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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 September 30, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number 0-27170
CLASSIC BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 61-1289391
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(State or other jurisdiction of (I.R.S. Employer 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) 326-2800
--------------
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 November 6, 2003, there were 1,276,476 shares of the Registrant's
common stock outstanding.
Transitional Small Disclosure (check one): Yes [_] No [X]
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CLASSIC BANCSHARES, INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
and March 31, 2003 3
Consolidated Statements of Income for the three and
six months ended September 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income for
the three and six months ended September 30, 2003 and 2002 5
Consolidated Statements of Stockholders' Equity for the
six months ended September 30, 2003 6
Consolidated Statements of Cash Flows for the six months
ended September 30, 2003 and 2002 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-19
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION 20
Signatures 21
Index to Exhibits 22
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, MARCH 31,
2003 2003
--------- ---------
(UNAUDITED)
(IN THOUANDS)
ASSETS
Cash and due from banks $ 16,273 $ 8,124
Federal funds sold 110 24
Securities available for sale 43,021 37,843
Loans receivable, net 249,753 187,175
Accrued interest receivable 1,489 1,157
Federal Home Loan Bank stock 2,837 1,949
Premises and equipment, net 7,769 6,267
Goodwill 8,236 5,555
Other intangible assets 872 --
Prepaid expenses and other assets 2,777 1,787
--------- ---------
TOTAL ASSETS $ 333,137 $ 249,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Non-interest bearing demand deposits $ 28,606 $ 23,159
Savings, NOW, and money market demand deposits 104,739 65,762
Other time deposits 128,028 101,235
--------- ---------
Total deposits 261,373 190,156
Securities sold under agreements to repurchase 9,282 4,382
Advances from Federal Home Loan Bank 27,344 28,126
Other short-term borrowings 270 6
Accrued expenses and other liabilities 1,926 1,445
Accrued interest payable 326 344
--------- ---------
Total Liabilities $ 300,521 $ 224,459
--------- ---------
Stockholders' Equity
Common stock, $.01 par value, 1,551,165 and 1,322,500 shares
issued and 1,276,476 and 1,216,035 shares outstanding $ 16 $ 13
Additional paid-in capital 26,308 20,436
Retained earnings 9,186 7,721
Accumulated other comprehensive income (loss) 581 751
Unearned ESOP shares (57,675 and 59,857 shares) (577) (599)
Unearned RRP shares (750 and 850 shares) (10) (12)
Treasury stock, at cost (217,014 shares) (2,888) (2,888)
--------- ---------
Total Stockholders' Equity $ 32,616 $ 25,422
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 333,137 $ 249,881
========= =========
See accompanying notes to consolidated financial statements.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2003 2002 2003 2002
------ ------ ------ ------
(IN THOUSANDS)
INTEREST INCOME
- ---------------
Loans $3,946 $3,059 $7,103 $6,066
Securities 463 474 942 968
Dividends on Federal Home Loan Bank stock 28 23 49 43
Other interest 18 1 19 3
------ ------ ------ ------
TOTAL INTEREST INCOME 4,455 3,557 8,113 7,080
------ ------ ------ ------
INTEREST EXPENSE
- ----------------
Deposits 1,122 1,021 2,070 1,997
Federal Home Loan Bank advances 313 246 556 510
Securities sold under repurchase agreements 18 16 31 33
Other short-term borrowings 1 2 3 2
------ ------ ------ ------
TOTAL INTEREST EXPENSE 1,454 1,285 2,660 2,542
------ ------ ------ ------
NET INTEREST INCOME 3,001 2,272 5,453 4,538
Provision for loss on loans 46 50 92 210
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOSS ON
LOANS 2,955 2,222 5,361 4,328
------ ------ ------ ------
NON-INTEREST INCOME
- -------------------
Service charges and other fees 451 341 850 645
Gain on sale of securities 1 -- 1 4
Other income 127 55 224 107
------ ------ ------ ------
TOTAL NON-INTEREST INCOME 579 396 1,075 756
------ ------ ------ ------
NON-INTEREST EXPENSES
- ---------------------
Employee compensation and benefits 1,016 851 1,918 1,610
Occupancy and equipment expense 312 231 585 476
