation considers
cash, balances with banks, federal funds sold, securities purchased under
agreements to resell and interest-bearing cash deposits in other depository
institutions with initial maturities of three months or less to be cash
equivalents.
N. ADVERTISING COSTS
Advertising costs are expensed when incurred.
O. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2002
consolidated financial statements. Such reclassifications had no effect on net
income or stockholders' equity as previously reported.
NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS
- ------- ---------------------------------------
The Bank is required to maintain reserve funds in cash or on deposit with a
designated depository financial institution. The required reserve as of March
31, 2002 and 2001 was $175,000 and $443,000, respectively.
31
<page>
NOTE 3: ACQUISITION
- ------- -----------
Effective May 14, 1999, Classic Bank acquired 100% of the outstanding common
stock of Citizens Bank, Grayson, Kentucky, utilizing the purchase method of
accounting. Citizens Bank was dissolved upon consummation of the transaction
with the assets and liabilities of Citizens merged into Classic Bank and the
former Citizens Bank continuing in operations as a branch of Classic Bank.
The total acquisition cost was $4,581,777 cash. At May 14, 1999, the fair value
of Citizens assets were $13,749,847, liabilities were $12,435,720, and net
assets were $1,314,127. Goodwill recorded in connection with the transaction was
$3,267,650.
The results of Citizens operations subsequent to May 14, 1999, are included in
the consolidated financial statements. Presented below is the unaudited
pro-forma condensed consolidated results of operations for the year ended March
31, 2000, assuming the transaction occurred at the beginning of the fiscal year
ended March 31, 2000.
2000
(In thousands except
per share amounts)
Net interest income $ 6,054
Net income $ 743
Basic earnings per share $ 0.66
Diluted earnings per share $ 0.64
NOTE 4: INVESTMENT AND MORTGAGE-BACKED SECURITIES
- ------- -----------------------------------------
Investment securities and mortgage-backed securities have been classified in the
consolidated statements of financial condition according to management's intent.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of investment securities at March 31, 2002 and 2001 are as
follows:
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
MARCH 31, 2002:
U.S. Government Agency Securities $ 2,500,000 $ 6,946 $ (19,265) $ 2,487,681
Obligations of state and political
subdivisions 17,177,903 284,343 (419,812) 17,042,434
Corporate debt securities 6,532,480 21,814 (280,918) 6,273,376
$ 26,210,383 $ 313,103 $ (719,995) $ 25,803,491
MARCH 31, 2001:
U.S. Government Agency Securities $ 3,068,322 $ 15,112 $ -- $ 3,083,434
Obligations of state and political
subdivisions 16,259,763 301,173 (204,739) 16,356,197
Corporate debt securities 5,681,075 10,375 (336,712) 5,354,738
$ 25,009,160 $ 326,660 $ (541,451) $ 24,794,369
32
<page>
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at March 31, 2002 and 2001
are as follows:
AMORTIZED GROSS GROSS ESTIMATED
COST UNREALIZED UNREALIZED FAIR
GAINS LOSSES VALUE
AVAILABLE-FOR-SALE
MARCH 31, 2002:
FHLMC $ 7,602,117 $ 35,810 $ (135,458) $ 7,502,469
FNMA 1,061,986 20,779 -- 1,082,765
Other 108,408 -- (1,372) 107,036
REMICS:
FHLMC 377,996 -- (6,649) 371,347
$ 9,150,507 $ 56,589 $ (143,479) $ 9,063,617
MARCH 31, 2001:
FNMA $ 1,841,016 $ -- $ (53,910) $ 1,787,106
FHLMC 1,075,229 16,015 -- 1,091,244
Other 132,855 -- (1,962) 130,893
REMICS:
FHLMC 439,914 -- (4,554) 435,360
$ 3,489,014 $ 16,015 $ (60,426) $ 3,444,603
Gross realized gains and gross realized losses on the sale of available-for-sale
investment and mortgage-backed securities were $7,015 and $0, respectively for
the year ended March 31, 2002, and $33,227 and $1,707, respectively for the year
ended March 31, 2001, and $0 and $2,500, respectively for the year ended March
31, 2000.
33
<page>
The amortized cost and estimated fair value of investment and mortgage-backed
securities at March 31, 2002 and 2001 by contractual term to maturity are shown
below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
2002 2001
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR COST FAIR
VALUE VALUE
(In Thousands)
Due in one year or less $ 150 $ 152 $ 100 $ 100
Due after one year through five years 2,511 2,618 2,358 2,436
Due after five years through ten years 4,095 4,140 4,650 4,743
Due after ten years 19,454 18,893 17,901 17,515
26,210 25,803 25,009 24,794
Mortgage-backed securities-not due at a
single maturity date 9,151 9,064 3,489 3,445
TOTAL $35,361 $34,867 $28,498 $28,239
Securities carried at approximately $14,781,917 at March 31, 2002, and
$14,423,820 at March 31, 2001, were pledged to secure deposits of public funds
and for other purposes required or permitted by law.
The amortized cost of mortgage-backed securities includes unamortized premiums
of $108,564 and $66,950 and unearned discounts of $12,299 and $17,170 at March
31, 2002 and 2001, respectively.
Mortgage-backed securities with adjustable rates totaled $1,130,735 and
$1,729,113 at March 31, 2002 and 2001, respectively.
Accrued interest receivable includes $378,000 and $354,406, at March 31, 2002
and 2001, respectively, related to investment and mortgage-backed securities.
34
<page>
NOTE 5: LOANS RECEIVABLE
- ------- ----------------
The components of loans in the consolidated statements of financial condition
were as follows:
MARCH 31
2002 2001
(In Thousands)
Real estate loans:
One-to-four family $ 74,321 $ 73,576
Commercial 23,105 16,877
Multi-family 1,083 1,342
Construction 4,823 3,287
Consumer Loans 24,966 18,249
Commercial loans 33,522 26,846
Total loans receivable 161,820 140,177
Less: Unearned discounts and loan origination costs (124) (92)
Allowance for loan losses 1,628 1,407
Total loans receivable, net $ 160,316 $ 138,862
Loans with adjustable rates totaled $73.9 million and $57.5 million March 31,
2002 and 2001, respectively.
Accrued interest receivable includes $780,144 and $832,836 at March 31, 2002 and
2001, respectively, related to loans receivable.
Activity in the allowance for loan losses is summarized as follows for the years
ended March 31:
2002 2001 2000
Balance at beginning of year $ 1,406,908 $ 1,289,302 $ 860,658
Provision for losses 363,000 261,000 222,500
Allowance resulting from acquisition -- -- 505,989
Charge-offs (181,876) (190,821) (370,712)
Recoveries 40,210 47,427 70,867
Balance at end of year $ 1,628,242 $ 1,406,908 $ 1,289,302
35
<page>
The following is a summary of non-performing loans at March 31:
2002 2001 2000
(In Thousands)
Accruing loans past due 90 days or more $244 $124 $153
Nonaccrual loans 412 662 620
Total non-performing loan balances at year end $656 $786 $773
Non-performing loans as a percentage of loans .41% .56% .60%
In the normal course of business and subject to normal credit policies, the Bank
makes loans to officers, directors, their immediate family and business
interests of such persons. At March 31, 2002 and 2001, the balances of loans to
such parties were as follows:
2002 2001
Aggregate amount of indebtedness at beginning of year $ 8,108,287 $ 5,875,096
New loans 42,573,962 23,729,645
Repayments (36,559,531) (21,496,454)
Aggregate amount of indebtedness at end of year $ 14,122,718 $ 8,108,287
NOTE 6: PREMISES AND EQUIPMENT
- ------- ----------------------
Premises and equipment at March 31, 2002 and 2001 by major classifications are
as follows:
2002 2001
Land $1,267,198 $1,267,198
Buildings and improvements 4,094,683 4,080,603
Furniture and equipment 2,965,557 2,863,636
TOTAL 8,327,438 8,211,437
- ------
Less: Accumulated depreciation 2,961,312 2,590,503
$5,366,126 $5,620,934
Depreciation expense charged to operations for the years ended March 31, 2002,
2001, and 2000 totaled $430,032, $445,235, and $426,917, respectively.
Subsequent to March 31, 2002, the Corporation acquired land in Greenup,
36
<page>
Kentucky for the purpose of constructing a new branch bank. The total estimated
cost of the new branch, including land, improvements and furnishings, totals
approximately $925,000.00.
37
<page>
NOTE 7: DEPOSITS
- ------- --------
The aggregate amount of short-term jumbo certificates of deposit each with a
minimum denomination of $100,000 or more was approximately $26,529,516 and
$19,678,826 at March 31, 2002 and 2001, respectively.
The scheduled maturities of certificates of deposit were as follows for the
years ending March 31:
2003 $ 63,112,589
2004 15,589,401
2005 1,160,650
2006 420,286
2007 and thereafter 753,513
$ 81,036,439
Interest expense on deposits is summarized as follows for the years ended March
31:
2002 2001 2000
(In Thousands)
Certificates of deposit $4,034 $4,336 $3,856
NOW accounts and money market demand accounts 973 1,265 996
Passbook and club accounts 259 334 404
$5,266 $5,935 $5,256
The Bank held related party deposits of approximately $4.0 million and $3.1
million at March 31, 2002 and 2001, respectively.
NOTE 8: ADVANCES FROM FEDERAL HOME LOAN BANK
- ------- ------------------------------------
Advances from the Federal Home Loan Bank of Cincinnati totaled $27,401,157 at
March 31, 2002. In addition, the Federal Home Loan Bank had issued for the
account of Classic Bank, $11,700,000 in standby letters of credit for the
benefit of depositors of public funds. The advances and letters of credit are
collateralized with the Bank's Federal Home Loan Bank stock with a carrying
value of $1,480,300 and certain residential real estate mortgage loans in the
amount of $53,136,209.
At March 31, 2002, advances with a remaining term of 90 days or less, and a
weighted average interest rate of 1.90% totaled $8,200,000. Advances requiring
monthly principal reductions with a weighted average maturity of 4.6 years and a
weighted average interest rate of 4.09% totaled $19,201,157.
38
<page>
Scheduled principal payments are due as follows:
Due in fiscal year ending:
March 31, 2003 $ 11,777,339
March 31, 2004 4,008,980
March 31, 2005 3,773,615
March 31, 2006 3,146,403
March 31, 2007 3,381,133
After March 31, 2007 1,313,687
$ 27,401,157
NOTE 9: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- ------- -----------------------------------------------
Securities sold under agreements to repurchase at March 31, 2002 and 2001
totaled $5,395,941 and $3,179,589, respectively.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
2002 2001
Average balance during the year $4,552,598 $3,027,566
Average interest rate during the year 2.37% 6.02%
Maximum month-end balance during the year $5,872,828 $3,689,960
U.S. Government Agency and municipal securities underlying the agreements at
year-end:
Amortized cost $ 5,396,000 $ 3,290,573
Estimated fair value $ 5,287,000 $ 3,369,336
Securities sold under agreements to repurchase at March 31, 2002 and 2001 had
maturities ranging from one day to nine months.
NOTE 10: OTHER BORROWINGS
- -------- ----------------
Other short-term borrowings at March 31, 2002 and 2001 consist of term treasury
tax and loan deposits and are generally repaid within one to twenty days from
the date of the transaction. Securities with an amortized cost of $450,000 and
$1,518,322 and estimated fair value of $453,125 and $1,528,331, were pledged at
March 31, 2002 and 2001, respectively, as collateral for treasury tax and loan
deposits.
39
<page>
NOTE 11: INCOME TAXES
- -------- ------------
The provision for income taxes consists of:
YEARS ENDED MARCH 31
2002 2001 2000
Currently payable - Federal $ 721,320 $ 327,252 $ 241,698
Deferred - Federal 19,812 6,221 42,012
$ 741,132 $ 333,473 $ 283,710
Federal tax benefit (expense) from RRP
credited (charged) to paid in capital 32,401 (3,483) 8,630
$ 773,533 $ 329,990 $ 292,340
The following tabulation reconciles the federal statutory tax rate to the
effective rate of taxes provided for income taxes:
YEARS ENDED MARCH 31
2002 2001 2000
Tax at statutory rate 34.0% 34.0% 34.0%
Tax exempt income (9.4) (20.4) (20.3)
Non-deductible expenses 1.3 10.1 9.1
Other 0.1 0.2 (1.3)
26.0% 23.9% 21.5%
The components of the Corporation's net deferred tax asset (liability) as of
March 31, 2002 and 2001, are summarized as follows:
2002 2001
DEFERRED TAX ASSETS:
Loans and loan loss allowance $ 239,218 $ 153,241
AMT credit carryforward 0 32,050
Retirement and incentive programs 51,495 35,352
Foreclosed real estate 0 37,501
Net unrealized loss on available for sale securities 167,886 88,129
Other assets 27,183 38,791
485,782 385,064
DEFERRED TAX LIABILITIES:
Federal Home Loan Bank stock dividends (290,972) (261,630)
Premises and equipment (340,791) (339,373)
Retirement and incentive programs (264,195) (264,195)
Accretion on securities (19,616) (18,092)
Deferred loan origination costs (42,969) (34,480)
(958,543) (917,770)
Net deferred tax asset (liability) $(472,761) $(532,706)
40
<page>
For years prior to 1996, savings institutions (formerly Classic Bank) were
allowed a statutory bad debt deduction of otherwise taxable income of 8%,
subject to limitations based on aggregate loans and savings balances. If the
amounts that qualify as deductions for federal income taxes are later used for
purposes other than for bad debt losses, including distributions in liquidation,
such distributions will be subject to federal income taxes at the then current
corporate income tax rate. The percentage of earnings bad debt deductions for
Classic Bank had accumulated to approximately $1.9 million at March 31, 2002.
The estimated deferred tax liability on such amount is approximately $646,000,
which has not been recorded in the accompanying consolidated financial
statements. The Bank does not have any significant post 1987 increases in the
percentage of earnings bad debt deduction subject to recapture. Banks can no
longer utilize the percentage of earnings method to compute their bad debt
deduction.
NOTE 12: OFF BALANCE SHEET ACTIVITIES
- -------- -----------------------------
Credit-Related Financial Instruments. The Bank is a party to credit related
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit and
commercial letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual amount of
these commitments. The Bank follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
At March 31, 2002 and 2001, the following financial instruments were outstanding
whose contract amounts represent credit risk:
Contract Amount
March 31 March 31
2002 2001
(In thousands)
Commitments to grant loans $ 2,966 $ 785
Unfunded commitments under lines of credit 11,982 9,332
Commercial and standby letters of credit 323 560
41
<page>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Bank, is based on management's credit
evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines-of-credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Bank is committed.
Commercial and standby letters-of-credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. Those
letters-of-credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters-of-credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank generally holds collateral supporting those commitments if deemed
necessary.
The Corporation has entered into lease agreements for office premises and
equipment under operating leases which expire at various dates through 2020. The
following table summarizes minimum payments due under lease agreements by year:
Year Ending March 31 (Dollars in Thousands)
2003 $ 87
2004 85
2005 79
2006 79
2007 and thereafter 693
$ 1,023
Total rental expense under operating leases was approximately $98,017, $61,363,
and $27,515, for the years ended March 31, 2002, 2001 and 2000, respectively.
42
<page>
NOTE 13: LEGAL CONTINGENCIES
- -------- -------------------
Various legal claims arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on the
Corporation's consolidated financial statements.
NOTE 14: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT
- -------- -------------------------------------------
All of the Bank's loans, commitments and standby letters of credit have been
granted to customers in the Bank's market area. Investments in state and
municipal securities primarily involve government entities within the Bank's
market area. The concentration of credit by type of loan are set forth in Note
5.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit and letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default and the value of any existing collateral become worthless.
The Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit that are recorded on
the consolidated statements of financial condition. Because these instruments
have fixed maturity dates and because many of them expire without being drawn
upon, they do not generally present any significant liquidity risk to the Bank.
The Bank had deposits with other financial institutions which exceeded the
federally insured limits at March 31, 2002 by approximately $215,483. The Bank
does not have a policy for requiring collateral on such deposits.
NOTE 15: BENEFIT PLANS
- -------- -------------
The Corporation and its subsidiary participate in the Pentegra multi-employer
pension plan. This non-contributory defined benefit plan covers all eligible
employees of the Corporation and its subsidiary meeting certain service and age
requirements. The plan operates on a fiscal year ending June 30, and it is the
policy of the Corporation to fund the normal cost of the plan. Contributions to
the plan have not been required for the years ended March 31, 2002, 2001 and
2000. The data available from the plan administrators is not sufficient to
determine the Corporation's share of the pension plan's accumulated benefit
obligation or the net assets attributable to the Corporation.
43
<page>
Effective July 1, 1997, First National's defined benefit plan was terminated and
its plan assets were merged into the Corporation's Pentegra multi-employer
pension plan. All eligible employees of First National became participants in
the Corporation's multi-employer pension plan. Prepaid pension expense of
$777,045, representing the excess of the fair value of pension plan assets over
the accrued actuarial pension liability at July 1, 1998, is included in other
assets in the consolidated statement of financial condition at March 31, 2002
and 2001.
Effective September 30, 1995, Classic Bank entered into a non-qualified
supplemental executive retirement agreement (agreement) with the Bank's chief
executive officer which provides for the payment of a monthly supplemental
retirement benefit equal to up to 24% of his average monthly compensation during
the three highest 12-month periods in the ten years prior to retirement. Such
benefit shall be payable upon normal retirement at age 65 or under certain
circumstances, after age 55, if his termination is without cause. Upon the
officer's death, 50% of the amount payable under the agreement shall be payable
to his spouse until her death.
The following table sets forth the supplemental executive retirement plan's
funded status and amounts recognized in the consolidated financial statements at
March 31, 2002 and 2001, and 2000:
2002 2001 2000
Accumulated vested benefit obligation $ (65,116) $ (47,928) $ (34,231)
Projected benefit obligation $(120,279) $ (98,052) $ (71,462)
Under (over) accrual 32,769 24,656 10,449
Accrued retirement cost $ (87,510) $ (73,396) $ (61,013)
Net retirement cost includes the following components:
Service cost - benefits earned during the year $ 16,058 $ 15,273 $ 13,357
Interest cost 6,745 5,346 3,740
Other (7,976) (7,262) (6,218)
Net retirement cost $ (14,827) $ 13,357 $ 10,879
Discount rate 7.0% 7.0% 7.0%
Rate of increase in future compensation levels 5.0% 5.0% 5.0%
44
<page>
In conjunction with the stock conversion, the Corporation established an
Employee Stock Ownership Plan (ESOP) which covers substantially all employees.
The ESOP borrowed $1,058,000 from the Corporation and purchased 105,800 common
shares, equal to 8% of the total number of shares issued in the conversion. The
Bank makes scheduled discretionary contributions to the ESOP sufficient to
service the debt. Shares are allocated to participants' accounts under the
shares allocated method. The cost of shares not committed to be released and
unallocated shares is reported as a reduction of stockholders' equity.
Dividends on unallocated ESOP shares are recorded as a reduction of debt and
accrued interest; dividends on allocated ESOP shares are recorded as a reduction
of retained earnings. Allocated ESOP shares become outstanding for
earnings-per-share computations. Compensation expense is recorded based on the
average fair market value of the ESOP shares when committed to be released. The
expense under the ESOP for the years ended March 31, 2002, 2001, and 2000, was
$68,529, $52,077, and $63,080, respectively.
The ESOP shares at March 31, 2002 and 2001 are as follows:
2002 2001
Allocated shares 41,469 36,868
Unearned shares 64,331 68,932
Total ESOP shares 105,800 105,800
Fair value of unearned shares $ 1,098,194 $ 878,883
On July 29, 1996, stockholders of the Corporation approved the 1996 Recognition
and Retention Plan ("RRP"). Under the RRP, restricted stock awards of up to 4%
of the common stock sold in the conversion may be awarded to the directors,
officers and key employees of the Corporation and its subsidiary. The
Corporation completed the funding of the plan in September 1996 by purchasing
52,900 shares of common stock in the open market at a total cost of $621,575,
which reduced consolidated stockholders equity. At March 31, 2002, vested,
unvested and unawarded RRP shares totaled 51,396, 1,390 and 114, respectively.
45
<page>
NOTE 16: STOCK OPTION PLAN
- -------- -----------------
The holders of the restricted shares have all of the rights of a shareholder,
except that they cannot sell, assign, pledge or transfer any of the restricted
shares during the restricted period. The restricted shares vest at a rate of 20%
on each anniversary of the grant date. RRP expense of $48,131, $117,166, and
$116,255, was recorded for the years ended March 31, 2002, 2001, and 2000
respectively.
During the fiscal year ended March 31, 1998, the Corporation adopted a 401(k)
Savings and Profit Sharing Plan covering substantially all employees. Under the
plan, the Corporation matches 50.0% of the employee's contribution up to 3.0% of
the employee's salary. Total expense under this plan was $51,487, $52,900, and
$47,842, for the years ended March 31, 2002, 2001, and 2000, respectively.
On July 29, 1996, stockholders of the Corporation approved the 1996 Stock Option
and Incentive Plan ("SOP"). Under the 1996 SOP 132,250 shares were reserved for
issuance to officers, directors, and key employees of the Corporation and its
subsidiary.
The following tabulation shows the number of shares and the exercise price of
options awarded to officers, directors, and key employees by date of grants, net
of subsequent forfeitures:
Shares Granted Exercise Price
July 29, 1996 106,774 $ 10.8125
February 1, 1997 19,000 $ 13.3750
September 14, 1998 4,500 $ 13.8750
October 12, 1998 626 $ 13.7500
April 19, 1999 200 $ 13.6250
March 12, 2001 450 $ 12.3130
February 15, 2002 400 $ 16.7500
All grants under the 1996 "SOP" are exercisable at the fair market value at the
date of the grants. The options vest with the grantees at the rate of 20% per
year on each anniversary date of the grants and are available for exercise,
subject to the vesting schedule, for up to ten years from the grant date.
46
<page>
A summary of the status of the Corporation's 1996 stock option plan as of March
31, 2002, 2001, and 2000, and changes during the periods ending on those dates
is presented below:
2002 2001 2000
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
Options outstanding at beginning of year 132,250 11.32 131,800 $ 11.32 132,050 $ 11.32
Granted 400 $ 16.75 450 $ 12.31 200 $ 13.63
Exercised 0 -- 0 -- 0 --
Forfeited (700) 0 -- (450) $ 13.38
Options outstanding at end of year 131,950 $ 11.33 132,250 $ 11.32 131,800 $ 11.32
Eligible for exercise at year end 129,020 $ 11.33 103,109 $ 11.32 76,749 $ 11.32
Weighted average fair value of options $ 5.05 $ 3.71 $ 3.98
granted during the year
The following information applies to the 1996 Stock Option and Incentive Plan
options outstanding at March 31, 2002:
RANGE OF OUTSTANDING AVERAGE AVERAGE
EXERCISE PRICE REMAINING EXERCISE
LIFE (YEARS) PRICE
$ 10.8125 to $16.7500 131.950 4.5 years $ 11.33
On July 27, 1998, the stockholders of the Corporation approved the 1998 Premium
Price Stock Option Growth Plan. Under the 1998 SOP, 50,000 shares were reserved
for issuance to officers, directors, and key employees of the Corporation and
its subsidiaries.
The following tabulation shows the number of shares and the exercise price of
options awarded to officers, directors, and key employees by date of grants, net
of subsequent forfeitures:
SHARES GRANTED EXERCISE PRICE
February 15, 1999 5,000 $ 16.2950
April 19, 1999 5,550 $ 14.9880
April 24, 2000 24,000 $ 11.2750
March 12, 2001 14,350 $ 13.5440
47
<page>
These grants vest immediately with the grantees and may be exercised at any time
up to ten years.
A summary of the Corporation's 1998 Premium Price Stock Option Growth Plan as of
March 31, 2002, 2001 and 2000 and changes during the periods ending on those
dates is presented below:
2002 2001 2000
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
Options outstanding at beginning
of year 50,000 $ 12.84 11,300 $ 15.57 5,000 $ 16.30
Granted during the year 0 -- 39,450 $ 12.10 6,300 $ 14.99
Exercised 0 -- 0 -- 0 --
Forfeited 1,100 $(11.28) (750) $(14.99) 0 --
Options outstanding at end of year 48,900 $ 12.88 50,000 $ 12.84 11,300 $ 15.57
Eligible for exercise at year end 48,900 $ 12.88 50,000 $ 12.84 11,300 $ 15.57
Weighted-average fair value of
options granted during the year N/A $ 2.64 $ 3.55
The following information applies to the 1998 Premium Price Stock Option Growth
Plan at March 31, 2002:
RANGE OF OUTSTANDING AVERAGE AVERAGE
EXERCISE PRICE REMAINING EXERCISE
LIFE (YEARS) PRICE
$11.275 to $16.295 48,900 7 $ 12.88
On August 13, 2001, the stockholders of the Corporation approved the 2001
Premium Price Stock Option and Growth Plan. Under the 2001 SOP, 50,000 shares
were reserved for issuance to officers, directors and key employees of the
Corporation and its subsidiary. No options had been granted under the 2001 plan
as of March 31, 2002.
The Corporation has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair-value based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is
48
<page>
then recognized over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for stock
options and similar equity instruments under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that
continue to account for stock options using APB Opinion No. 25 are required to
make pro forma disclosures of net earnings and earnings per share, as if the
fair-value based method of accounting defined in SFAS No. 123 had been applied.
The Corporation utilizes APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the plans. Had compensation cost for the Corporation's stock
option plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the accounting method utilized in SFAS
No. 123, the Corporation's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
MARCH 31
2002 2001 2000
Net earnings
As reported $ 2,199,887 $ 1,048,245 $ 1,069,682
Pro forma $ 2,172,325 $ 894,619 $ 983,115
Earnings per share
Basic:
As reported $ 2.08 $ .97 $ .94
Pro forma $ 2.05 $ .83 $ .86
Diluted:
As reported $ 1.94 $ .96 $ .92
Pro forma $ 1.92 $ .82 $ .85
The fair value of each option grant is estimated on the date of grant using the
modified Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: dividend yield 3.0%; expected volatility of 28.48%;
risk free interest rate of 6.19%; and expected lives of 7 years.
NOTE 17: REGULATORY CAPITAL REQUIREMENTS
- -------- -------------------------------
As of March 31, 2000, Classic Bank was subject to minimum regulatory capital
standards promulgated by the Office of Thrift Supervision (the "OTS"), and the
former First National Bank was subject to the regulatory capital requirements of
the Federal Deposit Insurance Corporation (the "FDIC"). During the 2001 fiscal
year, Classic Bank converted to a state chartered bank and First National Bank
49
<page>
was merged into Classic Bank in a consolidation of subsidiaries. The surviving
entity, Classic Bank, is now subject to the regulatory capital requirements of
the "FDIC". Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
requires the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
adjusted total assets (as defined).
As of March 31, 2002, the most recent notification from regulatory agencies
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table. There are no conditions or events since
those dates that management believes have changed the bank's category. The
following table sets forth the Bank's minimum capital requirements and actual
capital as of March 31, 2002 and 2001.
ACTUAL FOR CAPITAL TO BE WELL
ADEQUACY PURPOSES CAPITALIZED UNDER
PROMPT
ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
MARCH 31, 2002
Total Capital
(to Risk Weighted Assets) $ 16,277 10.6% $ 12,274 8.0% $ 15,342 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 14,649 9.5% $ 6,137 4.0% $ 9,205 6.0%
Tier I Capital
(to Adjusted Total Assets) $ 14,649 7.1% $ 8,234 4.0% $ 10,293 5.0%
MARCH 31, 2001
Total Capital
(to Risk Weighted Assets) $ 14,827 11.4% $ 10,450 8.0% $ 13,063 10.0%
Tier I Capital
(to Risk Weighted Assets) $ 13,420 10.3% $ 5,225 4.0% $ 7,838 6.0%
Tier I Capital
(to Adjusted Total Assets) $ 13,420 7.4% $ 7,252 4.0% $ 9,065 5.0%
50
<page>
The Corporation's principal source of funds is dividends received from the
subsidiary bank. Regulations limit the amount of dividends that may be paid by
the Corporation's banking subsidiary without prior approval. During the fiscal
year March 31, 2003, approximately $1,128,354 plus any fiscal year 2003 net
profits can be paid by the Corporation's banking subsidiary without prior
regulatory approval.
51
<page>
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
- -------- ------------------------------------------------------
The following condensed financial statements summarize the financial position of
the Corporation as of March 31, 2002 and 2001 and the results of its operations
and its cash flows for each of the years ended March 31, 2002, 2001, and 2000:
STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2002 MARCH 31, 2001
ASSETS
* Cash $ 688,821 $ 99,648
Temporary investments 81,701 74,485
Securities available for sale 512,500 515,375
Accrued interest receivable 5,625 7,292
* Note receivable - ESOP 713,306 749,886
* Equity in net assets of Bank
Subsidiary 19,896,270 18,889,310
Other assets 121,351 193,379
TOTAL ASSETS $ 22,019,574 $ 20,529,375
LIABILITIES
Accounts payable and accrued expenses $ 34,955 $ 64,758
Deferred income taxes 3,664 4,310
TOTAL LIABILITIES 38,619 69,068
STOCKHOLDERS' EQUITY
Common stock 13,225 13,225
Additional paid-in capital 20,373,556 20,317,385
Retained earnings 5,136,114 3,275,716
Net unrealized gain (loss) on available for sale securities (325,896) (171,073)
Treasury stock (2,553,922) (2,227,192)
Unearned ESOP shares (643,310) (689,320)
Unearned RRP shares (18,812) (58,434)
TOTAL STOCKHOLDERS' EQUITY $ 21,980,955 $ 20,460,307
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,019,574 $ 20,529,375
* These accounts eliminate upon consolidation.
52
<page>
YEARS ENDED MARCH 31,
STATEMENTS OF INCOME 2002 2001 2000
INCOME
* Equity in undistributed earnings of bank subsidiaries $ 1,138,819 $ -- $ 674,722
* Dividends from bank subsidiaries 1,241,077 1,292,691 600,000
* Other income - management fees 60,000 127,000 12,652
* Interest income - ESOP loan 45,716 47,988 50,259
Interest and dividend income 45,164 32,797 27,253
TOTAL INCOME 2,530,776 1,500,476 1,364,886
EXPENSES
Salaries and benefits 9,731 112,499 66,426
Interest expense 2,579 6,612 18,139
Legal and accounting fees 60,695 65,699 66,765
* Corporate management fees 186,000 179,095 103,140
Printing and supplies 19,752 29,690 18,636
Other professional services 35,698 65,855 36,975
Directors fees 62,400 61,200 64,800
Other expenses 46,454 55,883 36,235
TOTAL EXPENSES 423,309 576,533 411,116
INCOME BEFORE INCOME TAXES 2,107,467 923,943 953,770
Federal and state income tax benefit (expense) 92,420 124,302 115,912
NET INCOME $ 2,199,887 $ 1,048,245 $ 1,069,682
* These accounts eliminate upon consolidation.
53
<page>
YEARS ENDED MARCH 31,
STATEMENTS OF CASH FLOWS 2002 2001 2000
OPERATING ACTIVITIES
Net income $ 2,199,887 $ 1,048,245 $ 1,069,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,094 2,745 1,326
Equity in undistributed net income of subsidiary (1,138,819) -- (674,722)
Earned ESOP shares 68,529 -- --
Earned RRP shares 43,810 105,920 59,198
Deferred income taxes 331 267 (18)
Decrease (increase) in:
Accrued interest receivable 1,667 (1,667) --
Other assets 79,270 (63,889) 165,925
Increase (decrease)
Accounts payable and accrued expenses (29,803) 14,098 (46,814)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,228,966 1,105,719 574,577
INVESTING ACTIVITIES :
Repayment on loan receivable from ESOP 36,580 36,579 36,580
Purchased equipment -- (12,910) --
Nondividend distribution from First National Bank -- -- 2,000,000
Additional capital invested in Classic Bank -- -- (1,400,000)
Dividend distribution from subsidiary in excess of current year's earnings -- 10,465 --
Purchased securities available for sale -- (255,000) --
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 36,580 (220,866) 636,580
FINANCING ACTIVITIES
Dividends paid (339,489) (348,262) (369,632)
Treasury shares purchased (329,668) (512,536) (814,787)
NET CASH USED BY FINANCING ACTIVITIES (669,157) (860,798) (1,184,419)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 596,389 24,055 26,738
Cash and Cash Equivalents at Beginning of Year 174,133 150,078 123,340
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 770,522 $ 174,133 $ 150,078
54
<page>
STOCKHOLDER INFORMATION
CORPORATE OFFICE
344 Seventeenth Street
Ashland, KY 41101
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 5:00 p.m., Ashland Kentucky
time on August 6, 2002 at the AEP Kentucky headquarters building, corner of 17
th Street and Central Avenue, Ashland, Kentucky 41101.
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission may be obtained without charge upon written
request to Lisah M. Frazier, Senior Vice President and Chief Financial Officer,
Classic Bancshares, Inc., 344 Seventeenth Street Ashland, Kentucky 41101, or by
calling (606) 326-2800, or by e-mail at lfrazier@classicbank.com. The report may
also be obtained from EDGAR at www.sec.gov.
REGISTRAR/TRANSFER AGENT
Communications regarding change of address, transfer of stock and lost
certificates should be sent to:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10007
(212) 936-5100
www.amstock.com
E-mail: info@amstock.com
INDEPENDENT ACCOUNTANTS
Smith, Goolsby, Artis & Reams, P.S.C.
1330 Carter Avenue
Ashland, KY 41101
GENERAL COUNSEL SPECIAL COUNSEL
Rose, Short & Pitt Jenkens & Gilchrist, P.C.
Community Trust Bank Building 1919 Pennsylvania Avenue, NW
1544 Winchester Avenue Washington, DC 20006
Ashland, KY 41101
55
<page>
STOCK LISTING
The Company's common stock is traded over the counter and is listed on the
NASDAQ Small-Cap Market under the symbol "CLAS." At June 28, 2002, there were
1,120,586 shares of the Company's common stock outstanding and approximately 215
holders of record. The Company's common stock began trading on December 28,
1995. The price ranges of the Company's common stock and the dividends paid for
each quarter in fiscal 2001 and fiscal 2002 were as follows:
FISCAL 2001 HIGH LOW DIVIDENDS
First Quarter $ 11.125 $ 10.000 $ .08
Second Quarter $ 11.125$ 9.938 $ .08
Third Quarter $ 11.875$ 10.250 $ .08
Fourth Quarter $ 13.930$ 11.063 $ .08
FISCAL 2002 HIGH LOW DIVIDENDS
First Quarter $ 15.500 $ 12.510 $ .08
Second Quarter $ 15.420 $ 11.750 $ .08
Third Quarter $ 17.240 $ 12.990 $ .08
Fourth Quarter $ 17.601 $ 15.100 $ .08
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. The closing price of the
Company's common stock on March 31, 2002 was $17.601.
The Company declared and paid cash dividends totaling $.32 per share during
fiscal 2002. The Board of Directors intends to continue the payment of quarterly
cash dividends, dependent on the results of operations and financial condition
of the Company, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors. The
Company's ability to pay dividends is dependent on the dividend payments it
receives from its subsidiary, Classic Bank, which is subject to regulations and
continued compliance with all regulatory capital requirements. See Note 17 of
the Notes to the Consolidated Financial Statements for information regarding
limitations of the subsidiary's ability to pay dividends to the Company.
