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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. ONE TO FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 0-27170
CLASSIC BANCSHARES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 61-1289391
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
344 Seventeenth Street, Ashland, Kentucky 41101
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (606) 326-2800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer had $19.4 million in gross income for the year ended March 31,
2004.
As of June 24, 2004, there were issued and outstanding 1,404,839 shares of
the Issuer's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Issuer, computed by reference to the last sale price of
such stock on the Nasdaq SmallCap Market as of June 24, 2004 was approximately
$43.5 million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the Issuer that such
person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-KSB - - Proxy Statement For 2004 and Meeting of Stockholders
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Explanatory Note: This Amendment No. One to our Annual Report on From 10-KSB is
being filed to include the report of Smith, Goolsby, Artis & Reams, P.S.C. dated
June 5, 2003 on certain of our financial statments. Such report was
inadvertently omitted from the original filing of this Annual Report on Form 10-
KSB on June 29, 2004.
PART I
ITEM 1. BUSINESS
GENERAL
Classic Bancshares, Inc. ("Classic" or the "Company"), a Delaware
corporation, is a financial holding company, which has as its wholly-owned
subsidiary Classic Bank, a Kentucky chartered commercial bank. The Company was
organized in 1995 by Classic Bank for the purpose of becoming the savings and
loan holding company of Classic Bank in connection with Classic Bank's
conversion from mutual to stock form of organization (the "Conversion") on
December 28, 1995. The Company became a bank holding company effective September
30, 1996 and a financial holding company effective June 30, 2000. The Company
and its subsidiary each operate under the direction of a Board of Directors and
officers.
As a community-oriented financial institution, Classic Bank seeks to
serve the financial needs of communities in its market area through ten banking
offices in Eastern and Northeastern Kentucky as well as Southeastern Ohio. Its
current business strategy involves attracting deposits from the general public
and using such deposits, together with other funds, to originate consumer,
commercial and other loans in its market areas.
The Company faces strong competition from both banking and
non-banking competition. Its banking competitors include local and regional
banking companies, as well as credit unions, savings institutions and brokerage
firms that provide many of the same services and products as offered by the
Company. It is anticipated that strong competition from bank and non-bank
competitors will continue in the future.
The Company's internet site WWW.CLASSICBANK.COM contains a hyperlink
to the Securities and Exchange Commission's ("SEC") website where the Company's
periodic reports and all amendments, if any, to these reports filed pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 can be obtained
free of charge on EDGAR as soon as reasonably practicable after the Company has
filed the report with the SEC.
At March 31, 2004, the Company had total consolidated assets of
$341.8 million, deposits of $260.2 million and stockholders' equity of $35.2
million. On such date, the Company's assets consisted of all of the outstanding
capital stock of Classic Bank and cash and cash equivalents. The executive
office of the Company is located at 344 Seventeenth Street, Ashland, Kentucky
41101 and its telephone number is (606) 326-2800.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-KSB 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, regulatory policies, interest rates, (including the relationship between
long and short term interest rates) real estate values in the Company's market
area, demand for loans in the Company's market area and competition, that could
cause actual results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to
2
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.
ACQUISITION
On June 20, 2003, the Company completed its acquisition 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 are 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. At the completion of
the transaction, Classic issued a total of 228,665 shares and paid total cash of
$5.6 million. On the date of closing, First Federal had total assets of $72.1
million and total deposits of $56.7 million.
MARKET AREA
Classic Bank serves its market areas through ten banking offices
located in Kentucky and Ohio. The main office and corporate headquarters are
located in Ashland, Kentucky. Seven of the banking offices, five in Kentucky and
two in Ohio, are located in the Huntington, WV/Ashland, KY/Ironton, OH
Metropolitan Statistical Area (MSA). The bank operates three banking offices in
Johnson County, KY, serving parts of Martin, Floyd, Magoffin and Lawrence
counties. Johnson County, KY is approximately 55 miles south of the
Huntington/Ashland/Ironton MSA.