Advertising 143 73 239 157
Communications 74 53 126 91
Franchise and deposit taxes 63 57 126 114
Directors fees 25 24 49 48
Professional fees 79 40 145 96
Stationery and supplies 111 66 207 144
Other operating expenses 440 219 746 452
------ ------ ------ ------
TOTAL NON-INTEREST EXPENSE 2,263 1,614 4,141 3,188
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 1,271 1,004 2,295 1,896
- --------------------------
Income tax expense 366 275 645 513
------ ------ ------ ------
NET INCOME $ 905 $ 729 $1,650 $1,383
- ---------- ====== ====== ====== ======
Basic earnings per share $ 0.64 $ 0.63 $ 1.28 $ 1.20
Diluted earnings per share $ 0.59 $ 0.58 $ 1.16 $ 1.10
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
Net Income $ 905 $ 729 $ 1,650 $ 1,383
-------- -------- -------- --------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax (672) 638 (171) 1,129
Reclassification adjustments for realized gains
(losses) included in earnings, net of tax 1 -- 1 4
-------- -------- -------- --------
Other comprehensive income (671) 638 (170) 1,133
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 234 $ 1,367 $ 1,480 $ 2,516
======== ======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME $ 581 $ 808 $ 581 $ 808
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER UNEARNED UNEARNED
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP RRP TREASURY
STOCK CAPITAL EARNINGS INCOME SHARES SHARES STOCK TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
BALANCES AT APRIL 1, 2003 $ 13 $ 20,436 $ 7,721 $ 751 $ (599) $ (12) $ (2,888) $ 25,422
Net income for the six months
ended September 30, 2003 -- -- 1,650 -- -- -- -- 1,650
Dividend paid ($.08 per share) -- -- (185) -- -- -- -- (185)
Commitment of shares to be
released under ESOP (2,182) -- 44 -- -- 22 -- -- 66
RRP shares earned (100) -- -- -- -- -- 2 -- 2
Additional shares issued (228,665) 3 5,828 -- -- -- -- -- 5,831
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
taxes and reclassifications -- -- -- (170) -- -- -- (170)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCES AT SEPTEMBER 30, 2003 $ 16 $ 26,308 $ 9,186 $ 581 $ (577) $ (10) $ (2,888) $ 32,616
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
-------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net Income $ 1,650 $ 1,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 346 197
Provision for loss on loans 92 210
Gain on sale of securities available for sale (1) (4)
Gain on sale of fixed assets (13) --
Loss on foreclosed real estate 15 12
Federal Home Loan Bank stock dividends (49) (42)
Net amortization of securities 74 37
ESOP shares earned 66 49
RRP shares earned 2 1
Decrease (increase) in:
Accrued interest receivable (7) 9
Other assets (77) (82)
Increase (decrease) in:
Accrued interest payable (207) (20)
Accounts payable and accrued expenses (374) 66
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,517 1,816
-------- --------
INVESTING ACTIVITIES
Securities:
Proceeds from sale, maturities or calls 2,237 1,448
Purchased -- (1,408)
Mortgage-backed securities:
Principal payments 1,889 976
Purchase of Federal Home Loan Bank stock -- (386)
Loan originations and principal payments, net (12,888) (14,447)
Proceeds from sale of foreclosed real estate 24 67
Purchases of software (46) --
Purchases of premises and equipment (195) (680)
Proceeds from sale of premises and equipment 245 --
Net cash acquired in acquisition 3,564 --
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (5,170) (14,430)
-------- --------
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
2003 2002
-------- --------
FINANCING ACTIVITIES
Net increase in deposits $ 14,065 $ 14,545
Net proceeds (payments) from FHLB borrowings (7,155) 555
Increase in securities sold under agreements to repurchase 4,899 (67)
Net increase in short-term borrowings 264 11
Purchase of treasury stock -- (334)
Dividends paid (185) (169)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,888 14,541
-------- --------
Increase in cash and cash equivalents 8,235 1,927
Cash and cash equivalent at beginning of period 8,148 5,400
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,383 $ 7,327
======== ========
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and borrowings $ 2,678 $ 2,561
Taxes $ 600 $ 450
Assets acquired in settlement of loans $ 425 $ 76
See accompanying notes to consolidated financial statements.