MARKET MAKERS
J.J.B. Hilliard , W.L. Lyons
Keefe, Bruyette & Woods, Inc.
Advest, Inc.
AnPac Securities Group, Inc.
Herzog, Heine, Geduld, Inc.
Knight Securities, LP
Spear, Leeds & Kellogg
Hill, Thompson, Magid & Co.
56
<page>
ANNEX E PART 2
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 0-27170
CLASSIC BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 61-1289391
- ------------------------------- ----------------------
(State or other jurisdiction of Identification Number)
incorporation or organization) (I.R.S. Employer
344 SEVENTEENTH STREET, ASHLAND, KENTUCKY 41101
----------------------------------------- ----------
(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 10, 2003, there were 1,322,500 shares of the Registrant's common
stock issued and 1,105,486 outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
<page>
CLASSIC BANCSHARES, INC.
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002
(Unaudited) and March 31, 2002 3
Consolidated Statements of Income for the three and nine
months ended December 31, 2002 and 2001 4
Consolidated Statements of Comprehensive Income for the
three and nine months ended December 31, 2002 and 2001 5
Consolidated Statements of Stockholders' Equity for the
nine months ended December 31, 2002 and 2001 6
Consolidated Statements of Cash Flows for the nine months
ended December 31, 2002 and 2001 7-8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
PART II. OTHER INFORMATION 19
Certifications of Principal Executive Officer and Principal 20-21
Financial Officer
Signatures 22
Index to Exhibits 23
<page>
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2002 2002
---- ----
(UNAUDITED)
<s> <c> <c>
ASSETS
- ------
Cash and due from bank $ 5,771,176 $ 5,400,046
Federal funds sold 0 0
Securities available for sale 27,219,349 25,803,491
Mortgage-backed and related securities
available for sale 7,100,558 9,063,617
Loans receivable, net 180,160,836 160,315,663
Real estate acquired in the settlement
of loans 0 77,622
Accrued interest receivable 1,288,858 1,158,144
Federal Home Loan Bank stock 1,929,900 1,480,300
Premises and equipment, net 6,044,005 5,366,126
Cost in excess of fair value of net
assets acquired (goodwill),
net of accumulated amortization 5,554,549 5,554,549
Other assets 1,556,945 1,227,518
------------- -------------
TOTAL ASSETS $236,626,176 $215,447,076
- ------------ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
Non-interest bearing demand deposits $ 21,536,050 $ 20,404,210
Savings, NOW, and money market demand deposits 63,940,115 57,433,787
Other time deposits 90,511,568 81,036,439
------------- -------------
Total deposits 175,987,733 158,874,436
Securities sold under agreements to repurchase 4,630,401 5,395,941
Advances from Federal Home Loan Bank 29,146,862 27,401,157
Other short-term borrowings 500,577 445,806
Accrued expenses and other liabilities 722,199 501,744
Accrued interest payable 350,463 374,276
Accrued income taxes 11,117 0
Deferred income taxes 863,124 472,761
------------- -------------
Total Liabilities $212,212,476 $193,466,121
------------- -------------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and 1,105,486 shares outstanding $ 13,225 $ 13,225
Additional paid-in capital 20,373,556 20,373,556
Retained earnings - substantially restricted 7,055,587 5,136,114
Accumulated other comprehensive income (loss) 515,032 (325,896)
Unearned ESOP shares (643,310) (643,310)
Unearned RRP shares (12,388) (18,812)
Treasury stock, at cost (2,888,002) (2,553,922)
------------- -------------
Total Stockholders' Equity $ 24,413,700 $ 21,980,955
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $236,626,176 $215,447,076
- ------------------------------------------ ============= =============
</Table>
See accompanying Accountant's Review Report and
notes to consolidated financial statements
3
<page>
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<table>
<caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
- ---------------
<s> <c> <c> <c> <c>
Loans $ 3,105,170 $2,951,456 $ 9,171,067 $ 9,049,109
Investment securities 382,111 404,564 1,151,829 1,097,197
Mortgage-backed securities 91,799 63,141 332,960 153,269
Other interest earning assets 1,620 3,632 5,220 10,036
------------- ----------- ------------ -------------
TOTAL INTEREST INCOME 3,580,700 3,422,793 10,661,076 10,309,611
------------- ----------- ------------ -------------
INTEREST EXPENSE
- ----------------
Interest on deposits 987,525 1,256,193 2,984,802 4,213,422
Interest on FHLB Advances 240,527 140,369 750,465 523,104
Interest on other borrowed funds 13,298 24,426 48,076 100,521
------------- ----------- ------------ -------------
TOTAL INTEREST EXPENSE 1,241,350 1,420,988 3,783,343 4,837,047
------------- ----------- ------------ -------------
NET INTEREST INCOME 2,339,350 2,001,805 6,877,733 5,472,564
Provision for loss on loans 96,000 127,000 306,000 267,500
------------- ----------- ------------ -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOSS ON LOANS 2,243,350 1,874,805 6,571,733 5,205,064
------------- ----------- ------------ -------------
NON-INTEREST INCOME
- -------------------
Service charges and other fees 383,255 312,166 1,027,911 900,832
Gain on sale of securities 6,800 6,241 10,989 7,015
Other income 74,366 100,748 181,448 189,595
------------- ----------- ------------ -------------
TOTAL NON-INTEREST INCOME 464,421 419,155 1,220,348 1,097,442
------------- ----------- ------------ -------------
NON-INTEREST EXPENSES
- ---------------------
Employee compensation and benefits 785,490 744,292 2,395,487 2,076,645
Occupancy and equipment expense 269,644 220,581 745,449 695,996
Other general and administrative expense 559,897 478,808 1,661,695 1,402,488
------------- ----------- ------------ -------------
TOTAL NON-INTEREST EXPENSE 1,615,031 1,443,681 4,802,631 4,175,129
------------- ----------- ------------ -------------
INCOME BEFORE INCOME TAXES 1,092,740 850,279 2,989,450 2,127,377
- --------------------------
Income tax expense 304,706 227,170 817,685 546,935
------------- ----------- ------------ -------------
NET INCOME 788,034 623,109 2,171,765 1,580,442
- ---------- ============= =========== ============ =============
Basic earnings per share $ 0.76 $ 0.59 $ 2.07 $ 1.50
Diluted earnings per share $ 0.70 $ 0.57 $ 1.91 $ 1.45
</table>
See accompanying Accountant's Review Report and notes to consolidated financial
statements
4
<page>
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<table>
<caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
<s> <c> <c> <c> <c>
NET INCOME $ 788,034 $ 623,109 $ 2,171,765 $ 1,580,442
------------ ----------- ------------- ------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities during the period, net of tax 288,194 (353,017) 833,675 (127,976)
Reclassification adjustments for realized gains
(losses) included in earnings, net of tax 4,488 4,119 7,253 4,630
------------ ----------- ------------- ------------
Other comprehensive income 292,682 (348,898) 840,928 (123,346)
------------ ----------- ------------- ------------
COMPREHENSIVE INCOME (LOSS) $ 1,080,716 $ 274,211 $ 3,012,693 $ 1,457,096
============ =========== ============= ============
ACCUMULATED OTHER COMPREHENSIVE INCOME $ 515,032 $ (294,419) $ 515,032 $ (294,419)
============ =========== ============= ============
</table>
See accompanying Accountant's Review Report and notes to consolidated financial
statements
5
<page>
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<table>
<caption>
NET UNREALIZED
GAIN (LOSS) ON UNEARNED UNEARNED
PAID-IN RETAINED AVAILABLE FOR ESOP RRP TREASURY
COMMON ------- -------- ------------- ------ ------ --------
STOCK CAPITAL EARNINGS SALE SECURITIES SHARES SHARES STOCK TOTAL
----- ------- -------- --------------- ------ ------ ----- -----
<s> <c> <c> <c> <c> <c> <c> <c> <c>
BALANCES AT APRIL 1, 2001 $ 13,225 $12,830,398 $10,762,703 $(171,073) $(689,320) $(58,434) $(2,227,192) $20,460,307
Net income for the nine months
ended December 31, 2001 - - 1,580,442 - - - - 1,580,442
Dividend paid ($.08 per share) - - (255,378) - - - - (255,378)
RRP shares earned - - - - - 45,007 - 45,007
Purchased 24,000 treasury shares - - - - - - (329,668) (329,668)
Change in unrealized gain - - - - - - - 0
(loss) on available for
sale securities, net of
applicable deferred income
taxes of $63,452 - - - (123,346) - 0 - (123,346)
--------- ------------ ------------ ----------- ---------- --------- ------------ -----------
BALANCES AT DECEMBER 31, 2001 $ 13,225 $12,830,398 $12,087,767 $(294,419) $(689,320) $(13,427) $(2,556,860) $21,377,364
========= ============ ============ =========== ========== ========= ============ ===========
BALANCES AT APRIL 1, 2002 13,225 20,373,556 5,136,114 (325,896) (643,310) (18,812) (2,553,922) 21,980,955
Net income for the nine months
ended December 31, 2002 - - 2,171,765 - 0 - - 2,171,765
Dividend paid ($.08 per share) - - (252,292) - 0 - - (252,292)
RRP shares earned - - - - 0 6,424 - 6,424
Purchased 15,100 shares - - - - 0 0 (334,080) (334,080)
Change in unrealized gain
(loss) on available for
sale securities, net of
applicable deferred income
taxes of $433,051 - - 0 840,928 - - - 840,928
--------- ------------ ------------ ----------- ---------- --------- ------------ -----------
BALANCES AT DECEMBER 31, 2002 $ 13,225 $20,373,556 $ 7,055,587 $ 515,032 $(643,310) $(12,388) $(2,888,002) $24,413,700
========= ============ ============ =========== ========== ========= ============ ===========
</table>
See accompanying Accountant's Review Report and notes to consolidated financial
statements
6
<page>
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<table>
<caption>
NINE MONTHS ENDED
DECEMBER 31,
------------
2002 2001
---- ----
OPERATING ACTIVITIES
- --------------------
<s>
Net Income 2,171,765 1,580,442
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 304,301 359,758
Provision for loss on loans 306,000 267,500
Gain on sale of securities available for sale (10,989) (7,015)
Gain on foreclosed real estate (1,453) (12,027)
Federal Home Loan Bank stock dividends (64,000) (70,100)
Deferred income tax benefit (42,843) (17,636)
Net amortization of mortgage-backed and investment
securities 63,312 69,548
RRP shares earned 6,424 45,007
Decrease (increase) in:
Accrued interest receivable (130,714) (95,046)
Other assets (341,829) (34,591)
Increase (decrease) in:
Accrued interest payable (23,813) (145,634)
Accrued income taxes 11,117 (5,410)
Accounts payable and accrued expenses 221,432 (64,682)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,468,710 1,870,114
----------- -----------
INVESTING ACTIVITIES
- --------------------
Securities:
Proceeds from sale, maturities or calls 1,904,600 1,292,224
Purchased (2,377,125) (2,223,223)
Mortgage-backed securities:
Purchased 0 (6,991,295)
Principal payments 2,240,568 765,687
Purchase of Federal Home Loan Bank Stock (385,600) 0
Loan originations and principal payments, net (20,227,173) (17,488,055)
Proceeds from sale of foreclosed real estate 155,066 239,284
Purchases of software 0 (1,747)
Purchases of premises and equipment (969,777) (147,913)
----------- -----------
NET CASH USED BY INVESTING ACTIVITES (19,659,441) (24,555,038)
----------- -----------
</table>
See accompanying Accountant's Review Report and notes to consolidated financial
statements
7
<page>
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<table>
<caption>
NINE MONTHS ENDED
DECEMBER 31,
------------
2002 2001
---- ----
<s> <c> <c>
FINANCING ACTIVITIES
- --------------------
Net increase in deposits $ 17,113,297 $ 19,498,131
Net proceeds from FHLB borrowings 1,745,705 5,034,325
(Decrease) increase in securities sold under agreements to
repurchase (765,540) 1,528,037
Net increase (decrease) in short-term borrowings 54,771 (212,265)
Purchase of treasury stock (334,080) (329,668)
Dividends paid (252,292) (255,378)
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 17,561,861 25,263,182
------------ ------------
Increase (decrease) in cash and cash equivalents 371,130 2,578,258
Cash and cash equivalent at beginning of period 5,400,046 5,606,391
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,771,176 $ 8,184,649
============ ============
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings $ 1,484,324 $ 1,363,756
Taxes $ 800,000 $ 569,981
Assets acquired in settlement of loans $ 76,000 $ 288,033
Net unrealized (loss) gain on securities available for
sale $ 840,928 $ (123,346)
</table>
See accompanying Accountant's Review Report and notes to consolidated financial
statements
8
<page>
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) PRINCIPLES OF CONSOLIDATION
---------------------------
The financial statements for fiscal year 2003 are presented for Classic
Bancshares, Inc. (the "Company") and its wholly owned subsidiary, Classic Bank.
The consolidated balance sheets for December 31, 2002 and March 31, 2002 are for
the Company and Classic Bank. The consolidated statements of income include the
operations of the Company and Classic Bank for the three and nine months ended
December 31, 2002 and 2001.
(2) BASIS OF PRESENTATION
---------------------
The accompanying Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of Classic Bancshares, Inc.
as of December 31, 2002, and the results of operations for all interim periods
presented. Operating results for the nine months ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2003.
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, 2002.
(3) 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.
The weighted average number of shares used in the basic earnings per
share computations was 1,040,204 and 1,049,550 for the three-month periods ended
December 31, 2002 and 2001, respectively and 1,047,448 and 1,056,797 for the
nine-month periods ended December 31, 2002 and 2001. The weighted average number
of shares used in the diluted earnings per share computations was 1,127,129 and
1,084,419 for the three-month periods ended December 31, 2002 and 2001,
respectively and 1,134,373 and 1,091,666 for the nine-month periods ended
December 31, 2002 and 2001, respectively.
Options to purchase 187,850 shares of common stock were outstanding at
December 31, 2002 but 7,000 of those shares were not included in the computation
of diluted earnings per share due to their anti-dilutive effect. Options to
purchase 180,750 shares of common stock were outstanding at December 31, 2001
but 10,550 of those shares were not included in the computation of diluted
earnings per share due to their anti-dilutive effect.
9
<page>
(4) GOODWILL AND OTHER INTANGIBLES
------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement
No. 142, Goodwill and Other Intangible Assets. This Statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and how they should be accounted for after they have been initially
recognized in the financial statements. This Statement provides specific
guidance for testing goodwill for impairment. This Statement specifically
relates to the Company in that it changes the accounting for goodwill that the
Company currently has on its balance sheet. The Statement outlines that goodwill
should not be amortized but should be tested for impairment on an annual basis
and between annual tests in certain circumstances. Impairment is the condition
that exists when the carrying amount of goodwill exceeds its implied fair value.
The annual goodwill impairment test may be performed any time during the fiscal
year provided the test is performed at the same time every year.
The Statement is effective for fiscal years beginning after December
15, 2001. However, early application is permitted for entities with fiscal years
beginning after March 15, 2001. An entity has six months from the date it
initially applies this statement to complete the impairment test. The Company
adopted Statement No. 142 effective April 1, 2001. As a result of the adoption
of Statement No. 142, the Company will discontinue the amortization of its
goodwill and will only record impairment losses if deemed necessary in future
periods.
The changes in the carrying amount of goodwill for the nine months ended
December 31, 2002, are as follows:
($000s) BANKING SEGMENT
---------------
Balance as of April 1, 2002 $5,555
Goodwill acquired --
Impairment losses --
Goodwill written off related to
disposal of reporting unit --
------
Balance as of December 31, 2002 $5,555
------
The annual goodwill impairment test was performed in the third quarter of the
Company's 2003 fiscal year. To determine an estimate of the banking segment's
fair value, we utilized a market approach (comparative transactions method). The
comparative transactions method is based on the consideration of recent sales of
stock of similar companies. Under the comparative transactions method,
comparisons are made of the relationship of selling prices to such indicators as
total assets, total deposits, total core deposits, total equity, total tangible
equity and earnings. The testing indicated that the fair value of the reporting
unit exceeded the carrying amount of the net assets (including goodwill). The
goodwill will be tested annually for impairment.
(5) EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
-----------------------------------
The Company has an Employee Stock Ownership Plan (ESOP), which covers
substantially all employees. The ESOP borrowed $1,058,000 from the Company, and
purchased 105,800 common shares, equal to 8% of the total number of shares
issued in the conversion. The loan is for a term of twenty-five years. The
Company's subsidiary bank makes scheduled discretionary contributions to the
ESOP sufficient to service the debt. Shares are allocated to participants'
accounts under the shares allocated method. The cost of shares committed to be
released and unallocated shares is reported as a reduction of stockholders'
equity. Compensation expense is recorded based on the average fair market value
of the ESOP shares when committed to be released. Furthermore, ESOP shares that
have not been committed to be released are not considered outstanding. The
expense under the ESOP was $26,480 and $17,064 for the three months ended
December 31, 2002 and 2001, respectively and $75,335 and $49,511 for the
10
<page>
nine months ended December 31, 2002 and 2001, respectively. As of December 31,
2002, the Company considered 64,331 shares as unearned ESOP shares with a fair
value of $1,647,517.
(6) STOCK OPTION AND INCENTIVE PLANS AND RECOGNITION AND RETENTION PLAN
-------------------------------------------------------------------
On July 29, 1996, the shareholders of the Company ratified the adoption
of the Company's 1996 Stock Option and Incentive Plan and the Recognition and
Retention Plan ("RRP"). Pursuant to the Stock Option Plan, 132,250 shares of the
Company's common stock are reserved for issuance, of which the Company has
granted options on 106,774 shares at $10.8125 per share, options on 19,000
shares at $13.375 per share, options on 4,500 shares at $13.875 per share,
options on 626 shares at $13.75 per share, options on 200 shares at $13.625 per
share, options on 450 shares at $12.313 per share and options on 400 shares at
$16.75 per share. Pursuant to the Recognition and Retention Plan, 52,900 shares
of the Company's common stock are reserved for issuance, of which the Company
has granted awards on 52,786 shares. At the end of the quarter, 300 of the stock
options remain ungranted due to forfeitures and 114 RRP shares remain ungranted.
Ungranted RRP shares are included in treasury stock at cost.
On July 27, 1998, the shareholders of the Company ratified the adoption
of the Company's 1998 Premium Price Stock Option Plan. Pursuant to the Premium
Price Stock Option Plan, 50,000 shares of the Company's common stock is reserved
for issuance of which the Company has granted options on 5,000 shares at $16.295
per share, options on 5,550 shares at $14.988 per share, options on 24,000
shares at $11.275 per share and options on 14,350 shares at $13.544 per share.
At the end of the quarter, 1,100 of the stock options remain ungranted due to
forfeitures.
On August 13, 2001, the shareholders of the Company ratified the
adoption of the Company's 2001 Premium Price Stock Option Plan. Pursuant to the
Premium Price Stock Option Plan, 50,000 shares of the Company's common stock is
reserved for issuance, of which the Company has granted options on 7,000 shares
at $22.549 per share. At the end of the quarter, 43,000 of the stock options
remain ungranted.
(7) CASH DIVIDEND
-------------
On January 21, 2003, the Board declared a cash dividend of $.08 per
share payable on February 18, 2003 to shareholders of record on February 4,
2003.
(8) CONSTRUCTION OF NEW FACILITY
----------------------------
In April 2002, the Company acquired land in Greenup, Kentucky for the
purpose of constructing a new branch bank. The total estimated cost of the new
branch, including land, improvements and furnishings, totals approximately
$925,000. The construction of the facility was completed in December 2002 and
the Company spent approximately $855,000 towards the purchase of land and the
construction of the new facility.
(9) ACQUISITION OF FIRST FEDERAL FINANCIAL BANCORP, INC.
---------------------------------------------------
On December 30, 2002, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with First Federal Financial Bancorp, Inc. ("First
Federal"). Under the terms of the Agreement, First Federal will merge into the
Company in a transaction valued at approximately $11.5 million. Under the terms
of the agreement, First Federal shareholders may elect to receive either shares
of the Company's common stock, $24.00 in cash or a combination of stock and cash
in exchange for their shares of First Federal common stock. The elections of
First Federal shareholders will be subject to the requirement that 50% of First
Federal shares be exchanged for cash and 50% be exchanged for the Company's
common stock.
11
<page>
Under the terms of the agreement, the number of shares of the Company's
common stock for which each First Federal share will be exchanged will be .9797.
Based on the above, the total number of the Company's shares to be issued in the
transaction is anticipated to be 226,615 and the total amount of cash to be paid
in the transaction is anticipated to be $5.5 million.
The merger is subject to certain condition, including the approval of
the shareholders of the Company and First Federal and receipt of regulatory
approval. The merger is expected to be completed in the second quarter of 2003.
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
The Company's total assets increased $21.2 million from $215.4 million
at March 31, 2002 to $236.6 million at December 31, 2002. The increase was due
primarily to an increase in loans of $19.9 million, an increase in investment
securities of approximately $1.4 million, an increase in cash and cash
equivalents of approximately $400,000, an increase in FHLB stock of $400,000, an
increase in premise and equipment of approximately $700,000 and an increase in
other assets of approximately $400,000 offset by a decrease in mortgage-backed
securities of approximately $2.0 million.
Net loans receivable increased $19.9 million from $160.3 million at
March 31, 2002 to $180.2 million at December 31, 2002. Consistent with the
Company's strategic plan, the growth in loans was primarily in the areas of
consumer and commercial business loans. Consumer loans increased approximately
$8.9 million, commercial business loans increased approximately $7.2 million,
1-4 family mortgage loans increased approximately $2.0 million and commercial
real estate loans increased approximately $1.8 million. The Company experienced
loan growth for the period due to use of an incentive plan for lending
personnel, and competitive loan rates.
Investment securities increased approximately $1.4 million from $25.8
million at March 31, 2002 to $27.2 million at December 31, 2002 primarily due to
an increase in the market value of these available for sale securities of
$963,000. The remainder of the increase was due to purchases of investment
securities during the period of $2.4 million offset by sales, maturities and
calls of $1.9 million. Mortgage-backed securities decreased approximately $2.0
million from $9.1 million at March 31, 2002 to $7.1 million at December 31,
2002. The decrease was primarily due to principal repayments during the period
partially offset by an increase in the market value of these available for sale
securities.
Net deposits increased $17.1 million from $158.9 million at March 31,
2002 to $176.0 million at December 31, 2002. Non-interest bearing demand
deposits increased approximately $1.1 million, savings, NOW and money market
accounts increased approximately $6.5 million and other time deposits consisting
primarily of certificates of deposit increased approximately $9.5 million. The
increase in deposits was used to fund loan growth. In the first quarter of the
2003 fiscal year, the Company funded loan growth primarily utilizing short-term,
variable rate borrowings, however during the second and third quarters of the
fiscal year the Company was able to increase deposits at attractive rates to
fund growth. Several factors contributed to the increased deposits in the second
and third quarters, including the attraction of a large public fund deposit
account, deposits from equity fund disintermediation and an increase in
certificate of deposit accounts primarily through competitive market pricing in
order to lengthen liability maturities.
12
<page>
Total stockholders' equity was $22.0 million at March 31, 2002 compared
to $24.4 million at December 31, 2002. The increase was due to net income
recorded for the period and an increase in the market value of available for
sale securities offset by the purchase of treasury stock 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 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, that could cause actual results to differ materially from
historical earnings, the failure to achieve anticipated merger cost savings or
difficulty in merger integration, 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, 2002 AND 2001
- ---------------------------------------
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 $788,000 for the three months ended
December 31, 2002 compared to net income of $623,000 for the three months ended
December 31, 2001. The increase in net income of $165,000 between the two
periods was primarily the result of an increase in net interest income of
$338,000, an increase in non-interest income of $45,000 and a decrease in
provision for loss on loans of $31,000 partially offset by an increase in
non-interest expense of $171,000 and an increase in income taxes of $78,000.
The Company reported net income of $2.2 million for the nine months
ended December 31, 2002 compared to net income of $1.6 million for the nine
months ended December 31, 2001. The increase in income of $591,000 between the
two periods was primarily the result of an increase in net interest income of
$1.4 million and an increase in non-interest income of $123,000 partially offset
by an increase in provision for loss on loans of $39,000, an increase in
non-interest expense of $628,000 and an increase in income taxes of $271,000.
13
<page>
INTEREST INCOME. Total interest income increased $158,000 for the three
months ended December 31, 2002 and increased $351,000 for the nine months ended
December 31, 2002 as compared to the three and nine months ended December 31,
2001. 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 $29.4
million for the three-month period and an increase of $31.6 million 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 an increase in the
average balance of mortgage-backed securities. The average balance of loans
increased $25.7 million for the three-month period and $25.5 million for the
nine-month period. The average balance of mortgage-backed securities increased
$2.3 million for the three-month period and $4.5 million for the nine-month
period. The average yield on interest-earning assets was 6.9% for the three
months ended December 31, 2002 and 7.0% for the nine months ended December 31,
2002 compared to 7.6% and 7.9% for the same periods in 2001. Tax equivalent
adjustments were made to the yield. The decrease in the yield was due to the
repricing of assets during the period in a declining interest rate environment.
INTEREST EXPENSE. Interest expense decreased $180,000 and $1.1 million
for the three and nine months ended December 31, 2002 as compared to the same
period in 2001. Interest expense decreased for the periods 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 2.6% and 2.7% for the three and
nine months ended December 31, 2002 compared to 3.5% and 4.2% for the three and
nine months ended December 31, 2001. The decrease in the average rate paid on
interest-bearing liabilities was due to a significant decline in interest rates
in the past twelve months. Most of the Company's interest-bearing liabilities
have repriced to lower interest rates in the past twelve months. All of the
Company's borrowings during the period of the interest rate decreases were
short-term with variable rates allowing the cost of the borrowings to decrease
as rates decreased. Within the past six months, some of the borrowings have been
restructured to long-term, fixed rate borrowings. At December 31, 2002, the
Company's FHLB borrowings had an average remaining maturity of 2.8 years and an
average cost of 3.3%.
The average balance of interest-bearing liabilities increased $27.1
million for the three months ended December 31, 2002 compared to the same period
in 2001 and the average balance of interest-bearing liabilities increased $29.0
million for the nine months ended December 31, 2002 compared to the same period
in 2001. The increase in these balances is primarily the result of an increase
in the average balance of interest-bearing transaction accounts, an increase in
the average balance of certificate of deposit accounts and an increase in the
average balance of FHLB borrowings.
The resulting interest rate spread was 4.3% for the three and nine
months ended December 31, 2002 compared to 4.1% and 3.7% for the same periods in
2001.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
totaled $96,000 and $306,000 for the three and nine months ended December 31,
2002 compared to $127,000 and $267,500 for the three and nine months ended
December 31, 2001 based on management's overall assessment of the 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, charge-off history, peer data 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 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.
14
<page>
NON-INTEREST INCOME. Non-interest income increased approximately
$45,000 and $123,000 for the three and nine months ended December 31, 2002
compared to the same period in 2001. The increase for the three and nine-month
period is primarily the result of an increase in service charges and other fees
on deposits of $71,000 and $127,000, respectively offset by a decrease in other
income for the three and nine-month period of $26,000 and $8,000. The increase
in service charges and other fees on deposits for the periods is the result of
an increased core deposit base. Non-interest income also increased for the
nine-month period due to an increase of $4,000 in the gain recorded on the sale
of securities.
NON-INTEREST EXPENSE. Non-interest expenses increased $171,000 and
$628,000 for the three and nine months ended December 31, 2002 compared to the
same periods in 2001. Non-interest expenses increased $171,000 for the
three-month period due to an increase in employee compensation and benefits of
$41,000, an increase in occupancy and equipment expense of $49,000, an increase
in tax on deposits of $29,000, an increase in stationary, printing and supplies
expense of $12,000, an increase in communications expense of $8,000, and an
increase in other general administrative expenses of $32,000.
Non-interest expenses increased $628,000 for the nine-month period due
to an increase in employee compensation and benefits of $319,000, an increase in
stationary, printing and supplies of $62,000, an increase in technology expense
related to on-line banking, ATM and other services of $52,000, an increase in
occupancy and equipment expense of $49,000, an increase in taxes paid on capital
and deposits of $44,000, an increase in marketing and advertising of $24,000, an
increase in federal deposit insurance premiums of $7,000, an increase in the
loss on foreclosed real estate of $10,000, an increase in insurance expense of
$10,000 and an increase in other general and administrative expenses of $51,000.
Employee compensation and benefits increased for the two periods
primarily due to the hiring of staff for our new Greenup County banking office
which opened in August 2002; 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. Stationary, printing and
supplies expense and occupancy and equipment expense also increased due to
expenses related to the opening of the new Greenup County office.
Advertising increased due to the undertaking of an aggressive
advertising campaign utilizing the endorsement of a national celebrity. The
increase for the nine-month period in the loss reported on foreclosed real
estate was due to the write-down of a piece of foreclosed real estate.
INCOME TAX EXPENSE. Income tax expense increased $78,000 and $271,000
for the three and nine months ended December 31, 2002 primarily due to an
increase in income before income taxes for each period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------
The allowance for loan losses is calculated based upon an evaluation
and assessment of pertinent factors underlying the types and qualities of the
Company's loans. Management considers such factors as the payment status of a
loan, peer data, the borrower's ability to repay the loan, the estimated fair
value of the underlying collateral, anticipated economic conditions that may
affect the borrower's repayment ability and the Company's historical
charge-offs. The Company's allowance for loan losses as of December 31, 2002 was
$1.9 million or 1.1% of the total loans. The March 31, 2002 allowance for loan
loss was $1.6 million, or 1.0% of total loans. The Company recorded a provision
for loan losses of $306,000 for the nine-month period, and had net charge-offs
of $23,000 for the nine-month period. The allowance for loan losses at December
31, 2002 was allocated as follows: $337,000 to one-to-four family real estate
loans, $17,000 to commercial real estate, $92,000 to commercial business loans,
$31,000 to consumer loans and $1.4 million remained unallocated.
15
<page>
The ratio of non-performing assets to total assets is one indicator of
other exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans, accruing loans delinquent 90 days or more, and foreclosed
assets, which have been acquired as a result of foreclosure or deed-in-lieu of
foreclosure. For all periods presented the Company had no troubled debt
restructurings. The following table sets forth the amount of non-performing
assets at the periods indicated.
December 31, 2002 March 31, 2002
----------------- --------------
(Dollars in Thousands)
Non-Accruing Loans ...................... $ 353 $ 412
Accruing Loans Delinquent 90 Days or More 1,022 244
Foreclosed Assets ....................... 4 82
------ ------
Total Non-Performing Assets ............. $1,379 $ 738
Total Non-Performing Assets as a
Percentage of Total Assets ..... .6% .3%
Total non-performing assets increased $641,000 from March 31, 2002 to
December 31, 2002 due primarily to an increase in non-performing loans in
primarily the 1-4 family mortgage portfolio and commercial real estate
portfolio. The increase includes a few large delinquent 1-4 family mortgage
loans and commercial real estate loans which management believes are adequately
collateralized and which involve borrowers which management believes have
sufficient resources to service the debt. Management does not feel that this is
an indication of a trend of increased non-performing assets for the Company.
Management continually pursues collection of these loans in order to decrease
the level of non-performing assets.
OTHER ASSETS OF CONCERN. Other than the non-performing assets set forth
in the table above, as of December 31, 2002, 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, 2002 and March 31, 2002, cash and cash
equivalents totaled $5.8 million and $5.4 million, respectively. The Company's
primary sources of funds include principal and interest payments on loans (both
scheduled and prepayments), maturities of investment securities and principal
payments from mortgage-backed securities, deposits and Federal Home Loan Bank of
Cincinnati advances 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, 2002 maturing within one year totaled
$63.0 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 interest-bearing deposits, and liquidity of its asset/liability
management program. Excess liquidity is generally invested in interest-bearing
overnight deposits and other short-term liquid asset funds. If funds are
required beyond the funds generated internally, the subsidiaries of the Company
have the ability to borrow funds from the FHLB and other third parties. At
December 31, 2002, the Company had $29.1 million in borrowings outstanding with
the FHLB. 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, 2002, the Company had $4.6
million of repurchase agreements with existing relationship based business
customers.
16
<page>
At December 31, 2002, the Company had outstanding commitments to fund
loans of $18.5 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, 2002, the capital requirements applicable to
Classic Bank and its actual capital ratios. As of December 31, 2002, Classic
Bank was in compliance with its capital requirements.
<table>
<caption>
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
------------------- ------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
<s> <c> <c> <c> <c>
Total Capital
(to Risk Weighted Assets) $13,926 8.0% $ 18,892 10.9%
Tier 1 Capital
(to Adjusted Total Assets) 9,144 4.0 16,980 7.4
</table>
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, 2002, the
capital requirements applicable to the Company and its actual capital ratios. As
of December 31, 2002, the Company was in compliance with its capital
requirements.
<table>
<caption>
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
------------------- ------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
<s> <c> <c> <c> <c>
Total Capital
(to Risk Weighted Assets) $13,966 8.0% $20,255 11.6%
Tier 1 Capital
(to Adjusted Total Assets) 9,187 4.0 18,343 8.0
</table>
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 include certain
internal controls adopted in connection with applicable accounting 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
17
<page>
accounting policies. The Company's Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of these interim disclosure controls
within the 90 days prior to the filing of this report and found them to be
adequate.
The Company maintains internal controls and has evaluated such controls
within 90 days of the filing of this report. There have not been any significant
changes in such internal controls subsequent to the date of their evaluation
18
<page>
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 28 Accountant's Review Report
Exhibit 99.1 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 99.2 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, 2002:
Report filed on November 1, 2002 containing press release,
dated October 30, 2002, announcing earnings for the quarter
ending September 30, 2002 and declaring a cash dividend.
Report filed December 31, 2002 containing press release,
dated December 30, 2002, announcing merger agreement
between the Company and First Federal Bancorp, Inc.
19
<page>
Certification of Principal Executive Officer and Principal Financial Officer
CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-QSB
I, David B. Barbour, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of Classic
Bancshares, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether material or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in other
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Signature and Title: /s/ David B. Barbour Date: 2/13/03
------------------------------ ---------------
David B. Barbour
President and Chief
Executive Officer
20
<page>
Certification of Principal Executive Officer and Principal Financial Officer
CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-QSB
I, Lisah M. Frazier, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of Classic
Bancshares, Inc.;
2) Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether material or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in other
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Signature and Title: /s/ Lisah M. Frazier Date: 2/13/03
--------------------------- ---------------------
Lisah M. Frazier
Chief Operating Officer
and Chief Financial Officer
21
<page>
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: _______________________ /s/ David B. Barbour
------------------------------------
David B. Barbour, President, Chief
Executive Officer and Director
(duly Authorized Officer)
Date: _______________________ /s/ Lisah M. Frazier
---------------------------------------
Lisah M. Frazier, Chief Operating Officer,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
22
<page>
ANNEX F PART 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2002
OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-28020
FIRST FEDERAL FINANCIAL BANCORP, INC.
(Name of Small Business Issuer in its charter)
Delaware 31-1456058
- ------------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
415 Center Street
Ironton, Ohio 45638
- ------------------------------------- -------------------------------------
(Address of Principal (Zip Code)
Executive Offices)
Issuer's telephone number, including area code: (740) 532-6845
Securities registered under Section 12(b) of the Exchange Act:
NOT APPLICABLE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[]
Issuer's revenues for its most recent fiscal year: $4.6 million
As of December 16, 2002, the aggregate value of the 376,729 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
84,893 shares held by all directors and executive officers of the Registrant as
a group, was approximately $7.5 million. This figure is based on the last known
trade price of $19.80 per share of the Registrant's Common Stock on December 16,
2002.
