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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer Identification Number)
incorporation or organization)
344 Seventeenth Street, Ashland, Kentucky 41101
- ----------------------------------------- --------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 326-2801
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 August 9, 2002, there were 1,322,500 shares of the Registrant's
common stock issued and 1,114,086 outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
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CLASSIC BANCSHARES, INC.
INDEX
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Page
Number
PART I. FINANCIAL INFORMATION ------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (Unaudited)
and March 31, 2002 3
Consolidated Statements of Income for the three months
ended June 30, 2002 and 2001 4
Consolidated Statements of Comprehensive Income for the
three months ended June 30, 2002 and 2001 5
Consolidated Statements of Stockholders' Equity for the
three months ended June 30, 2002 (Unaudited) and Year
Ended March 31, 2002 6
Consolidated Statements of Cash Flows for the three
months ended June 30, 2002 and 2001 7-8
Notes to Consolidated Financial Statements 9-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
PART II. OTHER INFORMATION 18
Signatures 19
Index to Exhibits 20
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2002 2002
------------- -------------
(Unaudited)
ASSETS
Cash and due from bank $ 5,183,698 $ 5,400,046
Federal funds sold -- --
Securities available for sale 26,557,799 25,803,491
Mortgage-backed and related securities available for sale 8,871,513 9,063,617
Loans receivable, net 171,169,614 160,315,663
Real estate acquired in the settlement of loans 70,621 77,622
Accrued interest receivable 1,295,160 1,158,144
Federal Home Loan Bank stock 1,863,200 1,480,300
Premises and equipment, net 5,668,099 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 1,252,732 1,227,518
------------- -------------
TOTAL ASSETS $ 227,486,985 $ 215,447,076
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Non-interest bearing demand deposits $ 20,643,193 $ 20,404,210
Savings, NOW, and money market demand deposits 56,441,921 57,433,787
Other time deposits 82,742,380 81,036,439
------------- -------------
Total deposits 159,827,494 158,874,436
Securities sold under agreements to repurchase 6,017,866 5,395,941
Advances from Federal Home Loan Bank 36,569,864 27,401,157
Other short-term borrowings 460,902 445,806
Accrued expenses and other liabilities 291,092 501,744
Accrued interest payable 354,331 374,276
Accrued income taxes 188,436 --
Deferred income taxes 728,009 472,761
------------- -------------
Total Liabilities $ 204,437,994 $ 193,466,121
------------- -------------
Commitments and contingencies
Stockholders' Equity
Common stock, $.01 par value, 1,322,500 shares
issued and 1,120,586 shares outstanding $ 13,225 $ 13,225
Additional paid-in capital 20,373,556 20,373,556
Retained earnings - substantially restricted 5,707,510 5,136,114
Accumulated other comprehensive income (loss) 169,585 (325,896)
Unearned ESOP shares (643,310) (643,310)
Unearned RRP shares (17,653) (18,812)
Treasury stock, at cost (2,553,922) (2,553,922)
------------- -------------
Total Stockholders' Equity $ 23,048,991 $ 21,980,955
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 227,486,985 $ 215,447,076
============= =============
See accompanying Accountant's Review Report and notes to
consolidated financial statements
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
------------ ------------
INTEREST INCOME
Loans $ 3,007,311 $ 3,014,104
Investment securities 386,363 348,233
Mortgage-backed securities 127,632 44,371
Other interest earning assets 2,301 2,925
------------ ------------
Total Interest Income 3,523,607 3,409,633
------------ ------------
INTEREST EXPENSE
Interest on deposits 975,969 1,537,275
Interest on FHLB advances 263,592 198,141
Interest on other borrowed funds 17,157 38,641
------------ ------------
Total Interest Expense 1,256,718 1,774,057
------------ ------------
Net Interest Income 2,266,889 1,635,576
Provision for loss on loans 160,000 70,000
------------ ------------
Net interest income after