8
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The accompanying Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of Classic Bancshares, Inc.
as of September 30, 2003, and the results of operations for all interim periods
presented. Operating results for the six months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2004.
Certain financial information and footnote disclosures normally
included in annual financial statements prepared in conformity with generally
accepted accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The unaudited interim
consolidated financial statements presented herein should be read in conjunction
with the annual consolidated financial statements of the Company as of and for
the fiscal year ended March 31, 2003.
STOCK OPTION PLANS
------------------
Employee compensation expense under stock option plans is reported
using the intrinsic value method. No stock-based compensation cost is reflected
in net income, as all options granted had an exercise price equal to or greater
than the market price of the underlying common stock at date of grant. The
following table illustrates the effect on net income and earnings per share if
expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
2003 2002
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $ 905 $ 729
Deduct:
Stock-based compensation
expense determined under fair
value based method 429 1
-------- --------
Pro forma net income $ 476 $ 728
======== ========
Basic earnings per share as reported $ 0.64 $ 0.63
Pro forma basic earnings per share 0.34 0.63
Diluted earnings per share as reported 0.59 0.58
Pro forma diluted earnings per share 0.31 0.58
9
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
2003 2002
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported $ 1,650 $ 1,383
Deduct:
Stock-based compensation
expense determined under fair
value based method 430 50
-------- --------
Pro forma net income $ 1,220 $ 1,333
======== ========
Basic earnings per share as reported $ 1.28 $ 1.20
Pro forma basic earnings per share .94 1.15
Diluted earnings per share as reported 1.16 1.10
Pro forma diluted earnings per share .86 1.06
Options to purchase 60,000 shares of common stock were granted on
September 18, 2003 at an exercise price of $34.991 per share.
PRINCIPLES OF CONSOLIDATION
---------------------------
The financial statements include the accounts of Classic Bancshares,
Inc. (the "Company") and its wholly owned subsidiary, Classic Bank. All
significant intercompany balances and transactions have been eliminated.
DIVIDEND
--------
The Company declared a 10% dividend on October 20, 2003, payable in
November 2003. The payment of this dividend is in addition to the regular
quarterly cash dividend. Per share amounts have been restated for the impact of
this stock dividend.
(2) EARNINGS PER SHARE
Earnings per share are presented pursuant to the provisions of SFAS
No. 128, "Earnings Per Share." Basic earnings per share are calculated based on
the weighted average number of common shares outstanding during the respective
periods.
Diluted earnings per share are computed taking into consideration
common shares outstanding and dilutive potential common shares to be issued
under the Company's stock option plans and recognition and retention plan.
For the Three Months Ended For the Three Months Ended
September 30, 2003 September 30, 2002
(In thousands, except per share data) (In thousands, except per share data)
---------------------------------- ----------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS $ 905 1,403 $ 0.64 $ 729 1,152 $ 0.63
Effect of Dilutive
Securities-Options -- 135 (0.05) -- 104 (0.05)
------ ------ ------ ------ ------ ------
Diluted EPS $ 905 1,538 $ 0.59 $ 729 1,256 $ 0.58
====== ====== ====== ====== ====== ======
10
For the Six Months Ended For the Six Months Ended
September 30, 2003 September 30, 2002
(In thousands, except per share data) (In thousands, except per share data)
---------------------------------- ----------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS $1,650 1,292 $ 1.28 $1,383 1,156 $ 1.20
Effect of Dilutive
Securities-Options -- 132 (0.12) -- 104 (0.10)
------ ------ ------ ------ ------ ------
Diluted EPS $1,650 1,424 $ 1.16 $1,383 1,260 $ 1.10
====== ====== ====== ====== ====== ======
Options to purchase 319,935 shares of common stock were outstanding
at September 30, 2003 but 66,000 of those shares were not included in the
computation of diluted earnings per share due to their anti-dilutive effect.