Number of shares of Common Stock outstanding as of December 16, 2002: 461,622
Transitional Small Business Disclosure Format: Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
None.
<page>
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
First Federal Financial Bancorp, Inc. (the "Company") is a Delaware corporation
and sole stockholder of First Federal Savings Bank of Ironton (the "Savings
Bank"), which converted from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings bank in June 1996. The only
significant assets of the Company are the capital stock of the Savings Bank,
investment securities, and the Company's loan to its employee stock ownership
plan. The business of the Company consists primarily of the business of the
Savings Bank. At September 30, 2002, the Company had $68.9 million in total
consolidated assets, $59.8 million in total consolidated liabilities and $9.1
million in total consolidated stockholders' equity.
The Company's principal executive office is located in Ironton, Ohio. The
Savings Bank conducts business from its main office in Ironton, Ohio and one
branch office located in Proctorville, Ohio. In October, the Company acquired
Lincoln Savings and Loan Association, which maintains one office in Ironton,
Ohio. The Savings Bank began conducting business in 1935. The Savings Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted
by law.
The Savings Bank is a community oriented savings bank which has traditionally
offered a variety of savings products to its retail customers. The Company has
concentrated its lending activities on originating real estate loans secured by
single-family residential properties in the local markets it serves. See
"-Competition." At September 30, 2002, the total gross loan portfolio amounted
to $50.4 million, or 73.1% of total consolidated assets, of which $37.9 million,
or 75.2%, were single-family residential mortgage loans, $3.9 million, or 7.7%,
were multi-family residential loans, $4.8 million, or 9.5%, were commercial real
estate loans and $3.8 million, or 7.6%, were comprised of other loans, including
home improvement loans, automobile loans, home equity loans and loans secured by
savings accounts.
The Company also invests its funds in U.S. Government and agency securities, as
well as mortgage-backed and related securities (hereinafter "mortgage-backed
securities"), municipal and corporate debt securities and other short-term
investments. At September 30, 2002, investment securities (both "held to
maturity" as well as "available for sale") were $5.6 million, or 8.1% of total
consolidated assets, and mortgage-backed securities (both "held to maturity" as
well as "available for sale") were $8.8 million, or 12.8% of total consolidated
assets. The Company derives its income principally from interest earned on
loans, securities and its other investments and, to a lesser extent, from fees
received in connection with the origination of loans and for other services. The
Company's primary expenses are interest expense on deposits and advances from
the Federal Home Loan Bank ("FHLB") and noninterest expenses. Funds are provided
primarily by deposits and FHLB advances, amortization and prepayments of
outstanding loans and mortgage-backed securities and other sources.
Operating characteristics of the Company and the Savings Bank in recent years
include the following:
- - PROFITABILITY. For the year ended September 30, 2002, the Company had net
income of $502,000 as compared to $268,000 and $356,000 for the years ended
September 30, 2001 and 2000, respectively. The Company's net income is primarily
dependent on its net interest income, the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income amounted to $2.3 million, $1.9 million and $1.9 million for
the years ended September 30, 2002, 2001 and 2000, respectively. The interest
rate spreads were 2.96%, 2.25% and 2.32% for the years ended September 30, 2002,
2001 and 2000, respectively. Return on average assets was .72%, .39% and .53%
for the years ended September 30, 2002, 2001 and 2000, respectively.
1
<page>
- - NON-INTEREST INCOME. Non-interest income historically has not been a source of
profitability for the Company. However, in recent years, the Company has focused
on increasing its market share of transaction accounts which has resulted in
increased service fee income. Total non-interest income, including service fee
income totaled $124,000 for the year ended September 30, 2002, as compared to
$128,000 and $106,000 for the years ended September 30, 2001 and 2000,
respectively.
- - NON-INTEREST EXPENSE. The Company's ratio of noninterest expense to average
total consolidated assets amounted to 2.23% for the year ended September 30,
2002 and averaged 2.20% for the three years ended September 30, 2002.
- - ASSET QUALITY. Management of the Company believes that good asset quality is
the key to long-term financial strength and, as a result, the Company's
investments are intended to maintain asset quality and control credit risk. In
accordance with this approach, the Company has predominantly emphasized
single-family residential real estate loans, which comprised 75.2% of total
loans receivable at September 30, 2002. As of such date, total non-performing
assets constituted $262,000, or .38% of total consolidated assets.
- - STRONG CAPITAL POSITION. At September 30, 2002, the Company had total
stockholders' equity of $9.1 million. The Savings Bank exceeded all of its
regulatory capital requirements, with tangible, core and risk-based capital
ratios of 11.5%, 11.5% and 21.3%, respectively, as compared to the minimum
requirements of 1.5%, 4.0% and 8.0%, respectively.
The Company, as a registered savings and loan holding company, is subject to
examination and regulation by the Office of Thrift Supervision ("OTS") and is
subject to various reporting and other requirements of the Securities and
Exchange Commission ("SEC"). The Savings Bank is subject to examination and
comprehensive regulation by the OTS, which is the Savings Bank's chartering
authority and primary regulator. The Savings Bank is also regulated by the FDIC,
the administrator of the SAIF. The Savings Bank is also subject to certain
reserve requirements established by the Board of Governors of the Federal
Reserve System and is a member of the FHLB of Cincinnati, which is one of the 12
regional banks comprising the FHLB System.
LENDING ACTIVITIES
GENERAL. The Company's primary lending emphasis has been, and continues to be,
the origination of conventional loans secured by first liens on single-family
residences located primarily in Lawrence County, Ohio. Conventional residential
real estate loans are loans which are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Veterans Administration
("VA"). The Company does not originate either FHA-insured or VA-guaranteed real
estate loans. The Company's single-family residential loans constituted 75.2% of
the total loan portfolio at September 30, 2002. To a significantly lesser
extent, the Company's loan portfolio also includes loans secured by multi-family
residential properties and commercial real estate, loans secured by savings
deposits, automobile loans, home improvement loans and miscellaneous other
loans.
2
<page>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
September 30,
------------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
Amount % Amount % Amount %
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Real estate loans:
Single-family residential $ 37,880 75.2% $ 41,069 77.5% $ 43,271 79.8%
Multi-family residential 3,883 7.7 2,739 5.2 2,440 4.5
Commercial real estate 4,816 9.5 5,088 9.6 4,369 8.1
--------- --------- --------- --------- --------- ---------
Total real estate loans 46,579 92.4 48,896 92.3 50,080 92.4
--------- --------- --------- --------- --------- ---------
Non-real estate loans:
Loans secured by
savings accounts 607 1.2 656 1.2 701 1.3
Home improvement 192 .4 236 .4 290 .5
Automobile 964 1.9 1,002 1.9 973 1.8
Other(1) 2,060 4.1 2,212 4.2 2,176 4.0
--------- --------- --------- --------- --------- ---------
Total other loans 3,823 7.6 4,106 7.7 4,140 7.6
--------- --------- --------- --------- --------- ---------
Total loans 50,402 100.0% 53,002 100.0% 54,220 100.0%
========= ========= =========
Less:
Unearned interest (121) (209) (255)
Loans in process (131) (111) (115)
Deferred loan fees (150) (159) (136)
Allowance for
loan losses (293) (248) (297)
--------- --------- ---------
Net loans $ 49,707 $ 52,275 $ 53,417
========= ========= =========
(1) Comprised primarily of unsecured consumer loans and home equity loans.
3
<page>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table sets
forth certain information at September 30, 2002 regarding the dollar amount of
loans maturing in the Company's total loan portfolio, based on the contractual
terms to maturity. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
Due 15
Due 1-3 Due 3-5 Due 5-10 Due 10-15 years and
Due 1 year years after years after years after years after more after
or less 9/30/02 9/30/02 9/30/02 9/30/02 9/30/02 Total
---------- ----------- ----------- ----------- ----------- ---------- --------
(In Thousands)
Single-family residential $ 2,206 $ 2,638 $ 2,837 $ 6,964 $ 8,585 $ 14,650 $ 37,880
Multi-family residential 50 113 133 444 548 2,595 3,883
Commercial real estate 183 409 457 1,693 1,008 1,066 4,816
Non-real estate 1,483 1,132 390 256 245 317 3,823
---------- ----------- ----------- ----------- ----------- ---------- --------
Total $ 3,922 $ 4,292 $ 3,817 $ 9,357 $ 10,386 $ 18,628 $ 50,402
========== =========== =========== =========== =========== ========== ========
The following shows for the total loans due after one year from September 30,
2002 the type and amount which have fixed interest rates and those which have
adjustable interest rates.
Fixed Floating or
Rates Adjustable-Rates Total
---------- ---------------- ----------
(In Thousands)
Real estate loans:
Single-family residential $ 11,275 $ 24,399 $ 35,674
Multi-family residential 571 3,262 3,833
Commercial real estate 1,748 2,885 4,633
---------- ---------- ----------
Total real estate loans 13,594 30,546 44,140
---------- ---------- ----------
Non-real estate loans:
Home improvement 168 - 168
Automobile 848 - 848
Other(1) 896 428 1,324
---------- ---------- ----------
Total other loans 1,912 428 2,340
---------- ---------- ----------
Total loans $ 15,506 $ 30,974 $ 46,480
========== ========== ==========
(1) Comprised primarily of unsecured consumer loans and home equity loans.
4
<page>
Scheduled contractual amortization of loans does not reflect the expected term
of the Company's loan portfolio. The average life of loans is substantially less
than their contractual terms because of prepayments. The Company also has the
right under its mortgage loan documentation to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid.
However, depending on whether it is profitable for the Company to do so, the
Company will also permit loan assumptions subject to the acceptability of the
assignee from a full credit underwriting standpoint. The average life of
mortgage loans tends to increase when current mortgage loan rates are higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are lower than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstances, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
LOAN ACTIVITY. The following table shows total loans originated and repaid
during the periods indicated. There were no loans purchased or sold during the
periods.
Year Ended September 30,
-----------------------------------
2002 2001 2000
--------- --------- --------
(In Thousands)
Loan originations:
Single-family residential $ 6,802 $ 6,454 $ 9,048
Multi-family residential 2,484 1,299 1,422
Commercial real estate 316 1,173 570
Non-real estate 1,834 1,976 2,568
--------- --------- --------
Total loans originated 11,436 10,902 13,608
Loan principal reductions (10,792) (10,225) (8,001)
--------- --------- --------
Net increase before other items 644 677 5,607
Decrease due to other items, net (3,212) (1,819) (1,893)
--------- --------- --------
Net increase (decrease) in loan portfolio $ (2,568) $ (1,142) $ 3,714
========= ========= ========
The lending activities of the Company are subject to underwriting standards and
loan origination procedures established by the Company's Board of Directors.
After a loan application is taken, the Company begins the process of obtaining
credit reports, appraisals (with respect to a mortgage loan) and other
documentation involved with the loan. With respect to loans on property, the
Company generally requires that a property appraisal be obtained in connection
with all new mortgage loans, which are performed by independent appraisers
designated by the Board of Directors. The Company also requires that hazard
insurance be maintained on all security properties and that flood insurance be
maintained if the property is within a designated flood plain. The Company
receives a title opinion from an attorney in connection with closing a mortgage
loan.
Residential mortgage loan applications are primarily developed from referrals,
existing customers and walk-in customers and advertising. Commercial real estate
loan applications are primarily attributable to walk-in customers and referrals.
Consumer loan applications are primarily obtained through existing and walk-in
customers and advertising.
Applications for residential mortgage loans are required to be approved by
either the Loan Committee of the Board of Directors, which is comprised of at
least three directors (for loans of more than $50,000) or a majority of the
Board of Directors. The Company's President has authority to approve residential
mortgage loans of $50,000 or less and consumer loans in amounts of up to $30,000
(on a secured basis) and $25,000 (on an unsecured basis) provided that the
Company's underwriting requirements are otherwise satisfied. The two branch
managers have authority to approve consumer loans in amounts of up to $12,500
each or $25,000 together (on a secured basis) and $5,000 each or $10,000
together (on an unsecured basis) provided that the Company's underwriting
requirements are otherwise satisfied.
5
<page>
Most of the Company's single-family residential mortgage loans are originated
for up to 80% of the lesser of the purchase price or appraised value (although
the Company will originate such loans for up to a lesser of 95% of the appraised
value of the property securing a single-family residential loan or the purchase
price of the property) for terms of up to 20 years and 30 years for fixed-rate
and adjustable-rate loans, respectively. The Company will originate multi-family
residential loans up to 80% of the value of the security property for terms of
up to 20 years and commercial real estate loans for up to 70% of the appraised
value for terms of up to 20 years. Share loans are originated in an amount up to
95% of the savings account balance at 2% over the rate paid on the account.
Automobile loans are for up to five years for new cars and shorter terms for
loans on used cars.
Under applicable federal regulations, the permissible amount of loans to one
borrower may not exceed 15% of unimpaired capital and surplus. Loans in an
amount equal to an additional 10% of unimpaired capital and surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. At September 30, 2002, the Company's five largest loans or groups of
loans to one borrower, including related entities, ranged from an aggregate of
$683,000 to $914,000 and the Company's loans-to-one-borrower limit was $1.2
million at such date. All of such loans were performing as of September 30,
2002.
SINGLE-FAMILY RESIDENTIAL LOANS. The Company's single-family residential
mortgage loans consist almost exclusively of conventional loans. The Company
originates solely for portfolio retention and has never sold any loans
originated. The single-family residential mortgage loans offered by the Company
currently consist of fixed-rate and adjustable-rate loans. Fixed-rate loans have
maturities of up to 20 years and are fully amortizing with monthly loan payments
sufficient to repay the total amount of the loan with interest by the end of the
loan term. At September 30, 2002, $12.0 million, or 31.7%, of the Company's
single-family residential mortgage loans were fixed-rate loans.
The adjustable-rate loans currently offered by the Company have maturities which
range up to 30 years, with interest rates which adjust every year in accordance
with a Federal Housing Finance Board index of national contract averages of
single-family loans closed in the prior month, plus a margin. The margin
established by the Company may be more or less than the Federal Housing Finance
Board index rate. The Company's adjustable-rate residential loans generally have
a cap of 1% on any increase or decrease in the interest rate at any adjustment
date and 5% over the life of the loan. The Company's adjustable-rate loans
require that any payment adjustment resulting from a change in the interest rate
be fully amortized by the end of the loan term and, thus, do not permit
so-called negative amortization. With the decline in market rates of interest
over the past few years, the Company's customers have shown a preference for
adjustable-rate loans. Originations of adjustable-rate residential loans
constituted 67.0%, 69.6% and 48.5% of total origination of single-family
residential loans during the years ended September 30, 2002, 2001 and 2000,
respectively. At September 30, 2002, $25.9 million, or 68.3%, of the Company's
single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks to the Company of holding long-term
mortgages, but involve other risks. In a rising interest rate environment, as
interest rates increase, the loan payment by the borrower increases to the
extent permitted by the terms of the loan, thereby increasing the potential for
default. Moreover, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Company believes that these risks, which have not had a material
adverse effect on the Company to date because of the generally declining
interest rate environment in recent years, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment.
The Company currently will lend up to the lesser of 95% of the appraised value
of the property securing a single-family residential loan or the purchase price
of the property. Most loans are made for up to 80% of the lesser of the purchase
price or appraised value. However, the Company also offers a "First Time
Homebuyer's Program," which has been popular with customers, pursuant to which
it will lend up to the lesser of 90% of the purchase price or the appraised
value of the property and offer an interest rate which is .25% below its quoted
rate. A prospective borrower must otherwise meet the Company's underwriting
standards. The Company requires either private mortgage insurance or sufficient
funds on deposit in a savings account with the Company on any loans which are
originated with a loan-to-value ratio of greater than 80%, with the exception of
"First Time Homebuyer's Program" loans. The Company's "First Time Homebuyer's
Program" contributed 23.9%, 14.1% and 14.9% of total residential originations
during fiscal 2000, 2001 and 2002.
6
<page>
The Company also offers home equity loans secured by the underlying equity in
the borrower's home to those borrowers with whom it has a first mortgage loan.
Such home equity loans are amortizing loans with a maximum term of 20 years. The
Company's home equity loans require combined loan-to-value ratios of 95% or
less, depending on the borrowers debt to income ratio.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. At September 30,
2002, the Company's multi-family residential loan portfolio was comprised of
thirteen loans, all of which are secured by apartment buildings, which contain
between 5 and 37 units. The Company will originate loans up to 80% of the value
of the security property for terms of up to 20 years. At September 30, 2002, the
Company had $3.9 million, or 7.7% of the total loan portfolio, invested in
multi-family residential loans.
At September 30, 2002, the Company's commercial real estate portfolio was
comprised of 46 loans, with principal balances of up to $907,500. The properties
which secure such loans are primarily local facilities and include land and
improved land, a warehouse, churches, a multi-purpose building, a funeral home,
and various other small commercial facilities. The Company will originate loans
for up to 70% of the appraised value for terms of up to 20 years. At September
30, 2002, the Company's commercial real estate loan portfolio amounted to $4.8
million, or 9.5% of the total loan portfolio.
The Company evaluates various aspects of commercial and multi-family residential
real estate loan transactions in an effort to mitigate risk to the extent
possible. In underwriting these loans, consideration is given to the stability
of the property's cash flow history, future operating projections, current and
projected occupancy, position in the market, location and physical condition.
The underwriting analysis also includes credit checks and a review of the
financial condition of the borrower and guarantor, if applicable. An appraisal
report is prepared by an independent appraiser to substantiate property values
for every commercial real estate and multi-family loan transaction.
Multi-family and commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and because
the payment experience on such loans is typically dependent on the successful
operation of the project or the borrower's business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, or other commercial space. The Company attempts to minimize
its risk exposure by limiting such lending to proven owners, only considering
properties with existing operating performance which can be analyzed, requiring
conservative debt coverage ratios, and periodically monitoring the operation and
physical condition of the collateral.
NON-REAL ESTATE LOANS. At September 30, 2002, the Company had $607,000, or
1.2% of the total loan portfolio, invested in loans secured by savings accounts.
The Company will originate such loans in an amount up to 95% of the account
balance at 2% over the rate paid on the account. In addition, as of such date,
the Company had $964,000, or 1.9% of the total loan portfolio, invested in new
and used automobile loans, which are fixed-rate loans with terms ranging up to
five years in the case of loans on new cars and shorter terms for loans on used
cars; $192,000 or .4% of the total loan portfolio, invested in home improvement
loans and $2,060,000, or 4.1% of the total loan portfolio, invested in other
miscellaneous loans, primarily small, short-term unsecured loans to customers,
lines of credit, and home equity loans.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking payment.
A notice is sent 15 days after a payment is due and, if payment has not been
received within approximately 10 days, the borrower is contacted by phone. In
most cases, deficiencies are cured promptly. If a delinquency continues,
additional efforts are made to collect the loan. While the Company generally
prefers to work with borrowers to resolve such problems, when a real estate loan
becomes 90 days delinquent, the Company institutes foreclosure proceedings or
takes such other action as may be necessary to minimize any potential loss. The
Company believes that the attention paid by its collection department to late
payments is a major reason for the low level of non-performing assets over the
last several years.
7
<page>
Real estate loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a real estate loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Company does not accrue interest on
real estate loans past due 90 days or more.
The Company generally follows the same rigorous collection procedure described
above for its consumer loans. The Company charges off all consumer loans after
the fifth payment due is missed.
Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure are classified as real estate owned until sold. Such assets are
carried at the lower of fair value minus estimated costs to sell the property,
or cost (generally the balance of the loan on the property at the date of
acquisition). After the date of acquisition, all costs incurred in maintaining
the property are expenses and costs incurred for the improvement or development
of such property are capitalized up to the extent of their net realizable value.
NON-PERFORMING ASSETS. The following table sets forth the amounts and categories
of the Company's non-performing assets at the dates indicated. The Company had
no troubled debt restructurings during the periods presented.
September 30,
--------------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in Thousands)
Non-accruing loans:
Single-family residential $ 206 $ 204 $ 206
-------- -------- --------
Total non-accruing loans 206 204 206
-------- -------- --------
Accruing loans greater than
90 days delinquent 17 7 15
-------- -------- --------
Total non-performing loans(1) 223 211 221
-------- -------- --------
Real estate owned(1) 39 311 -
-------- -------- --------
Total non-performing assets $ 262 $ 522 $ 221
======== ======== ========
Total non-performing loans as a percentage of
total loans 0.45% 0.40% 0.41%
======== ======== ========
Total non-performing assets as a percentage of
total assets 0.38% 0.74% 0.33%
======== ======== ========
(1) At September 30, 2002, non-accruing single family residential loans consist
of six loans with balances ranging from $25,000 to $45,000, compared to seven
loans with balances ranging from $15,000 to $60,000 at September 30, 2001.
Accruing loans greater than 90 days delinquent at September 30, 2002 consist of
three installment loans, the largest of which was $8,500, as compared to two
installment loans, the largest of which was $3,600 at September 30, 2001.
Management does not expect any material losses to be sustained as a result of
these non-accrual loans.
For the years ended September 30, 2002 and 2001, gross interest income which
would have been recorded had the loans accounted for on a non-accrual basis been
current in accordance with their original terms amounted to $6,605 and $10,844,
respectively. For the years ended September 30, 2002 and 2001, $10,493, and
$5,746 were included in interest income for these same loans prior to the time
they were placed on non-accrual status.
8
<page>
ALLOWANCE FOR LOAN LOSSES. The Company's policy is to establish reserves for
estimated losses on loans when it determines that a significant and probable
decline in value occurs. The allowance for losses on loans is maintained at a
level believed adequate by management to absorb estimated losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. The Company's allowance for loan losses has historically
been predicated on its low loss experience.
The following table sets forth an analysis of the Company's allowance for loan
losses during the periods indicated.
Year Ended
September 30,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
(Dollars in Thousands)
Balance at beginning of period $ 248 $ 297 $ 292
---------- ---------- ----------
Charge-offs:
Single-family residential (7) (14) (20)
Consumer and other (34) (92) (4)
Recoveries:
Single-family residential - - 6
Consumer and other 5 2 -
---------- ---------- ----------
Net charge-offs (36) (104) (18)
---------- ---------- ----------
Provision for loan losses 81 55 23
---------- ---------- ----------
Balance at end of period $ 293 $ 248 $ 297
========== ========== ==========
Allowance for loan losses as a percent of total 0.59% 0.47% 0.55%
========== ========== ==========
Ratio of net charge-offs to average loans outstanding 0.07% 0.20% 0.03%
========== ========== ==========
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at the dates indicated.
September 30,
-------------------------------------------------------------------------------------
2002 2001 2000
------------------------ --------------------------- ------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------- ------------- --------- ------------- -------- ------------
(Dollars in Thousands)
Single-family residential $ 195 66.6% $ 205 82.6% $ 237 79.8%
Multi-family residential 20 6.8 13 5.3 13 4.5
Commercial real estate 25 8.5 25 10.1 24 8.1
Other loans 53 18.1 5 2.0 23 7.6
------- ------------- --------- ------------- -------- ------------
Total $ 293 100.0% $ 248 100.0% $ 297 100.0%
======= ============= ========= ============= ======== ============
9
<page>
MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES
GENERAL. Federally-chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally-insured banks and savings and loan
associations, certain bankers' acceptances and Federal funds. Subject to various
restrictions, federally-chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally-chartered savings
institutions are otherwise authorized to make directly.
The Company's President has authority to implement the Company's Board-approved
investment policy. The President may make investments of up to $500,000 without
prior approval of the Board; however, the President generally seeks Board
approval on all investments over $250,000. All of such investments are required
to be reported to the Board for ratification at the next scheduled meeting.
Pursuant to the Company's investment policy, all securities are to be purchased
with the primary objective of safety of principal and liquidity and,
secondarily, with consideration given to the yield to be earned. The Company is
authorized to invest in U.S. Government and agency issues, mortgage-backed
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA"), municipal bonds issued by state or local authorities
(which generally must be rated in one of the top categories by one of the
nationally recognized rating services) and certificates of deposit in insured
institutions up to a maximum of $99,000 per institution.
MORTGAGE-BACKED SECURITIES. The Company maintains a significant portfolio of
mortgage-backed securities as a means of investing in housing-related mortgage
instruments without the costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of default which arises in
holding a portfolio of loans to maturity. Mortgage-backed securities (which also
are known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family mortgages. The
principal and interest payments on mortgage-backed securities are passed from
the mortgage originators, as servicer, through intermediaries (generally U.S.
Government agencies and government-sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Company. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to investors,
primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and owned by
the 12 Federal Home Loan Banks and federally-insured savings institutions. The
FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks. The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities are guaranteed
by the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide support for
low- and middle-income housing, there are limits to the maximum size of loans
that qualify for these programs. At September 30, 2002, the Company had an
aggregate of $4.6 million, or 52.3% of total mortgage-backed securities (held to
maturity and available for sale), invested in GNMA, FNMA and FHLMC certificates
and, as of such date, the Company had $4.2 million, or 47.7% of total
mortgage-backed securities, invested in eleven collateralized mortgage
obligations ("CMOs").
10
<page>
In contrast to pass-through mortgage-backed securities, in which cash flow is
received pro rata by all security holders, the cash flow from the mortgages
underlying a CMO is segmented and paid in accordance with a predetermined
priority to investors holding various CMO classes. By allocating the principal
and interest cash flows from the underlying collateral among the separate CMO
classes, different classes of bonds are created, each with its own stated
maturity, estimated average life, coupon rate and prepayment characteristics.
The Company's CMO's were issued by the GNMA, FNMA and FHLMC and are performing
in accordance with their terms. As of September 30, 2002, the Company did not
own any mortgage-related securities designated as "high-risk mortgage
securities" under OTS pronouncements.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
Mortgage-backed securities generally yield less than the loans which underlie
such securities because of their payment guarantees or credit enhancements which
offer nominal credit risk. In addition, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize certain
obligations. At September 30, 2002, none of the Company's mortgage-backed
securities were pledged as security for an obligation. Mortgage-backed
securities issued or guaranteed by the FNMA or the FHLMC (except interest-only
securities or the residual interests in CMOs) are weighted at no more than 20.0%
for risk-based capital purposes, compared to a weight of 50.0% to 100.0% for
residential loans.
The Company's mortgage-backed securities are classified as either held to
maturity or available for sale based upon the Company's intent and ability to
hold such securities to maturity at the time of purchase, in accordance with
GAAP. The mortgage-backed securities of the Company which are held to maturity
are carried at cost, adjusted for the amortization of premiums and the accretion
of discounts using a method which approximates a level yield, while
mortgage-backed securities available for sale are carried at the lower of cost
or current market value.
The following table sets forth the composition of the Company's mortgage-backed
securities held to maturity at the dates indicated.
September 30,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
(Dollars in Thousands)
GNMA certificates $ - $ 15 $ 17
FNMA certificates 700 1,012 808
FHLMC certificates 868 1,131 1,371
Collateralized mortgage obligations 1,716 2,035 1,577
---------- ---------- ----------
Total mortgage-backed securities held to
maturity 3,284 4,193 3,773
Unamortized premiums 97 106 108
Unearned discounts (2) (3) (4)
---------- ---------- ----------
Net mortgage-backed securities held to
maturity $ 3,379 $ 4,296 $ 3,877
========== ========== ==========
Weighted average interest rate 6.28% 6.25% 6.25%
========== ========== ==========
11
<page>
The following table sets forth the composition of the Company's mortgage-backed
securities available for sale at the dates indicated.
September 30,
--------------------------------------------
2002 2001 2000
--------------------------------------------
(Dollars in Thousands)
GNMA certificates $ 1,092 $ 520 $ 375
FNMA certificates 1,359 913 400
FHLMC certificates 450 213 268
Collateralized mortgage obligations 2,458 4,556 3,645
---------- ---------- ----------
Total mortgage-backed securities available for
sale 5,359 6,202 4,688
Unamortized premiums 60 71 31
Unearned discounts (56) (111) (113)
Unrealized holding gain (loss) on mortgage-backed
securities available for sale 77 41 (195)
---------- ---------- ----------
Net mortgage-backed securities available for sale $ 5,440 $ 6,203 $ 4,411
========== ========== ==========
Weighted average interest rate 5.34% 5.74% 5.82%
========== ========== ==========
The following table sets forth the activity in the Company's aggregate
mortgage-backed securities portfolio (held to maturity and available for sale)
during the periods indicated.
At or For the Year Ended
September 30,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(In Thousands)
Mortgage-backed securities at
beginning of period $ 10,499 $ 8,288 $ 9,146
Purchases 1,740 2,997 -
Repayments (3,492) (1,019) (720)
Sales - - -
Accretion and amortization, net 36 (3) (24)
Net change in unrealized holding
gain on available for sale securities 36 236 (114)
---------- ---------- ----------
Mortgage-backed securities at
end of period $ 8,819 $ 10,499 $ 8,288
========== ========== ==========
At September 30, 2002, the weighted average contractual maturity of the
Company's aggregate mortgage-backed securities (held to maturity and available
for sale) was approximately 19 years. The actual maturity of a mortgage-backed
security is less than its stated maturity due to prepayments of the underlying
mortgages. Prepayments that are faster than anticipated may shorten the life of
the security and adversely affect its yield to maturity. The yield is based upon
the interest income and the amortization of any premium or discount related to
the mortgage-backed security. In accordance with GAAP, premiums and discounts
are amortized over the estimated lives of the securities, which decrease and
increase interest income, respectively. The prepayment assumptions used to
determine the amortization period for premiums and discounts can significantly
affect the yield of the mortgage-backed security, and these assumptions are
reviewed periodically to reflect actual prepayments. Although prepayments of
underlying mortgages depend on many factors, the difference between the interest
rates on the underlying mortgages and the prevailing mortgage interest rates
generally is the most significant determinant of the rate of prepayments. During
periods of falling mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest rates offered for mortgage
loans, refinancing generally increases
12
<page>
and accelerates the prepayment of the underlying mortgages and the related
security. Under such circumstances, the Company may be subject to reinvestment
risk because to the extent that the Company's mortgage-related securities
amortize or prepay faster than anticipated, the Company may not be able to
reinvest the proceeds of such repayments and prepayments at a comparable rate.
INVESTMENT SECURITIES. The following table sets forth certain information
relating to the Company's investment securities held to maturity at the dates
indicated.
September 30,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In Thousands)
U.S. Government agency
securities $ 3,417 $ 1,348 $ 491
Municipal bonds 781 883 1,089
FHLB stock 681 649 599
---------- ---------- ----------
Total $ 4,879 $ 2,880 $ 2,179
========== ========== ==========
The following table sets forth certain information relating to the Company's
investment securities available for sale at the dates indicated.
September 30,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(In Thousands)
U.S. Government agency securities $ 750 $ 655 $ 350
---------- ---------- ----------
Total investment securities
available for sale 750 655 350
Unrealized holding gain (loss) on investment
securities available for sale 5 4 (4)
---------- ---------- ----------
Net investment securities available for sale $ 755 $ 659 $ 346
========== ========== ==========
The following table sets forth certain information regarding the maturities of
the Company's investment securities at September 30, 2002.
Contractually Maturing
---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average Average Average Over 10 Average
Year Yield 1-5 Years Yield 6-10 Years Yield Years Yield
------- -------- --------- -------- ----------- --------- ------- ---------
(Dollars in Thousands)
U.S. Government
agency securities $ - -% 831 $ 4.11% $ 3,095 5.39% $ 246 5.00%
Municipal bonds 400 5.25 286 5.52 95 4.95 - -
FHLB stock - - - - - - 681 4.80
---------- ----------- ---------- ----------
Total $ 400 5.25% $ 1,117 4.47% $ 3,190 5.38% $ 927 4.85%
========== ========== ========== ========== ========== ========== ========== ==========
The Company's investment securities are classified as either held to maturity or
available for sale at the time of purchase, in accordance with GAAP.
13
<page>
SOURCES OF FUNDS
GENERAL. The Company's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through its main and branch offices. The Company also derives funds from
amortization and prepayments of outstanding loans and mortgage-backed
securities, from maturing investment securities and from advances from the FHLB
of Cincinnati. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. The Company uses borrowings to supplement its
deposits as a source of funds.
DEPOSITS. The Company's current deposit products primarily include passbook
accounts and certificates of deposit ranging in terms from six months to 37
months, and to a lesser extent, demand accounts. The Company's deposit products
also include Individual Retirement Account ("IRA") certificates.
The Company's deposits are obtained from residents in its primary market area.
The Company attracts local deposit accounts by offering competitive interest
rates. The Company utilizes traditional marketing methods to attract new
customers and savings deposits, including print media, radio and television
advertising.
The following table sets forth the dollar amount and average interest rates of
deposits in the various types of deposit programs offered by the Company at the
dates indicated.
September 30,
-----------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
Amount Percentage Amount Percentage
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Certificate accounts:
2.00 - 4.00% $ 26,924 54.1% $ 480 .9% $ - -%
4.01 - 6.00% 4,506 9.1 32,376 63.3 4,986 10.8
6.01 - 8.00% 3,024 6.1 7,053 13.8 30,884 66.6
---------- ---------- ---------- ---------- ---------- ----------
Total certificate accounts 34,454 69.3 39,909 78.0 35,870 77.4
---------- ---------- ---------- ---------- ---------- ----------
Transaction accounts:
Passbook accounts 11,967 24.0 8,695 17.0 8,343 18.0
Christmas Club 100 .2 96 .2 89 .2
Demand accounts 3,229 6.5 2,416 4.8 2,064 4.4
---------- ---------- ---------- ---------- ---------- ----------
Total transaction accounts 15,296 30.7 11,207 22.0 10,496 22.6
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 49,750 100.0% $ 51,116 100.0% $ 46,366 100.0%
========== ========== ========== ========== ========== ==========
The following table sets forth the deposits activities of the Company during the
periods indicated.
Year Ended September 30,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
(In Thousands)
Deposits $ 64,804 $ 59,212 $ 51,560
Withdrawals (67,643) (56,551) (54,704)
---------- ---------- ----------
Net increase (decrease)
before interest credited (2,839) 2,661 (3,144)
Interest credited 1,473 2,089 1,767
---------- ---------- ----------
Net increase (decrease) in
deposits $ (1,366) $ 4,750 $ (1,377)
========== ========== ==========
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The following table shows the contractual interest rate and maturity information
for the Company's certificates of deposit at September 30, 2002.
Maturity Date
--------------------------------------------------------------
One Year Over Over Over
or Less 1-2 Years 2-3 Years 3 Years Total
---------- ---------- ---------- ---------- ----------
(In Thousands)
2.00 - 4.00% $ 19,111 $ 3,274 $ 3,874 $ 665 $ 23,924
4.01 - 6.00% 689 1,816 2,001 - 4,506
6.01 - 8.00% 2,238 786 - - 3,024
---------- ---------- ---------- ---------- ----------
Total $ 22,038 $ 5,876 $ 5,875 $ 665 $ 34,454
========== ========== ========== ========== ==========
The following table sets forth the maturities of the Company's certificates of
deposit having principal amounts of $100,000 or more at September 30, 2002. The
Company does not use brokered deposits and the substantial majority of all funds
are from within the local market area.