provision for loss on loans 2,106,889 1,565,576
------------ ------------
NON-INTEREST INCOME
Service charges and other fees 303,335 295,682
Gain on sale of securities 4,189 --
Other income 52,467 37,632
------------ ------------
Total Non-Interest Income 359,991 333,314
------------ ------------
NON-INTEREST EXPENSES
Employee compensation and benefits 758,685 658,483
Occupancy and equipment expense 244,609 236,502
Federal deposit insurance premiums 7,050 3,616
Loss (gain) on foreclosed real estate 15,238 (15,451)
Other general and administrative
expenses 547,924 474,473
------------ ------------
Total Non-Interest Expense 1,573,506 1,357,623
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 893,374 541,267
Income tax expense 237,847 127,828
------------ ------------
NET INCOME $ 655,527 $ 413,439
============ ============
Basic earnings per share $ 0.62 $ 0.39
============ ============
Diluted earnings per share $ 0.58 $ 0.37
============ ============
See accompanying Accountant's Review Report and notes to
consolidated financial statements
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
2002 2001
------------ ------------
Net Income $ 655,527 $ 413,439
------------ ------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax 498,246 (33,785)
Reclassification adjustments for realized gains
(losses) included in earnings, net of tax (2,765) --
------------ ------------
Other comprehensive income 495,481 (33,785)
------------ ------------
Comprehensive Income (Loss) $ 1,151,008 $ 379,654
============ ============
Accumulated Other Comprehensive Income (Loss) $ 169,585 $ (204,858)
============ ============
See accompanying Accountant's Review Report and notes to
consolidated financial statements
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET UNREALIZED
ADDITIONAL GAIN (LOSS) ON
COMMON PAID-IN RETAINED AVAILABLE FOR UNEARNED UNEARNED
STOCK CAPITAL EARNINGS SALE SECURITIES ESOP SHARES RRP SHARES
------------ ------------ ------------ ------------ ------------ ------------
Balances at April 1, 2001 $ 13,225 $ 20,317,385 $ 3,275,716 $ (171,073) $ (689,320) $ (58,434)
Net income for the year
ended March 31, 2002 -- -- 2,199,887 -- -- --
Dividend paid ($.32 per share) -- -- (339,489) -- -- --
ESOP shares earned -- 22,519 -- -- 46,010 --
RRP shares earned -- -- -- -- -- 43,810
RRP shares granted -- 1,250 -- -- -- (4,188)
Tax benefit from RRP -- 32,402 -- -- -- --
Purchased 24,000 treasury shares -- -- -- -- -- --
Change in unrealized gain -- -- -- -- -- --
(loss) on available for sale
securities, net of applicable
deferred income taxes of $79,757 -- -- -- (154,823) -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances at March 31, 2002 13,225 20,373,556 5,136,114 (325,896) (643,310) (18,812)
Net income for the three months
ended June 30, 2002 -- -- 655,527 -- -- --
Dividend paid ($.08 per share) -- -- (84,131) -- -- --
RRP shares earned -- -- -- -- -- 1,159
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
deferred income taxes of $255,248 -- -- -- 495,481 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances at June 30, 2002 $ 13,225 $ 20,373,556 $ 5,707,510 $ 169,585 $ (643,310) $ (17,653)
============ ============ ============ ============ ============ ============
TREASURY
STOCK TOTAL
------------ ------------
Balances at April 1, 2001 $ (2,227,192) $ 20,460,307
Net income for the year
ended March 31, 2002 -- 2,199,887
Dividend paid ($.32 per share) -- (339,489)
ESOP shares earned -- 68,529
RRP shares earned -- 43,810
RRP shares granted 2,938 --
Tax benefit from RRP -- 32,402
Purchased 24,000 treasury shares (329,668) (329,668)
Change in unrealized gain -- --
(loss) on available for sale
securities, net of applicable
deferred income taxes of $79,757 -- (154,823)
------------ ------------
Balances at March 31, 2002 (2,553,922) 21,980,955
Net income for the three months
ended June 30, 2002 -- 655,527
Dividend paid ($.08 per share) -- (84,131)
RRP shares earned -- 1,159
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
deferred income taxes of $255,248 -- 495,481
------------ ------------
Balances at June 30, 2002 $ (2,553,922) $ 23,048,991
============ ============
See accompanying Accountant's Review Report and notes to
consolidated financial statements
