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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 June 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 61-1289391
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
344 SEVENTEENTH STREET, ASHLAND, KENTUCKY 41101
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 326-2800
--------------
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 12, 2003, there were 1,274,643 shares of the Registrant's
common stock outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
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CLASSIC BANCSHARES, INC.
INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003
and March 31, 2003 3
Consolidated Statements of Income for the three months
ended June 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income for the three
months ended June 30, 2003 and 2002 5
Consolidated Statements of Stockholders' Equity for the three
months ended June 30, 2003 6
Consolidated Statements of Cash Flows for the three months
ended June 30, 2003 and 2002 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
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION 19
Signatures 20
Index to Exhibits 21
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, MARCH 31,
2003 2003
------------ ------------
ASSETS
------
Cash and due from banks $ 16,878,797 $ 8,125,092
Federal funds sold 110,000 23,768
Securities available for sale 32,764,629 28,246,870
Mortgage-backed and related securities available for sale 14,942,471 9,596,082
Loans receivable, net 241,122,042 187,174,520
Real estate acquired in the settlement of loans 192,506 --
Accrued interest receivable 1,608,252 1,156,839
Federal Home Loan Bank stock 2,809,000 1,948,900
Premises and equipment, net 8,019,942 6,267,376
Goodwill and other intangibles 9,052,346 5,554,549
Prepaid expenses and other assets 2,117,421 1,787,454
------------ ------------
TOTAL ASSETS $329,617,406 $249,881,450
------------ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Non-interest bearing demand deposits $ 28,144,151 $ 23,158,669
Savings, NOW, and money market demand deposits 86,916,713 65,761,590
Other time deposits 133,862,088 101,234,763
------------ ------------
Total deposits 248,922,952 190,155,022
Securities sold under agreements to repurchase 4,996,944 4,382,494
Advances from Federal Home Loan Bank 40,021,737 28,126,225
Other short-term borrowings 469,795 6,244
Accrued expenses and other liabilities 2,412,152 1,444,325
Accrued interest payable 344,623 344,399
------------ ------------
Total Liabilities $297,168,203 $224,458,709
------------ ------------
Stockholders' Equity
Common stock, $.01 par value, 1,551,165 and 1,322,500 shares
issued and 1,274,643 and 1,044,779 shares outstanding $ 15,512 $ 13,225
Additional paid-in capital 26,284,531 20,435,502
Retained earnings 8,382,948 7,721,067
Accumulated other comprehensive income (loss) 1,252,184 751,069
Unearned ESOP shares (58,758 and 59,857 shares) (587,580) (598,570)
Unearned RRP shares (750 and 850 shares) (10,390) (11,550)
Treasury stock, at cost (217,014 shares) (2,888,002) (2,888,002)
------------ ------------
Total Stockholders' Equity $ 32,449,203 $ 25,422,741
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $329,617,406 $249,881,450
------------------------------------------ ============ ============
See accompanying notes to consolidated financial statements.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------ ------------
INTEREST INCOME
---------------
Loans $ 3,155,999 $ 3,007,311
Investment securities 364,704 366,411
Mortgage-backed securities 115,382 127,632
Dividends on Federal Home Loan Bank stock 20,267 19,952
Other interest 1,662 2,301
------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME 3,658,014 3,523,607
------------ ------------
INTEREST EXPENSE
----------------
Deposits 948,195 975,969
Federal Home Loan Bank advances 243,537 263,592
Securities sold under repurchase agreements 13,361 16,436
Other short-term borrowings 1,379 721
------------ ------------
TOTAL INTEREST EXPENSE 1,206,472 1,256,718
------------ ------------
NET INTEREST INCOME 2,451,542 2,266,889
Provision for loss on loans 45,500 160,000
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOASS ON LOANS 2,406,042 2,106,889
------------ ------------
NONINTEREST INCOME
------------------
Service charges 398,971 303,335
Gain on sale of securities -- 4,189
Other income 97,068 52,467
------------ ------------
TOTAL NONINTEREST INCOME 496,039 359,991
------------ ------------
NONINTEREST EXPENSES
--------------------
Employee compensation and benefits 901,701 758,685
Occupancy and equipment expense 272,694 244,609
Advertising 95,993 83,571
Communications 51,799 37,926
Franchise and deposit taxes 65,845 57,109
Directors fees 24,075 23,625
Professional fees 66,581 56,316
Stationery and supplies 95,279 78,717
Other operating expenses 303,657 232,948
------------ ------------
TOTAL NONINTEREST EXPENSE 1,877,624 1,573,506
------------ ------------
INCOME BEFORE INCOME TAXES 1,024,457 893,374
--------------------------
Income tax expense 279,081 237,847
------------ ------------
NET INCOME $ 745,376 $ 655,527
---------- ============ ============
Basic earnings per share $ 0.70 $ 0.62
============ ============
Diluted earnings per share $ 0.63 $ 0.58
============ ============
See accompanying notes to consolidated financial statements.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------ ------------
Net Income $ 745,376 $ 655,527
------------ ------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax 501,115 498,246
Reclassification adjustments for realized gains
(losses) included in earnings, net of tax -- (2,765)
------------ ------------
Other comprehensive income 501,115 495,481
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 1,246,491 $ 1,151,008
============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME $ 1,252,184 $ 169,585
============ ============
See accompanying notes to consolidated financial statements.