Certificates of deposit maturing in
quarter ending:
--------------------------------
(In Thousands)
December 31, 2002 $ 1,135
March 31, 2003 553
June 30, 2003 1,216
September 30, 2003 668
After September 30, 2003 3,109
-------
Total certificates of deposit with
balances of $100,000 or more $ 6,681
=======
BORROWINGS. The Company may obtain advances from the FHLB of Cincinnati upon the
security of the common stock it owns in that bank and certain of its residential
mortgage loans and securities held to maturity, provided certain standards
related to creditworthiness have been met. Such advances are made pursuant to
several credit programs, each of which has its own interest rate and range of
maturities. At September 30, 2002, the Company had $9.6 million in outstanding
advances from the FHLB of Cincinnati.
The following table sets forth the maximum month-end balance and average balance
of the Company's FHLB advances during the periods indicated.
Year Ended September 30,
--------------------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in Thousands)
Maximum balance $ 10,834 $ 12,087 $ 11,746
Average balance 9,747 10,318 10,056
Year end balance 9,612 10,837 11,690
Weighted average interest rate:
At end of year 4.40% 4.54% 6.31%
During the year 4.52 5.60 6.07
SUBSIDIARIES
The Savings Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Savings Bank has no
subsidiaries.
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COMPETITION
The Company faces strong competition both in attracting deposits and making real
estate loans. Its most direct competition for deposits has historically come
from other savings associations, credit unions and commercial banks located
within 15 miles of Ironton, which covers Lawrence County, Ohio, Boyd and Greenup
Counties, Kentucky and Cabell County, West Virginia, including many large
financial institutions which have greater financial and marketing resources
available to them.
The Company's primary market area is Lawrence County, Ohio. Lawrence County has
six banks with thirteen offices and four thrift institutions with eight offices
which all compete for deposits and loans. Lawrence County has a very competitive
financial institution market dominated in total deposits by banks. The Company
is much smaller in size than many of its competitors in terms of assets and is
less diversified.
In addition, during times of high interest rates, the Company has faced
additional significant competition for investors' funds from short-term money
market securities, mutual funds and other corporate and government securities.
The ability of the Company to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Company experiences strong competition for real estate loans principally
from other savings associations, commercial banks and mortgage banking
companies. The Company competes for loans principally through interest rates, by
minimizing loan fees, and the efficiency and quality of services it provides
borrowers. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
REGULATION
GENERAL.
Savings and loan holding companies and savings associations are extensively
regulated under both federal and state law. This regulation is intended
primarily for the protection of depositors and the Savings Association Insurance
Fund, or SAIF, and not for the benefit of a company's stockholders. The
following information describes certain aspects of those regulations applicable
to the Company and the Savings Bank, and does not purport to be complete. The
discussion is qualified in its entirety by reference to all particular statutory
or regulatory provisions.
REGULATION OF THE COMPANY.
GENERAL. The Company is a savings and loan holding company subject to regulatory
oversight by the OTS. As such, it is required to register and file reports with
the OTS and is subject to regulation and examination by the OTS. In addition,
the OTS has enforcement authority over the Company and the Savings Bank, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the Savings Bank.
ACTIVITIES RESTRICTIONS. The Company's activities are subject to restrictions
applicable to bank holding companies. Bank holding companies are prohibited,
subject to certain exceptions, from engaging in any business or activity other
than a business or activity that the Federal Reserve Board has determined to be
so closely related to banking as to be a proper incident thereto. The Federal
Reserve Board has by regulation determined that certain activities satisfy this
closely related to banking standard. These activities include operating a
mortgage company, finance company, credit card company, factoring company, trust
company or savings association; performing certain data processing operations;
providing limited securities brokerage services, acting as an investment or
financial advisor; acting as an insurance agent for certain types of
credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services. The Federal Reserve
Board also has determined that certain other activities, including real estate
brokerage and syndication, land development, property management and
underwriting of life insurance not related to credit transactions, are not
closely related to banking nor a proper incident thereto. Legislation enacted in
1999 has expanded the types of activities that may be conducted by qualifying
holding companies that register as "financial holding companies."
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RESTRICTIONS ON ACQUISITIONS. The Company must obtain approval from the OTS
before acquiring control of any SAIF-insured association. Such acquisitions are
generally prohibited if they result in a savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in the case of a supervisory acquisition of a failing savings association.
Federal law generally provides that no person or entity, acting directly or
indirectly or through or in concert with one or more other persons or entities,
may acquire "control," as that term is defined in OTS regulations, of a
federally insured savings association without giving at least 60 days written
notice to the OTS and providing the OTS an opportunity to disapprove the
proposed acquisition. These provisions also prohibit, among other things, any
director or officer of a savings and loan holding company, or any individual who
owns or controls more than 25% of the voting shares of a savings and loan
holding company, from acquiring control of any savings association that is not a
subsidiary of such savings and loan holding company, unless the acquisition is
approved by the OTS.
REGULATION OF THE SAVINGS BANK.
GENERAL. As a federally chartered, SAIF-insured savings association, the Savings
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments of the Savings Bank must comply with various
statutory and regulatory requirements. The Savings Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Savings Bank and
prepares reports for the Savings Bank's board of directors on any deficiencies
found in the operations of the Savings Bank. The relationship between the
Savings Bank and depositors and borrowers is also regulated by federal and state
laws, especially in such matters as the ownership of savings accounts and the
form and content of mortgage documents utilized by the Savings Bank.
The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Savings Bank
and their operations.
INSURANCE OF DEPOSIT ACCOUNTS. The SAIF, as administered by the FDIC, insures
the Savings Bank's deposit accounts up to the maximum amount permitted by law.
The FDIC may terminate insurance of deposits upon a finding that the Savings
Bank:
- - has engaged in unsafe or unsound practices;
- - is in an unsafe or unsound condition to continue operations; or
- - has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC or the OTS.
The FDIC charges an annual assessment for the insurance of deposits based on the
risk a particular institution poses to its deposit insurance fund. Under this
system, as of December 31, 2001, SAIF members pay zero to 27 cents per $100 of
domestic deposits, depending upon the institution's risk classification. This
risk classification is based on an institution's capital group and supervisory
subgroup assignment. In addition, all FDIC-insured institutions are required to
pay assessments to the FDIC at an annual rate for the third quarter of 2002 of
approximately $0.0172 per $100 of assessable deposits to fund interest payments
on bonds issued by the Financing Corporation, or FICO, an agency of the Federal
government established to recapitalize the predecessor to the SAIF. These
assessments will continue until the FICO bonds mature in 2017.
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PROPOSED LEGISLATION. From time to time, new laws are proposed that, if enacted,
could have an effect on the financial institutions industry. For example,
deposit insurance reform legislation has recently been introduced in Congress
that would:
- - merge the Bank Insurance Fund and the SAIF;
- - increase the current deposit insurance coverage limit for insured deposits to
$130,000 and index future coverage limits to inflation;
- - increase deposit insurance coverage limits for municipal deposits;
- - double deposit insurance coverage limits for individual retirement accounts;
and
- - replace the current fixed 1.25 designated reserve ratio with a reserve range
of 1-1.5%, giving the FDIC discretion in determining a level adequate within
this range.
While the Company cannot predict whether such proposals will eventually become
law, they could have an effect on the Company's operations and the way it
conducts business.
REGULATORY CAPITAL REQUIREMENTS AND PROMPT CORRECTIVE ACTION. The prompt
corrective action regulation of the OTS, requires certain mandatory actions and
authorizes certain other discretionary actions to be taken by the OTS against a
savings association that falls within certain undercapitalized capital
categories specified in the regulation.
Under the regulation, an institution is well capitalized if it has a total
risk-based capital ratio of a least 10.0%, a Tier1 risk-based capital ratio of
at least 6.0% and a leverage ratio of at least 5.0%, with no written agreement,
order, capital directive, prompt corrective action directive or other individual
requirements by the OTS to maintain a specific capital measure. An institution
is adequately capitalized if it has a total risk-based capital ratio of at least
8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of
at least 4.0% (or 3.0% if it has a composite rating of "1" and is not
experiencing significant growth). The regulation also established three
categories for institutions with lower ratios: undercapitalized, significantly
undercapitalized and critically undercapitalized. At September 30, 2002, the
Savings Bank met the capital requirements of a "well capitalized" institution
under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew or roll-over brokered
deposits.
If the OTS determines that an institution is in an unsafe or unsound condition,
or if the institution is deemed to be engaging in an unsafe and unsound
practice, the OTS may, if the institution is well capitalized, reclassify it as
adequately capitalized; if the institution is adequately capitalized but not
well capitalized, require it to comply with restrictions applicable to
undercapitalized institutions; and, if the institution is undercapitalized,
require it to comply with certain restrictions applicable to significantly
undercapitalized institutions. Finally, pursuant to an interagency agreement,
the FDIC can examine any institution that has a substandard regulatory
examination score or is considered undercapitalized without the express
permission of the institution's primary regulator.
OTS capital regulations require savings associations to meet three capital
standards:
- - tangible capital equal to at least 1.5% of total adjusted assets,
- - leverage capital (core capital) equal to 4.0% of total adjusted assets, and
- - risk-based capital equal to 8.0% of total risk-weighted assets.
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These capital requirements are viewed as minimum standards by the OTS, and most
institutions are expected to maintain capital levels well above the minimum. In
addition, the OTS regulations provide that minimum capital levels higher than
those provided in the regulations may be established by the OTS for individual
savings associations, upon a determination that the savings association's
capital is or may become inadequate in view of its circumstances. The Savings
Bank is not subject to any such individual minimum regulatory capital
requirements. The Savings Bank's regulatory capital exceeds all minimum
regulatory capital requirements as of September 30, 2002.
The Home Owners' Loan Act, or HOLA, permits savings associations not in
compliance with the OTS capital standards to seek an exemption from certain
penalties or sanctions for noncompliance. Such an exemption will be granted only
if certain strict requirements are met, and must be denied under designated
circumstances. If an exemption is granted by the OTS, the savings association
still may be subject to enforcement actions for other violations of law or
unsafe or unsound practices or conditions.
LOANS-TO-ONE-BORROWER LIMITATIONS. Savings associations generally are subject to
the lending limits applicable to national banks. With certain limited
exceptions, the maximum amount that a savings association or a national bank may
lend to any borrower, including certain related entities of the borrower, at one
time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily marketable collateral. Savings associations are
additionally authorized to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, by order of the Director of OTS, in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus
for the purpose of developing residential housing, provided:
- - the purchase price of each single-family dwelling in the development does not
exceed $500,000;
- - the savings association is in compliance with its fully phased-in capital
requirements;
- - the loans comply with applicable loan-to-value requirements; and
- - the aggregate amount of loans made under this authority does not exceed 150%
of unimpaired capital and surplus.
At September 30, 2002, the Savings Bank's loans-to-one-borrower limit was $1.2
million based upon the 15% of unimpaired capital and surplus measurement. At
September 30, 2002, the Savings Bank's largest single lending relationship had
an outstanding balance of $907,500, and consisted of a loan secured by real
estate being developed for single-family residential construction located in
Ohio, which was performing in accordance with its terms.
QUALIFIED THRIFT LENDER TEST. Savings associations must meet a qualified thrift
lender, or QTL, test, which test may be met either by maintaining a specified
level of assets in qualified thrift investments as specified by the HOLA, or by
meeting the definition of a "domestic building and loan association" under the
Internal Revenue Code of 1986, as amended, or the Code. Qualified thrift
investments are primarily residential mortgages and related investments,
including certain mortgage related securities. The required percentage of
investments under the HOLA is 65% of assets while the Code requires investments
of 60% of assets. An association must be in compliance with the QTL test or the
definition of domestic building and loan association on a monthly basis in nine
out of every 12 months. Associations that fail to meet the QTL test will
generally be prohibited from engaging in any activity not permitted for both a
national bank and a savings association. As of September 30, 2002, the Savings
Bank was in compliance with its QTL requirement and met the definition of a
domestic building and loan association.
AFFILIATE TRANSACTIONS. Transactions between a savings association and its
"affiliates" are quantitatively and qualitatively restricted under the Federal
Reserve Act. The Federal Reserve Board has also recently issued Regulation W,
which codifies prior regulations under Sections 23A and 23B of the Federal
Reserve Act and interpretative guidance with respect to affiliate transactions.
The OTS has issued proposed regulations which implement Regulation W. Regulation
W incorporates the exemption from the affiliate transaction rules but expands
the exemption to cover the purchase of any type of loan or extension of credit
from an
19
<page>
affiliate. Affiliates of a savings association include, among other entities,
the savings association's holding company and companies that are under common
control with the savings association. The Company is considered to be affiliate
of the Savings Bank. In general, a savings association or its subsidiaries are
limited in their ability to engage in "covered transactions" with affiliates:
- - to an amount equal to 10% of the association's capital and surplus, in the
case of covered transactions with any one affiliate; and
- - to an amount equal to 20% of the association's capital and surplus, in the
case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction"
includes:
- - a loan or extension of credit to an affiliate;
- - a purchase of investment securities issued by an affiliate;
- - a purchase of assets from an affiliate, with some exceptions;
- - the acceptance of securities issued by an affiliate as collateral for a loan
or extension of credit to any party; and
- - the issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations:
- - a savings association may not make a loan or extension of credit to an
affiliate unless the affiliate is engaged only in activities permissible for
bank holding companies;
- - a savings association may not purchase or invest in securities of an affiliate
other than shares of a subsidiary;
- - a savings association and its subsidiaries may not purchase a low-quality
asset from an affiliate;
- - covered transactions and other specified transactions between a savings
association or its subsidiaries and an affiliate must be on terms and conditions
that are consistent with safe and sound banking practices; and
- - with some exceptions, each loan or extension of credit by a savings
association to an affiliate must be secured by collateral with a market value
ranging from 100% to 130%, depending on the type of collateral, of the amount of
the loan or extension of credit.
The OTS regulations generally exclude all non-bank and non-savings association
subsidiaries of savings associations from treatment as affiliates, except to the
extent that the OTS or the Federal Reserve Board decides to treat these
subsidiaries as affiliates. The regulations also require savings associations to
make and retain records that reflect affiliate transactions in reasonable detail
and provide that specified classes of savings associations may be required to
give the OTS prior notice of affiliate transactions.
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CAPITAL DISTRIBUTION LIMITATIONS. OTS regulations impose limitations upon all
capital distributions by savings associations, like cash dividends, payments to
repurchase or otherwise acquire its shares, payments to stockholders of another
institution in a cash-out merger and other distributions charged against
capital. Under these regulations, a savings association may, in circumstances
described therein:
- - be required to file an application and await approval from the OTS before it
makes a capital distribution;
- - be required to file a notice 30 days before the capital distribution; or
- - be permitted to make the capital distribution without notice or application to
the OTS.
The OTS regulations require a savings association to file an application if:
- - it is not eligible for expedited treatment of its other applications under OTS
regulations;
- - the total amount of all of capital distributions, including the proposed
capital distribution, for the applicable calendar year exceeds its net income
for that year to date plus retained net income for the preceding two years;
- - it would not be at least adequately capitalized under the prompt corrective
action regulations of the OTS following the distribution; or
- - the association's proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation or agreement between the savings
association and the OTS or the FDIC, or violate a condition imposed on the
savings association in an OTS-approved application or notice.
In addition, a savings association must give the OTS notice of a capital
distribution if the savings association is not required to file an application,
but:
- - would not be well capitalized under the prompt corrective action regulations
of the OTS following the distribution;
- - the proposed capital distribution would reduce the amount of or retire any
part of the savings association's common or preferred stock or retire any part
of debt instruments like notes or debentures included in capital, other than
regular payments required under a debt instrument approved by the OTS; or
- - the savings association is a subsidiary of a savings and loan holding company.
If neither the savings association nor the proposed capital distribution meet
any of the above listed criteria, the OTS does not require the savings
association to submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital distribution that
would otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings associations have
a responsibility under the Community Reinvestment Act and related regulations of
the OTS to help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. An
institution's failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities and the denial of applications. In addition, an institution's failure
to comply with the Equal Credit Opportunity Act and the Fair Housing Act could
result in the OTS, other federal regulatory agencies and/or the Department of
Justice taking enforcement actions against the institution. Based on its most
recent examination, the Savings Bank received a satisfactory rating with respect
to its performance pursuant to the Community Reinvestment Act.
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<page>
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member of the Federal Home
Loan Bank, or FHLB, system. Among other benefits, each FHLB serves as a reserve
or central bank for its members within its assigned region. Each FHLB is
financed primarily from the sale of consolidated obligations of the FHLB system.
Each FHLB makes available loans or advances to its members in compliance with
the policies and procedures established by the board of directors of the
individual FHLB. As an FHLB member, the Savings Bank is required to own capital
stock in an FHLB in an amount equal to the greater of:
- - 1% of its aggregate outstanding principal amount of its residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
calendar year; or
- - 5% of its FHLB advances or borrowings.
The Savings Bank's required investment in FHLB stock, based on September 30,
2002 financial data, was $102,171. At September 30, 2002, the Savings Bank had
$681,200 of the FHLB of Cincinnati stock.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain noninterest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non personal time deposits. At September 30, 2002, the
Savings Bank was in compliance with these requirements.
ACTIVITIES OF SUBSIDIARIES. A savings association seeking to establish a new
subsidiary, acquire control of an existing company or conduct a new activity
through a subsidiary must provide 30 days prior notice to the FDIC and the OTS
and conduct any activities of the subsidiary in compliance with regulations and
orders of the OTS. The OTS has the power to require a savings association to
divest any subsidiary or terminate any activity conducted by a subsidiary that
the OTS determines to pose a serious threat to the financial safety, soundness
or stability of the savings association or to be otherwise inconsistent with
sound banking practices.
RECENT BANKING LEGISLATION.
USA PATRIOT ACT OF 2001. In October 2001, the USA Patriot Act of 2001 was
enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C. which occurred on September 11, 2001. The Patriot Act is
intended is to strengthen U.S. law enforcement's and the intelligence
communities' abilities to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial institutions of all
kinds is significant and wide ranging. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and imposes various
regulations, including standards for verifying client identification at account
opening, and rules to promote cooperation among financial institutions,
regulators and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering.
FINANCIAL SERVICES MODERNIZATION LEGISLATION. In November 1999, the
Gramm-Leach-Bliley Act of 1999, or the GLB, was enacted. The GLB repeals
provisions of the Glass-Steagall Act which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities, and which restricted officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in specified
securities activities.
In addition, the GLB also contains provisions that expressly preempt any state
law restricting the establishment of financial affiliations, primarily related
to insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and expanding
the Bank Holding Company Act framework to permit a holding company to engage in
a full range of financial activities through a new entity known as a "financial
holding company." "Financial activities" is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
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The GLB provides that no company may acquire control of an insured savings
association unless that company engages, and continues to engage, only in the
financial activities permissible for a financial holding company, unless the
company is grandfathered as a unitary savings and loan holding company. The
Financial Institution Modernization Act grandfathers any company that was a
unitary savings and loan holding company on May 4, 1999 or became a unitary
savings and loan holding company pursuant to an application pending on that
date.
The GLB also permits national banks to engage in expanded activities through the
formation of financial subsidiaries. A national bank may have a subsidiary
engaged in any activity authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the Bank Holding Company
Act or permitted by regulation.
To the extent that the GLB permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The GLB is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis
and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of
competition that the Company faces from larger institutions and other types of
companies offering financial products, many of which may have substantially more
financial resources than the Company has.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
The SOA is the most far-reaching U.S. securities legislation enacted in some
time. The SOA generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the Securities and Exchange
Commission, or the SEC, under the Securities Exchange Act of 1934, or the
Exchange Act. Given the extensive SEC role in implementing rules relating to
many of the SOA's new requirements, the final scope of these requirements
remains to be determined.
The SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller
General. The SOA represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
The SOA addresses, among other matters:
- - audit committees for all reporting companies;
- - certification of financial statements by the chief executive officer and the
chief financial officer;
- - the forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer's securities by directors and senior officers in the
twelve month period following initial publication of any financial statements
that later require restatement;
- - a prohibition on insider trading during pension plan black out periods;
- - disclosure of off-balance sheet transactions;
- - a prohibition on personal loans to directors and officers; expedited filing
requirements for Forms 4's;
- - disclosure of a code of ethics and filing a Form 8-K for a change or waiver of
such code;
- - "real time" filing of periodic reports;
- - the formation of a public accounting oversight board;
- - auditor independence; and
- - various increased criminal penalties for violations of securities laws.
The SOA contains provisions which became effective upon enactment on July 30,
2002 and provisions which will become effective from within 30 days to one year
from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.
FEDERAL TAXATION
GENERAL. The Company and Savings Bank are subject to the generally applicable
corporate tax provisions of the Code, and Savings Bank is subject to certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters material to the
taxation of the Company and the Savings Bank and is not a comprehensive
discussion of the tax rules applicable to the Company and Savings Bank.
BAD DEBT RESERVES. Under the Small Business Job Protection Act of 1996, the
Savings Bank is required to use the Experience Method (a six-year moving average
of the Savings Bank's actual loss experience) of computing additions to its bad
debt reserve for taxable years beginning with the Savings Bank's taxable year
beginning January 1, 1996. At December 31, 2001, the federal income tax reserves
of the Savings Bank included $1.3 million for which no federal income tax has
been provided.
23
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OTHER MATTERS. Federal legislation is introduced from time to time that would
limit the ability of individuals to deduct interest paid on mortgage loans.
Individuals are currently not permitted to deduct interest on consumer loans.
Significant increases in tax rates or further restrictions on the deductibility
of mortgage interest could adversely affect the Savings Bank.
The Savings Bank's federal income tax returns for the tax years ended December
31, 1999 forward are open under the statute of limitations and are subject to
review by the IRS.
STATE TAXATION
The Company is subject to a Delaware franchise tax based on the Company's
authorized capital stock or on its assumed par and no-par capital, whichever
yields a lower result. Under the authorized capital method, each share is taxed
at a graduated rate based on the number of authorized shares with a maximum
aggregate tax of $150,000 per year. Under the assumed par-value capital method,
Delaware taxes each $1,000,000 of assumed par-capital at the rate of $200.
The Company will be subject to an Ohio franchise tax only to the extent it is
determined to be doing business in Ohio. The Company, a Delaware corporation,
does not expect to transact business in Ohio. To the extent that the Ohio
franchise tax is determined to apply to the Company, the tax is computed based
on the greater of a Company's tax liability as determined under separate net
worth and net income computations. The Company would exclude its investment in
the Savings Bank in determining its tax liability under the net worth
computation. The tax liability under the net worth computation will be computed
at 0.014% of the Company's net taxable value. The tax liability under the net
income method would be computed at a graduated rate not exceeding 8.72% of the
Company's Ohio taxable income.
The Savings Bank is subject to an Ohio franchise tax based on its net worth plus
certain reserve amounts. Total net worth for this purpose is reduced by certain
exempted assets. The resultant net worth is taxed at a rate of 1.3% for the 2002
return, which is based on net worth as of December 31, 2001.
The Savings Bank's state franchise tax returns for the tax years ended December
31, 1999 forward are open under the statute of limitations and are subject to
review by state taxing authorities.
EMPLOYEES
The Company has 19 full-time employees and 2 part-time employees as of September
30, 2002. Only the President and Comptroller of the Company and Bank, each
office served by the same person at each entity, have employment agreements with
the Company or Bank.
24
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal executive office is located at 415 Center Street,
Ironton, Ohio 45638. The following table sets forth certain information with
respect to the offices and other properties of the Savings Bank at September 30,
2002.
Net Book Value
Description/Address Leased/Owned of Property Deposits
- ----------------------------------- -------------- ---------------- ----------
(In Thousands)
MAIN OFFICE:
415 Center Street
Ironton, Ohio 45638 Owned $ 901 $ 36,765
BRANCH OFFICE:
201 State Street
Proctorville, Ohio 45669 Owned $ 704 $ 12,985
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or to
which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of First Federal Financial Bancorp, Inc. is listed for
quotation on the OTC Bulletin Board under the symbol "FFFB". The stock was
issued on June 4, 1996 at $10.00 per share. As of December 19, 2002, there were
147 stockholders of record and 461,622 outstanding shares of common stock.
The following table sets forth the high and low closing bid prices as reported
by the National Association of Securities Dealers, Inc. and dividends declared
per share of common stock for fiscal years 2001 and 2002:
Price Per Share
------------------------------- Dividends
Quarter Ended High Low Declared
------------------- ---------- --------- -----------
2001
December 31, 2000 11 1/2 10 13/16 .07
March 31, 2001 11 3/4 10 13/16 .07
June 30, 2001 11 7/8 11 1/10 .07
September 30, 2001 12 11 11/20 .07
2002
December 31, 2001 13 11 11/20 .07
March 31, 2002 15 1/4 14 .07
June 30, 2002 15 14 10/91 .07
September 30, 2002 15 3/4 14 13/20 .07
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations, and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company is a Delaware corporation organized in 1996 by First Federal Savings
and Loan Association of Ironton (the "Association") for the purpose of acquiring
all of the capital stock of First Federal Savings Bank of Ironton (the "Bank")
issued in the conversion of the Association from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings bank (the
"Conversion"). The Conversion was completed on June 3, 1996. The only
significant assets of the Company are the capital stock of the Bank and the
remaining net conversion proceeds retained by the Company. To date, the business
of the Company has consisted of the business of the Bank.
The Bank conducts business from its main office located in Ironton, Ohio and one
full-service branch office located in Proctorville, Ohio. In October, the
Company acquired Lincoln Savings and Loan Association, which maintains one
office in Ironton, Ohio. The Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC") to the maximum extent permitted by law. At September 30, 2002, the
Company had total consolidated assets of $68.9 million, total consolidated
liabilities of $59.8 million, and total stockholders' equity of $9.1 million.
The Bank is primarily engaged in attracting deposits from the general public and
using those funds to originate loans secured by single-family residences located
in Lawrence County and surrounding counties in Southern Ohio and to invest in
mortgage-backed securities and United States Government and federal agency
securities. To a lesser extent, the Bank also makes consumer loans and loans
secured by savings accounts.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earnings assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
which consist of interest-bearing checking accounts, passbook savings accounts,
certificates of deposit and advances from the FHLB. The Company's net income is
also affected by its provision for loan losses, as well as its non-interest
income, including fees and gains or losses on sales of assets, its operating
expenses, including compensation and benefits expenses, occupancy and equipment
expenses, federal deposit insurance premiums, miscellaneous other expenses and
federal income taxes.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are contained
herein that are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Bank
operates), the impact of competition for the Bank's customers from other
providers of financial services, the impact of government legislation and
regulation (which change from time to time and over which the Bank has no
control), and other risks detailed herein and in the Company's other Securities
and Exchange Commission filings. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements, to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-QSB to be filed by the Company in 2003 and any Current
Reports on Form 8-K filed by the Company.
27
<page>
FINANCIAL CONDITION
ASSETS. Total assets decreased by $2.1 million, or 3.0%, from $71.0 million at
September 30, 2001 to $68.9 million at September 30, 2002. The decrease
consisted primarily of decreases in loans receivable of $2.6 million, and
mortgage-backed securities (held to maturity and available for sale) of $1.6
million, partially offset by increases in investment securities of $2.1 million
and cash and cash equivalents of $.5 million.
CASH AND CASH EQUIVALENTS. These balances consist of cash on hand and
interest-bearing checking accounts and overnight deposit accounts in other
financial institutions. Cash and cash equivalents increased $.5 million,
totaling $2.7 million at September 30, 2002 as compared to $2.2 million at
September 30, 2001. The increase resulted from net cash flows from operating
activities of $.9 million and from investing activities of $2.4 million, offset
by net cash flows used for financing activities of $2.8 million.
INVESTMENT SECURITIES. Investment securities consist primarily of U.S.
Government agency securities and obligations of states and political
subdivisions. Investment securities, both held to maturity and available for
sale, increased $2.1 million, or 60.0%, from $3.5 million at September 30, 2001
to $5.6 million at September 30, 2002.
LOANS RECEIVABLE. The Company's loans receivable, net, decreased by $2.6
million, or 5.0%, from $52.3 million at September 30, 2001 to $49.7 million at
September 30, 2002. Total loan originations during the year amounted to $11.4
million, of which $6.8 million were for single-family residential loans within
the Company's local trade area.
LOAN CONCENTRATIONS. The Company does not have a concentration of its loan
portfolio in any one industry or to any one borrower. Real estate lending (both
mortgage and construction loans) continues to be the largest component of the
loan portfolio, representing $46.6 million, or 92.4%, of total gross loans
outstanding at September 30, 2002, while consumer loans, including installment
loans, loans secured by deposit accounts and unsecured loans, totaled $3.8
million, or 7.6%, of total gross loans outstanding.
The Company's lending is concentrated to borrowers who reside in and/or which
are collateralized by real estate and property located in Lawrence and Scioto
County, Ohio, and Boyd and Greenup County, Kentucky. Employment in these areas
is highly concentrated in the petroleum, iron and steel industries. Therefore,
many debtors' ability to honor their contracts is dependent upon these economic
sectors.
ALLOWANCE FOR LOAN LOSSES. The Company's policy is to establish an allowance for
estimated losses on loans when it determines that a significant and probable
decline in value occurs. The allowance for losses on loans is maintained at a
level believed adequate by management to absorb estimated losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income. The Company's allowance for loan losses has historically
been predicated on its low loss experience.
The allowance for loan losses as a percentage of total loans increased slightly
from .47% at September 30, 2001 to .59% at September 30, 2002. The total dollar
amount of the allowance increased from $248,000 at September 30, 2001 to
$293,000 at September 30, 2002.
Charge-off activity for the year ended September 30, 2002 totaled $40,595 as
compared to $105,698 for the preceding year. Recoveries totaled $5,055 and
$1,550 for the years ended September 30, 2002 and 2001, respectively. Of the
$40,545 of charge-offs in 2002, $33,347 consisted of consumer loans with the
remaining $7,248 attributable to real estate loans.
28
<page>
The Company had $206,000 and $204,000 of non-accrual loans at September 30, 2002
and 2001, respectively. At the same dates, there were loans of $17,000 and
$7,000 greater than 90 days delinquent which were still accruing interest.
The Company had no troubled debt restructurings during the years ended September
30, 2002 and 2001.
Management has determined that the allowance for loan losses is adequate at
September 30, 2002 and 2001.
MORTGAGE-BACKED SECURITIES. The Company invests in both fixed-rate and
adjustable-rate mortgage-backed securities, which are classified either as held
to maturity or available for sale. Aggregate balances of mortgage-backed
securities decreased $1.6 million, or 15.2%, totaling $8.9 million at September
30, 2002 and $10.5 million at September 30, 2001. During the year ended
September 30, 2002, there was $1.7 million of mortgage-backed securities
purchased, and $3.3 million in principal repayments. The market value of the
available for sale portfolio increased $.1 million.
DEPOSITS. The Company's deposit accounts consist of passbook savings accounts,
certificates of deposit and checking accounts. Deposits decreased $1.3 million,
or 2.5%, from $51.1 million at September 30, 2001 to $49.8 million at September
30, 2002. The Savings Bank continues to offer competitive interest rates on
deposit accounts. The increase in deposits was used primarily to fund purchases
of investment securities during the year.
ADVANCES FROM FEDERAL HOME LOAN BANK. The Company utilized $3.6 million in new
advances during the year ended September 30, 2002 to meet its loan demand and
other funding needs. Approximately $4.8 million of advances were repaid during
the year. Outstanding advances totaled $9.6 million at September 30, 2002 as
compared to $10.8 million at September 30, 2001. The Company has ample borrowing
capacity if needed to fund future commitments.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $.4 million, or 4.6%, from
$8.7 million at September 30, 2001, to $9.1 million at September 30, 2001. Net
income during the year of $502,000 was partially offset by dividends paid, the
purchase of treasury stock, and stock released to employee benefit plans.
29
<page>
RESULTS OF OPERATIONS
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The
following table presents for the years indicated the total dollar amount of
interest from average interest-earning assets and the resultant yields, as well
as the interest expense on average interest-bearing liabilities, expressed both
in dollars and rates, and the net interest margin. The table does not reflect
any effect of income taxes. All average balances are based on month-end
balances.
Year Ended September 30,
-----------------------------------------------------------------------------------------
2002 2001
--------------------------------------- ------------------------------------------
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- ------- ----------- ---------- -------
Interest-earning assets:
Loans receivable (1) $ 50,492 $ 3,926 7.78% $ 52,961 $ 4,219 7.97%
Mortgage-backed securities (2) 9,098 434 4.77 9,156 567 6.19
Investment securities (3) 5,255 238 4.53 2,701 167 6.18
Other interest-earning assets 2,171 27 1.24 1571 66 4.20
----------- ---------- ----------- ----------
Total interest-earning assets 67,016 4,625 6.90 66,389 5,019 7.56
---------- ------- ---------- -------
Non-interest earning assets 2,602 2,619
----------- -----------
Total assets $ 69,618 $ 69,008
=========== ===========
Interest-bearing liabilities:
Deposits $ 50,233 1,921 3.82 $ 47,332 2,568 5.21
FHLB advances 9,747 441 4.52 10,318 598 5.80
----------- ---------- ----------- ----------
Total interest-
bearing liabilities 59,980 2,362 3.94 59,650 3,166 5.31
---------- ------- ---------- -------
Non-interest bearing liabilities 593 463
----------- -----------
Total liabilities 60,573 60,113
Stockholders' equity 9,045 8,895
----------- -----------
Total liabilities and
stockholders' equity $ 69,618 $ 69,008
=========== ===========
Net interest income;
interest rate spread $ 2,263 2.96% $ 1,853 2.25%
========== ======= ========== =======
Net interest margin (4) 3.38% 2.79%
======= =======
Average interest-earning
assets to average interest-bearing
liabilities 111.73% 111.30%
======= =======
Year Ended September 30,
---------------------------------------
2000
---------------------------------------
(Dollars in Thousands)
Average Yield/
Balance Interest Rate
----------- ---------- -------
Interest-earning assets:
Loans receivable (1) $ 52,015 $ 3,986 7.66%
Mortgage-backed securities (2) 8,941 540 6.04
Investment securities (3) 2,717 174 6.40
Other interest-earning assets 897 48 5.35
----------- ----------
Total interest-earning assets 64,606 4,748 7.35
---------- -------
Non-interest earning assets 2,263
-----------
Total assets $ 66,869
===========
Interest-bearing liabilities:
Deposits $ 47,509 2,290 4.82
FHLB advances 9,603 583 6.07
----------- ----------
Total interest-
bearing liabilities 57,112 2,873 5.03
---------- -------
Non-interest bearing liabilities 403
-----------
Total liabilities 57,515
Stockholders' equity 9,354
-----------
Total liabilities and
stockholders' equity $ 66,869
===========
Net interest income;
interest rate spread $ 1,875 2.32%
========== =======
Net interest margin (4) 2.90%
=======
Average interest-earning
assets to average interest-bearing
liabilities 113.12%
=======
(1) Includes non-accrual loans.
(2) Includes mortgage-backed securities held to maturity as well as those
available for sale.