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net Income $ 655,527 $ 413,439
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 98,003 124,428
Provision for loss on loans 160,000 70,000
Gain on sale of securities available for sale (4,189) --
Loss (gain) on foreclosed real estate 15,001 (15,452)
Federal Home Loan Bank stock dividends (19,900) (25,100)
Net amortization of mortgage-backed and investment
securities 16,627 35,412
RRP shares earned 1,159 28,768
Decrease (increase) in:
Accrued interest receivable (137,016) (88,225)
Other assets (27,954) (12,310)
Increase (decrease) in:
Accrued interest payable (19,945) (54,853)
Accrued income taxes 188,436 82,167
Accounts payable and accrued expenses (210,652) (313,210)
------------ ------------
Net cash provided by operating activities 715,097 245,064
============ ============
INVESTING ACTIVITIES
Securities:
Proceeds from sale, maturities or calls 1,188,700 --
Purchased (1,408,175) --
Mortgage-backed securities:
Principal payments 395,562 400,578
Purchase of Federal Home Loan Bank Stock (363,000) --
Loan originations and principal payments, net (11,021,951) (5,648,683)
Proceeds from sale of foreclosed real estate -- 120,000
Purchases of software -- (1,747)
Purchases of premises and equipment (397,236) (59,228)
------------ ------------
Net cash used by investing activities (11,606,100) (5,189,080)
============ ============
See accompanying Accountant's Review Report and notes to
consolidated financial statements
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
----------------------------
2002 2001
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits $ 953,058 $ 1,666,973
Net proceeds from FHLB borrowings 9,168,707 1,389,629
Increase in securities sold under agreements to repurchase 621,925 947,366
Net increase in short-term borrowings 15,096 232,478
Purchase of treasury stock -- (64,062)
Dividends paid (84,131) (85,173)
------------ ------------
Net cash (used) provided by financing activities 10,674,655 4,087,211
------------ ------------
Increase (decrease) in cash and cash equivalents (216,348) (856,805)
Cash and cash equivalent at beginning of period 5,400,046 5,606,391
------------ ------------
Cash and cash equivalents at end of period $ 5,183,698 $ 4,749,586
============ ============
Additional cash flows and supplementary information
Cash paid during the period for:
Interest on deposits and borrowings $ 555,456 $ 508,530
Taxes $ 200,000 $ 50,000
Assets acquired in settlement of loans $ 8,000 $ 172,971
Net unrealized (loss) gain on securities available for sale $ 495,481 $ (33,785)
See accompanying Accountant's Review Report and notes to
consolidated financial statements
8
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 June 30, 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 months ended June 30,
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 June
30, 2002, and the results of operations for all interim periods presented.
Operating results for the three months ended June 30, 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 1,054,941 and 1,065,508 for the three-month periods ended June
30, 2002 and 2001, respectively. The weighted average number of shares used in
the diluted earnings per share computations was 1,132,791 and 1,108,700 for the
three-month periods ended June 30, 2002 and 2001, respectively.
Options to purchase 187,850 shares of common stock were outstanding at June
30, 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
9
purchase 181,750 shares of common stock were outstanding at June 30, 2001 but
10,550 of those shares were not included in the computation of diluted earnings
per share due to their anti-dilutive effect.
(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 three months ended
June 30, 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 June 30, 2002 $ 5,555
--------
The transitional goodwill impairment test was performed in the second quarter of
the Company's 2002 fiscal year. The fair value of that 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). The Banking
segment will be tested for impairment in the second quarter of the Company's
2003 fiscal year. The fair value of the reporting unit will be estimated using a
multiple of earnings as determined by current industry information.