5
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED UNEARNED TREASURY
STOCK CAPITAL EARNINGS INCOME ESOP SHARES RRP SHARES STOCK TOTAL
------- ----------- ---------- ----------- ----------- ---------- ----------- -----------
BALANCES AT APRIL 1, 2003 $13,225 $20,435,502 $7,721,067 $ 751,069 $ (598,570) $ (11,550) $(2,888,002) $25,422,741
Net income for the
three months ended
June 30, 2003 -- -- 745,376 -- -- -- -- 745,376
Dividend paid
($.08 per share) -- -- (83,495) -- -- -- -- (83,495)
Commitment of shares to
be released under
ESOP (1,099) -- 20,359 -- -- 10,990 -- -- 31,349
RRP shares earned (100) -- -- -- -- -- 1,160 -- 1,160
Additional shares
issued (228,665) 2,287 5,828,670 -- -- -- -- -- 5,830,957
Change in unrealized
gain (loss) on
available for sale
securities, net of
applicable taxes and
reclassifications -- -- -- 501,115 -- -- -- 501,115
------- ----------- ---------- ----------- ----------- ---------- ----------- -----------
BALANCES AT JUNE 30, 2003 $15,512 $26,284,531 $8,382,948 $ 1,252,184 $ (587,580) $ (10,390) $(2,888,002) $32,449,203
======= =========== ========== =========== =========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
--------------------
Net Income $ 745,376 $ 655,527
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 138,351 98,003
Provision for loss on loans 45,500 160,000
Gain on sale of securities available for sale -- (4,189)
Loss (gain) on foreclosed real estate -- 15,001
Federal Home Loan Bank stock dividends (20,230) (19,900)
Net amortization of mortgage-backed and
investment securities 15,779 16,627
ESOP shares earned 31,349 22,871
RRP shares earned 1,160 1,159
Decrease (increase) in:
Accrued interest receivable (126,081) (137,016)
Other assets 5,909 (27,954)
Increase (decrease) in:
Accrued interest payable (188,543) (19,945)
Accounts payable and accrued expenses (143,720) (45,087)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 504,850 715,097
------------ ------------
INVESTING ACTIVITIES
--------------------
Securities:
Proceeds from sale, maturities or calls 202,000 1,188,700
Purchased -- (1,408,175)
Mortgage-backed securities:
Principal payments 374,509 395,562
Purchase of Federal Home Loan Bank stock -- (363,000)
Loan originations and principal payments, net (3,581,984) (11,021,951)
Purchases of software (62,468) --
Purchases of premises and equipment (245,495) (397,236)
Net cash acquired in acquisition 3,593,993 --
------------ ------------
NET CASH PROVIDED BY (USED BY)
INVESTING ACTIVITIES 280,555 (11,606,100)
------------ ------------
See accompanying notes to consolidated financial statements.