Options to purchase 206,635 shares of common stock were outstanding at September
30, 2002.
(3) IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued two
new accounting standards, Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, and Statement 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equities, both of which generally became effective in the quarter beginning July
1, 2003.
Management determined that, upon adopting the new standards, they
will not materially affect the Company's operating results or financial
condition because the Company does not have these instruments or engage in these
activities.
On April 1, 2003, the Company adopted Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. On July 1, 2003, the
Company adopted Statement 149, amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities. On
October 1, 2003, the Company adopted Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
(4) ACQUISITION OF FIRST FEDERAL FINANCIAL BANCORP
On June 20, 2003, the Company acquired 100 percent of the
outstanding common stock of First Federal Financial Bancorp, Inc., headquartered
in Ironton, Ohio, the holding company for First Federal Savings Bank of Ironton,
which operated three offices in southeastern Ohio. In the transaction, First
Federal Savings Bank of Ironton was merged with and into Classic Bank with
Classic Bank as the surviving institution. All locations of First Federal will
be operated as branch offices of Classic Bank. Shareholders of First Federal
were able to elect to receive either shares of Classic common stock, $24.00 in
cash or a combination of stock and cash subject to the requirement that 50% of
First Federal shares were exchanged for cash and 50% were exchanged for Classic
common stock. The results of First Federal's operations have been included in
the consolidated financial statements since June 20, 2003. Presented below are
the net assets acquired from First Federal. Management believes that the assets
and liabilities acquired are similar to those of the Company.
11
(IN THOUSANDS)
Cash $ 9,573
Loans, net 49,474
Securities 9,490
Other assets 3,442
Deposits (56,682)
FHLB borrowings (6,373)
Other liabilities (720)
--------
Net asset acquired $ 8,204
--------
First Federal is located in the market area of the Company and thus,
the acquisition enabled the Bank to gain market share and affords the Company
the opportunity to reduce costs through economies of scale.
The aggregate purchase price was $11.4 million, including $5.6
million of cash and common stock valued at $5.8 million and resulted in goodwill
and other intangibles of $3.6 million. The value of the 228,665 common shares
issued was determined based upon the closing market price of Classic's common
shares on December 30, 2002, the date the terms of the acquisition were agreed
to and announced. Under the terms of the agreement, the number of shares of the
Company's common stock for which each First Federal shares was exchanged was
..9797.
Presented below are the unaudited, pro-forma condensed consolidated
results of operations of the Company for the six months ended September 30, 2003
and the three and six months ended September 30, 2002, assuming the transaction
occurred on April 1, 2003 and April 1, 2002.
6 MOS. ENDED 3 MOS. ENDED 6 MOS. ENDED
SEPT. 30, 2003 SEPT. 30, 2002 SEPT. 30, 2002
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net interest income $ 5,950 $ 2,798 $ 5,556
Net income (loss) 636 728 1,420
Basic income (loss) per share .46 .53 1.03
Diluted income (loss) per share .42 .49 .95
The pro-forma information for the six-month period ending September 30,
2003 results included material expense items recorded by First Federal. The
material items recorded during the period by First Federal include a provision
to the loan loss allowance of $500,000, and merger expenses of $499,490. First
Federal's merger expenses include employee severance payments, the payment of an
employment contract, legal fees, accounting fees, fees paid to an investment
banker and data processing termination fees. The total non-recurring expense
items for the period net of tax was $659,663.
12
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
The Company's total assets increased $83.2 million from $249.9
million at March 31, 2003 to $333.1 million at September 30, 2003. The increase
was due primarily to an increase in loans of $62.6 million, an increase in cash
and cash equivalents of $8.2 million, an increase in securities of $5.2 million,
an increase in goodwill and other intangibles of $3.6 million, an increase in
premise and equipment of approximately $1.5 million, an increase in other assets
of approximately $1.2 million and an increase in FHLB stock of approximately
$890,000.
Net loans receivable increased $62.6 million from $187.2 million at
March 31, 2003 to $249.8 million at September 30, 2003. The increase was due
primarily to net loans acquired from First Federal of approximately $49.5
million and a premium of approximately $700,000 recorded on the acquired loans
based on the market valuation of the loans. The remainder of the increase of
$12.4 million was due to internal loan growth primarily in the consumer and
commercial portfolios.