(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'
10
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 $22,871 and $16,414 for the three months ended June
30, 2002 and 2001, respectively. As of June 30, 2002, the Company considered
64,331 shares as unearned ESOP shares with a fair value of $1,395,983.
(6) STOCK OPTION AND INCENTIVE PLAN AND RECOGNITION AND RETENTION PLAN
On July 29, 1996, the shareholders of the Company ratified the adoption of
the Company's 1996 Stock Option and Incentive Plan and the Recognition and
Retention Plan ("RRP"). Pursuant to the Stock Option Plan, 132,250 shares of the
Company's common stock are reserved for issuance, of which the Company has
granted options on 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 July 15, 2002, the Board declared a cash dividend of $.08 per share
payable on August 12, 2002 to shareholders of record on July 29, 2002.
(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. At the June 30, 2002, the Company had spent approximately $353,000
towards the purchase of land and the construction of the new facility.
11
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's total assets increased $12.1 million from $215.4 million at
March 31, 2002 to $227.5 million at June 30, 2002. The increase was due
primarily to an increase in loans of $10.9 million, an increase in investment
securities of approximately $800,000, an increase in Federal Home Loan Bank
stock of $400,000 and an increase in premises and equipment of approximately
$300,000 offset by a decrease in cash and cash equivalents of approximately
$200,000 and a decrease in mortgage-backed securities of approximately $200,000.
Net loans receivable increased $10.9 million from $160.3 million at March
31, 2002 to $171.2 million at June 30, 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 $4.6 million,
commercial business loans increased approximately $3.4 million, 1-4 family
mortgage loans increased approximately $1.6 million and commercial real estate
loans increased approximately $1.3 million.
Investment securities increased $800,000 from $25.8 million at March 31,
2002 to $26.6 million at June 30, 2002. The increase was due primarily to
purchases of $1.4 million and an increase in the market value of these available
for sale securities of approximately $600,000 offset by sales, maturities and
redemptions of $1.2 million.
Mortgage-backed securities decreased approximately $200,000 from $9.1
million at March 31, 2002 to $8.9 million at June 30, 2002. The decrease was
primarily the result of principal repayments of $400,000 during the period
offset by an increase in the market value of these available for sale securities
of approximately $200,000.
Net deposits increased approximately $900,000 from $158.9 million at March
31, 2002 to $159.8 million at June 30, 2002. Non-interest bearing demand
deposits increased approximately $200,000, and other time deposits consisting
primarily of certificates of deposit increased approximately $1.7 million offset
by a decrease in savings, NOW, and money market accounts of approximately $1.0
million. The Company primarily utilized Federal Home Loan Bank borrowings, which
increased $9.2 million from $27.4 million at March 31, 2002 to $36.6 million at
June 30, 2002, to fund loan demand. The increased borrowings consisted of both
short-term, variable rate borrowings and $20.3 million of long-term, fixed rate
borrowings with an average remaining maturity of approximately 4 years. The
Company utilizes long-term, fixed rate borrowings to fund certain loans in an
attempt to lock in the spread earned for the life of the loan thereby reducing
interest rate risk in future periods. The Company continues to utilize FHLB
borrowing as a source of funding due to the high rates currently paid on
deposits within the Company's market area.
Total stockholders' equity was $23.0 million at June 30, 2002 compared to
$22.0 million at March 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
partially offset by cash dividends paid.
12
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 and local real estate values, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake - and specifically declines any obligation -
to publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
- ----------------------------------------------------------------------------
ENDED JUNE 30, 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 $656,000 for the three months ended June
30, 2002 compared to net income of $413,000 for the three months ended June 30,
2001. The increase in income of $243,000 between the two periods was primarily
the result of an increase in net interest income of $631,000 and an increase in
non-interest income of $27,000 partially offset by an increase in provision for
loss on loans of $90,000, an increase in non-interest expenses of $215,000 and
an increase in income taxes of $110,000.
INTEREST INCOME. Total interest income increased $114,000 for the three
months ended June 30, 2002 as compared to the three months ended June 30, 2001.