(3) Includes investment securities held to maturity as well as those available
for sale.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
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RATE/VOLUME ANALYSIS. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
Year Ended September 30,
--------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000 2000 vs. 1999
------------------------------ ---------------------------- ----------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
----------------- Increase --------------- Increase --------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
------- ------- ---------- ------ ------ ---------- ------ ------ ----------
(In Thousands)
Interest-earning assets:
Loans receivable $ (101) $ (192) $ (293) $ 161 $ 72 $ 233 $ 179 $ 224 $ 403
Mortgage-backed securities (5) (130) (3) (133) 14 13 27 2 (32) (30)
Investment securities (6) (45) 116 71 (6) (1) 7 23 (26) (3)
Other interest-earning assets (47) 8 (39) (10) 28 18 (16) 16 -
------- ------- ---------- ------ ------ ---------- ------ ------ ----------
Total interest-earning assets (323) (71) (394) 159 112 271 188 182 370
------- ------- ---------- ------ ------ ---------- ------ ------ ----------
Interest-bearing liabilities:
Deposits (681) 34 (647) 183 95 278 19 23 (4)
FHLB advances (131) (26) (157) (26) 41 15 63 151 214
------- ------- ---------- ------ ------ ---------- ------ ------ ----------
Total interest-bearing
liabilities (812) 8 (804) 157 136 293 82 128 210
------- ------- ---------- ------ ------ ---------- ------ ------ ----------
Increase (decrease) in net
interest income $ 489 $ (79) $ 410 $ 2 $ (24) $ (22) $ 106 $ 54 $ 160
======= ======= ========== ====== ====== ========== ====== ====== ==========
(5) Includes mortgage-backed securities held to maturity as well as those
available for sale.
(6) Includes investment securities held to maturity as well as those available
for sale.
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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2002 AND 2001
NET INCOME. Net income totaled $502,000 for the year ended September 30, 2002 as
compared to $268,000 for the year ended September 30, 2001, an increase of
$234,000, or 87.3%. Basic and diluted earnings per share were $1.17 and $1.15,
respectively, for the year ended September 30, 2002, as compared to $.61 and
$.61, respectively, for the year ended September 30, 2001. The $234,000 increase
in net income resulted from an increase in net interest income of $410,000, or
22.1%, offset by a decrease in non-interest expense of $4,000, or 3.1%, and
increases in non-interest expense of $18,000, or 1.2%, the provision for loan
losses of $26,000, or 47.3% and the provision for income taxes of $128,000, or
105.8%.
INTEREST INCOME. Interest income decreased $394,000, or 7.9%, from $5,019,000
for the year ended September 30, 2001 to $4,625,000 for the year ended September
30, 2002. The decrease consisted of decreases in interest earned on loans
receivable of $293,000, mortgage-backed securities of $133,000, and other
interest-earning assets of $39,000, offset by an increase in interest earned on
investment securities of $71,000. The decrease in loan interest income was
primarily due to a decline in the average volume of the loan portfolio, and to a
lesser extent, from a decrease in the average yield earned on the loan portfolio
which was experienced industry-wide during 2002. The decrease in interest earned
on mortgage-backed securities was primarily due to a decline in market rates of
interest, while interest earned on other interest-earning assets decreased
primarily due to falling rates of interest during the year on short-term,
interest-bearing deposits. Investment interest income increased primarily due to
an increase in the volume of the investment securities portfolio during the
year.
Overall, the interest-earning asset yield decreased 66 basis points, from 7.56%
for fiscal year 2001 to 6.90% for fiscal year 2002.
INTEREST EXPENSE. Interest expense decreased $804,000, or 25.4%, from $3,166,000
for the year ended September 30, 2001 to $2,362,000 for the year ended September
30, 2002. The decrease consisted of decreases in interest paid on
interest-bearing deposits of $647,000, and on advances from the FHLB of
$157,000. The decrease in interest on deposits was primarily attributable to
lower rates paid during the year, partially offset by an increase in the average
volume of deposits. The Company faces strong competition from other area
institutions for deposits but was able to significantly reduce the rates paid
for deposits during the year due to falling market rates in interest. The
decrease in interest expense on FHLB borrowings was due to a decrease in the
rates paid on advances during the year, and to a lesser extent, from a decline
in the average volume of advances outstanding.
The rate paid on all interest-bearing liabilities decreased 137 basis points,
from 5.31% for fiscal 2001 to 3.94% for fiscal 2002.
PROVISION FOR LOAN LOSSES. For the 2002 fiscal year, the provision for loan
losses totaled $81,000 as compared to $55,000 for fiscal 2001. The 2002 loan
losses were primarily in the consumer loan portfolio which is attributable to a
slowing, local economy. Based on an evaluation of the existing loan portfolio at
September 30, 2002, management increased the provision for loan losses in order
to restore the allowance for loan losses to an adequate level. In providing for
loan losses, management makes a review of non-performing loans, the overall
quality of the loan portfolio, levels of past due loans and prior loan loss
experience.
NON-INTEREST INCOME. The $4,000 decrease in non-interest income, from $128,000
for the year ended September 30, 2001 to $124,000 for the year ended September
30, 2002, was primarily attributable to $12,679 in losses on sales of foreclosed
real estate in 2002 as compared to $9,101 of gains for fiscal 2001, partially
offset by increases in service charges on deposits and other fee income.
NON-INTEREST EXPENSE. The $18,000 increase in non-interest expense, from
$1,537,000 for the year ended September 30, 2001 to $1,555,000 for the year
ended September 30, 2002, consisted primarily of increases
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<page>
in compensation and benefits of $56,000 and other non-interest expenses of
$16,000, partially offset by declines in professional services expenses of
$23,000 and franchise taxes of $24,000.
PROVISION FOR INCOME TAXES. The $128,000 increase in the provision for income
taxes, from $121,000 for the year ended September 30, 2001 to $249,000 for the
year ended September 30, 2002 resulted from the increase in pretax income. The
Company's effective tax rates were 33.2% and 31.3% for the 2002 and 2001 fiscal
years, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND
2000
NET INCOME. Net income totaled $268,000 for the year ended September 30, 2001 as
compared to $356,000 for the year ended September 30, 2000, a decrease of
$88,000, or 24.7%. Basic and diluted earnings per share were $.61 and $.70 for
the years ended September 30, 2001 and 2000, respectively. The $88,000 decrease
in net income resulted from a decrease in net interest income of $22,000, or
1.2%, an increase in non-interest expense of $97,000, or 6.7%, and an increase
in the provision for loan losses of $32,000, or 139.1%, offset by an increase in
non-interest income of $22,000, or 20.8%, and a decrease in the provision for
income taxes of $41,000, or 25.3%.
INTEREST INCOME. Interest income increased $271,000, or 5.7%, from $4,748,000
for the year ended September 30, 2000 to $5,019,000 for the year ended September
30, 2001. The increase consisted of increases in interest earned on loans
receivable $233,000, mortgage-backed securities of $27,000, and other
interest-earning assets of $18,000, offset by a decline in interest earned on
investment securities of $7,000. The increase in loan interest income was
primarily due to increased yields earned on the loan portfolio, and to a lesser
extent, from an increase in the average volume of the loan portfolio. The rates
earned on the Company's variable rate loan portfolio adjust primarily on an
annual basis and thus, will produce overall yields which are six months, to one
year behind the current national market rates of interest. The increases in
interest earned on mortgage-backed securities was due to increases in both rates
and average volume, while interest on other interest-earning assets increased
primarily due to a higher volume of these assets. Investment interest income
declined primarily due to a decline in the yields earned on investment
securities during the year.
Overall, the interest-earning asset yield increased 21 basis points, from 7.35%
for fiscal year 2000 to 7.56% for fiscal year 2001.
INTEREST EXPENSE. Interest expense increased $293,000, or 10.2%, from $2,873,000
for the year ended September 30, 2000 to $3,166,000 for the year ended September
30, 2001. The increase consisted of increases in interest paid on
interest-bearing deposits of $278,000, and on advances from the FHLB of $15,000.
The increase in interest on deposits was primarily attributable to higher rates
paid during the year, and to a lesser extent, from an increase in the average
volume of deposits. The Company faces strong competition from other area
institutions for deposits and has only recently been able to significantly
reduce the rates being paid for deposits. The increase in interest expense on
FHLB borrowings was due to an increase in the average volume of advances
maintained during the year, partially offset by a reduction in the rates paid on
such advances.
The rate paid on all interest-bearing liabilities increased 28 basis points,
from 5.03% for fiscal 2000 to 5.31% for fiscal 2001.
PROVISION FOR LOAN LOSSES. For the 2001 fiscal year, the provision for loan
losses totaled $55,000 as compared to $23,000 for fiscal 2000. The 2001 loan
losses were primarily in the consumer loan portfolio which is attributable to a
slowing, local economy. Based on an evaluation of the existing loan portfolio at
September 30, 2001, management increased the provision for loan losses in order
to restore the allowance for loan losses to an
33
<page>
adequate level. In providing for loan losses, management makes a review of
non-performing loans, the overall quality of the loan portfolio, levels of past
due loans and prior loan loss experience.
NON-INTEREST INCOME. The $22,000 increase in non-interest income, from $106,000
for the year ended September 30, 2000 to $128,000 for the year ended September
30, 2001, was primarily attributable to an increase in other service charges,
commissions and fees of $15,000, and $12,873 in securities losses in the 2000
fiscal year, with no comparable losses during the 2001 fiscal year.
NON-INTEREST EXPENSE. The $97,000 increase in non-interest expense, from
$1,440,000 for the year ended September 30, 2000 to $1,537,000 for the year
ended September 30, 2001, consisted primarily of increases in compensation and
benefits of $34,000, professional services expenses of $26,000 primarily
associated with the Company's adoption of a stockholders' rights plan, and other
non-interest expenses of $27,000, partially offset by declines in franchise
taxes and SAIF deposit insurance premiums of $5,600, and $5,300, respectively.
PROVISION FOR INCOME TAXES. The $41,000 decrease in the provision for income
taxes, from $162,000 for the year ended September 30, 2000 to $121,000 for the
year ended September 30, 2001 resulted from the decrease in pretax income. The
Company's effective tax rates were 31.3% and 31.2% for the 2001 and 2000 fiscal
years, respectively.
ASSET AND LIABILITY MANAGEMENT
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and advances. When interest-earning liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. Finally, a flattening of the "yield curve" (i.e., a
decline in the difference between long- and short-term interest rates) could
adversely impact net interest income to the extent that the Company's assets
have a longer average term than its liabilities. At September 30, 2002, the
ratio of the Company's average interest-earning assets to average
interest-bearing liabilities amounted to 111.73% as compared to 111.30% at
September 30, 2001.
The Company's actions with respect to interest rate risk and its asset/liability
gap management are taken under the guidance of the Savings Bank's Board of
Directors, through its Executive/Loan Committee, which generally meets every two
to three weeks.
34
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The Company attempts to mitigate the interest-rate risk of holding long-term
assets in its portfolio through the origination of adjustable-rate, residential
and commercial mortgage loans, which have interest rates which adjust annually,
and the purchase of mortgage-backed securities, primarily secured by
single-family residential dwellings financed with adjustable-rate mortgages. The
following table presents, as of September 30, information showing the relative
short-term nature of certain of the Company's assets, the maturity proceeds of
which are subject to reinvestment in loans or securities at then market rates:
2002 2001
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Millions)
Adjustable rate:
Single family mortgage loans $ 25.9 68.3% $ 27.4 66.4%
Total loans 32.2 69.0 33.6 63.4
Mortgage-backed securities 5.6 63.6 9.9 94.3
Investment securities (maturities of
five years or less) 1.5 26.8 .7 20.0
As part of its efforts to maximize net interest income and manage the risks
associated with changing interest rates, management of the Savings Bank uses the
"market value of portfolio equity" ("NPV") methodology which the OTS has adopted
as part of its capital regulations. Although the Savings Bank would not be
subject to the NPV regulation because such regulation does not apply to
institutions with less than $300 million in assets and risk based capital in
excess of 12%, the application of the NPV methodology may illustrate the Savings
Bank's interest rate risk.
Under this methodology, interest rate risk exposure is assessed by reviewing the
estimated changes in the Savings Bank's NPV which would hypothetically occur if
interest rates rapidly rise or fall all along the yield curve. Projected values
of NPV at both higher and lower regulatory defined rate scenarios are compared
to base case values (no changes in rates) to determine the sensitivity to
changing interest rates.
35
<page>
Presented below, as of September 30, 2002 and 2001, is an analysis of the
Savings Bank's interest rate risk ("IRR") as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. The table also contains the policy that the Board of Directors
deems advisable in the event of various changes in interest rates. Such limits
have been established with consideration of the impact of various rate changes
and the Savings Bank's currently strong capital position.
Market Value of Portfolio Equity
--------------------------------
Changes in As of September 30, 2002 As of September 30, 2001
Interest Rates Board Limit ------------------------ ------------------------
(Basis Points) % Change $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
- -------------- ----------- --------------- --------------- --------------- ---------------
(Dollars in Thousands)
+300 (30)% $ (1,006) (10)% $ (2,300) (27)%
+200 (20) (386) (4) (1,347) (16)
+100 (10) (75) (1) (617) (7)
- - - - - -
-100 (10) (11) 0 252 3
-200 (20) - - 474 5
As indicated in the table above, a decrease in the Company's exposure to
interest rate risk for 2002 as compared to 2001 would occur in an increasing
interest rate environment. This results primarily from an increase in the
Company's interest-earning assets with variable interest rates.
The OTS uses the above NPV calculation to monitor an institution's IRR. The OTS
has promulgated regulations regarding a required adjustment to the institution's
risk-based capital based on IRR. The application of the OTS' methodology
quantifies IRR as the change in the NPV which results from a theoretical 200
basis point increase or decrease in market interest rates. If the NPV from
either calculation would decrease by more than 2% of the present value of the
institution's assets, the institution must deduct 50% of the amount of the
decrease in excess of such 2% in the calculation of risk-based capital. At
September 30, 2002 and 2001, 2% of the present value of the Savings Bank's
assets was approximately $1.4 million and $1.4 million, respectively, and, as
shown in the table, a 200 basis point increase or decrease in market interest
rates would not significantly impact the Bank's portfolio value. Thus, at
September 30, 2002 and 2001, the Savings Bank would not have a significant
interest rate risk component deducted from its regulatory capital.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government
and government agency obligations and other similar investments having
maturities of five years or less. Such investments are intended to provide a
source of relatively liquid funds upon which the Savings Bank may rely if
necessary to fund deposit withdrawals and for other short-term funding needs.
The required level of such liquid investments is currently 4% of certain
liabilities as defined by the OTS and may be changed to reflect economic
conditions.
The liquidity of the Savings Bank, as measured by the ratio of cash, cash
equivalents, qualifying investments and mortgage-backed securities and interest
receivable on investments and mortgage-backed securities that would qualify
except for the maturity dates, to the sum of total deposits less any share loans
on deposits, averaged 36.4% for the quarter ended September 30, 2002, as
compared to 31.1% for the quarter ended September 30, 2001. At September 30,
2002, the Savings Bank's "liquid" assets totaled approximately $14.9 million,
which was $13.9 million in excess of the current OTS minimum requirement.
The Savings Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, prepayments and maturities of outstanding
loans and mortgage-backed securities, maturities of short-term investments, and
funds
36
<page>
provided from operations. While scheduled loan and mortgage-backed securities
amortization and maturing short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. The Savings Bank
generates cash through its retail deposits and, to the extent deemed necessary,
has utilized borrowings from the FHLB of Cincinnati. Outstanding advances
totaled $9.6 million at September 30, 2002.
Liquidity management is both a daily and long-term function of business
management. The Savings Bank uses its sources of funds primarily to meet its
ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and investment securities. At September 30, 2002, the total approved loan
commitments and unused lines of credit outstanding amounted to $1.5 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
2002 totaled $22.0 million. The Company believes that it has adequate resources
to fund all of its commitments and that it could either adjust the rate of
certificates of deposit in order to retain deposits in changing interest rate
environments or replace such deposits with borrowings if it proved to be
cost-effective to do so.
At September 30, 2002, the Savings Bank had regulatory capital which was well in
excess of applicable limits. At September 30, 2002, the Savings Bank was
required to maintain tangible capital of 1.5% of adjusted total assets, core
capital of 4.0% of adjusted total assets and risk-based capital of 8.0% of
adjusted risk-weighted assets. At September 30, 2002, the Savings Bank's
tangible capital was $7.8 million or 11.5% of adjusted total assets, core
capital was $7.8 million or 11.5% of adjusted total assets and risk-based
capital was $8.1 million or 21.3% of adjusted risk-weighted assets, exceeding
the requirements by $6.8 million, $5.1 million and $5.1 million, respectively.
The Company, as a separately incorporated holding company, has no significant
operations other than serving as sole stockholder of the Savings Bank. On an
unconsolidated basis, the Company has no paid employees. The Company's assets
consist of its investment in the Savings Bank, the Company's loan to the ESOP
and the net proceeds retained from the Conversion, and its sources of income
consist primarily of earnings from the investment of such funds as well as any
dividends from the Savings Bank. The only significant expenses incurred by the
Company relate to its reporting obligations under federal securities laws and
related expenses as a publicly traded company. The Company retained 50% of the
net Conversion proceeds, and management believes that the Company will have
adequate liquidity available to respond to liquidity demands.
Any future cash dividends will be based on a percentage of the Company's
consolidated earnings and should not have a significant impact on its liquidity.
In addition, the Company also has the ability to obtain dividends from the
Savings Bank.
RECENT ACCOUNTING PRONOUNCEMENTS
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS. In October 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS's No. 72 and No. 144 and
Interpretation No. 9. This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation No. 9 and
requires that those transactions be accounted for in accordance with FSAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. The amendment to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, now includes in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor and
depositor-relationship intangible assets and credit cardholder intangible
assets. This Statement is effective for acquisitions occurring on or after
October 1, 2002.
BUSINESS COMBINATIONS. In June 2001, the Financial Accounting Standards Board
(FASB) issued SFAS 141, Business Combinations, which replaces APB Opinion 16.
SFAS 141 requires all business combinations to be
37
<page>
accounted for by the purchase method and eliminates the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
While SFAS 141 will affect how future business combinations, if undertaken, are
accounted for and disclosed in the financial statements, the issuance of the new
guidance had no effect of the Company's results of operations, financial
position, or liquidity during 2002.
GOODWILL AND OTHER INTANGIBLE ASSETS. In conjunction with the issuance of the
new guidance for business combinations, the FASB also issued SFAS 142, Goodwill
and Other Intangible Assets, which addressed the accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion 17.
Under the provisions of SFAS 142, goodwill and certain other intangible assets,
which do not possess finite useful lives, will no longer be amortized into net
income over an estimated life but rather will be tested at least annually for
impairment based on specific guidance provided in the new standard. Intangible
assets determined to have finite lives will continue to be amortized over their
estimated useful lives and also continue to be subject to impairment testing.
The Company is currently evaluating the provisions of the above accounting
pronouncements as they relate to its October 4, 2002 acquisition of Lincoln
Savings and Loan Association (see Note 25 to the consolidated financial
statements).
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes 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.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Savings Bank's assets and liabilities are
critical to the maintenance of acceptable performance levels.
CRITICAL ACCOUNTING POLICIES
The Company considers its Allowance for Loan Losses Policy as a policy critical
to the sound operations of the Savings Bank. The Savings Bank provides for loan
losses each period to include both (a) an estimate of the amount of loan losses
which occurred during the period and (b) the ongoing adjustment of prior
estimates of losses occurring in prior periods. The provision for loan losses
increases the allowance for loan losses which is netted against loans in the
consolidated balance sheet. As losses are determined, they are written off
against the allowance. Recoveries of amounts previously written off and added
back to the allowance. Further information regarding the Company's provision and
allowance for loan losses can be found in Notes 1 and 4 to its September 30,
2002 consolidated financial statements.
38
<page>
ITEM 7. FINANCIAL STATEMENTS.
[Kelley, Galloway & Company, PSC Letterhead]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
First Federal Financial Bancorp, Inc.
Ironton, Ohio 45638
We have audited the accompanying consolidated balance sheets of First Federal
Financial Bancorp, Inc. and subsidiary as of September 30, 2002 and 2001, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years ended September 30, 2002, 2001 and 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Federal Financial Bancorp, Inc. and subsidiary as of September 30, 2002 and
2001, and the results of their operations and their cash flows for the years
ended September 30, 2002, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Kelley, Galloway & Company, PSC
Ashland, Kentucky
October 25, 2002
39
<page>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
2002 2001
------------ ------------
ASSETS
CASH AND CASH EQUIVALENTS, including interest-bearing
deposits of $2,279,677 and $1,827,221, respectively $ 2,669,467 $ 2,196,367
INVESTMENT SECURITIES HELD TO MATURITY, approximate
market value of $4,968,189 and $2,947,593, respectively 4,878,630 2,879,973
INVESTMENT SECURITIES AVAILABLE FOR SALE,
at approximate market value 754,656 659,023
LOANS RECEIVABLE, less allowance for loan losses of
$293,134 and $247,674, respectively 49,706,792 52,274,784
MORTGAGE-BACKED SECURITIES HELD TO MATURITY,
approximate market value of $3,387,820 and
$4,299,156, respectively 3,378,557 4,296,086
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE,
at approximate market value 5,440,200 6,203,315
ACCRUED INTEREST RECEIVABLE 370,275 397,696
FORECLOSED REAL ESTATE 38,747 310,593
OFFICE PROPERTIES AND EQUIPMENT 1,604,557 1,667,884
OTHER ASSETS 125,050 100,360
------------ ------------
$ 68,966,931 $ 70,986,081
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 49,750,208 $ 51,115,536
ADVANCES FROM FEDERAL HOME LOAN BANK 9,611,711 10,837,289
ACCRUED INCOME TAXES PAYABLE:
Current 118,262 (35,975)
Deferred 142,546 130,505
ACCRUED INTEREST PAYABLE 44,300 47,879
OTHER LIABILITIES 176,569 180,597
------------ ------------
Total liabilities 59,843,596 62,275,831
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 1,000,000 shares
authorized; 461,622 and 447,137
shares, respectively, issued and outstanding 4,616 4,471
Employee benefit plans (590,721) (371,793)
Additional paid-in capital 4,409,534 4,254,063
Retained earnings-substantially restricted 5,246,558 4,792,222
Accumulated other comprehensive income 53,348 31,287
------------ ------------
Total stockholders' equity 9,123,335 8,710,250
------------ ------------
$ 68,966,931 $ 70,986,081
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
40
<page>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
INTEREST INCOME:
Loans receivable -
First mortgage loans $ 3,597,781 $ 3,844,648 $ 3,659,298
Consumer and other loans 328,455 375,300 326,594
Mortgage-backed and related securities 434,453 566,333 539,745
Investment securities 238,425 167,323 173,858
Other interest-earning assets 26,272 66,001 48,179
------------ ------------ ------------
Total interest income 4,625,386 5,019,605 4,747,674
------------ ------------ ------------
INTEREST EXPENSE:
Interest-bearing checking 20,502 21,525 22,531
Passbook savings 246,560 233,314 241,533
Certificates of deposit 1,653,671 2,313,571 2,025,630
Advances from Federal Home Loan Bank 441,327 597,758 583,420
------------ ------------ ------------
Total interest expense 2,362,060 3,166,168 2,873,114
------------ ------------ ------------
Net interest income 2,263,326 1,853,437 1,874,560
PROVISION FOR LOAN LOSSES 81,000 55,000 22,500
------------ ------------ ------------
Net interest income after provision for loan losses 2,182,326 1,798,437 1,852,060
------------ ------------ ------------
NON-INTEREST INCOME:
Service charges on deposits 58,776 51,411 54,372
Other service charges, commissions and fees 63,934 57,975 43,013
Gains (losses) on foreclosed real estate (12,679) 9,101 11,112
Securities losses - - (12,873)
Other 13,971 9,268 10,644
------------ ------------ ------------
Total non-interest income 124,002 127,755 106,268
------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and benefits 677,048 620,693 586,911
Occupancy and equipment 145,846 140,750 136,376
SAIF deposit insurance premiums 9,003 9,282 14,612
Directors' fees and expenses 91,459 96,694 91,904
Franchise taxes 101,890 125,671 131,297
Data processing 140,135 134,859 130,948
Advertising 71,683 84,168 76,971
Professional services 122,021 144,639 118,666
Other 196,333 179,838 152,945
------------ ------------ ------------
Total non-interest expense 1,555,418 1,536,594 1,440,630
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 750,910 389,598 517,698
------------ ------------ ------------
PROVISION FOR INCOME TAXES:
Current 249,862 96,349 155,720
Deferred (1,358) 25,637 5,866
------------ ------------ ------------
Total provision for income taxes 248,504 121,986 161,586
------------ ------------ ------------
NET INCOME $ 502,406 $ 267,612 $ 356,112
============ ============ ============
EARNINGS PER SHARE:
BASIC $ 1.17 $ .61 $ .70
============ ============ ============
DILUTED $ 1.15 $ .61 $ .70
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Retained Accumulated
Employee Additional Earnings- Other Total
Common Benefit Paid-in Substantially Comprehensive Stockholders'
Stock Plans Capital Restricted Income (Loss) Equity
----------- ----------- ----------- ------------- ------------- -------------
BALANCES, September 30, 1999 $ 5,516 $ (549,531) $ 5,227,406 $ 4,658,872 $ (59,178) $ 9,283,085
COMPREHENSIVE INCOME:
Net income, 2000 - - - 356,112 - 356,112
Other comprehensive income, net of tax:
Change in unrealized loss on investments
available for sale, net of tax of $39,298 - - - - (80,319) (80,319)
Add reclassification adjustment - - - - 8,496 8,496
-------------
TOTAL COMPREHENSIVE INCOME - - - - - 284,289
ESOP SHARES RELEASED, 4,955
shares; $9.40 average fair market value - 49,550 (2,948) - - 46,602
RRP SHARES AMORTIZED, 3,270 shares - 38,422 - - - 38,422
DIVIDENDS PAID ($.28 per share) - 5,550 134 (141,612) - (135,928)
PURCHASE OF 21,705 TREASURY SHARES (217) - (202,725) (27,246) - (230,188)
----------- ----------- ----------- ------------- ------------- -------------
BALANCES, September 30, 2000 5,299 (456,009) 5,021,867 4,846,126 (131,001) 9,286,282
COMPREHENSIVE INCOME:
Net income, 2001 - - - 267,612 - 267,612
Other comprehensive income, net of tax:
Change in unrealized loss on investments
available for sale, net of tax of $81,570 - - - - 162,288 162,288
-------------
TOTAL COMPREHENSIVE INCOME - - - - - 429,900
ESOP SHARES RELEASED, 4,613
shares; $11.28 average fair market value - 46,130 5,921 - - 52,051
RRP SHARES AMORTIZED, 2,891 shares - 33,966 - - - 33,966
DIVIDENDS PAID ($.28 per share) - 4,120 (1,033) (122,398) - (119,311)
PURCHASE OF 82,755 TREASURY SHARES (828) - (772,692) (199,118) - (972,638)
----------- ----------- ----------- ------------- ------------- -------------
BALANCES, September 30, 2001 4,471 (371,793) 4,254,063 4,792,222 31,287 8,710,250
(continued)
42
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONCLUDED)
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Retained Accumulated
Employee Additional Earnings- Other Total
Common Benefit Paid-in Substantially Comprehensive Stockholders'
Stock Plans Capital Restricted Income (Loss) Equity
----------- ----------- ----------- ------------- ------------- -------------
COMPREHENSIVE INCOME:
Net income, 2002 - - - 502,406 - 502,406
Other comprehensive income, net of tax:
Change in unrealized gain on investments
available for sale, net of tax of $11,365 - - - - 22,061 22,061
-------------
TOTAL COMPREHENSIVE INCOME - - - - - 524,467
ESOP SHARES RELEASED, 4,262
shares; $14.18 average fair market value - 42,620 17,695 - - 60,315
RRP SHARES AMORTIZED, 649 shares - 7,620 - - - 7,620
DIVIDENDS PAID ($.28 per share) - 6,711 2,486 (117,248) - (108,051)
2002 DIRECTORS STOCK PLAN, 21,996 shares 220 (275,879) 205,443 104,701 - 34,485
PURCHASE OF 7,511 TREASURY SHARES (75) - (70,153) (35,523) - (105,751)
----------- ----------- ----------- ------------- ------------- -------------
BALANCES, September 30, 2002 $ 4,616 $ (590,721) $ 4,409,534 $ 5,246,558 $ 53,348 $ 9,123,335
=========== =========== =========== ============= ============= =============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
43
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income $ 502,406 $ 267,612 $ 356,112
Adjustments to reconcile net income
to net cash provided by operating
activities -
Securities losses - - 12,873
Losses (gains) on foreclosed real estate 12,679 (9,101) (11,112)
Provision for loan losses 81,000 55,000 22,500
Depreciation 79,991 78,457 78,343
FHLB stock dividends (32,300) (44,800) (40,300)
RRP compensation 42,105 33,966 38,422
Amortization and accretion, net (32,643) 562 25,560
ESOP compensation 60,315 52,051 46,602
Change in -
Accrued interest receivable 27,421 (17,252) (42,834)
Other assets (24,690) (12,002) 6,049
Current income taxes 154,237 (55,122) 6,756
Deferred income taxes (1,358) 25,609 5,866
Accrued interest payable (3,579) (16,847) 27,711
Other liabilities (4,028) 10,620 10,500
----------- ----------- -----------
Net cash provided by operating activities 861,556 368,753 543,048
----------- ----------- -----------
INVESTING ACTIVITIES:
Net (increase) decrease in loans 2,379,600 712,510 (3,756,900)
Proceeds from maturities and calls of
investment securities held to maturity 3,025,000 700,000 440,000
Purchases of investment securities
held to maturity (4,995,000) (1,348,125) (245,547)
Proceeds from sales, calls and maturities of
investment securities available for sale 655,000 350,000 436,930
Purchases of investment securities
available for sale (750,000) (655,000) -
Principal collected on mortgage-backed
securities held to maturity 909,150 664,249 542,767
Purchases of mortgage-backed
securities held to maturity - (1,090,678) -
Principal collected on mortgage-backed
securities available for sale 2,582,876 354,293 177,230
Purchases of mortgage-backed
securities available for sale (1,740,269) (1,906,555) -
Purchases of FHLB stock - (5,300) (17,100)
Purchases of office properties
and equipment (24,764) (35,622) (29,011)
Proceeds from sale of land 8,100 - -
Proceeds from sales of foreclosed
real estate 366,559 73,503 76,730
----------- ----------- -----------
Net cash provided by (used for) investing activities 2,416,252 (2,186,725) (2,374,901)
----------- ----------- -----------
(continued)
44
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
FINANCING ACTIVITIES:
Dividends paid (108,051) (119,311) (135,928)
Purchase of treasury shares (105,751) (972,638) (230,188)
Proceeds from FHLB advances 3,600,000 6,275,000 19,575,000
Principal paid on FHLB advances (4,825,578) (7,128,010) (15,730,570)
Net increase (decrease) in deposits (1,365,328) 4,749,767 (1,377,681)
------------ ------------ ------------
Net cash provided by (used for) financing activities (2,804,708) 2,804,808 2,100,633
------------ ------------ ------------
INCREASE IN CASH
AND CASH EQUIVALENTS 473,100 986,836 268,780
CASH AND CASH EQUIVALENTS, beginning of year 2,196,367 1,209,531 940,751
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,669,467 $ 2,196,367 $ 1,209,531
============ ============ ============
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate $ 107,392 $ 374,995 $ 13,806
Unrealized holding gain (loss) on securities
available for sale $ 33,426 $ 243,858 $ (108,823)
SUPPLEMENTAL DISCLOSURES:
Federal income taxes paid $ 95,625 $ 151,497 $ 148,966
Interest paid $ 2,365,639 $ 3,183,015 $ 2,845,403
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
45
<page>
FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
First Federal Financial Bancorp, Inc. (the "Company") was incorporated under
Delaware law in February 1996 by First Federal Savings and Loan Association of
Ironton (the "Association") in connection with the conversion of the Association
from a federally-chartered mutual savings and loan association to a
federally-chartered stock savings bank to be known as "First Federal Savings
Bank of Ironton" (the "Bank") and the issuance of the Bank's common stock to the
Company and the offer and sale of the Company's common stock by the Company to
the members of the public, the Association's Board of Directors, its management,
and the First Federal Financial Bancorp, Inc. Employee Stock Ownership Plan (the
"ESOP") (the "Conversion").
As part of the Conversion, the Company issued 671,783 shares of its common
stock. Total proceeds of $6,717,830 were reduced by $537,600 for shares to be
purchased by the ESOP and by approximately $432,000 for conversion expenses. As
a result of the Conversion, the Company contributed approximately $3,145,000 of
additional capital to the Bank and retained the balance of the proceeds.
The Company's principal business is conducted through the Bank which conducts
business from its main office located in Ironton, Ohio, and one full-service
branch located in Proctorville, Ohio. The Bank's deposits are insured by the
Savings Association Insurance Fund ("SAIF") to the maximum extent permitted by
law. The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS"), which is the Bank's chartering authority
and primary regulator. The Bank is also subject to regulation by the Federal
Deposit Insurance Corporation ("FDIC"), as the administrator of the SAIF, and to
certain reserve requirements established by the Federal Reserve Board ("FRB").
The Bank is a member of the Federal Home Loan Bank of Cincinnati ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at September 30, 2002 and 2001, and for
the years ended September 30, 2002, 2001 and 2000, include the accounts of the
Company and the Bank. All significant intercompany transactions and balances
have been eliminated in consolidation. The accompanying financial statements
have been prepared on the accrual basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
46
<page>
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses, and
the effect of prepayments on premiums and discounts associated with investments
and mortgage-backed securities. Management believes that the allowance for loan
losses and the effect of prepayments on premiums and discounts associated with
investments and mortgage-backed securities have been adequately evaluated.
Various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuations of
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowance or adjustments to the valuations based on their
judgments about information available to them at the time of their examination.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents include
cash and interest bearing deposits in other financial institutions. The Company
and Bank maintain cash deposits in other depository institutions which
occasionally exceed the amount of deposit insurance available. Management
periodically assesses the financial condition of these institutions.
Federal regulations require the maintenance of certain daily reserve balances.
Based upon the regulatory calculation, the Bank's reserve requirements at
September 30, 2002 and 2001 were $-0-. However, aggregate reserves (in the form
of vault cash) are maintained to satisfy federal regulatory requirements should
they be needed.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investment securities and mortgage-backed securities held to maturity are
carried at amortized cost, based upon management's intent and their ability to
hold such securities to maturity. Adjustments for premiums and discounts are
recognized in interest income using the interest method over the period to
maturity.
Equity securities that are nonmarketable and restricted are carried at cost. The
Bank is required to maintain stock in the Federal Home Loan Bank of Cincinnati
in an amount equal to 1% of mortgage related assets (residential mortgages and
mortgage-backed securities) or 0.3% of the Bank's total assets at December 31 of
each year. Such stock is carried at cost.
Investment securities and mortgage-backed securities available for sale are
stated at approximate market value, adjusted for amortization of premiums and
accretion of discounts using the interest method. Unrealized gains and losses on
such securities are reported as a separate component of stockholders' equity.
Realized gains and losses on sales of investment securities and mortgage-backed
securities are recognized in the statements of income using the specific
identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net deferred loan origination fees and costs.
It is the policy of the Bank to provide a valuation allowance for estimated
losses on loans when a significant and probable decline in value occurs. The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio,
47
<page>
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic conditions.
Loans are placed on non-accrual when a loan is specifically determined to be
impaired or when principal and interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other non-accrual loans is recognized only to the extent of the interest
payments received.
Unearned income on certain installment loans, home improvement loans and
automobile loans is amortized over the term of the loans using the Rule of 78's
methods.