Securities increased approximately $5.2 million from $37.8 million
at March 31, 2003 to $43.0 million at September 30, 2003 primarily due to the
acquisition of $9.5 million of securities in connection with the acquisition of
First Federal offset by maturities, calls and principal repayments of $4.1
million and a decrease in the market value of these available for sale
securities of approximately $200,000.
Deposits increased $71.2 million from $190.2 million at March 31,
2003 to $261.4 million at September 30, 2003. The increase was due primarily to
the acquisition of First Federal. Deposits acquired from First Federal totaling
$56.7 million. The remainder of the increase of $14.5 million was a result of
internal deposit growth. The increase in deposits was used to fund loan growth.
Total stockholders' equity was $32.6 million at September 30, 2003
compared to $25.4 million at March 31, 2003. The increase was due primarily to
the issuance of additional shares of the Company's stock in connection with the
acquisition of First Federal. The increase was also due to net income recorded
for the period offset by a decrease in the market value of available for sale
securities and cash dividends paid.
FORWARD-LOOKING STATEMENTS
- --------------------------
When used in this Form 10-QSB and in future filings by the Company
with the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area including unemployment levels and plant closings, changes in real estate
values in the Company's market area, changes in policies by regulatory
13
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, the failure to achieve anticipated merger cost
savings or difficulty in merger integration, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake - and specifically declines any
obligation - to publicly release the result of any revisions, which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
- -----------------------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
- ----------------------------------------
GENERAL. The Company's results of operations depend primarily upon
the level of net interest income, which is the difference between the interest
income earned on its interest-earning assets such as loans and investments, and
the costs of the Company's interest-bearing liabilities, primarily deposits and
borrowings. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on them, respectively.
The Company reported net income of $905,000 for the three months
ended September 30, 2003 compared to net income of $729,000 for the three months
ended September 30, 2002. The increase in net income of $176,000 between the two
periods was primarily the result of an increase in net interest income of
$729,000, an increase in non-interest income of $183,000 and a decrease in
provision for loss on loans of $4,000 partially offset by an increase in
non-interest expense of $649,000 and an increase in income taxes of $91,000.
The Company reported net income of $1.7 million for the six months
ended September 30, 2003 compared to net income of $1.4 million for the six
months ended September 30, 2002. The increase in net income of $267,000 between
the two periods was primarily the result of an increase in net interest income
of $915,000 and an increase in non-interest income of $319,000 and a decrease in
provision for loss on loans of $118,000 offset by an increase in non-interest
expense of $953,000 and an increase in income taxes of $132,000.
INTEREST INCOME. Total interest income increased $898,000 for the
three months ended September 30, 2003 and increased $1.0 million for the six
months ended September 30, 2003 as compared to the three and six months ended
September 30, 2002. The increase in interest income for the three and six-month
period was due to an increase in the average balance of interest-earning assets
of $92.0 million for the three months ended September 30, 2003 and an increase
of $57.8 for the six-month period offset by a decrease in the yield earned on
interest-earning assets. The increase in the average balance of interest-earning
assets was due primarily to an increase in the average balance of loans and
securities primarily as a result of the
14
acquisition of First Federal. The average yield on interest-earning assets was
6.1% and 6.3% for the three and six months ended September 30, 2003 compared to
7.0% for the same periods in 2002. Tax equivalent adjustments were made to the
yield. The decrease in the yield was due to a decrease in market interest rates
between the two periods.
INTEREST EXPENSE. Interest expense increased $169,000 and $118,000
for the three and six months ended September 30, 2003 as compared to the same
periods in 2002. Interest expense increased for the periods primarily due to an
increase in the average balance of interest-bearing liabilities offset by a
decrease in the average rate paid on interest-bearing liabilities. The average
balance of interest-bearing liabilities increased $87.1 million for the three
months ended September 30, 2003 and $54.2 million for the six months ended
September 30, 2003 compared to the same periods in 2002. The increase in these
balances is primarily the result of an increase in the average balance of
interest-bearing deposits and FHLB borrowings due primarily to the acquisition
of First Federal. The average rate paid on interest-bearing liabilities was 2.2%
and 2.3% for the three and six months ended September 30, 2003 compared to 2.8%
for the three and six months ended September 30, 2002.