The economic base in the MSA was in the past primarily industrial and
reliant upon a small number of large employers, particularly in the steel and
petroleum industries. A decline in these segments of the local economy has
resulted in population loss over the past several years. The diversification of
employment base into more retail, medical and service businesses has resulted in
a slowing of previously experienced declines in population. Per capita incomes
in the counties in which we operate in the MSA all lag the applicable Kentucky
or Ohio State averages, with the exception of Boyd County where the Company
headquarters is located.
The economy in the Johnson County market area has historically been
based on manufacturing and coal related industries, but now includes retail,
medical and government sectors. Per capita income in Johnson County is also
below the Kentucky State average.
The unemployment rate in each of the counties in which we operate
banking offices exceeds the state and national unemployment rates.
LENDING ACTIVITIES
GENERAL. The Company generally makes loans in northeastern Kentucky,
eastern Kentucky, and Southeastern Ohio, where its branches are located and, to
a lesser degree, in areas adjacent to our market area including western West
Virginia. The Company's principal lending activities currently are (i) direct
consumer loans, (ii) commercial loans and, to a lesser extent, (iii) other
loans. At March 31, 2004, loans receivable net, totaled $257.5 million.
3
LOAN PORTFOLIO COMPOSITION. The following table presents the
composition of the Company's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
March 31,
-------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- -------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------- -------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
Real Estate Loans
One- to four-family........ $113,074 43.6% $ 74,233 39.2% $ 74,321 45.9% $ 73,576 52.5% $ 71,928 55.7%
Commercial................. 29,867 11.5 24,869 13.2 23,105 14.3 16,877 12.0 15,216 11.8
Multi-family............... 3,701 1.4 1,042 0.6 1,083 0.7 1,342 1.0 1,486 1.2
Construction and land
development.............. 11,802 4.5 4,623 2.4 4,823 3.0 3,287 2.3 2,670 2.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 158,444 61.0 104,767 55.4 103,332 63.9 95,082 67.8 91,300 70.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans............. 47,474(1) 18.3 36,272(1) 19.2 24,966 15.4 18,249 13.0 14,076 10.9
Commercial business loans.. 53,698(2) 20.7 47,962 25.4 33,448 20.7 26,727 19.1 23,539 18.3
Other loans................ 30 -- 9 -- 74 -- 119 0.1 148 0.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans...... 101,202 39.0 84,243 44.6 58,488 36.1 45,095 32.2 37,763 29.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans............ 259,646 100.0% 189,010 100.0% 161,820 100.0% 140,177 100.0% 129,063 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== -------- =====
Loans in process........... -- -- -- -- (10)
Deferred fees and discounts 18 140 124 92 44
Allowance for loan losses.. (2,209) (1,975) (1,628) (1,407) (1,289)
-------- -------- -------- -------- --------
Total loans receivable, net $257,455 $187,175 $160,316 $138,862 $127,808
======== ======== ======== ======== ========
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1. Includes $17.2 million of automobile loans, $4.2 million of home equity
loans, and $6.6 million of recreational vehicle loans at March 31, 2004,
and $12.9 million of automobile loans, $2.9 million of home equity loans,
and $5.4 million of recreational vehicle loans at March 31, 2003.
2. Does not include the unfunded portion of commercial lines of credit
totaling $10.1 million.
4
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rates at the dates indicated.