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits $ 1,501,261 $ 953,058
Net proceeds from FHLB borrowings 5,522,765 9,168,707
Increase in securities sold under
agreements to repurchase 614,450 621,925
Net increase in short-term borrowings 463,551 15,096
Dividends paid (83,495) (84,131)
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 8,018,532 10,674,655
------------ ------------
Increase (decrease) in cash and cash equivalents 8,803,937 (216,348)
Cash and cash equivalent at beginning of period 8,184,860 5,400,046
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,988,797 $ 5,183,698
============ ============
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest on deposits and borrowings $ 1,206,248 $ 1,276,663
Taxes $ -- $ 200,000
Assets acquired in settlement of loans $ -- $ 8,000
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 June 30, 2003, and the results of operations for all interim periods
presented. Operating results for the three months ended June 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
JUNE 30,
--------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
---- ----
Net income as reported $ 745 $ 656
Deduct:
Stock-based compensation
expense determined under fair
value based method 1 6
-------- --------
Pro forma net income $ 744 $ 650
======== ========
Basic earnings per share as reported $ 0.70 $0.62
Pro forma basic earnings per share 0.70 0.62
Diluted earnings per share as reported 0.63 0.58
Pro forma diluted earnings per share 0.63 0.57
There were no options granted during the three-month periods ending June 30,
2003 and 2002.
9
PRINCIPLES OF CONSOLIDATION
---------------------------
The financial statements include the accounts of Classic Bancshares,
Inc. (the "Company") and its wholly owned subsidiary, Classic Bank. All
significant intercompany balances and transactions have been eliminated.
(2) EARNINGS PER SHARE
Earnings per share are presented pursuant to the provisions of SFAS No.
128, "Earnings Per Share." Basic earnings per share are calculated based on the
weighted average number of common shares outstanding during the respective
periods.
Diluted earnings per share are computed taking into consideration
common shares outstanding and dilutive potential common shares to be issued
under the Company's stock option plans and recognition and retention plan.
For the Three Months Ended For the Three Months Ended
June 30, 2003 June 30, 2002
------------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------
Basic EPS $745,376 1,069,983 $0.70 $655,527 1,054,941 $0.62
Effect of
Dilutive
Securities-
Options -- 109,456 (0.07) -- 77,850 (0.04)
------------------------------------------------------------------
Diluted EPS $745,376 1,179,439 $0.63 $655,527 1,132,791 $0.58
==================================================================
Options to purchase 230,850 shares of common stock were outstanding at
June 30, 2003 but 43,000 of those shares were not included in the computation of
diluted earnings per share due to their anti-dilutive effect. 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.
(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.
(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
10
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.
(DOLLARS IN THOUSANDS)
Cash $ 9,274
Loans, net 49,474
Securities 9,490
Other assets 3,395
Deposits (56,682)
FHLB borrowings (6,373)
Other liabilities (374)
--------
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 $3.5 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 three months ended June 30, 2003
and June 30, 2002, assuming the transaction occurred on April 1, 2003 and April
1, 2002.
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
(DOLLARS IN THOUSANDS)
Net interest income $2,949 $2,758
Net income (loss) (269) 693
Basic income (loss) per share (.21) .54
Diluted income (loss) per share (.19) .51
The pro-forma information for the period ending June 30, 2003 resulted
in a loss due to material expense items recorded by First Federal included in
the pro forma results. 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.
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 $79.7 million from $249.9 million
at March 31, 2003 to $329.6 million at June 30, 2003. The increase was due
primarily to an increase in loans of $53.9 million, an increase in cash and cash
equivalents of $8.8 million, an increase in mortgage-backed securities of $5.3
million, an increase in investment securities of approximately $4.6 million, an
increase in goodwill and other intangibles of $3.5 million, an increase in
premise and equipment of approximately $1.8 million, an increase in other assets
of approximately $1.6 million and an increase in FHLB stock of approximately
$860,000.
Net loans receivable increased $53.9 million from $187.2 million at
March 31, 2003 to $241.1 million at June 30, 2003. The increase was due
primarily to net loans acquired from First Federal of approximately $49.5
million and a premium of approximately $900,000 recorded on the acquired loans
based on the market valuation of the loans. The remainder of the increase of
$3.6 million was due to loan growth within the Company's existing market areas.
Investment securities increased approximately $4.6 million from $28.2
million at March 31, 2003 to $32.8 million at June 30, 2003 primarily due to the
acquisition of $3.9 million of securities in connection with the acquisition of
First Federal. The remainder of the increase was due to an increase in the
market value of these available for sale securities offset by maturities of
approximately $200,000. Mortgage-backed securities increased approximately $5.3
million from $9.6 million at March 31, 2003 to $14.9 million at June 30, 2003.
The increase was primarily due to $5.6 million of securities acquired from First
Federal and an increase in the market value of these available for sale
securities offset by principal repayments received during the period.