The resulting interest rate spread was 3.9% and 4.0% for the three
and six months ended September 30, 2003 compared to 4.2% for the same periods in
2002. The Company's interest rate spread has declined primarily due to the
incorporation of First's Federal balance sheet. Over time, management intends to
change the composition of the former First Federal balance sheet to a mix more
similar to that of the Company's other interest-bearing assets and liabilities.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
totaled $46,000 and $92,000 for the three and six months ended September 30,
2003 compared to $50,000 and $210,000 for the three and six months ended
September 30, 2002 based on management's overall assessment of the loan
portfolio. The provision recorded for the three and six-month period was based
on management's evaluation of the Company's current portfolio including factors
such as the quality of the portfolio, the increase in loans that are not secured
by 1-4 family real estate, the level of non-performing loans, charge-off
history, 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 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
$183,000 and $319,000 for the three and six months ended September 30, 2003
compared to the same periods in 2002. The increase for the three and six-month
periods is primarily the result of an increase in service charges and other fees
on deposits of $110,000 for the three-month period and an increase of $205,000
for the six-month period. The remainder of the increase was due to an increase
in other income for the three-month period of $72,000 and an increase of
$117,000 for the six-month period. The increase in service charges and other
fees on deposits for the periods is the result of increased deposit accounts.
The increase in other non-interest income is due to an increase in the referral
fees earned on secondary market loans, letter of credit fees and commissions on
insurance sold with loans.
15
NON-INTEREST EXPENSE. Non-interest expenses increased $649,000 and
$953,000 for the three and six months ended September 30, 2003 compared to the
same period in 2002. Non-interest expenses increased for the three-month period
due to an increase in employee compensation and benefits of $165,000, an
increase in occupancy and equipment expense of $81,000, an increase in
advertising expense of $70,000, an increase in communications expense of
$21,000, an increase in deposit and franchise taxes of $6,000, an increase in
professional fees of $39,000, an increase in stationery, printing and supplies
of $45,000 and an increase in other operating expenses of $221,000.
Non-interest expenses increased for the six-month period due to an
increase in employee compensation and benefits of $308,000, an increase in
occupancy and equipment expense of $109,000, an increase in advertising expense
of $82,000, an increase in communications expense of $35,000, an increase in
deposit and franchise taxes of $12,000, an increase in professional fees of
$49,000, an increase in stationery, printing and supplies of $63,000 and an
increase in other operating expenses of $294,000.
Employee compensation and benefits increased primarily due an
increase in the number of employees as a result of the First Federal
acquisition; an increase in costs related to incentive-based compensation
programs; and an increase in ESOP expense due to the increase in the average
market price of the Company's stock. Occupancy and equipment expense increased
primarily due to an increase in depreciation expense as a result of increased
locations, improvements to existing facilities, and upgrades in equipment. The
increase in other operating expenses was due partially to increased expenses as
a result of the acquisition of First Federal and the remainder of the increase
was due to increased costs related to technology for various services provided
to customers. The Company recently upgraded its on-line banking product and also
upgraded its operating environment so that customers may obtain real-time
balances at automated teller machines and point of sale terminals.
INCOME TAX EXPENSE. Income tax expense increased $91,000 and
$132,000 for the three and six months ended September 30, 2003 primarily due to
an increase in income before income taxes for the periods.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------
The allowance for loan losses is calculated based upon management's
evaluation and assessment of pertinent factors underlying the types and
qualities of the Company's loans. The assessment includes internal risk grading
of all commercial credits and based upon this evaluation, a specific allocation
allowance may be assigned to individual loans. Consumer and residential mortgage
loans are not specifically graded unless apparent weakness is determined through
payment history at which time a specific allowance allocation may be made.