The increase in interest income for the three-month period resulted primarily
from an increase in the average balance of interest-earning assets of $33.1
million from $172.6 million for the three months ended June 30, 2001 to $205.7
million for the three months ended June 30, 2002. The increase in the average
balance of interest-earning assets was due primarily to the increase in the
average balance of loans and an increase in the average balance of
13
mortgage-backed securities. The average yield on interest-earning assets was
7.1% for the three months ended June 30, 2002 compared to 8.1% for the three
months ended June 30, 2001. The decrease in the yield on interest-earning assets
was due to a decrease in market interest rates between the two periods. The
volume of interest-earning assets was the main driver for the increase in
interest income despite the decline in interest rates. Tax equivalent
adjustments were made to the yield.
INTEREST EXPENSE. Interest expense decreased $517,000 for the three months
ended June 30, 2002 as compared to the same period in 2001. Interest expense
decreased for the period primarily due to a decrease in the average rate paid on
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities was 2.8% for the three months ended June 30, 2002 compared to 4.7%
for the three months ended June 30, 2001. The decrease in the average rate paid
was due to a decrease in interest rates between the two periods. Most of the
Company's interest-bearing liabilities repriced to lower interest rates since
June 30, 2001. 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 decline as rates decreased. Within the past three to six months
some of the borrowings have been restructured to long-term, fixed rate
borrowings. Furthermore, within a twelve-month period of time from June 2001 to
June 2002, approximately 84% of total certificates of deposit repriced to lower
interest rates.
The average balance of interest-bearing liabilities increased $28.7 million
from $151.0 million for the three months ended June 30, 2001 to $179.7 million
for the three months ended June 30, 2002. The increase in these balances is the
result of an increase in the average balance of interest-bearing transaction
accounts in the past twelve months, an increase in the average balance of
certificate of deposit accounts and an increase in the average balance of FHLB
and other borrowings.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses totaled
$160,000 for the three months ended June 30, 2002 compared to $70,000 for the
three months ended June 30, 2001 based on management's overall assessment of the
loan portfolio. The provision recorded for the three-month period was based on
management's evaluation of the Company's current portfolio including factors
such as the increase in non-residential loans, overall growth in the loan
portfolio and an increase in non-performing assets. 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.
NON-INTEREST INCOME. Non-interest income increased approximately $27,000
for the three months ended June 30, 2002 compared to the same period in 2001.
The increase for the three-month period is primarily the result of an increase
in service charges and other fees on deposits of $8,000, a gain on the sale of
securities of $4,000 and an increase in other income of $15,000. The increase in
other income for the three-month period is primarily the result of an increase
in commissions received on credit life insurance sold during the origination of
loans.
14
NON-INTEREST EXPENSE. Non-interest expenses increased $215,000 for the
three months ended June 31, 2002 compared to the same period in 2001.
Non-interest expenses increased for the three-month period due to an increase in
employee compensation and benefits of $100,000, an increase in occupancy and
equipment expense of $8,000, an increase in FDIC premiums of $3,000, an increase
in the loss reported on foreclosed real estate of $31,000, an increase in
advertising expense of $30,000, an increase in stationary, printing and supplies
of $30,000, and an increase in other general and administrative expenses of
$13,000.
Employee compensation and benefits increased primarily due to the hiring of
staff for our banking office in Greenup County opening 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. Occupancy and equipment expense and stationary, printing and
supplies also increased due to expenses related to the opening of the Greenup
County office.
The loss reported on foreclosed real estate was due to the write-down of a
piece of foreclosed real estate. Advertising expenses increased due to the
undertaking of an aggressive advertising campaign utilizing the endorsement of a
national celebrity.
INCOME TAX EXPENSE. Income tax expense increased $110,000 for the three
months ended June 30, 2001 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, 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 June 30, 2002 was $1.8 million or 1.0% 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 $160,000 for the three-month
period, and had net recoveries of approximately $3,000 for the three-month
period. The allowance for loan losses at June 30, 2002 was allocated as follows:
$289,000 to one-to-four family real estate loans, $39,000 to commercial real
estate, $44,000 to commercial business loans, $31,000 to consumer loans and $1.4
million remained unallocated.