Net deposits increased $58.8 million from $190.2 million at March 31,
2003 to $248.9 million at June 30, 2003. The increase was due primarily to the
acquisition of First Federal. Deposits acquired from First Federal totaled $56.7
million. The remainder of the increase of $1.5 million was a result of deposit
growth within the Company's existing market area. The increase in deposits was
used to fund loan growth.
Total stockholders' equity was $32.4 million at June 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 and an increase in the market value of available for sale
securities offset by cash dividends paid.
FORWARD-LOOKING STATEMENTS
--------------------------
When used in this Form 10-QSB and in future filings by the Company with
the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
12
Such statements are subject to certain risks and uncertainties, including
changes in economic conditions in the Company's market area including
unemployment levels and plant closings, changes in real estate values in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and
competition, that could cause actual results to differ materially from
historical earnings, the failure to achieve anticipated merger cost savings or
difficulty in merger integration, and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake - and specifically declines any
obligation - to publicly release the result of any revisions, which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
----------------------------------------------------------------------------
ENDED JUNE 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 $745,000 for the three months ended
June 30, 2003 compared to net income of $656,000 for the three months ended June
30, 2002. The increase in net income of $89,000 between the two periods was
primarily the result of an increase in net interest income of $184,000, an
increase in non-interest income of $136,000 and a decrease in provision for loss
on loans of $114,000 partially offset by an increase in non-interest expense of
$304,000 and an increase in income taxes of $41,000.
INTEREST INCOME. Total interest income increased $134,000 for the three
months ended June 30, 2003. The increase in interest income was due to an
increase in the average balance of interest-earning assets of $23.6 million for
the three months ended June 30, 2003 as compared to the same period in 2002
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. The average yield on
interest-earning assets was 6.5% for the three months June 30, 2003 compared to
7.1% for the same period 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.
13
INTEREST EXPENSE. Interest expense decreased $50,000 for the three
months ended June 30, 2003 as compared to the same period in 2002. Interest
expense decreased for the period primarily due to a decrease in the average rate
paid on interest-bearing liabilities offset by an increase in the average
balance of interest-bearing liabilities. The average rate paid on
interest-bearing liabilities was 2.4% for the three months ended June 30, 2003
compared to 2.8% for the three months ended June 30, 2002. The average balance
of interest-bearing liabilities increased $21.4 million for the three months
ended June 30, 2003 compared to the same period in 2002. The increase in these
balances is primarily the result of an increase in the average balance of
interest-bearing transaction accounts, an increase in the average balance of
certificate of deposit accounts and an increase in the average balance of FHLB
borrowings.
The resulting interest rate spread was 4.1% for the three months ended
June 30, 2003 compared to 4.3% for the same period in 2002. Management believes
that the Company's interest rate spread may decline in the next quarter as a
result of the acquisition. Over time, management intends to change the
composition of the former First Federal assets and liabilities to a mix more
similar to that of the Company's other assets and liabilities.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
totaled $45,500 for the three months ended June 30, 2003 compared to $160,000
for the three months ended June 30, 2002 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 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
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
$136,000 for the three months ended June 30, 2003 compared to the same period in
2002. The increase for the three-month period is primarily the result of an
increase in service charges and other fees on deposits of $96,000 and an
increase in other income for the three-month period of $45,000 offset by a
decrease in the gain on sale of securities of $5,000. The increase in service
charges and other fees on deposits for the periods is the result of an 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.
NON-INTEREST EXPENSE. Non-interest expenses increased $304,000 for the
three months ended June 30, 2003 compared to the same period in 2002.
Non-interest expenses increased due to an increase in employee compensation and
benefits of $143,000, an increase in occupancy and equipment expense of $28,000,
an increase in advertising expense of $12,000, an increase in communications
expense of $14,000, an increase in deposit and franchise taxes of $9,000, an
14
increase in professional fees of $10,000, an increase in amortization of the
core deposit intangible of $12,000, an increase in stationery, printing and
supplies of $17,000 and an increase in other operating expenses of $59,000.
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 First Federal acquisition 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 $41,000 for the three
months ended June 30, 2003 primarily due to an increase in income before income
taxes for the period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
---------------------------------------------------
The allowance for loan losses is calculated based upon management's
evaluation and assessment of pertinent factors underlying the types and
qualities of the Company's loans. The methodology employed includes internal
risk grading of all commercial credits and based upon this evaluation, a
specific allocation allowance may be assigned to the loan. 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.