Unallocated allowance estimates are given to each lending segment based upon
historical loss and peer loss information. An unallocated portion of the
allowance is assigned in recognition of inherent risks that include current
delinquency trends, current economic trends both local and national, strength of
supervision and administration of the loan portfolio, trends of non-performing
assets to the allowance and concentrations within commercial credits. These
factors are weighed quarterly and adjusted as deemed appropriate by management.
The Company has not materially changed any aspect of its overall approach in the
determination of the allowance for loan losses and there have been no material
changes in assumptions or estimations as compared to prior years that have
impacted the basis of the current year allowance.
16
The Company's allowance for loan losses as of September 30, 2003
was $2.6 million or 1.0% of the total loans. The March 31, 2003 allowance for
loan loss was $2.0 million, or 1.0% of total loans. The Company recorded a
provision for loan losses of $92,000 for the six-month period, and had net
charge-offs of $321,000 for the six-month period. The loans charged off
consisted largely of loans acquired from First Federal.
The ratio of non-performing assets to total assets is an indicator
of exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans, accruing loans delinquent 90 days or more, and foreclosed
assets, which have been acquired as a result of foreclosure or deed-in-lieu of
foreclosure. For all periods presented the Company had no troubled debt
restructurings. The following table sets forth the amount of non-performing
assets at the periods indicated.
September 30, 2003 March 31, 2003
------------------ --------------
(Dollars in Thousands)
Non-Accruing Loans ............................... $ 1,031 $ 600
Accruing Loans Delinquent 90 Days or More ........ 1,592 669
Foreclosed Assets ................................ 578 --
---------- ----------
Total Non-Performing Assets ...................... $ 3,201 $ 1,269
Total Non-Performing Assets as a
Percentage of Total Assets ........... 1.0% .5%
Total non-performing assets increased $1.9 million from March 31,
2003 to September 30, 2003 due primarily to delinquent one to four family loans
acquired in connection with the acquisition of First Federal. Management does
not feel that this is an indication of a trend of increased non-performing
assets for the Company. The problem credits with First Federal's portfolio were
identified through pre-acquisition due diligence and reserved for appropriately.
Management is attempting to resolve these credits at the earliest date.
OTHER ASSETS OF CONCERN. Other than the non-performing assets set
forth in the table above, as of September 30, 2003, there were no loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
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 September 30, 2003 and March 31, 2003, cash and cash
equivalents totaled $16.3 million and $8.1 million, respectively. The Company's
primary sources of funds include principal and interest payments on loans (both
scheduled and prepayments), maturities of and interest payments on investment
securities and principal and interest payments from mortgage-backed securities,
deposits and Federal Home Loan Bank of Cincinnati advances and other borrowings.
While scheduled loan and mortgage-backed security repayments and proceeds from
maturing investment securities are relatively predictable, deposit flows and
early repayments are more influenced by interest rates, general economic
conditions and competition. Certificates of
17
deposit as of September 30, 2003 maturing within one year totaled $83.8 million.
Management believes based on experience that most of these funds will remain
with the Company.
Liquidity management is both a short- and long-term responsibility
of management. The Company adjusts its investments in liquid assets based upon
management's assessment of expected loan demand, projected purchases of
investment and mortgage-backed securities, expected deposit flows, yields
available on other assets, and the liquidity goals of its asset/liability
management program. Excess liquidity is generally invested in interest-bearing
overnight deposits and other short-term liquid asset funds. If funds are
required beyond the funds generated internally, the subsidiaries of the Company
have the ability to borrow funds from the FHLB and other third parties. At
September 30, 2003, the Company had $27.3 million in borrowings outstanding with
the FHLB and additional borrowing capacity of $41.3 million. On a limited basis,
the Company at times utilizes repurchase agreements for the generation of
additional funds from our established relationship business customers. At
September 30, 2003, the Company had $9.3 million of repurchase agreements with
existing relationship based business customers.
At September 30, 2003, the Company had outstanding commitments to
fund loans of $22.7 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 September 30, 2003, the capital requirements applicable to
Classic Bank and its actual capital ratios. As of September 30, 2003, Classic
Bank was in compliance with its capital requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
----------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $18,547 8.0% $21,825 10.2%
Tier 1 Capital
(to Adjusted Total Assets) 12,876 4.0 21,103 6.6
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 September 30, 2003, the
capital requirements applicable to the Company and its actual capital ratios. As
of September 30, 2003, the Company was in compliance with its capital
requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANCSHARES, INC.