FORECLOSED REAL ESTATE
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the Bank's cost or the asset's fair value, less estimated costs to sell, which
becomes the property's new basis. Any write-downs based on the asset's fair
value at date of acquisition are charged to the allowance for loan losses. Costs
incurred in maintaining foreclosed real estate and subsequent write-downs to
reflect declines in the fair value of the property are included in expenses.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
transactions recognized for financial reporting purposes and income tax
purposes. Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment accounts are stated at cost. Expenditures which
increase values or extend useful lives of the respective assets are capitalized,
whereas expenditures for maintenance and repairs are charged to expense as
incurred.
DEPRECIATION
The Bank computes depreciation generally on the straight-line method. The
estimated useful lives used to compute depreciation are:
Years
-----
Buildings and improvements 20-50
Furniture, fixtures and equipment 5-10
Automobile 5
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
outstanding common shares outstanding during each period. For diluted earnings
per share, the average number of stock options outstanding is included. Shares
which have not been committed to be released to the ESOP are not considered to
be outstanding for purposes of calculating earnings per share.
48
<page>
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 financial statement presentation. These
reclassifications had no effect on net income.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the consolidated
balance sheet for cash and cash equivalents approximates fair value.
Investment securities and mortgage-backed securities: Fair values for investment
securities and mortgage-backed securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate mortgage loans) are
estimated using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Loan fair value estimates include judgments regarding future expected
loss experience and risk characteristics. The carrying amount of accrued
interest receivable approximates fair value.
Deposits: The fair values disclosed for demand and passbook accounts are, by
definition, equal to the amount payable on demand at the reporting date (that is
their carrying amounts). The fair values for certificates of deposit are
considered to approximate carrying value if they have original maturities of two
years or less. For other certificates of deposit, fair values are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated contractual maturities on such
deposits. The carrying amount of accrued interest payable approximates fair
value.
Advances from Federal Home Loan Bank: Due to the short-term maturities and/or
variable interest rates, the advances from the Federal Home Loan Bank carrying
value approximates fair value.
49
<page>
ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income consists of unrealized securities gains
and losses on investment securities classified as available for sale. In
accordance with Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income", changes in these unrealized gains and losses
are reported, net of tax, as a separate component of stockholders' equity.
(2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consist of the following:
September 30, 2002
--------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------------- ------------ ------------- ---------------
U.S. Government agency
securities $ 3,416,079 $ 58,614 $ 3,788 $ 3,470,905
Obligations of states and
political subdivisions 781,351 34,733 - 816,084
-------------- ------------ ------------- ---------------
4,197,430 93,347 3,788 4,286,989
Restricted Equity Securities:
Stock in FHLB, at cost 681,200 - - 681,200
-------------- ------------ ------------- ---------------
$ 4,878,630 $ 93,347 $ 3,788 $ 4,968,189
============== ============ ============= ===============
September 30, 2001
--------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------------- ------------ ------------- ---------------
U.S. Government agency
securities $ 1,348,223 $ 27,935 $ - $ 1,376,158
Obligations of states and
political subdivisions 882,850 39,685 - 922,535
-------------- ------------ ------------ ---------------
2,231,073 67,620 - 2,298,693
Restricted Equity Securities:
Stock in FHLB, at cost 648,900 - - 648,900
-------------- ------------ ------------ ---------------
$ 2,879,973 $ 67,620 $ - $ 2,947,593
============== ============ ============ ===============
The amortized cost and estimated market value of investment securities held to
maturity at September 30, 2002, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
Estimated
Amortized Market
Cost Value
-------------- -------------
Due in one year or less $ 400,175 $ 404,025
Due after one year through five years 865,874 888,859
Due after five years through ten years 2,691,128 2,735,617
Due after ten years 921,453 939,688
-------------- -------------
$ 4,878,630 $ 4,968,189
============== =============
At September 30, 2002 and 2001, investment securities with a carrying value of
$560,000 were pledged to secure public deposits.
There were no sales of investment securities held to maturity during the years
ended September 30, 2002, 2001 and 2000.
50
<page>
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consist of the following:
September 30, 2002
-----------------------------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
-------------- ---------- ----------- --------------
U.S. Government
agency securities $ 750,467 $ 4,189 $ - $ 754,656
============== ========== =========== ==============
September 30, 2002
-----------------------------------------------------------------------
Gross Gross Carrying
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
-------------- ---------- ----------- --------------
U.S. Government
agency securities $ 655,000 $ 4,023 $ - $ 659,023
============== ========== =========== ==============
The amortized cost and estimated market value of investment securities available
for sale at September 30, 2002, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations without call or prepayment
penalties.
Carrying
Amortized (Market)
Cost Value
--------------- --------------
Due after one year through five years $ 251,560 $ 254,298
Due after five years through ten years 498,907 500,358
--------------- --------------
$ 750,467 $ 754,656
=============== ==============
Gross realized losses from sales of investment securities available for sale
were $12,873 for the year ended September 30, 2000. There were no sales of
investment securities available for sale during the years ended September 30,
2002 and 2001.
51
<page>
(4) LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
2002 2001
-------------- --------------
Real estate loans:
Single family residential $ 37,880,207 $ 41,068,744
Multi-family residential 3,882,734 2,739,089
Commercial real estate 4,816,089 5,088,393
-------------- --------------
Total real estate loans 46,579,030 48,896,226
-------------- --------------
Consumer and other loans:
Loans secured by deposit accounts 607,122 655,806
Home improvement 191,567 236,308
Automobile 964,178 1,002,220
Home equity 428,472 478,374
Other 1,631,478 1,732,678
-------------- --------------
Total consumer and other loans 3,822,817 4,105,386
-------------- --------------
Total loans 50,401,847 53,001,612
Less:
Unearned interest (120,837) (209,016)
Loans in process (130,994) (111,116)
Deferred loan fees and costs (150,090) (159,022)
Allowance for loan losses (293,134) (247,674)
-------------- --------------
Loans receivable, net $ 49,706,792 $ 52,274,784
============== ==============
Weighted average interest rate 7.41% 7.86%
============== ==============
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
2002 2001 2000
------------- -------------- --------------
Balance, beginning of year $ 247,674 $ 296,822 $ 292,500
Provision charged to expense 81,000 55,000 22,500
Loans charged off (40,595) (105,698) (24,491)
Loans recovered 5,055 1,550 6,313
------------- -------------- --------------
Balance, end of year $ 293,134 $ 247,674 $ 296,822
============= ============== ==============
Loans on which the accrual of interest had been discontinued or reduced and for
which impairment had not been recognized totaled approximately $206,000,
$204,000 and $206,000, at September 30, 2002, 2001 and 2000, respectively.
Interest income which would have been recognized under the original terms of
these contracts was $10,493, $5,746 and $7,086, respectively.
The Bank is not committed to lend additional funds to debtors whose loans are in
nonaccrual status.
The Bank is principally a local lender and, therefore, has a significant
concentration of loans to borrowers who reside in and/or which are
collateralized by real estate located in Lawrence and Scioto County, Ohio, and
Boyd and Greenup County, Kentucky. Employment in these areas is highly
concentrated in the petroleum, iron and steel industries. Therefore, many
debtors' ability to honor their contracts is dependent upon these economic
sectors.
The aggregate amount of loans by the Bank to its directors and executive
officers, including loans to related persons and entities, was $54,981 and
$6,274 at September 30, 2002 and 2001, respectively. Management's opinion is
that these loans compare favorably to other loans made in the ordinary course of
business. An analysis of the activity of loans to directors and executive
officers is as follows:
Year Ended
September 30,
----------------------------------
2002 2001
--------------- --------------
Balance, beginning of year $ 6,274 $ 193,868
New loans advanced 50,000 -
Repayments (1,293) (187,594)
--------------- --------------
Balance, end of year $ 54,981 $ 6,274
=============== ==============
52
<page>
(5) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity at September 30 consist of the
following:
2002
----------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------------- ---------- -------------- --------------
FHLMC Certificates $ 886,035 $ 3,254 $ 4,006 $ 885,283
FNMA Certificates 717,885 5,020 3,557 719,348
FNMA and FHLMC CMO's 1,774,637 18,127 9,575 1,783,189
-------------- ---------- -------------- --------------
$ 3,378,557 $ 26,401 $ 17,138 $ 3,387,820
============== ========== ============== ==============
Weighted average rate 6.28%
==============
2001
----------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------------- ---------- -------------- --------------
FHLMC Certificates $ 1,160,070 $ 2,906 $ 12,779 $ 1,150,197
FNMA Certificates 1,034,456 2,537 21,642 1,015,351
GNMA Certificates 15,066 1,770 - 16,836
FNMA and FHLMC CMO's 2,086,494 30,278 - 2,116,772
-------------- ----------- -------------- ---------------
$ 4,296,086 $ 37,491 $ 34,421 $ 4,299,156
============== ========== ============== ==============
Weighted average rate 6.25%
==============
There were no sales of mortgage-backed securities held to maturity during the
years ended September 30, 2002, 2001 and 2000.
(6) MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale at September 30 consist of the
following:
2002
----------------------------------------------------------------
Gross Gross Carring
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
-------------- ----------- -------------- ---------------
FHLMC Certificates $ 456,344 $ 4,534 $ 450 $ 460,428
FNMA Certificates 1,372,145 26,261 107 1,398,299
GNMA Certificates 1,101,802 10,189 1,642 1,110,349
FNMA and FHLMC CMO's 2,433,267 61,352 23,495 2,471,124
-------------- ----------- -------------- --------------
$ 5,363,558 $ 102,336 $ 25,694 $ 5,440,200
============== =========== ============== ==============
Weighted average rate 5.34%
==============
2001
----------------------------------------------------------------
Gross Gross Carring
Amortized Unrealized Unrealized (Market)
Cost Gains Losses Value
-------------- ----------- -------------- ---------------
FHLMC Certificates $ 215,495 $ - $ 1,061 $ 214,434
FNMA Certificates 924,932 - 5,980 918,952
GNMA Certificates 515,195 6,994 1,243 520,946
FNMA and FHLMC CMO's 4,506,345 50,736 8,098 4,548,983
-------------- ----------- -------------- --------------
$ 6,161,967 $ 57,730 $ 16,382 $ 6,203,315
============== =========== ============== ==============
Weighted average rate 5.74%
==============
There were no sales of mortgage-backed securities available for sale during the
years ended September 30, 2002, 2001 or 2000.
53
<page>
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
2002 2001
--------------- -------------
Loans $ 279,573 $ 289,788
Investment securities 58,658 55,979
Mortgage-backed and related securities 32,044 51,929
--------------- -------------
$ 370,275 $ 397,696
=============== =============
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30 are summarized as follows:
2002 2001
--------------- --------------
Land $ 437,171 $ 445,271
Buildings and improvements 1,455,480 1,449,385
Furniture, fixtures and equipment 342,059 321,992
Automobile 20,170 20,170
--------------- --------------
2,254,880 2,236,818
Less - accumulated depreciation (650,323) (568,934)
--------------- --------------
$ 1,604,557 $ 1,667,884
=============== ==============
(9) OTHER ASSETS
Other assets at September 30 are summarized as follows:
2002 2001
--------------- -------------
Prepaid Federal insurance $ 2,111 $ 2,333
Prepaid franchise taxes 24,499 24,994
Other prepaid expenses 98,440 73,033
--------------- -------------
$ 125,050 $ 100,360
=============== =============
54
<page>
(10) DEPOSITS
Deposits at September 30 are summarized as follows:
Weighted
Average Rate
at September 30,
2002 2002 2001
---------------- ---------------------------------- ------------------------------
Amount Percent Amount Percent
---------------- ------------ --------------- -----------
Passbook 2.13% $ 11,966,587 24.0% $ 8,694,594 17.0%
------- ---------------- ------------ --------------- --------
Christmas club 2.25 99,882 .2 95,874 .2
------- ---------------- ------------ --------------- --------
Demand accounts - 1,895,338 3.8 1,468,850 2.9
------- ---------------- ------------ --------------- --------
NOW accounts 1.75 1,334,111 2.7 947,595 1.9
------- ---------------- ------------ --------------- --------
Certificates:
2.0-2.99% 2.72 18,797,420 37.8 - -
3.0-3.99% 3.68 2,380,100 4.8 479,786 .9
4.0-4.99% 4.55 6,504,028 13.1 4,136,272 8.1
5.0-5.99% 5.16 6,420,181 12.9 28,239,604 55.2
6.0-6.99% 6.01 166,540 .3 6,860,072 13.4
7.0-7.99% 7.52 186,021 .4 192,889 .4
------- ---------------- ------------ --------------- --------
3.63 34,454,290 69.3 39,908,623 78.0
------- ---------------- ------------ --------------- --------
3.08% $ 49,750,208 100.0% $ 51,115,536 100.0%
======= ================ ============ =============== ========
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $6,681,000 at September 30, 2002 and 2001.
At September 30, 2002, scheduled maturities of certificates of deposit are as
follows:
Year
Ending
September 30, Amount Percent
- ------------- ---------------- ---------
2003 $ 22,038,145 63.9%
2004 5,875,803 17.1
2005 5,875,661 17.1
2006 664,681 1.9
---------------- ---------
$ 34,454,290 100.0%
================ =========
(11) OTHER LIABILITIES
Other liabilities at September 30 are summarized as follows:
2002 2001
-------------- ------------
Escrow accounts $ 75,505 $ 84,081
Accrued expenses 69,597 68,549
Other liabilities 31,467 27,967
-------------- ------------
$ 176,569 $ 180,597
============== ============
(12) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank at September 30 consist of the
following:
Due in Year
Ending
September 30 2002 2001
- ------------ --------------- ---------------
2002 $ - $ 3,575,000
2003 1,000,000 1,000,000
2004 1,650,000 -
2005 750,000 -
2006 - -
2007 - -
After 2007 6,211,711 6,262,289
--------------- ---------------
$ 9,611,711 $ 10,837,289
=============== ===============
Weighted average rate 4.40% 4.54%
=============== ===============
The advances were collateralized by first mortgage loans totaling $12,014,600
and $13,546,600 at September 30, 2002 and 2001, respectively.
55
<page>
(13) INCOME TAXES
The provision for income taxes differs from the amount computed by applying the
U.S. Federal income tax rate of 34 percent for 2002, 2001, and 2000 to income
before the provision for income taxes as a result of the following:
Year Ended
September 30,
----------------------------------------------------------
2002 2001 2000
------------ ------------- -------------
Expected provision for
income taxes at Federal tax rate $ 255,309 $ 132,463 $ 176,017
Tax-exempt interest (11,983) (13,738) (18,545)
Others, net 5,178 3,261 4,114
------------ ------------- -------------
$ 248,504 $ 121,986 $ 161,586
============ ============= =============
The net deferred income tax liability consists of income taxes applicable to
temporary differences between transactions recognized for financial reporting
and income tax reporting purposes. A deferred tax asset valuation allowance is
established for deferred tax assets not expected to be realized. The deferred
tax assets, deferred tax liabilities, and net deferred tax liabilities at
September 30 consist of the following:
2002 2001
-------------- -------------
Deferred tax assets:
Loan fees $ 51,030 $ 54,067
Bad debts 83,038 67,581
Employee benefit plans 12,829 13,571
-------------- -------------
146,897 135,219
Less - valuation allowance for bad debts (82,013) (82,013)
-------------- -------------
Deferred tax assets 64,884 53,206
-------------- -------------
Deferred tax liabilities:
FHLB stock dividends not currently taxable (150,727) (138,929)
Depreciation (29,220) (30,725)
Unrealized securities gains and losses (27,483) (14,057)
-------------- -------------
Deferred tax liabilities (207,430) (183,711)
-------------- -------------
Net deferred tax liabilities $ (142,546) $ (130,505)
============== =============
Retained earnings at September 30, 2002 and 2001, includes approximately
$1,309,000 for which no deferred Federal income tax liability has been
recognized. These amounts represent an allocation of pre-1987 income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for purposes
other than bad debt losses would create income for tax purposes only, which
would be subject to the then current corporate income tax rate. The unrecorded
deferred income tax liability on the above amounts was approximately $445,000 at
September 30, 2002 and 2001, respectively.
(14) STOCK-BASED COMPENSATION PLANS
STOCK OPTION PLAN
The Company's stockholders approved the Stock Option Plan on December 16, 1996.
A total of 67,178 common shares have been reserved for issuance pursuant to the
Plan, of which 36,224 have been granted at September 30, 2002 and 2001.
Participants vest in the options granted over a five year period.
56
<page>
The Company follows Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, in accounting and reporting for
stock-based compensation. This standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement allows for the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach. Accordingly, no compensation expense has been recognized for the stock
option plan. Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant date consistent with the
provisions of FASB No. 123, the Company's 2002, 2001 and 2000 results of
operations would have been reduced to the pro forma amounts indicated below:
2002 2001 2000
------------ -------------- --------------
Net income:
As reported $ 502,406 $ 267,612 $ 356,112
Pro forma $ 501,099 $ 259,865 $ 351,158
Basic earnings per share:
As reported $ 1.17 $ .61 $ 70
Pro forma $ 1.17 $ .59 $ .69
Diluted earnings per share:
As reported $ 1.15 $ .61 $ .70
Pro forma $ 1.15 $ .59 $ .69
The fair value of each option granted is estimated using the Black-Scholes
option pricing model with the following assumptions:
2002 2001 2000
------------ -------------- --------------
Expected dividend yield $ .28 $ .28 $ .28
Expected stock price volatility 30.09% 32.50% 10.00%
Risk-free interest rate 3.0% 3.50% 6.00%
Expected life of options 2 years 3 years 4 years
A summary of the status of the Company's stock option plan as of September 30 is
as follows:
2002 2001 2000
--------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ---------- ------ ---------- ------ ---------
Outstanding at
beginning of year 36,224 $ 12.00 36,224 $ 12.00 36,224 $ 12.00
Granted - - - - - -
Excercised - - - - - -
Forfeited - - - - - -
-------- --------- --------
Outstanding at
end of year 36,224 $ 12.00 36,224 $ 12.00 36,224 $ 12.00
======== ========= ========
Options exercisable
at year end 36,224 12.00 28,147 12.00 20,641 12.00
Weighted average
fair value of
options granted
during the year $ - $ - $ -
57
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Information pertaining to options outstanding at September 30, 2002 is as
follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- ---------- ------------ ----------
$12.00 - $12.00 36,224 4.7 Years $ 12.00 36,224 $ 12.00
RECOGNITION AND RETENTION PLAN AND TRUST ("RRP")
The Company's stockholders approved the RRP on December 16, 1996. The Company
purchased 26,871 shares in the open market to fully fund the RRP at an aggregate
cost of $315,734. Awards are subject to five year vesting periods and other
provisions as more fully described in the RRP document. The deferred cost of
unearned RRP shares totaled $128,463 and $136,083 at September 30, 2002 and
2001, respectively, and is recorded as a charge against stockholders' equity.
Compensation expense will be recognized ratably over the five year vesting
period only for those shares awarded. Compensation cost charged to expense for
the years ended September 30, 2002, 2001 and 2000 was $7,620, $33,966 and
$38,422, respectively. RRP shares available which have not been awarded totaled
10,933 at September 30, 2002 and 2001. There were 649, 2,891 and 3,270 shares
amortized during the years ended September 30, 2002, 2001 and 2000,
respectively.
2002 Directors Stock Plan
On May 22, 2002, the directors of the Company adopted the 2002 Directors Stock
Plan (the "Directors Plan"). A total of 21,996 shares of common stock were
awarded, 3,666 to each of six (6) directors. On each of the three anniversary
dates of the Directors Plan, 1,222 shares of such stock will become
non-forfeitable unless the forfeitability is accelerated by death or retirement
of a given director/holder. Compensation cost charged to expense for the year
ended September 30, 2002 was $34,485. The deferred cost of unearned shares
totaled $275,879 at September 30, 2002, and is recorded as a charge against
stockholders' equity.
(15) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (the "OTS").
Failure to meet minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material affect on the Bank and the consolidated
financial statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines involving quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). Management believes, as of
September 30, 2002, the Bank meets all capital adequacy requirements to which it
is subject.
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As of September 30, 2002, the most recent notification from the OTS, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, the Bank would
have to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have changed
the Bank's category.
For Capital
Actual Adequacy Purposes
---------------------- ---------------------------------------------------------------
Amount Ratio Amount Ratio
------------ ----- --------------------------------- -------------------------
As of September 30, 2002:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 8,110,461 21.3% LESS THAN OR EQUAL TO $ 3,051,520 LESS THAN OR EQUAL TO 8.0%
Tier I Capital
(to Adjusted Total Assets) $ 7,817,327 11.5% LESS THAN OR EQUAL TO $ 2,721,502 LESS THAN OR EQUAL TO 4.0%
Tangible Capital
(to Adjusted Total Assets) $ 7,817,327 11.5% LESS THAN OR EQUAL TO $ 1,020,563 LESS THAN OR EQUAL TO 1.5%
As of September 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 7,491,763 18.9% LESS THAN OR EQUAL TO $ 3,165,600 LESS THAN OR EQUAL TO 8.0%
Tier I Capital
(to Adjusted Total Assets) $ 7,244,089 10.3% LESS THAN OR EQUAL TO $ 2,809,805 LESS THAN OR EQUAL TO 4.0%
Tangible Capital
(to Adjusted Total Assets) $ 7,244,089 10.3% LESS THAN OR EQUAL TO $ 1,053,677 LESS THAN OR EQUAL TO 1.5%
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
--------------------------------------------
Amount Ratio
---------------------------------- -----
As of September 30, 2002:
Total Risk-Based Capital
(to Risk-Weighted Assets) LESS THAN OR EQUAL TO $ 3,814,400 10.0%
Tier I Capital
(to Adjusted Total Assets) LESS THAN OR EQUAL TO $ 4,082,253 6.0%
Tangible Capital
(to Adjusted Total Assets) LESS THAN OR EQUAL TO $ 3,401,877 5.0%
As of September 30, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) LESS THAN OR EQUAL TO $ 3,957,000 10.0%
Tier I Capital
(to Adjusted Total Assets) LESS THAN OR EQUAL TO $ 4,214,707 6.0%
Tangible Capital
(to Adjusted Total Assets) LESS THAN OR EQUAL TO $ 3,512,256 5.0%
(16) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding commitments
and contingent liabilities that are not reflected in the accompanying financial
statements. The principal commitments of the Bank are loan commitments which
approximated $1,460,000 and $2,300,000 at September 30, 2002 and 2001,
respectively. The Bank uses the same credit policies for making loan commitments
as it does for other loans.
The Bank was not committed to sell or purchase loans or securities at September
30, 2002 or 2001.
(17) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for employees of the Company and the Bank
which became effective upon the Conversion. Full-time employees of the Company
and the Bank who have been credited with at least 1,000 hours of service during
a twelve month period and who have attained age 21 are eligible to participate
in the ESOP. The Company loaned the ESOP $537,430 for the initial purchase of
the ESOP shares. The loan is due and payable in forty-eight (48) equal quarterly
installments of $11,200 beginning June 29, 1996, plus interest at the rate of
8.75% per annum. The Company will make scheduled discretionary cash
contributions to the ESOP sufficient to amortize the principal and interest on
the loan over a period of 12 years. The Company accounts for its ESOP in
accordance with Statement of Position 93-6, "Employer's Accounting For Employee
Stock Ownership Plans." As shares are committed to be released to
59
<page>
participants, the Company reports compensation expense equal to the average
market price of the shares during the period. ESOP compensation expense recorded
during the years ended September 30, 2002, 2001 and 2000 was $60,315, $52,051
and $46,602, respectively. During 2002, 2001 and 2000, 5,093, 5,437 and 5,576
shares were allocated to the employees leaving 22,197 unallocated and unreleased
shares at September 30, 2002.
The Company uses dividends paid on allocated and unallocated ESOP shares to
reduce the outstanding loan balance.
The fair value of the unreleased ESOP shares was approximately $338,000 and
$323,000 at September 30, 2002 and 2001, respectively.
(18) PURCHASE OF COMMON STOCK
The Company purchased 7,511, 82,755 and 21,705 shares of its outstanding common
stock at an aggregate cost of $105,751, $972,638 and $230,188, during the years
ended September 30, 2002, 2001 and 2000, respectively. The purchase of these
shares has been recorded as a purchase of common stock shares, which are
available for reissuance.
(19) EARNINGS PER SHARE
Basic and full dilution Earnings Per Share (EPS) were calculated by dividing the
consolidated net income by the weighted average number of common shares, and
common stock equivalents outstanding, as set forth below. Shares which have not
been committed to be released to the ESOP are not considered to be outstanding
for purposes of calculating EPS.
Income Shares Per Share
Year Ending September 30, (Numerator) (Denominator) Amount
----------- ------------- ---------
2002
Basic EPS $ 502,406 429,904 $ 1.17
Effect of dilutive securities -
options - 5,569 (.02)
----------- ------------- ---------
Diluted EPS $ 502,406 435,473 $ 1.15
=========== ============= =========
2001
Basic EPS $ 267,612 437,347 $ 0.61
Effect of dilutive securities -
options - - -
----------- ------------- ---------
Diluted EPS $ 267,612 437,347 $ 0.61
=========== ============= =========
2000
Basic EPS $ 356,112 505,715 $ 0.70
Effect of dilutive securities -
options - - -
----------- ------------ ---------
Diluted EPS $ 356,112 505,715 $ 0.70
=========== ============ =========
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During the years ended September 30, 2001 and 2000, outstanding options had no
dilutive effect on shares outstanding because the option price exceeded the
average market value of the Company's stock during the years.
(20) DIVIDEND RESTRICTION
At the time of the Conversion, the Bank established a liquidation account of
approximately $5,005,000 (the amount equal to its total retained earnings as of
the date of the latest statement of financial condition appearing in the final
prospectus). The liquidation account will be maintained for the benefit of
eligible deposit account holders who continue to maintain their accounts at the
Bank after the Conversion. The liquidation account will be reduced annually to
the extent that eligible deposit account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
Subsequent to the Conversion, the Bank may not declare or pay cash dividends on
its shares of common stock if the effect thereon would cause stockholders'
equity to be reduced below the amount of the liquidation account or applicable
regulatory capital maintenance requirements, or if such declaration and payment
would otherwise violate regulatory requirements.
(21) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and the estimated fair values of the Company's financial
instruments at September 30 are as follows:
2002 2001
------------------------------ --------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ----------- ----------
Financial assets:
Cash and cash equivalents $ 2,669,467 $ 2,669,467 $ 2,196,367 $ 2,196,367
Loans receivable, less allowance 49,706,792 50,047,134 52,274,784 52,587,677
Investment securities held to
maturity 4,878,630 4,968,189 2,879,973 2,947,593
Investment securities available
for sale 754,656 754,656 659,023 659,023
Mortgage-backed securities held
to maturity 3,378,557 3,387,820 4,296,086 4,299,156
Mortgage-backed securities
available for sale 5,440,200 5,440,200 6,203,315 6,203,315
Accrued interest receivable 370,275 370,275 397,696 397,696
Financial liabilities:
Deposits 49,750,208 49,852,065 51,115,536 51,189,555
Advances from Federal Home
Loan Bank 9,611,711 9,611,711 10,837,289 10,837,289
Accrued interest payable 44,300 44,300 47,879 47,879
The carrying amounts in the preceding tables are included in the consolidated
balance sheets under the applicable captions.
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<page>
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that if the Company were to have
disposed of such items at September 30, 2002 and 2001, the estimated fair values
would necessarily have been achieved at those dates, since market values may
differ depending on various circumstances. The estimated fair values at
September 30, 2002 and 2001 should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the trained work force,
customer goodwill, and similar items.
(22) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly consolidated financial data is as follows:
Fiscal Year 2002
---------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands except per share data)
Total interest income $ 1,221 $ 1,156 $ 1,131 $ 1,116
Total interest expense 701 592 560 509
--------- --------- --------- ---------
Net interest income 520 564 571 607
Provision for loan losses 16 15 15 35
--------- --------- --------- ---------
Net interest income after
provision for loan losses 504 549 556 572
Non-interest income 26 35 39 28
Non-interest expense 406 374 364 415
--------- --------- --------- ---------
Income before provision
for income taxes 124 210 231 185
Provision for income taxes 40 69 77 61
--------- --------- --------- ---------
Net income $ 84 $ 141 $ 154 $ 124
========= ========= ========= =========
Net income per share:
Basic $ .20 $ .33 $ .36 $ .28
========= ========= ========= =========
Diluted $ .20 $ .33 $ .35 $ .27
========= ========= ========= =========
Dividends declared per share $ .07 $ .07 $ .07 $ .07
========= ========= ========= =========
Fiscal Year 2001
---------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
(Dollars in thousands except per share data)
Total interest income $ 1,259 $ 1,254 $ 1,261 $ 1,246
Total interest expense 803 794 800 769
--------- --------- --------- ---------
Net interest income 456 460 461 477
Provision for loan losses 6 13 18 18
--------- --------- --------- ---------
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<page>
Net interest income after
provision for loan losses 450 447 443 459
Non-interest income 30 29 38 37
Non-interest expense 396 375 397 375
--------- --------- --------- ---------
Income before provision
for income taxes 84 101 84 121
Provision for income taxes 25 31 28 39
--------- --------- --------- ---------
Net income $ 59 $ 70 $ 56 $ 82
========= ========= ========= =========
Net income per share:
Basic $ .13 $ .16 $ .13 $ .19
========= ========= ========= =========
Diluted $ .13 $ .16 $ .13 $ .19
========= ========= ========= =========
Dividends declared per share $ .07 $ .07 $ .07 $ .07
========= ========= ========= =========
(23) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for the parent company only (First Federal
Financial Bancorp, Inc.) as of and for the year ended September 30 is as
follows:
BALANCE SHEETS
2002 2001
----------------- -----------------
ASSETS
Cash and cash equivalents $ 406,612 $ 667,801
Investment in subsidiary 7,867,910 7,271,380
Investment securities available for sale 754,656 659,023
Accrued interest receivable 7,511 6,010
Other assets 87,398 17,866
Income taxes refundable 56,072 140,272
Deferred income taxes 565 1,962
----------------- -----------------
$ 9,180,724 $ 8,764,314
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 57,389 $ 54,064
----------------- -----------------
Total liabilities 57,389 54,064
----------------- -----------------
Common stock 4,616 4,471
Employee benefit plans (590,721) (371,793)
Additional paid-in capital 4,409,534 4,254,063
Retained earnings 5,246,558 4,792,222
Accumulated other comprehensive income (loss) 53,348 31,287
----------------- -----------------
Total stockholders' equity 9,123,335 8,710,250
----------------- -----------------
$ 9,180,724 $ 8,764,314
================= =================
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<page>
STATEMENTS OF INCOME
2002 2001
---------------- -----------------
Interest on investment securities
and other interest-earning assets $ 34,363 $ 20,062
Non-interest income - 223
Non-interest expense 145,292 (181,292)
---------------- -----------------
Loss before income taxes and equity in
income of subsidiary (110,929) (161,007)
Credit for income taxes (31,618) (47,054)
---------------- -----------------
Loss before equity in income of subsidiary (79,311) (113,953)
Equity in income of subsidiary 581,717 381,565
---------------- -----------------
Net income $ 502,406 $ 267,612
================ =================
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STATEMENTS OF CASH FLOWS
2002 2001
----------------- ---------------
Operating activities:
Net income $ 502,406 $ 267,612
Adjustments to reconcile net income to net
cash flows provided by operating activities -
Equity in income of subsidiary (581,717) (381,565)
Dividends received from subsidiary - 1,250,000
Accretion (467) -
ESOP compensation 58,794 72,652
Directors' stock plans 42,105 33,966
Change in:
Other assets (69,532) 988
Accrued interest receivable (1,501) 872
Income taxes refundable 84,200 (82,652)
Other liabilities 3,325 3,527
----------------- ---------------
Net cash provided by
operating activities 37,613 1,165,400
----------------- ---------------
Investing activities:
Purchases of investment securities available for sale (750,000) (655,000)
Proceeds from sales, calls and maturities of investment
securities available for sale 655,000 350,000
----------------- ---------------
Net cash used for
investing activities (95,000) (305,000)
----------------- ---------------
Financing activities:
Dividends paid (108,051) (119,311)
Purchase of treasury shares (105,751) (972,638)
----------------- ---------------
Net cash used for
financing activities (213,802) (1,091,949)
----------------- ---------------
Net decrease in cash and cash equivalents (271,189) (231,549)
Cash and cash equivalents, beginning of year 677,801 899,350
----------------- ---------------
Cash and cash equivalents, end of year $ 406,612 $ 677,801
================= ===============
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(24) CAPITAL STOCK
During the year ended September 30, 2001, the stockholders approved an amendment
to the Company's Certificate of Incorporation to reduce the number of authorized
shares from 4,000,000, consisting of 1,000,000 preferred and 3,000,000 common
shares, to 1,500,000, consisting of 500,000 preferred and 1,000,000 common
shares. The Company has not issued any preferred shares since its incorporation.
(25) ACQUISITION OF LINCOLN SAVINGS
On October 4, 2002, the Company acquired Lincoln Savings and Loan Association
("Lincoln"), also of Ironton. The Company acquired all the outstanding shares of
Lincoln for a total cash consideration, including expenses of approximately
$603,500. At September 30, 2002, Lincoln had total assets of approximately
$8,703,000 total liabilities, of approximately $8,504,000, and total
stockholders' equity of approximately $199,000. The adjusted fair value of
Lincoln's stockholders' equity is expected to approximate $513,000.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
NAME POSITION AGE(1) DIRECTOR SINCE(2)
- ------------------- --------------------------- ------------ --------------------
Jeffery W. Clark Comptroller 44 N/A
Edith M. Daniels Director and Secretary 72 1986
Steven C. Milleson Director 50 1990
Thomas D. Phillips Director 64 1973
Edward R. Rambacher Director 57 1986
I. Vincent Rice President and Director 70 1986
(1) As of December 1, 2002.
(2) Includes service as a director the Savings Bank.
THOMAS D. PHILLIPS. Mr. Phillips has been the Chairman of the Board of the
Company since its organization in January 1996. Mr. Phillips was given the title
of Chairman of the Board of the Savings Bank in January 1996. Prior thereto, Mr.
Phillips performed the functions traditionally handled by the Chairman under the
title of President of the Savings Bank since January 1991. Mr. Phillips is the
owner, operator and President of Phillips Funeral Home, Inc. headquartered in
Ironton, Ohio. Mr. Phillips is a member and Past President of the Ironton City
Health Board, the Past President of the Ironton Lions Club, a 25-year Board
member and a member of the Immanuel United Methodist Church, and a member of the
Ironton Elks Lodge #177. Mr. Phillips has been a licensed Funeral Director since
1961 and is a member of the Ohio Funeral Directors Association and the National
Funeral Directors Association.
I. VINCENT RICE. Mr. Rice has been the President of the Company since its
organization in January 1996. Mr. Rice was given the title of President of the
Savings Bank in January 1996. Prior thereto, Mr. Rice performed the functions
traditionally performed by the President under the title Executive Vice
President and Managing Officer of the Savings Bank since January 1994 and Vice
President and Managing Officer since July 1987. Mr. Rice joined the Savings Bank
in July 1985 after 25 years experience with a local commercial bank. Mr. Rice is
the past Chairman of the Lawrence County United Way campaign, a former member of
the Chesapeake and Ironton Lions Club, a member of the Ironton Rotary Club, and
a 48-year member and Treasurer, Deacon and Music Director of the Ice Creek
Baptist Church.
EDITH M. DANIELS. Ms. Daniels has served as Corporate Secretary of the Company
since its organization in January 1996. Ms. Daniels has served as Corporate
Secretary of the Savings Bank since January 1976. Ms. Daniels joined the Savings
Bank in March 1956 and served the Savings Bank in various positions until her
retirement in December 1995. Ms. Daniels was a director of the Ironton American
Red Cross chapter for six years.