The Company's allowance for loan losses as of June 30, 2003 was $2.9
million or 1.2% 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 $45,500 for the three-month period, and had net charge-offs of
$17,000 for the three-month period.
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.
15
June 30, 2003 March 31, 2003
------------- --------------
(Dollars in Thousands)
Non-Accruing Loans ......................... $ 748 $ 600
Accruing Loans Delinquent 90 Days or More... 1,677 669
Foreclosed Assets .......................... 193 --
------ -----
Total Non-Performing Assets ................ $2,618 $1,269
Total Non-Performing Assets as a
Percentage of Total Assets ........ .8% .5%
Total non-performing assets increased $1.3 million from March 31, 2003
to June 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. 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, 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 June 30, 2003 and March 31, 2002, cash and cash
equivalents totaled $17.0 million and $8.1 million, respectively. The Company's
primary sources of funds include principal and interest payments on loans (both
scheduled and prepayments), maturities of and interest payments on investment
securities and principal and interest payments from mortgage-backed securities,
deposits and Federal Home Loan Bank of Cincinnati advances and other borrowings.
While scheduled loan and mortgage-backed security repayments and proceeds from
maturing investment securities are relatively predictable, deposit flows and
early repayments are more influenced by interest rates, general economic
conditions and competition. Certificates of deposit as of June 30, 2003 maturing
within one year totaled $89.3 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 June
30, 2003, the Company had $40.0 million in borrowings outstanding with the FHLB
and additional borrowing capacity of $39.4 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 June 30, 2003,
the Company had $5.0 million of repurchase agreements with existing relationship
based business customers.
16
At June 30, 2003, the Company had outstanding commitments to fund loans
of $19.3 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, 2003, the capital requirements applicable to Classic
Bank and its actual capital ratios. As of June 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) $17,859 8.0% $21,825 9.8%
Tier 1 Capital
(to Adjusted Total Assets) 9,955 4.0 19,033 7.6
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 June 30, 2003, the capital
requirements applicable to the Company and its actual capital ratios. As of June
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) $17,909 8.0% $24,945 11.1%
Tier 1 Capital
(to Adjusted Total Assets) 9,754 4.0 22,146 9.1
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
ITEM 3 - CONTROLS AND PROCEDURES
The Company has adopted interim disclosure controls and procedures
designed to facilitate the Company's financial reporting. The interim disclosure
controls currently consist of communications among the Chief Executive Officer,
the Chief Financial Officer and each department head to identify any
transactions, events, trends, risks or contingencies which may be material to
the Company's operations. The Company's disclosure controls also include certain
elements of internal controls adopted in connection with applicable accounting
guidelines. Finally, the Chief Executive Officer, Chief Financial Officer, the
Audit Committee and the Company's independent auditors also meet on a quarterly
basis and discuss the Company's material 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 controls over financial
reporting.
18
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
A special meeting of Shareholders (the "Meeting") of Classic
Bancshares, Inc. was held on June 17, 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
--- -------- ---------
The approval and adoption of the
agreement and plan of merger dated
as of December 30, 2002, pursuant
to which First Federal Financial
Bancorp, Inc. will merge with and
into the Company. 870,922 0 0
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 June 30, 2003:
On May 16, 2003, the Registant filed a Current Report on Form 8-K
containing a press release dated May 16, 2003, announcing earnings
for the quarter and fiscal year ending March 31, 2003.
On June 17, 2003 the Registant filed a Current Report on Form 8-K
containing a press release dated June 16, 2003, announcing
approval by shareholders of the pending merger with First Federal
Financial Bancorp, Inc.
On June 20, 2003, the Registant filed a Current Report on Form 8-K
containing a press release dated June 20, 2003, announcing the
consummation of the acquisition of First Federal Financial
Bancorp, Inc.
19
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 19, 2003 /s/ David B. Barbour
--------------------- -------------------------------------------
David B. Barbour, President, Chief
Executive Officer and Director (Duly
Authorized Officer)
Date: August 19, 2003 /s/ Lisah M. Frazier
--------------------- -------------------------------------------
Lisah M. Frazier, Chief Operating Officer,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
20
INDEX TO EXHIBITS
Exhibit
Number
------
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
21