----------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $18,635 8.0% $25,547 11.0%
Tier 1 Capital
(to Adjusted Total Assets) 12,962 4.0 22,917 7.1
18
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. Finally, the Chief Executive Officer, Chief Financial
Officer, the Audit Committee and the Company's independent auditors also meet on
a quarterly basis and discuss the Company's material accounting policies. The
Company's Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of these interim disclosure controls as of the end of the period
covered by this report and found them to be adequate.
The Company maintains internal control over financial reporting.
There have not been any significant changes in such internal control over
financial reporting in the last quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
19
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Shareholders (the "Meeting") of
Classic Bancshares, Inc. was held on August 26, 2003. The
matters approved by shareholders at the Meeting and the number
of votes cast for, against or withheld (as well as the number of
abstentions) as to each matter are as follows:
PROPOSAL NUMBER OF VOTES
-------- ---------------
BROKER
FOR WITHHELD NON-VOTES
--- -------- ---------
Election of the following directors for
the terms indicated:
Lisah M. Frazier (three years) 1,129,451 4,450 0
E.B. Gevedon, Jr. 1,129,901 4,000 0
Robert A. Moyer, Jr. 1,130,901 3,000 0
John W. Clark 1,130,876 3,025 0
FOR AGAINST ABSTAIN
--- ------- -------
The approval of the Company's 2003
Premium Price Stock Option Growth Plan 1,004,401 128,791 709
The authorziation of additional shares
of the Company's common stock 1,099,521 34,380 0
The ratification of the appointment of
Crowe Chizek and Company LLC as the
Company's auditors for the fiscal year
ending March 31, 2004. 1,128,685 8 5,208
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 31.1 Certification of David B. Barbour pursuant to Rule
13a-14 under the Securities Exchange Act of 1934.
Exhibit 31.2 Certification of Lisah M. Frazier pursuant to Rule
13a-14 under the Securities Exchange Act of 1934.
Exhibit 32.1 Certification of David B. Barbour pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Lisah M. Frazier pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
The Registrant filed the following current reports on Form 8-K
during the three months ended September 30, 2003:
On July 17, 2003, the Registant filed a Current Report on Form 8-K
to report the resignation of Smith, Goolsby, Artis & Reams, P.S.C.
as the Company's independent auditors and the engagement of Crowe,
Chizek & Company LLC to audit the Company's financial statements
for fiscal 2004.
On July 30, 2003 the Registant filed a Current Report on Form 8-K
containing a presentation presented on July 30, 2003 at the Keefe,
Bruyette & Woods 2003 Community Bank Investor Conference.
On August 18, 2003, the Registant filed a Current Report on Form
8-K containing a press release dated August 18, 2003 announcing
earnings for the quarter ended June 30, 2003.
On September 15, 2003, the Registrant filed a Current Report on
Form 8-K reporting the amendment of its Certificate of
Incorporation to increase the number of shares of Common Stock
authorized.
20
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLASSIC BANCSHARES, INC.
REGISTRANT
Date: November 12, 2003 /s/ David B. Barbour
--------------------- ----------------------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Duly Authorized Officer)
Date: November 12, 2003 /s/ Lisah M. Frazier
--------------------- ----------------------------------------------
Lisah M. Frazier, Chief Operating Officer,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
21
INDEX TO EXHIBITS
Exhibit
Number
------
11 Statement regarding computation of Per Share Earnings in the
Notes to the Consolidated Financial Statements in Part I of
this Report . For such computation, see Note 2 "Earnings Per
Share."
31.1 Certification of David B. Barbour pursuant to Rule 13a-14
under the Securities Exchange Act of 1934
31.2 Certification of Lisah M. Frazier pursuant to Rule 13a-14
under the Securities Exchange Act of 1934
32.1 Certification of David B. Barbour Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Lisah M. Frazier Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
22