STEVEN C. MILLESON. Dr. Milleson is a doctor of optometry and owner and operator
of the Ironton Vision Center, Inc. located in Ironton, Ohio. Dr. Milleson has
been a member and Past President of the Ironton Lions Club, a founding member
and past Board member of The Tri-State Fair and Regatta, a past Board member of
the Hecla Water Association, and an original member of the Board of the Ashland
Youth Ballet Company and its current President of the Board and Chairman of the
Production Committee. Dr. Milleson is a member of the St. Joseph Catholic
Church.
EDWARD R. RAMBACHER. Mr. Rambacher is a Certified Public Accountant and is
President and Chief Executive Officer of C.A. Rambacher & Co., a professional
accounting firm, located in Ironton, Ohio. Mr. Rambacher is a member and Past
Director and President of the Ironton Rotary Club and a 18 year Board member of
the Central Christian Church.
William P. Payne, a director of the Company and the Savings Bank, died in
October, 2002. James E. Waldo, a director emeritus of the Company, died in April
of 2002.
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<page>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers, directors and
persons who own more than 10% of the Company's Common Stock to file reports of
ownership and changes in ownership with the Commission and the NASD. Officers,
directors and greater than 10% stockholders are required by regulation to
furnish the Company with copies of all forms they file pursuant to Section 16(a)
of the Exchange Act.
Based solely on review of the copies of such forms furnished to the Company, or
written representations from its officers and directors, the Company believes
that during, and with respect to, fiscal 2002 the Company's officers and
directors complied in all respects with the reporting requirements promulgated
under Section 16(a) of the 1934 Act, except that directors who received grants
of restricted stock under the 2002 Directors Stock Plan are late in filing Form
5's, which will be filed by the end of December, 2002.
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ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The Company has not yet paid separate compensation to its officers. The
following table sets forth a summary of certain information concerning the
compensation paid by the Savings Bank for services rendered in all capacities
during the three fiscal years ended September 30, 2002 to the President of the
Savings Bank (who serves as the Chief Executive Officer). No executive officers
of the Savings Bank had total compensation during the fiscal year which exceeded
$100,000.
ANNUAL LONG-TERM COMPENSATION
COMPENSATION AWARDS
-------------------------------------------- -----------------------------
NAME AND FISCAL RESTRICTED NUMBER OF ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS STOCK(2) OPTIONS COMPENSATION(3)
- ---------------------- --------- ------------ ------- ------------ ----------- -----------------
I. Vincent Rice 2002 $ 61,550 $ 1,500 3,666 -- $ 14,342
President
2001 $ 59,104 $ 1,500 -- -- $ 12,795
2000 $ 57,366 $ 1,500 $ 11,046
(1) Does not include amounts attributable to miscellaneous benefits received by
the named executive officer. In the opinion of management of the Savings Bank,
the costs to the Savings Bank of providing such benefits to the named executive
officer during the indicated period did not exceed the lesser of $50,000 or 10%
of the total of annual salary and bonus reported for the individual.
(2) Mr. Rice, as a director of the Company, was granted 3,666 shares of common
stock on May 22, 2002 pursuant to the Company's 2002 Director Stock Plan. The
shares are restricted and become non-forfeitable in one-third increments on each
anniversary date following the grant. The total restricted stock awarded to Mr.
Rice in fiscal year 2002 had a fair market value of $70,734 at September 30,
2002, based on the $15.75 per share closing market price on such last date in
fiscal 2002 on which shares of the common stock were traded.
(3) Represents the allocation on behalf of Mr. Rice under the Company's ESOP.
No options were granted to the executive officer named in the Summary
Compensation Table during the fiscal year ended September 30, 2002.
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The following table sets forth, with respect to the executive officer named in
the Summary Compensation Table, information with respect to the aggregate amount
of options exercised during the last fiscal year, any value realized thereon,
the number of unexercised options at the end of the fiscal year (exercisable and
unexercisable) and the value with respect thereto under specified assumptions.
SHARES VALUE OF UNEXERCISED IN THE
ACQUIRED ON VALUE NUMBER OF UNEXERCISED MONEY OPTIONS AT
NAME EXERCISE REALIZED OPTIONS AT FISCAL YEAR END SEPTEMBER 30, 2002
- -------------------- -------------- ----------- ------------------------------ --------------------------------
UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
--------------- ------------- --------------- --------------
I. Vincent Rice -- -- 10,076(1) $ 0 $37,785(2)
President
(1) Options are exercisable at the rate of 20% per year on each annual
anniversary of the date the options were granted (December 16, 1996) at
$12.00 per share.
(2) The value of unexercised options was calculated based on the market price
at September 30, 2002 ($15.75), the last date in fiscal 2002 on which
shares of the Company's stock were traded, less the $12.00 exercise price
of the option.
DIRECTOR'S COMPENSATION
Directors of the Company do not receive fees for attendance at meetings. Members
of the Board of Directors of the Savings Bank receive fees of $950 per month
(except for Mr. Phillips who receives $1,150 per month for serving as Chairman)
regardless of attendance at meetings. Members of the Board of the Savings Bank
serving on committees do not receive any additional compensation for serving on
such committees.
EMPLOYMENT AGREEMENTS
The Company and the Savings Bank (the "Employers") have entered into employment
agreements with each of Messrs. I. Vincent Rice and Jeffery W. Clark, the
Company's and the Savings Bank's President and Comptroller, respectively (the
"Executives"). The Employers have agreed to employ Messrs. Rice and Clark for a
term of three years in their current respective positions at their current
salary levels of $60,300 and $40,800, respectively. The employment agreements
will be reviewed annually by the Boards of Directors of the Employers, and the
term of employment agreements shall be extended each year for a successive
additional one-year period, unless either party elects, not less than 30 days
prior to the annual anniversary date, not to extend the employment term.
Each of the employment agreements shall be terminable with or without cause by
the Employers. The Executives shall have no right to compensation or other
benefits pursuant to the employment agreement for any period after voluntary
termination or termination by the Employers for cause. The agreements provide
for certain benefits in the event of an Executives' death, disability or
retirement. In the event that (i) the Executive terminates his employment (a)
because of failure of the Employers to comply with any material provision of the
agreement or (b) as a result of certain adverse actions which are taken with
respect to the officer's employment following a change in control of the
Company, as defined, or (ii) the employment agreement is terminated by the
Employers other than for cause, disability, retirement or death, the Executive
will be entitled to a cash severance amount equal to three times the officer's
base salary. Based upon current compensation levels, in the event of a
termination of employment following a change in control, Messrs. Rice and Clark
would receive cash severance of $180,900 and $122,400, respectively.
A change in control is generally defined in the employment agreement to include
any change in control of the Company required to be reported under the federal
securities laws, as well as (i) the acquisition by any person of 25% or more of
the Company's outstanding voting securities and (ii) a change in a majority of
the directors of the Company during any two-year period without the approval of
at least two-thirds of the persons who were directors of the Company at the
beginning of such period.
Each employment agreement provides that in the event that any of the payments to
be made thereunder or otherwise upon termination of employment are deemed to
constitute "excess parachute payments" within the meaning of Section 280G of the
Code, then such payments and benefits received thereunder shall be reduced, in
the manner determined by the officer, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits being
non-deductible by the Employers for federal income tax purposes. Excess
parachute payments generally are payments in excess of three times the base
amount, which is defined to mean the recipient's average annual compensation
from the employer includable in the recipient's gross income during the most
recent five taxable years ending before the date on which a change in control of
the employer occurred. Recipients of excess parachute payments are subject to a
20% excise tax on the amount by which such payments exceed the
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base amount, in addition to regular income taxes, and payments in excess of the
base amount are not deductible by the employer as compensation expense for
federal income tax purposes.
Although the above-described employment agreements could increase the cost of
any acquisition of control of the Company, management of the Company does not
believe that the terms thereof would have a significant anti-takeover effect.
BENEFITS
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has established the ESOP for
employees of the Company and the Savings Bank. Full-time employees of the
Company and the Savings Bank who have been credited with at least 1,000 hours of
service during a twelve-month period and who have attained age 21 are eligible
to participate in the ESOP.
The ESOP borrowed funds from the Company to purchase 53,743 shares of common
stock in the Savings Bank's conversion. The loan equaled 100% of the aggregate
purchase price of the common stock. The loan to the ESOP will be repaid
principally from the Company's and the Savings Bank's contributions to the ESOP
over a period of 12 years, and the collateral for the loan is the common stock
purchased by the ESOP. The Company may, in any plan year, make additional
discretionary contributions for the benefit of plan participants in either cash
or shares of common stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders, upon the
original issuance of additional shares by the Company or upon the sale of
treasury shares by the Company. Such purchases, if made, would be funded through
additional borrowing by the ESOP or additional contributions from the Company.
The timing, amount and manner of future contributions to the ESOP will be
affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in a
suspense account and released on a pro rata basis as debt service payments are
made. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of
compensation. Forfeitures will be reallocated among remaining participating
employees and may reduce any amount the Company might otherwise have contributed
to the ESOP. Participants will vest in their right to receive their account
balances within the ESOP at the rate of 20% per year, starting with completion
of their third year of service. In the case of a "change in control," as
defined, however, participants will become immediately fully vested in their
account balances, subject to certain tax considerations. Benefits may be payable
upon retirement, early retirement, disability or separation from service. The
Company's contributions to the ESOP are not fixed, so benefits payable under the
ESOP cannot be estimated.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended, and the regulations of the Internal Revenue
Service and the Department of Labor thereunder.
STOCK OPTION PLAN. The Stock Option Plan is designed to attract and retain
qualified personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company and reward key employees for outstanding performance. The Stock
Option Plan is also designed to retain qualified directors for the Company. The
Stock Option Plan provides for the grant of incentive stock options intended to
comply with the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") ("incentive stock options"), non-qualified or
compensatory stock options and stock appreciation rights (collectively
"Awards"). Awards will be available for grant to directors and key employees of
the Company and any subsidiaries, except that directors will not be eligible to
receive incentive stock options. The Stock Option Plan was approved by the
Company's stockholders in December 1996. A total of 67,178 shares of common
stock has been reserved for issuance pursuant to the Stock Option Plan. The
Stock Option Plan is administered and interpreted by a committee of the Board of
Directors ("Committee") that is composed solely of two or more "Non-Employee
Directors." Unless sooner terminated, the Stock Option Plan shall continue in
effect for a period of ten years from the adoption by the Board of Directors.
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Under the Stock Option Plan, the Board of Directors or the Committee determines
which officers and key employees will be granted options, whether such options
will be incentive or compensatory options, the number of shares subject to each
option, whether such options may be exercised by delivering other shares of
common stock and when such options become exercisable. The per share exercise
price of a stock option shall be equal to the fair market value of a share of
common stock on the date the option is granted. Subject to certain exceptions,
all options granted to participants under the Stock Option Plan shall become
vested and exercisable at the rate of 20% per year on each annual anniversary of
the date the options were granted, and the right to exercise shall be
cumulative.
RECOGNITION AND RETENTION PLAN AND TRUST. The objective of the Recognition Plan
is to retain qualified personnel in key positions, provide officers, key
employees and directors with a proprietary interest in the Company as an
incentive to contribute to its success and reward key employees for outstanding
performance. Officers and key employees of the Company who are selected by the
Board of Directors of the Company or a committee thereof, as well as
non-employee directors of the Company, are eligible to receive benefits under
the Recognition Plan. The Recognition Plan was approved by the Company's
stockholders in December 1996. The Company has acquired through open market
purchases common stock on behalf of the Recognition Plan, in an amount necessary
to purchase 26,871 shares. The Recognition Plan is administered and interpreted
by a committee of the Board of Directors that is composed solely of two or more
"Non-Employee Directors."
Shares of common stock granted pursuant to the Recognition Plan will be in the
form of restricted stock payable over a five-year period at a rate of 20% per
year, beginning one year from the anniversary date of the grant. A recipient
will be entitled to all voting and other stockholder rights with respect to
shares which have been earned and allocated under the Recognition Plan. However,
until such shares have been earned and allocated, they may not be sold, pledged
or otherwise disposed of and are required to be held in the Recognition Plan
Trust. Under the terms of the Recognition Plan, all shares which have not yet
been earned and allocated are required to be voted by the trustees in their sole
discretion. In addition, any cash dividends or stock dividends declared in
respect of unvested share awards will be held by the Recognition Plan Trust for
the benefit of the recipients and such dividends, including any interest
thereon, will be paid out proportionately by the Recognition Plan Trust to the
recipients thereof as soon as practicable after the share awards become earned.
Any cash dividends or stock dividends declared in respect of each vested share
held by the Recognition Plan Trust will be paid by the Recognition Plan Trust as
soon as practicable after the Recognition Plan Trust's receipt thereof to the
recipient on whose behalf such share is then held by the Recognition Plan Trust.
2002 DIRECTORS STOCK PLAN. On May 22, 2002, the directors of the Company adopted
the 2002 Directors Stock Plan (the "Directors Plan"). A total of 21,996 shares
of common stock may be issued pursuant to the Directors Plan and 21,996 shares
were awarded: 3,666 to each of six (6) directors as of June 30, 2002. On each of
the three anniversary dates of the Directors Plan, 1,222 shares of such stock
will become non-forfeitable unless the forfeitability is accelerated by death or
retirement of a given director/holder and in the event of a change in control of
the Company, the shares granted to each participant which have not theretofore
become non-forfeitable shall immediately become non-forfeitable, the restriction
on transferability shall terminate and a stock certificate for the total number
of non-forfeited shares granted to such participant shall be delivered to such
participant.
INDEMNIFICATION AGREEMENTS WITH DIRECTORS AND OFFICERS
The Company and the Savings Bank have entered into agreements to indemnify each
of their directors and Jeffery W. Clark. The indemnification agreements require
the Company and the Savings Bank to indemnify the directors and Mr. Clark
against liabilities that may arise by reason of their status or service as
officers and directors, other than liabilities arising from willful misconduct
of a culpable nature and certain investigations by banking regulators, and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTER.
The following table sets forth, as of December 1, 2002, certain information as
to the Common Stock beneficially owned by (i) each person or entity, including
any "group" as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), who or which was known to the Company
to be the beneficial owner of more than 5% of the issued and outstanding Common
Stock, (ii) the directors of the Company, and (iii) all directors and executive
officers of the Company and the Savings Bank as a group.
AMOUNT AND NATURE
NAME OF BENEFICIAL OF BENEFICIAL
OWNER OR NUMBER OF OWNERSHIP AS OF PERCENT OF
PERSONS IN GROUP DECEMBER 1, 2002(1) COMMON STOCK
- --------------------------------------------------- ----------------------- ----------------
First Federal Financial Bancorp, Inc. Employee 49,790(2) 10.79%
Stock Ownership Plan Trust
Arnhold and S. Bleichroeder, Inc. 45,000(3) 9.75
Arnhold and S. Bleichroeder Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
Estate of James E. Waldo 44,611(4) 9.59
Tontine Financial Partners, L.P. 34,900(5) 7.56
Tontine Management, L.L.C.
Jeffrey L. Gendell
200 Park Avenue, Suite 3900
New York, New York 10166
Directors:
Thomas D. Phillips 33,367(6)(7) 7.12
I. Vincent Rice 26,246(7)(8) 5.64
Edith M. Daniels 18,366(9) 3.95
Steven C. Milleson 17,829(10) 3.80
Edward R. Rambacher 21,172(7)(11) 4.55
All directors and executive officers 132,728(12) 27.50
of the Company and the Savings Bank
as a group (6 persons)
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. Under regulations promulgated pursuant
to the Exchange Act, shares of Common Stock are deemed to be beneficially owned
by a person if he or she directly or indirectly has or shares (i) voting power,
which includes the power to vote or to direct the voting of the shares, or (ii)
investment power, which includes the power to dispose or to direct the
disposition of the shares. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares. Shares
which are subject to stock options and which may be exercised within 60 days of
December 1, 2002 are deemed to be outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by such person.
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(2) The First Federal Financial Bancorp, Inc. Employee Stock Ownership Plan
Trust ("Trust") was established pursuant to the First Federal Financial Bancorp,
Inc. Employee Stock Ownership Plan ("ESOP") by an agreement between the Company
and Messrs. Thomas D. Phillips, Edward R. Rambacher and I. Vincent Rice who act
as trustees of the plan ("Trustees"). As of December 1, 2002, 28,127 shares held
in the Trust had been allocated to the accounts of participating employees.
Under the terms of the ESOP, the Trustees will generally vote the allocated
shares held in the ESOP in accordance with the instructions of the participating
employees. Unallocated shares held in the ESOP will generally be voted in the
same ratio on any matter as those allocated shares for which instructions are
given, subject in each case to the fiduciary duties of the ESOP trustees and
applicable law. Any allocated shares which either abstain on the proposal or are
not voted will be disregarded in determining the percentage of stock voted for
and against each proposal by the participants and beneficiaries. The amount of
Common Stock beneficially owned by directors who serve as Trustees of the ESOP
and by all directors and executive officers as a group does not include the
unallocated shares held by the Trust.
(3) Based on a Schedule 13G filing pursuant to the Exchange Act on February 15,
2000. The reporting persons have shared voting and dispositive powers.
(4) Includes 3,358 shares which may be acquired by Mr. Waldo's estate upon the
exercise of stock options.
(5) Based on a Schedule 13D filing pursuant to the Exchange Act on February 7,
2001. The reporting persons have shared voting and dispositive powers.
(6) Includes 10,000 shares held by the Phillips' Funeral Home Trust Pension
Fund, 5,000 shares held by Mr. Phillips' spouse and 3,358 shares which may be
acquired by Mr. Phillips upon the exercise of stock options.
(7) Excludes the shares held by the ESOP, of which the named director is one of
three trustees.
(8) Includes 10,076 shares which may be acquired by Mr. Rice upon the exercise
of stock options and 6,586 shares held by the Company's ESOP for the account of
Mr. Rice.
(9) Includes 3,359 shares which may be acquired by Ms. Daniels upon the exercise
of stock options.
(10) Includes 2,400 shares held by Mr. Milleson's spouse as custodian for
children, 716 shares held by Mr. Milleson's spouse in her Individual Retirement
Account ("IRA"), and 3,358 shares which may be acquired by Mr. Milleson upon the
exercise of stock options.
(11) Includes 806 shares held by Mr. Rambacher's spouse, 5,000 shares held by
Mr. Rambacher's spouse in her IRA, 1,000 shares held by Mr. Rambacher's spouse
as custodian for her son, and 3,358 shares which may be acquired by Mr.
Rambacher upon the exercise of stock options.
(12) Includes 29,508 shares which may be acquired by all directors and executive
officers of the Company as a group upon the exercise of stock options. Also
includes 10,834 which are held by the Company's ESOP which have been allocated
to the accounts of executive officers.
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EQUITY COMPENSATION PLAN INFORMATION
The following tables presents information on the Company's equity compensation
plans generally at September 30, 2002.
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE FOR FUTURE ISSUANCE
ISSUED UPON UNDER EQUITY
EXERCISE OF WEIGHTED-AVERAGE COMPENSATION PLANS
OUTSTANDING EXERCISE PRICE OF (EXCLUDING SECURITIES
OPTIONS, WARRANTS OUTSTANDING OPTIONS, REFLECTED IN
AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ---------------------------------------------- -------------------- ---------------------- ------------------------
Equity compensation plans approved by
security holders......................... 36,224 $ 12.00 30,954(1)
Equity compensation plans not
approved by security holders............. 21,996(2) --
---------- ---------
Total................................ 58,220 30,954
========== =========
(1) Grants to non-employee directors may not exceed 30% of the shares reserved
and no grant to any one employee or non-employee director may exceed 25% or 5%
of the shares reserved under the plan, respectively.
(2) Includes 21,996 shares of restricted stock granted on May 20, 2002, evenly
to each of six (6) of the Company's directors, which restricted shares become
non-forfeitable in one-third increments every anniversary from the date of
grant. All restricted share's non-forfeitability will be accelerated upon the
acquisition of the Company by a third party.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All loans or extensions of credit to executive officers and directors must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with the general
public, unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution, and must not involve more than the normal risk of repayment or
present other unfavorable features.
The Savings Bank's policy provides that all loans made by the Savings Bank to
its directors and officers are made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
Savings Bank's policy provides that such loans may not involve more than the
normal risk of collection or present other unfavorable features. As of September
30, 2002, loans to directors and executive officers, including outstanding
balances and commitments, amounted to $52,308, or .66% of the Savings Bank's
total capital, at September 30, 2002. As of such date, there were no loans to
any director or executive officer made at preferential rates or terms which, in
the aggregate, exceeded $60,000 during the three years ended September 30, 2002.
All such loans were made by the Savings Bank in accordance with the
aforementioned policy.
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ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report.
INDEPENDENT AUDITOR'S REPORT.
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND 2001.
Consolidated Statements of Income for the Years Ended September 30, 2002, 2001
and 2000.
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years Ended September 30, 2002,
2001 and 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(2) All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are omitted because they
are not applicable or the required information is included in the Consolidated
Financial Statements or notes thereto.
(3)(a) The following exhibits are filed as part of this Form 10-KSB, and this
list includes the Exhibit Index.
No. Description
- ---------- ---------------------------------------------------------------
2.0 Agreement and Plan or Reorganization dated April 25, 2002 by
and between First Federal Savings Bank of Orton and Lincoln
Savings and Loan Association.(1)
3.1 Certificate of Incorporation of First Federal Financial
Bancorp, Inc.(2)
3.1.1 Certificate of Amendment to Certification of Incorporation.(3)
3.2 Bylaws of First Federal Financial Bancorp, Inc.(2)
4 Stock Certificate of First Federal Financial Bancorp, Inc.(2)
4.1 Stockholder Protection Rights Agreement.(4)
10.1 Stock Option Plan*(5)
10.2 Recognition and Retention Plan and Trust*(2)
10.3 Employment Agreement among First Federal Financial Bancorp,
Inc., First Federal Savings Bank of Ironton and I. Vincent
Rice(6)(7)
10.4 2002 Directors Stock Plan*(8)
10.5 Indemnification Agreement by and between First Federal
Financial Bancorp, Inc. and Thomas D. Phillips(9)
10.6 Indemnification Agreement by and between First Federal
Savings Bank of Ironton and Thomas D. Phillips(10)
21 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information
23 Independent Auditor's Consent
(1) Incorporated by reference from the Form 8-K filed by the Registrant with the
Securities and Exchange Commission ("SEC") on April 30, 2002.
(2) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-1672) filed by the Registrant with the Securities and
Exchange Commission ("SEC") on February 26, 1996, as amended.
(3) Incorporated by reference from the Form 10-QSB by the Registrant with the
Securities and Exchange Commission ("SEC") on February 2, 2001.
(4) Incorporated by reference from the Form 8-K filed by the Registrant with the
SEC on May 23, 2001.
(5) Incorporated by reference from the Form 10-KSB for the fiscal year ended
September 30, 1996 filed by the Registrant with the SEC on December 26, 1996.
(6) Incorporated by reference from the Form 10-KSB for the fiscal year ended
September 30, 1999 filed by the Registrant with the SEC on December 29, 1999.
(7) Representative of a similar agreement entered into with Jeffery W. Clark.
(8) Incorporated by reference from the Registration Statement on Form S-8 filed
by the Registrant with the Securities and Exchange Commission ("SEC") on June
11, 2002.
(9) First Federal Financial Bancorp, Inc. has entered into substantially
identical agreements with each of its directors and Jeffery W. Clark.
(10) First Federal Savings Bank of Ironton has entered into substantially
identical agreements with each of its directors and Jeffery W. Clark.
* Management contract or compensatory plan or arrangement.
(3)(b) Reports filed on Form 8-K.
A Form 8-K was filed by the Registrant with the Securities and Exchange
Commission ("SEC") on July 26, 2002, with a press release of the Registrant's
fourth quarter earnings.
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ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President along with the Company's
Comptroller, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to the Securities Exchange Act of
1934 ("Exchange Act") Rule 13a-14. Based upon that evaluation, the Company's
President along with the Company's Comptroller concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic Securities and
Exchange Commission ("SEC") filings. There have been no significant changes in
the Company's internal controls or in other factors which could significantly
affect these controls subsequent to the date the Company carried out its
evaluation.
Disclosure controls and procedures are Company controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files under the
Exchange Act is accumulated and communicated to the Company's management,
including its President and Comptroller, as appropriate, to allow timely
decisions regarding required disclosure.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST FEDERAL FINANCIAL BANCORP, INC.
By: /s/ I. Vincent Rice
----------------------------------------
I. Vincent Rice
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ I. Vincent Rice December 24, 2002
- -----------------------------------------------
I. Vincent Rice
President (Principal Executive Officer)
/s/ Jeffery W. Clark December 24, 2002
- -----------------------------------------------
Jeffery W. Clark
Comptroller (Principal Financial and
Accounting Officer)
/s/ Thomas D. Phillips December 24, 2002
- -----------------------------------------------
Thomas D. Phillips
Chairman
/s/ Edith M. Daniels December 24, 2002
- -----------------------------------------------
Edith M. Daniels
Corporate Secretary and Director
/s/ Edward R. Rambacher December 24, 2002
- -----------------------------------------------
Edward R. Rambacher
Director
/s/ Steven C. Milleson December 24, 2002
- -----------------------------------------------
Steven C. Milleson
Director
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CERTIFICATIONS
I, I. Vincent Rice, certify that:
1. I have reviewed this annual report on Form 10-KSB of First Federal Financial
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls;
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 24, 2002
/s/ I. Vincent Rice
--------------------
President
<page>
I, Jeffery W. Clark, certify that:
1. I have reviewed this annual report on Form 10-KSB of First Federal Financial
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant 's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls;
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 24, 2002
/s/ Jeffery W. Clark
--------------------
Comptroller
<page>
ANNEX F PART 2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number 0-28020
FIRST FEDERAL FINANCIAL BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 31-1456058
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
415 CENTER STREET, IRONTON, OHIO 45638
(Address of principal executive offices)
(Zip Code)
(740) 532-6845
(Issuer's telephone number, including area code)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PAST 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of February 12, 2003, there were issued and outstanding 461,622 shares of the
Registrant's Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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FIRST FEDERAL FINANCIAL BANCORP, INC.
TABLE OF CONTENTS
*****************
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (as of December 31, 2002 (unaudited) and
September 30, 2002)
Consolidated Statements of Income (for the three months ended December
31, 2002 (unaudited) and 2001 (unaudited))
Consolidated Statements of Changes in Stockholders' Equity (for the
three months ended December 31, 2002 (unaudited) and the year ended
September 30, 2002)
Consolidated Statements of Cash Flows (for the three months ended
December 31, 2002 (unaudited) and 2001 (unaudited))
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
i
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2002 2002
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS $ 6,788,572 $ 2,669,467
INVESTMENT SECURITIES HELD
TO MATURITY 6,479,184 4,878,630
INVESTMENT SECURITIES AVAILABLE
FOR SALE 927,797 754,656
LOANS RECEIVABLE 52,137,240 49,706,792
MORTGAGE-BACKED SECURITIES
HELD TO MATURITY 3,256,067 3,378,557
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE 3,954,792 5,440,200
ACCRUED INTEREST RECEIVABLE 397,914 370,275
FORECLOSED REAL ESTATE 236,552 38,747
OFFICE PROPERTIES AND EQUIPMENT 2,006,387 1,604,557
GOODWILL 82,837 --
OTHER ASSETS 182,529 125,050
$ 76,449,871 $ 68,966,931
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 57,556,694 $ 49,750,208
ADVANCES FROM FEDERAL HOME LOAN BANK 9,052,328 9,611,711
ACCRUED INCOME TAXES PAYABLE:
Current 116,155 118,262
Deferred 152,933 142,546
ACCRUED INTEREST PAYABLE 44,028 44,300
OTHER LIABILITIES 309,041 176,569
Total liabilities 67,231,179 59,843,596
STOCKHOLDERS' EQUITY:
Common stock 4,616 4,616
Employee benefit plans (553,618) (590,721)
Additional paid-in capital 4,418,257 4,409,534
Retained earnings-substantially restricted 5,307,607 5,246,558
Accumulated other comprehensive income 41,830 53,348
Total stockholders' equity 9,218,692 9,123,335
$ 76,449,871 $ 68,966,931
1
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
(UNAUDITED) (UNAUDITED)
INTEREST INCOME:
Loans receivable-
First mortgage loans $ 896,985 $ 940,845
Consumer and other loans 80,520 88,769
Mortgage-backed and related securities 70,853 129,994
Investment securities 83,509 51,410
Other interest-earning assets 11,648 9,910
Total interest income 1,143,515 1,220,928
INTEREST EXPENSE:
Interest-bearing checking 19,817 5,166
Passbook savings 69,045 58,573
Certificates of deposit 317,494 517,150
Advances from Federal Home
Loan Bank 108,129 119,703
Total interest expense 514,485 700,592
Net interest income 629,030 520,336
PROVISION FOR LOAN LOSSES 15,000 16,000
Net interest income after provision for loan losses 614,030 504,336
NON-INTEREST INCOME:
Service charges on deposits 28,743 14,579
Other service charges, commissions and fees 22,698 15,746
Losses on foreclosed real estate -- (6,646)
Other 6,007 2,824
Total non-interest income 57,448 26,503
NON-INTEREST EXPENSE:
Compensation and benefits 252,988 171,598
Occupancy and equipment 47,398 38,603
SAIF deposit insurance premium 2,111 2,330
Directors' fees and expenses 32,869 26,481
Franchise taxes 24,499 28,334
Data processing 57,793 33,474
Advertising 20,374 20,038
Professional services 35,324 30,737
Other 57,505 54,879
Total non-interest expense 530,861 406,474
INCOME BEFORE PROVISION FOR INCOME TAXES 140,617 124,365
PROVISION FOR INCOME TAXES 48,771 40,113
NET INCOME $ 91,846 $ 84,252
EARNINGS PER SHARE:
Basic $ .21 $ .20
Diluted $ .20 $ .20
2
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON EMPLOYEE ADDITIONAL RETAINED ACCUMULATED
STOCK BENEFIT PAID-IN EARNINGS- OTHER TOTAL
PLANS CAPITAL SUBSTANTIALLY COMPREHENSIVE STOCKHOLDERS'
RESTRICTED INCOME (LOSS) EQUITY
BALANCES, September
30, 2001 $ 4,471 $ (371,793) $ 4,254,063 $ 4,792,222 $ 31,287 $ 8,710,250
COMPREHENSIVE INCOME:
Net income, 2002 -- -- -- 502,406 -- 502,406
Other comprehensive
income, net of tax:
Change in unrealized -- -- -- -- 22,061 22,061
gain on investments
available for sale,
net of tax of $11,365
TOTAL COMPREHENSIVE -- -- -- -- -- 524,467
INCOME
ESOP SHARES RELEASED, -- 42,620 17,695 -- -- 60,315
4,262 shares; $14.18
average fair market
value
RRP SHARES AMORTIZED, -- 7,620 -- -- -- 7,620
649 shares
DIVIDENDS PAID ($.28 -- 6,711 2,486 (117,248) -- (108,051)
per share)
2002 DIRECTORS STOCK
PLAN, 21,996 shares 220 (275,879) 205,443 104,701 -- 34,485
PURCHASE OF 7,511
TREASURY SHARES (75) -- (70,153) (35,523) -- (105,751)
BALANCES, September 4,616 (590,721) 4,409,534 5,246,558 53,348 9,123,335
30, 2002
COMPREHENSIVE INCOME:
Net income, three -- -- -- 91,846 -- 91,846
months ended December
31, 2002 (unaudited)
Other comprehensive
income, net of tax:
Change in unrealized -- -- -- -- (11,518) (11,518)
gain on investments
available for sale,
net of tax of $5,934
(unaudited)
TOTAL COMPREHENSIVE -- -- -- -- -- 80,328
INCOME (unaudited)
ESOP SHARES RELEASED, -- 10,130 7,864 -- -- 17,994
1,013 shares; $17.76
average fair market
value (unaudited)
DIVIDENDS PAID ($.07 -- 1,109 859 (30,797) -- (28,829)
per share)
(unaudited)
2002 DIRECTORS STOCK -- 25,864 -- -- -- 25,864
PLAN, 1,833 shares
(unaudited)
BALANCES, December $ 4,616 $ (553,618) $ 4,418,257 $ 5,307,607 $ 41,830 $ 9,218,692
31, 2002
(unaudited)
3
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income $ 91,846 $ 84,252
Adjustments to reconcile net income to net cash provided by
operating activities -
Losses on sales of foreclosed real estate -- 6,646
Provision for loan losses 15,000 16,000
Depreciation 27,728 22,922
FHLB stock dividends (9,200) (9,200)
Amortization and accretion, net (22,036) 14,629
ESOP compensation 17,994 13,527
Stock compensation 25,864 7,620
Change in -
Accrued interest receivable (4,363) 44,201
Other assets 128,695 36,322
Deferred income taxes 28,753 174
Accrued interest payable (272) (3,795)
Accrued income taxes (9,202) 4,314
Other liabilities (126,123) 8,221
Net cash provided by operating activities 164,684 245,833
INVESTING ACTIVITIES:
Net decrease in loans 2,014,205 579,166
Proceeds from maturities of investment securities available for sale -- 300,000
Purchases of investment securities available for sale (150,000) (250,000)
Proceeds from maturities of investment securities held to maturity 325,000 100,000
Purchases of investment securities held to maturity (841,292) (750,000)
Principal collected on mortgage-backed securities held to maturity 173,408 236,289
Purchases of mortgage-backed securities held to maturity (47,763) --
Principal collected on mortgage-backed securities available for sale 1,458,244 212,221
Purchases of mortgage-backed securities available for sale -- (145,927)
Purchases of office properties and equipment (53,953) (3,403)
Cash received from acquisition of Lincoln Savings and Loan Association
in excess of cash paid 2,074,093 --
Proceeds from sale of REO 113,503 --
Net cash provided by investing activities 5,065,445 278,346
FINANCING ACTIVITIES:
Net decrease in deposits (322,812) (1,020,868)
Dividends paid (28,829) (24,086)
Repayments of FHLB advances (759,383) (684,326)
Purchase of treasury stock -- (26,795)
Net cash used for financing activities (1,111,024) (1,756,075)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,119,105 (1,231,896)
CASH AND CASH EQUIVALENTS, beginning of period 2,669,467 2,196,367
CASH AND CASH EQUIVALENTS, end of period $ 6,788,572 $ 964,471
NONCASH INVESTING ACTIVITIES:
Change in unrealized holding gains on investment securities available for sale $ (17,452) $ 32,245
Loans taken into foreclosed real estate 78,105 --
Excess of cost paid over fair value of assets acquired of Lincoln Savings and
Loan Association 82,837 --
(goodwill)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Federal income taxes paid 20,000 35,625
Interest paid 514,757 704,387
4
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FIRST FEDERAL FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
First Federal Financial Bancorp, Inc. (the "Company") was incorporated under
Delaware law in February 1996 by First Federal Savings and Loan Association of
Ironton (the "Association") in connection with the conversion of the Association
from a federally-chartered mutual savings and loan association to a
federally-chartered stock savings bank to be known as "First Federal Savings
Bank of Ironton" (the "Bank") and the issuance of the Bank's common stock to the
Company and the offer and sale of the Company's common stock by the Company to
the members of the public, the Association's Board of Directors, its management,
and the First Federal Financial Bancorp, Inc. Employee Stock Ownership Plan (the
"ESOP") (the "Conversion").