The ratio of non-performing assets to total assets is one indicator of
other exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans, accruing loans delinquent 90 days or more, and foreclosed
assets, which have been acquired as a result of foreclosure or deed-in-lieu of
foreclosure. For all periods presented the Company had no troubled debt
restructurings. The following table sets forth the amount of non-performing
assets at the periods indicated.
June 30, 2002 March 31, 2002
------------- --------------
(Dollars in Thousands)
Non-Accruing Loans............................. $ 439 $ 412
Accruing Loans Delinquent 90 Days or More...... 398 244
Foreclosed Assets.............................. 75 82
------- -------
Total Non-Performing Assets.................... $ 912 $ 738
Total Non-Performing Assets as a
Percentage of Total Assets................... .4% .3%
15
Total non-performing assets increased $170,000 from March 31, 2002 to June
30, 2002 due primarily to an increase in accruing 1-4 family real estate loans
delinquent 90 days or more. 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 June 30, 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 June 30, 2002 and March 31,
2002, cash and cash equivalents totaled $5.2 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 and
redemptions of investment securities and principal payments from mortgage-backed
securities, deposits and Federal Home Loan Bank of Cincinnati advances. While
scheduled loan repayments and proceeds from maturing investment securities and
principal payments on mortgage-backed securities are relatively predictable,
deposit flows and early repayments are more influenced by interest rates,
general economic conditions and competition. Certificates of deposit as of June
30, 2002 maturing within one year total $59.8 million.
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 the goals of its asset/liability
management program. Excess liquidity is generally invested in interest-bearing
overnight deposits and other short-term liquid asset funds. If funds are
required beyond the funds generated internally, the subsidiaries of the Company
have the ability to borrow funds from the FHLB. At June 30, 2002, the Company
had $36.6 million in borrowings outstanding with the FHLB.
At June 30, 2002, the Company had outstanding commitments to originate
loans of $13.7 million. The Company anticipates that it will have sufficient
funds available to meet its current commitments principally through the use of
current liquid assets and through its borrowing capacity with the FHLB.
Classic Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). The following table
summarizes, as of June 30, 2002, the capital requirements applicable to Classic
Bank and its actual capital ratios. As of June 30, 2002, Classic Bank was in
compliance with its capital requirements.
16
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
------------------- ------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $13,172 8.0% $17,175 10.4%
Tier 1 Capital
(to Adjusted Total Assets) 8,623 4.0 15,384 7.1
The Company is subject to the regulatory capital requirements of the
Federal Reserve Board that are similar to the capital requirements for FDIC
insured banks. The following table summarizes, as of June 30, 2002, the capital
requirements applicable to the Company and its actual capital ratios. As of June
30, 2002, the Company was in compliance with these capital requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANCSHARES, INC.
------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $13,221 8.0% $19,115 11.6%
Tier 1 Capital
(to Adjusted Total Assets) 8,958 4.0 17,324 7.7
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.
17
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
b. Reports on Form 8-K
The Registrant filed the following current reports on Form 8-K
during the three months ended June 30, 2002:
Report filed on June 4, 2002 containing press release, dated May
30, 2002 announcing earnings for the fiscal year ended March 31,
2002.
Report filed on June 11, 2002 containing press release, dated June
6, 2002 announcing its intent to initiate a stock repurchase
program.
18
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: August 14, 2002 /s/ David B. Barbour
---------------------- ---------------------------------------
David B. Barbour, President, Chief
Executive Officer and Director
(Duly Authorized Officer)
Date: August 14, 2002 /s/ Lisah M. Frazier
---------------------- ---------------------------------------
Lisah M. Frazier, Chief Operating
Officer, Treasurer and Chief Financial
Officer (Principal Financial Officer)
19
INDEX TO EXHIBITS
Exhibit
Number
------
28 Accountant's Review Report
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
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
20