The accompanying financial statements were prepared in accordance with
instructions to Form 10-QSB, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, all normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial statements,
have been included. These financial statements should be read in conjunction
with the audited consolidated financial statements and the notes thereto for the
year ended September 30, 2002.
Business
The Company's principal business is conducted through the Bank which conducts
business from its main office located in Ironton, Ohio, and two full-service
branches located in Ironton and Proctorville, Ohio. The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by law. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS"), which is the Bank's
chartering authority and primary regulator. The Bank is also subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC"), as the
administrator of the SAIF, and to certain reserve requirements established by
the Federal Reserve Board ("FRB"). The Bank is a member of the Federal Home Loan
Bank of Cincinnati ("FHLB").
Principles of Consolidation
The consolidated financial statements at December 31, 2002 and September 30,
2002, and for the three months ended December 31, 2002 and 2001, include the
accounts of the Company and the Bank. All significant intercompany transactions
and balances have been eliminated in consolidation. Additionally, certain
reclassifications may have been made in order to conform with the current
period's presentation. The accompanying financial statements have been prepared
on the accrual basis.
5
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(2) CONVERSION TRANSACTION
On June 3, 1996, (i) the Association converted from a federally-chartered mutual
savings and loan association to a federally-chartered stock savings bank to be
named "First Federal Savings Bank of Ironton", and (ii) the Company acquired all
of the common stock of the Bank in the Conversion. As part of the Conversion,
the Company issued 671,783 shares of its Common Stock. Total proceeds of
$6,717,830 were reduced by $537,430 for shares to be purchased by the ESOP and
by approximately $432,000 for Conversion expenses. As a result of the
Conversion, the Company contributed approximately $3,145,000 of additional
capital to the Bank and retained the balance of the net proceeds.
(3) COMMON STOCK ACQUIRED BY THE EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for employees of the Company and the Bank
which became effective upon the Conversion. Full-time employees of the Company
and the Bank who have been credited with at least 1,000 hours of service during
a twelve month period and who have attained age 21 are eligible to participate
in the ESOP. The Company loaned the ESOP $537,430 for the initial purchase of
the ESOP shares. The loan is due and payable in forty-eight (48) equal quarterly
installments of $11,200 beginning June 29, 1996, plus interest at the rate of
8.75% per annum. The Company makes scheduled discretionary cash contributions to
the ESOP sufficient to amortize the principal and interest on the loan over a
period of 12 years. The Company accounts for its ESOP in accordance with
Statement of Position 93-6, "Employer's Accounting For Employee Stock Ownership
Plans." As shares are committed to be released to participants, the Company
reports compensation expense equal to the average market price of the shares
during the period. ESOP compensation expense recorded during the three month
periods ended December 31, 2002 and 2001 was $17,994 and $13,527, respectively.
(4) STOCK OPTION PLAN
On December 16, 1996, the Stock Option Plan (the "Plan") was approved by the
Company's stockholders. A total of 67,178 shares of common stock may be issued
pursuant to the Plan and 36,224 shares have been awarded as of December 31,
2002. These options are subject to vesting provisions as well as other
provisions of the Plan. No options have been exercised through December 31,
2002.
(5) RECOGNITION AND RETENTION PLAN AND TRUST
On December 16, 1996, the Recognition and Retention Plan and Trust (the "RRP")
was approved by the Company's stockholders. A total of 26,871 shares of common
stock are available for awards pursuant to the RRP and 16,438 shares have been
awarded as of December 31, 2002. Awards will vest in equal installments over a
five year period, with the first installment vesting on the first anniversary
date of the grant and each additional installment vesting on the four subsequent
anniversaries of such date, subject to certain conditions as more fully
described in the plan documents. Compensation cost related to RRP shares earned
during the three month periods ended December 31, 2002 and 2001 was $ -0- and
$7,620, respectively.
6
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The Company purchased 26,871 shares of common stock during the year ended
September 30, 1997, to fully fund the RRP. The cost of unearned RRP shares is
recorded as a reduction of stockholders' equity.
(6) 2002 DIRECTORS STOCK PLAN
On May 22, 2002, the directors of the Company adopted the 2002 Directors Stock
Plan (the "Directors Plan"). A total of 21,996 shares of common stock were
awarded, 3,666 to each of six (6) directors. On each of the three anniversary
dates of the Directors Plan, 1,222 shares of such stock will become
non-forfeitable unless the forfeitability is accelerated by death or retirement
of a given director/holder. Compensation cost charged to expense for the three
months ended December 31, 2002 was $25,864. The deferred cost of unearned shares
totaled $250,015 and $275,879 at December 31, 2002 and September 30, 2002,
respectively, and is recorded as a charge against stockholders' equity.
(7) PURCHASE OF COMMON STOCK
There were no purchases of common stock during the three months ended December
31, 2002. During the year ended September 30, 2002, the Company purchased 7,511
shares of its outstanding common stock at an aggregate cost of $105,751. The
purchase of these shares has been recorded as a purchase of common stock shares,
which are authorized but unissued.
(8) EARNINGS PER SHARE
Basic and full dilution Earnings Per Share (EPS) for the three months ended
December 31, 2002 and 2001, were calculated by dividing the consolidated net
income by the weighted average number of common shares, and common stock
equivalents outstanding, as set forth below. Shares which have not been
committed to be released to the ESOP are not considered to be outstanding for
purposes of calculating earnings per share.
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
SHARES SHARES
INCOME (DEMONI- PER-SHARE INCOME (DENOMI- PER-SHARE
(NUMERATOR) NATOR) AMOUNT (NUMERATOR) NATOR) AMOUNT
Basic EPS $91,846 443,548 $ 0.21 $ 84,252 423,784 $ 0.20
Effect of Dilutive
Securities-Options -- 11,754 (0.01) -- 210 --
Diluted EPS $91,846 455,302 $ 0.20 $ 84,252 423,994 $ 0.20
(9) ACQUISITION OF LINCOLN SAVINGS
On October 4, 2002, the Bank acquired 100% of the outstanding stock of Lincoln
Savings and Loan Association ("Lincoln"), Ironton, Ohio, utilizing the purchase
method of accounting. Lincoln was dissolved upon consummation of the transaction
with the assets and liabilities of Lincoln merged into the Bank and the former
Lincoln continuing in operation as a branch of the Bank.
7
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The total consideration for Lincoln's stock was $428,968 cash, of which $340,147
had been paid as of December 31, 2002, with the remaining $88,821 to be paid
upon the surrender of the remaining stock certificates by the Lincoln
shareholders. The $88,821 unpaid amount is included in other liabilities in the
accompanying financial statements. In addition, the Bank paid $73,010 in
expenses associated with the transaction. The $428,968 purchase price is subject
to additional, contingent cash consideration which could increase the amount
paid for Lincoln by approximately $63,000. At the acquisition date, Lincoln had
total assets of $8.9 million, total liabilities of $8.5 million and total
stockholders' equity of $.4 million.
Lincoln was a local competitor of the Bank and thus, the acquisition enabled the
Bank to gain local market share and affords the Bank the opportunity to reduce
costs through economies of scale.
The results of Lincoln's operations subsequent to October 4, 2002 are included
in the accompanying consolidated financial statements for the three months ended
December 31, 2002. Lincoln's results of operations for the quarter ended
December 31, 2002 are substantially the same as those included in the
accompanying consolidated financial statements. Presented below are the
unaudited, pro-forma condensed consolidated results of operations of the Company
for the three months ended December 31, 2001, assuming the transaction occurred
on October 1, 2001.
Net interest income $ 566,312
Net income 70,468
Basic earnings per share 0.17
Diluted earning per share 0.17
Goodwill associated with the Lincoln transaction was originally recorded in the
amount of $77,122. During the three months ended December 31, 2002, $5,715 was
capitalized as additional goodwill resulting from the satisfaction of
contingencies as contained in the acquisition agreement.
(10) MERGER WITH CLASSIC BANCSHARES, INC.
On December 30, 2002, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Classic Bancshares, Inc. ("Classic"), Ashland, Kentucky,
pursuant to which the Company will be merged with and into Classic (the
"Merger"). The Agreement provides for Classic to pay aggregate consideration of
approximately $11.5 million for all the outstanding common shares of the
Company, which consideration will consist of a combination of Classic common
stock and cash, as described below. The Agreement provides that upon
consummation of the Merger, and subject to certain further terms, conditions,
limitations, procedures and adjustments set forth in the Agreement, each issued
and outstanding share of common stock of the Company shall, by virtue of the
Merger, be converted into and represent the right to receive the following
consideration: (i) $24.00 in cash, or (ii) .9797 shares of Classic common stock
for each share of the Company's common stock. The election of the form of merger
consideration by the Company's stockholders is subject to the requirement that
50% of the Company's shares be exchanged for cash and 50% be exchanged for
Classic's
8
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common stock. All options to purchase Company common stock outstanding upon
consummation of the Merger will be cancelled and in consideration of such
cancellation, the option holders will receive a cash payment equal to the number
of shares subject to the option times the difference between $24.00 and the
exercise price of the options, if any. In addition, the Bank will merge with
Classic Bank, the wholly owned subsidiary of Classic.
The Merger is subject to various conditions, including the approval of the
Agreement by the Company's and Classic's stockholders and the receipt of
regulatory approval. The Merger is currently expected to close during the second
quarter of 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
ASSETS. Total assets increased $7.4 million, or 10.7%, from $69.0 million at
September 30, 2002 to $76.4 million at December 31, 2002. The increase consisted
primarily of increases in cash and cash equivalents of $4.1 million, investment
securities (held to maturity and available for sale) of $1.8 million and loans
receivable of $2.4 million, which was partially offset by a $1.6 million
decrease in mortgage-backed securities held to maturity. The increase in net
assets was largely attributable to the Company's acquisition of Lincoln Savings
and Loan Association ("Lincoln"). At the date of acquisition, Lincoln had total
assets of $8.9 million, total liabilities of $8.5 million, and total
stockholders' equity of $.4 million.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased $4.1 million, or
151.9%, from $2.7 million at September 30, 2002 to $6.8 million at December 31,
2002. The increase resulted from net cash flows provided by operating activities
of $.2 million and from investing activities of $5.0 million, which was offset
by net cash flows used for financing activities of $1.1 million.
INVESTMENT SECURITIES. Investment securities consist primarily of U.S.
Government agency securities, FHLB stock, and obligations of states and
political subdivisions. Investment securities (held to maturity and available
for sale) increased $1.8 million, or 32.1%, from $5.6 million at September 30,
2002 to $7.4 million at December 31, 2002. The increase in investment securities
for the period ending December 31, 2002 was due primarily to purchases of
securities of $1.0 million, offset by proceeds of maturing securities of $.3
million. Securities acquired in the Lincoln acquisition totaled $1.1 million.
LOANS RECEIVABLE. The Company's loans receivable, net, increased $2.4 million,
or 4.8%, from $49.7 million at September 30, 2002 to $52.1 million at December
31, 2002. The increase in loans is primarily attributable to the acquisition of
Lincoln during the quarter ended December 31, 2002, with loans acquired from
Lincoln approximating $4.5 million, offset by scheduled principal payments.
LOAN CONCENTRATIONS. The Company does not have a concentration of its loan
portfolio in any one industry or to any one borrower. Real estate lending (both
mortgage and construction loans) continues to be the largest component of the
loan portfolio, representing $48.7
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million, or 91.9%, of total gross loans, while consumer loans, including
installment loans, loans secured by deposit accounts, and unsecured loans,
totaled $4.3 million, or 8.1%, of total gross loans outstanding at December 31,
2002.
The Company's lending is concentrated to borrowers who reside in and/or which
are collateralized by real estate and property located in Lawrence and Scioto
County, Ohio, and Boyd and Greenup County, Kentucky. Employment in these areas
is highly concentrated in the petroleum, iron and steel industries. Therefore,
many borrowers' ability to honor their contracts is dependent upon these
economic sectors.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses as a percentage of
total loans increased slightly, constituting .7% of total gross loans
outstanding at December 31, 2002 as compared to .6% at September 30, 2002. The
dollar amount of the allowance totaled $397,000 at December 31, 2002 as compared
to $293,000 at September 30, 2002. Based on management's evaluation of the
quality of the loan portfolio and current economic conditions, management has
determined that the allowance for loan losses is adequate.
Charge-off activity for the three months ended December 31, 2002 and 2001,
totaled $109,391 and $1,043, respectively. Recoveries totaled $2,347 and $1,203
for the three months ended December 31, 2002 and 2001, respectively. Of the
$109,391 of loans charged-off during the period, $102,547 represent loans
acquired by the Bank in connection with its acquisition of Lincoln which had
been provided for in the allowance for loan losses at the acquisition date.
The Company had $498,000 and $206,000 of non-accrual loans at December 31, 2002
and September 30, 2002, respectively. The increase in non-accrual loans is due
primarily to 16 loans, totaling $194,000, acquired by the Bank in connection
with its acquisition of Lincoln. At the same dates, there were no significant
loans greater than 90 days past due which were still accruing interest. The
Company had no troubled debt restructurings during the three month periods ended
December 31, 2002 and 2001.
MORTGAGE-BACKED SECURITIES. The Company invests in both fixed-rate and
adjustable-rate mortgage-backed securities, which are classified as either held
to maturity (carried at amortized cost) or available for sale (carried at quoted
market). Mortgage-backed securities decreased $1.6 million, or 18.2%, from $8.8
million at September 30, 2002 to $7.2 million at December 31, 2002, due to
principal repayments of $1.6 million.
DEPOSITS. Deposits increased $7.8 million, or 15.7%, from $49.8 million at
September 30, 2002 to $57.6 million at December 31, 2002. The Company continues
to offer competitive interest rates on deposits, and also utilizes available
advances from the FHLB to meet its liquidity and funding requirements. The
deposits of Lincoln recorded at the acquisition date totaled $8.1 million.
ADVANCES FROM FEDERAL HOME LOAN BANK. The Company's advances from the FHLB
totaled $9.1 million at December 31, 2002 as compared to $9.6 million at
September 30, 2002, a decrease of $.5 million, or 5.2%. Principal payments on
advances during the period were $759,383. Advances of $200,000 were recorded in
connection with the Lincoln acquisition.
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STOCKHOLDERS' EQUITY. Stockholders' equity totaled $9.2 million at December 31,
2002, as compared to $9.1 million at September 30, 2002. The Company's net
income for the period was offset by dividends paid and the release of common
stock shares to the employee benefit plans.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2002 AS COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 2001
Net income increased $7,594, or 9.0%, from $84,252 for the quarter ended
December 31, 2001 to $91,846 for the quarter ended December 31, 2002. Basic
earnings per share were $.21 and diluted earnings per share were $.20 for the
2002 quarter, as compared to $.20, both basic and assuming full dilution, for
the 2001 quarter. The increase in net income consisted of an increase in net
interest income of $108,694, or 20.9%, an increase in non-interest income of
$30,945, or 116.8%, and a decrease in the provision for loan losses of $1,000,
or 6.2%, which was partially offset by an increase in non-interest expenses of
$124,387, or 30.6%, and the provision for income taxes of $8,658, or 21.6%.
Total interest income decreased $77,413, or 6.3%, from $1,220,928 for the 2001
quarter to $1,143,515 for the 2002 quarter. The decrease was primarily due to
decreased levels of interest earned on loans receivable of $52,109 and
mortgage-backed securities of $59,141, partially offset by an increase in
interest earned on investment securities of $32,099. The decrease in interest
earned on loans receivable resulted primarily from a decline in variable rates
of interest on loans during the 2002 quarter as compared to the 2001 quarter.
Interest earned on mortgage-backed securities decreased due to a lower volume of
these securities during the 2002 quarter as compared to the 2001 quarter, while
interest earned on investment securities increased primarily due to higher
volumes of these assets during the 2002 quarter as compared to the 2001 quarter.
Total interest expense decreased $186,107, or 26.6%, from $700,592 for the 2001
quarter to $514,485 for the 2002 quarter. The decrease in interest expense
resulted primarily from decreased rates paid on FHLB advances and deposits due
to declining market rates of interest.
The Company provided $15,000 for loan losses during the 2002 quarter as compared
to $16,000 for the 2001 quarter in order to bring the allowance for loan losses
to an adequate level, based on management's evaluation of the quality of the
loan portfolio and current economic conditions.
The $30,945 increase in non-interest income, from $26,503 for the 2001 quarter
to $57,448 for the 2002 quarter, was primarily attributable to increases in
service charges on deposits of $14,164 and other service charges, commissions
and fees of $6,952.
The $124,387 increase in non-interest expense, from $406,474 for the 2001
quarter to $530,861 for the 2002 quarter consisted primarily of increases in
compensation and benefits of $81,390, data processing expenses of $24,319,
occupancy and equipment expenses of $8,795, and directors' fees and expenses of
$6,388, such increases being primarily attributable to the Lincoln acquisition.
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The $8,658 increase in the provision for income taxes from $40,113 for the 2001
quarter to $48,771 for the 2002 quarter reflects the tax effects of the increase
in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S. Government and
government agency obligations and other similar investments having maturities of
five years or less. Such investments are intended to provide a source of
relatively liquid funds upon which the Bank may rely if necessary to fund
deposit withdrawals and for other short-term funding needs. The required level
of such liquid investments is currently 4% of certain liabilities as defined by
the OTS and may be changed to reflect economic conditions.
The liquidity of the Bank, as measured by the ratio of cash, cash equivalents,
qualifying investments, mortgage-backed securities and interest receivable on
investments, and mortgage-backed securities that would qualify except for the
maturity dates, to the sum of total deposits less any share loans on deposits,
averaged 44.9% for the quarter ended December 31, 2002, as compared to 36.4% for
the quarter ended September 30, 2002. At December 31, 2002, the Bank's "liquid"
assets totaled approximately $17.1 million, which was $15.1 million in excess of
the current OTS minimum requirement.
The Bank's liquidity, represented by cash and cash equivalents, is a product of
its operating, investing and financing activities. The Bank's primary sources of
funds are deposits, prepayments and maturities of outstanding loans and
mortgage-backed securities, maturities of short-term investments, and funds
provided from operations. While scheduled loan and mortgage-backed securities
amortization and maturing short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly influenced
generally by interest rates, economic conditions and competition. The Bank
generates cash through its retail deposits and, to the extent deemed necessary,
has utilized borrowings from the FHLB of Cincinnati. Outstanding advances
totaled $9.1 million at December 31, 2002.
Liquidity management is both a daily and long-term function of business
management. The Bank maintains a strategy of investing in loans and
mortgage-backed securities. The Bank uses its sources of funds primarily to meet
its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and investment securities. At December 31, 2002, the total approved loan
commitments outstanding totaled $1.2 million. Certificates of deposit scheduled
to mature in one year or less at December 31, 2002, totaled $23.2 million. The
Bank believes that it has adequate resources to fund all of its commitments and
that it could either adjust the rate of certificates of deposit in order to
retain deposits in changing interest rate environments or replace such deposits
with borrowings if it proved to be cost-effective to do so.
At December 31, 2002, the Bank had regulatory capital which was well in excess
of applicable limits. At December 31, 2002, the Bank was required to maintain
tangible capital of 1.5% of adjusted total assets, core capital of 4.0% of
adjusted total assets and risk-based capital of 8.0% of adjusted risk-weighted
assets. At December 31, 2002, the Bank's tangible capital was $7.8 million, or
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10.4% of adjusted total assets, core capital was $7.8 million, or 10.4% of
adjusted total assets and risk-based capital was $8.2 million, or 19.6% of
adjusted risk-weighted assets, exceeding the requirements by $6.7 million, $5.5
million and $4.8 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements to be implemented which management
believes will have a material adverse effect on the Company's financial position
or results of operations.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
In addition to historical information, forward-looking statements are contained
herein that are subject to risks and uncertainties, that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Form 10-QSB and in the Company's
other Securities and Exchange Commission ("SEC") filings. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the SEC.
CRITICAL ACCOUNTING POLICIES
The Company considers its Allowance for Loan Losses Policy as a policy critical
to the sound operations of the Bank. The Bank provides for loan losses each
period to include both (a) an estimate of the amount of loan losses which
occurred during the period and (b) the ongoing adjustment of prior estimates of
losses occurring in prior periods. The provision for loan losses increases the
allowance for loan losses which is netted against loans in the consolidated
balance sheet. As losses are determined, they are written off against the
allowance. Recoveries of amounts previously written off and added back to the
allowance. Further information regarding the Company's provision and allowance
for loan losses can be found in Notes 1 and 4 to its September 30, 2002
consolidated financial statements.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President along with the Company's
Comptroller, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to the Securities Exchange Act of
1934 ("Exchange Act") Rule 13a-14. Based upon that evaluation, the Company's
President along with the Company's Comptroller concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information
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relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. There have been no significant
changes in the Company's internal controls or in other factors which could
significantly affect these controls subsequent to the date the Company carried
out its evaluation.
Disclosure controls and procedures are Company controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files under the
Exchange Act is accumulated and communicated to the Company's management,
including its President and Comptroller, as appropriate, to allow timely
decisions regarding required disclosure.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Issuer is a part, or to
which any of its property is subject.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None.
b) Reports filed on Form 8-K.
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The Company filed a Current Report on Form 8-K on December 31, 2002 announcing
that the Company had entered into an Agreement and Plan of Merger, dated as of
December 30, 2002 (the "Agreement"), by and between the Company and Classic
Bancshares, Inc. ("Classic"), pursuant to which the Company will merge with and
into Classic, with Classic as the surviving corporation. The Agreement and a
press release regarding the transaction were included as exhibits to such
Current Report.
The Company filed a Current Report on Form 8-K on December 24, 2002 announcing
that it had signed the certification required by Section 906 of the
Sarbanes-Oxley Act of 2002 in connection with the filing of the Company's Annual
Report on Form 10-KSB. The certification was included as an exhibit to such
Current Report.
The Company filed a Current Report on Form 8-K on October 29, 2002 announcing
the release of its press release for the Company's earnings for the fourth
quarter and year ended September 30, 2002. The press release was included as an
exhibit to such Current Report.
The Company filed a Current Report on Form 8-K on October 4, 2002 announcing the
consummation of the acquisition of Lincoln Savings and Loan Association
("Lincoln"). The Agreement and Plan of Reorganization, dated April 25, 2002, by
and between First Federal Savings Bank of Ironton and Lincoln and the press
release announcing the consummation of the merger were filed as exhibits to such
Current Report.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: February 14, 2003 By:/s/ I. Vincent Rice
I. Vincent Rice, President
Date: February 14, 2003 By:/s/ Jeffery W. Clark
Jeffery W. Clark, Comptroller
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CERTIFICATIONS
I, I. Vincent Rice, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First Federal
Financial Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls;
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
17
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ I. Vincent Rice
I. Vincent Rice, President
18
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I, Jeffery W. Clark, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First Federal
Financial Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and to the audit committee
of the registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls;
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Jeffery W. Clark
Jeffery W. Clark, Comptroller
20
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article ELEVENTH of the Certificate of Incorporation of Classic
Bancshares, Inc. requires indemnification of officers and directors as follows:
ELEVENTH:
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A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a
director or an officer of the Corporation or is or was serving at the
request of the Corporation as a director or officer of another
corporation, including, without limitation, any Subsidiary (as defined
in Article EIGHTH herein), partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in
any other capacity while serving as a director or officer, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than such law permitted the
Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith;
provided, however, that, except as provided in Section C hereof with
respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation.
B. The right to indemnification conferred in Section A of this Article
shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only
upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication"), that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article shall be
contract rights and such rights shall continue as to an indemnitee who
has ceased to be a director or officer and shall inure to the benefit
of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article is not paid in full by
the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be
twenty days, the indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought
by the Corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall also be entitled to
be paid the expense of prosecuting or defending such suit. In (i) any
suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a
right to an advancement of expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall
be entitled to recover such expenses upon a final adjudication that,
the indemnitee has not met any applicable standard for indemnification
set forth in the Delaware General Corporation Law. Neither the failure
of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is
proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard
of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to
an advancement of expenses hereunder, or by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article or
otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, By-laws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by a
majority vote of the disinterested directors, grant rights to
indemnification and to the advancement of expenses to any employee or
agent of the Corporation to the fullest extent of the provisions of
this Article with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.
DIRECTOR AND OFFICER INSURANCE POLICY
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Classic Bancorp, Inc. maintains standard insurance coverage for its
directors and officers. Such insurance coverage limits the payment of claims
arising from covered actions to directors and officers to $2 million per
occurrence.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
2.0 Agreement and Plan of Merger, dated as of December 30, 2002, by and
between Classic Bancshares, Inc. and First Federal Financial Bancorp,
Inc. (included as Appendix A to the proxy statement/prospectus
contained in this Registration Statement).
3.1 Certificate of Incorporation of Classic Bancshares, Inc. (incorporated
herein by reference to Classic Bancshares Inc.'s Registration Statement
on Form S-1 initially filed on December 19, 1995, Registration No.
33-87580).
3.2 Bylaws of Classic Bancshares, Inc. (incorporated herein by reference to
Current Report on Form 8-K filed February 25, 2003).
4.0 Specimen Stock Certificate of Classic Bancshares, Inc.
5.0 Opinion of Jenkens & Gilchrist, P.C. regarding legality.*
8.1 Opinion of Jenkens & Gilchrist, P.C. regarding tax matters.*
8.2 Opinion of Kelley Drye & Warren, LLP regarding tax matters.*
10.1 Employment Agreement between Classic Bancshares, Inc. and David B.
Barbour (incorporated herein by reference to Classic Bancshares, Inc.'s
Annual Report on Form 10-KSB for fiscal year ended March 31, 2001).
10.2 Employment Agreement between Classic Bank and Lisah M. Frazier
(incorporated herein by reference to Classic Bancshares, Inc.'s Annual
Report on Form 10-KSB for fiscal year ended March 31, 2001).
10.3 Employment Agreement between Classic Bancshares, Inc. and Robert S.
Curtis (incorporated herein by reference to Classic Bancshares, Inc.'s
Annual Report on Form 10-KSB for fiscal year ended March 31, 2001).
10.4 1996 Stock Option and Incentive Plan (incorporated herein by reference
to Classic Bancshares, Inc.'s Proxy Statement dated June 28, 1996 to
which it is attached as Exhibit A).
10.5 1996 Recognition and Retention Plan (incorporated herein by reference
to Classic Bancshares, Inc.'s Proxy Statement dated June 28, 1996 to
which it is attached as Exhibit B).
10.6 1998 Premium Price Stock Option Growth Plan (incorporated herein by
reference to Classic Bancshares, Inc.'s Proxy Statement dated June 26,
1998 to which it is attached as Exhibit A).
10.7 2001 Premium Price Stock Option Growth Plan (incorporated herein by
reference to Classic Bancshares, Inc.'s Proxy Statement dated July 13,
2001 to which it is attached as Exhibit A).
10.8 Form of Supplemental Retirement Agreement with David B. Barbour.
10.9 Proposed Non-Competition and Consulting Agreement by and between
Classic Bank and I. Vincent Rice (incorporated by reference to Classic
Bancshares, Inc.'s Current Report on Form 8-K filed on December 31,
2002 to which it is attached as Exhibit E to Exhibit 2.1).
10.10 Proposed Employment Agreement between Classic Bancshares and Jeffrey
Clark (incorporated by reference to Classic Bancshares, Inc.'s Current
Report on Form 8-K filed on December 13, 2002 to which it is attached
as Exhibit D to Exhibit 2.1).
21.0 List of Subsidiaries (incorporated herein by reference to Classic
Bancshares, Inc.'s Annual Report on Form 10-KSB for the year ended
March 31, 2002).
23.1 Consent of Jenkens & Gilchrist, P.C.*
23.2 Consent of Jenkens & Gilchrist, P.C. *
23.3 Consent of Kelley Drye & Warren, LLP.*
23.4 Consent of Smith, Goolsby, Artis & Reams, P.S.C.
23.5 Consent of Kelly Galloway & Company, P.S.C.
23.6 Consent of Keefe, Bruyette & Woods, Inc.
23.7 Consent of Keller & Co., Inc.
24.0 Powers of Attorney (included herewith on signature page).
99.1 Opinion of Keefe, Bruyette & Woods, Inc. included as Annex B to the
proxy statement/prospectus contained in this Registration Statement).
99.2 Opinion of Keller & Co. included as Annex C to the proxy
statement/prospectus contained in this Registration Statement).
99.3 Form of proxy of First Federal Financial Bancorp, Inc.*
99.4 Form of proxy of Classic Bancshares, Inc.*
99.5 Consent of Steven C. Millison.*
99.6 Cover letter for Election Form.*
99.7 Election Form and Letter of Transmittal.*
99.8 Notice of Guaranteed Delivery.*
99.9 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.*
* To be filed by amendment.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration
Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(d) (1) The undersigned Registrant hereby undertakes as follows:
that prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a
part of this Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule
145(c) of the Securities Act, the issuer undertakes that such
reoffering prospectus will contain the information called for
by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant hereby undertakes that every
prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is
used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that, in
the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(g) The undersigned Registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement
when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act, Classic Bancshares,
Inc., the Registrant, has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
_________, State of ___________, on _____________ __, 2003.
CLASSIC BANCSHARES, INC.
By: /s/ David B. Barbour
----------------------------------
David B. Barbour
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on ________, 2003.
We the undersigned officers and directors of Classic Bancshares, Inc.
hereby severally and individually constitute and appoint David B. Barbour and
Lisah M. Frazier as the true and lawful attorneys-in-fact and agents (with full
power of substitution in each case) of each of us to execute, in the name, place
and stead of each of us (individually and in any capacity stated below), any and
all amendments to this Registration Statement and all instruments necessary or
advisable in connection therewith, and to file the same with the SEC, said
attorneys-in-fact and agents to have power to act and to have full power and
authority to do and perform, in the name and on behalf of each of the
undersigned, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as any of the undersigned
might or could do in person and we hereby ratify and confirm our signatures as
they may be signed by or said attorneys-in-fact and agents to any and all such
amendments and instruments.
NAME TITLE
- ---- -----
/s/ David B. Barbour President, Chief Executive Officer and
- ------------------------------ Director (principal executive officer)
David B. Barbour
/s/ Lisah M. Frazier Chief Operating Officer, Chief
- ------------------------------ Financial Officer and Director
Lisah M. Frazier
/s/ Robert L. Bayes Executive Vice President and
- ------------------------------ Director
Robert L. Bayes
/s/ C. Cyrus Reynolds Chairman of the Board
- ------------------------------
C. Cyrus Reynolds
/s/ Robert B. Keifer, Jr. Director
- ------------------------------
Robert B. Keifer, Jr.
/s/ David A. Lang Director
- ------------------------------
David A. Lang
/s/ E.B. Gevedon, Jr. Director
- ------------------------------
E.B. Gevedon, Jr.
/s/ Robert A. Moyer, Jr. Director
- ------------------------------
Robert A. Moyer, Jr.
/s/ John W. Clark Director
- ------------------------------
John W. Clark
/s/ Jeffrey P. Lopez, M.D. Director
- ------------------------------
Jeffrey P. Lopez, M.D.
EXHIBIT INDEX
-------------
2.0 Agreement and Plan of Merger, dated as of December 30, 2002, by and
between Classic Bancshares, Inc. and First Federal Financial Bancorp,
Inc. (included as Appendix A to the proxy statement/prospectus
contained in this Registration Statement).
3.1 Certificate of Incorporation of Classic Bancshares, Inc. (incorporated
herein by reference to Classic Bancshares Inc.'s Registration Statement
on Form S-1 initially filed on December 19, 1995, Registration No.
33-87580).
3.2 Bylaws of Classic Bancshares, Inc. (incorporated herein by reference to
Current Report on Form 8-K filed February 25, 2003).
4.0 Specimen Stock Certificate of Classic Bancshares, Inc.
5.0 Opinion of Jenkens & Gilchrist, P.C. regarding legality.*
8.1 Opinion of Jenkens & Gilchrist, P.C. regarding tax matters.*
8.2 Opinion of Kelley Drye & Warren, LLP regarding tax matters.*
10.1 Employment Agreement between Classic Bancshares, Inc. and David B.
Barbour (incorporated herein by reference to Classic Bancshares, Inc.'s
Annual Report on Form 10-KSB for fiscal year ended March 31, 2001).
10.2 Employment Agreement between Classic Bank and Lisah M. Frazier
(incorporated herein by reference to Classic Bancshares, Inc.'s Annual
Report on Form 10-KSB for fiscal year ended March 31, 2001).
10.3 Employment Agreement between Classic Bancshares, Inc. and Robert S.
Curtis (incorporated herein by reference to Classic Bancshares, Inc.'s
Annual Report on Form 10-KSB for fiscal year ended March 31, 2001).
10.4 1996 Stock Option and Incentive Plan (incorporated herein by reference
to Classic Bancshares, Inc.'s Proxy Statement dated June 28, 1996 to
which it is attached as Exhibit A).
10.5 1996 Recognition and Retention Plan (incorporated herein by reference
to Classic Bancshares, Inc.'s Proxy Statement dated June 28, 1996 to
which it is attached as Exhibit B).
10.6 1998 Premium Price Stock Option Growth Plan (incorporated herein by
reference to Classic Bancshares, Inc.'s Proxy Statement dated June 26,
1998 to which it is attached as Exhibit A).
10.7 2001 Premium Price Stock Option Growth Plan (incorporated herein by
reference to Classic Bancshares, Inc.'s Proxy Statement dated July 13,
2001 to which it is attached as Exhibit A).
10.8 Form of Supplemental Retirement Agreement with David B. Barbour.
10.9 Proposed Non-Competition and Consulting Agreement by and between
Classic Bank and I. Vincent Rice (incorporated by reference to Classic
Bancshares, Inc.'s Current Report on Form 8-K filed on December 31,
2002 to which it is attached as Exhibit E to Exhibit 2.1).
<page>
10.10 Proposed Employment Agreement between Classic Bancshares and Jeffrey
Clark (incorporated by reference to Classic Bancshares, Inc.'s Current
Report on Form 8-K filed on December 31, 2002 to which it is attached
as Exhibit D to Exhibit 2.1).
21.0 List of Subsidiaries (incorporated herein by reference to Classic
Bancshares, Inc.'s Annual Report on Form 10-KSB for the year ended
March 31, 2002).
23.1 Consent of Jenkens & Gilchrist, P.C.*
23.2 Consent of Jenkens & Gilchrist, P.C. *
23.3 Consent of Kelley Drye & Warren, LLP.*
23.4 Consent of Smith, Goolsby, Artis & Reams, P.S.C.
23.5 Consent of Kelly Galloway & Company, P.S.C.
23.6 Consent of Keefe, Bruyette & Woods, Inc.
23.7 Consent of Keller & Co., Inc.
24.0 Powers of Attorney (included herewith on signature page).
99.1 Opinion of Keefe, Bruyette & Woods, Inc. included as Annex B to the
proxy statement/prospectus contained in this Registration Statement).
99.2 Opinion of Keller & Co. included as Annex C to the proxy
statement/prospectus contained in this Registration Statement).
99.3 Form of proxy of First Federal Financial Bancorp, Inc.*
99.4 Form of proxy of Classic Bancshares, Inc.*
99.5 Consent of Steven C. Millison.*
99.6 Cover letter for Election Form.*
99.7 Election Form and Letter of Transmittal.*
99.8 Notice of Guaranteed Delivery.*
99.9 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.*
* To be filed by amendment.