March 31,
-------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- -------------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------- -------------------- -------------------- -------------------- --------------------
(Dollars in Thousands)
Fixed-Rate Loans:
Real Estate:
One-to-four family.......... $ 37,829 14.6% $ 36,445 19.3% $ 43,646 26.9% $ 44,020 31.4% $ 44,377 34.4%
Commercial.................. 9,227 3.6 9,434 5.0 11,039 6.8 9,030 6.4 8,829 6.8
Multi-family................ 1,090 0.4 442 0.2 625 0.4 832 0.6 903 0.7
Construction & land
development................ 3,439 1.3 1, 582 0.8 1,648 1.1 1,959 1.4 1,950 1.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 51,585 19.9 47,903 25.3 56,958 35.2 55,841 39.8 56,059 43.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer................... 40,970 15.8 30,438 16.1 20,967 13.0 16,773 12.0 12,543 9.7
Commercial business........ 9,874 3.8 9,608 5.1 9,916 6.1 9,916 7.1 8,861 6.9
Other...................... 30 -- 9 -- 74 -- 119 0.1 148 0.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed-rate loans.. 102,459 39.5 87,958 46.5 87,915 54.3 82,649 59.0 77,611 60.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family....... 75,245 29.0 37,788 20.0 30,675 18.9 29,556 21.0 27,551 21.3
Commercial................ 20,640 7.9 15,435 8.2 12,066 7.5 7,846 5.6 6,387 4.9
Multi-family.............. 2,611 1.0 600 0.3 458 0.3 511 0.4 583 0.5
Construction & land
development............. 8,363 3.2 3,041 1.6 3,175 2.0 1,328 0.9 720 0.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 106,859 41.1 56,864 30.1 46,374 28.7 39,241 27.9 35,241 27.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer................... 6,504 2.5 5,834 3.1 3,999 2.5 1,476 1.1 1,533 1.2
Commercial business........ 43,824 16.9 38,354 20.3 23,532 14.5 16,811 12.0 14,678 11.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable-rate
loans................ 157,187 60.5 101,052 53.5 73,905 45.7 57,528 41.0 51,452 39.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans............ 259,646 100.0% 189,010 100.0% 161,820 100.0% 140,177 100.0% 129,063 100.0%
-------- ===== -------- ===== -------- ===== -------- ===== -------- =====
Loans in process........... -- -- -- -- (10)
Deferred fees and discounts 18 140 124 92 44
Allowance for loan losses.. (2,209) (1,975) (1,628) (1,407) (1,289)
-------- -------- -------- -------- --------
Total loans receivable,
net................... $257,455 $187,175 $160,316 $138,862 $127,808
======== ======== ======== ======== ========
5
The following schedule illustrates the contractual maturity of the
Company's loan portfolio at March 31, 2004. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
-------------------------------------------------------------------------
One-to-Four Multi-family and Construction and
Family Commercial Land Development Consumer
---------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Due
Within one year(1)......... $ 2,984 5.4% $ 570 5.5% $ 7,138 5.6% $ 9,073 4.5%
One to five years.......... 5,457 6.6 4,388 5.7 3,418 5.1 29,583 6.7
Over five years............ 104,633 6.4 28,610 5.9 1,246 5.7 8,818 7.8
-------- -------- -------- --------
Totals $113,074 $ 33,568 $ 11,802 $ 47,474
======== ======== ======== ========
Commercial
Business Other Total
------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------
(Dollars in Thousands)
Due
Within one year(1)......... $ 24,391 5.1% $ 6 6.0% $ 44,162 5.1%
One to five years.......... 14,255 5.6 24 5.0 57,125 6.2
Over five years............ 15,052 5.4 -- -- 158,359 6.3
-------- ----- --------
Totals $ 53,698 $ 30 $259,646
======== ===== ========
(1) Includes demand loans, loans having no stated maturity and overdraft
deposits which are reported as loans.
The total amount of loans due after March 31, 2005 which have predetermined
interest rates is $91.1 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $124.4 million.
6
COMMERCIAL BUSINESS LOANS. The Company emphasizes commercial lending to
small and mid-sized businesses in the Company's primary market area. These loans
are typically secured by business assets of the borrower such as fixed assets,
accounts receivable, inventory and other general assets. A significant portion
of the Company's commercial business loans are also partially secured by real
estate. Such loans generally have terms from 5 to 10 years. To a much lesser
degree, the Company also makes unsecured commercial loans with maturities of
less than five years. The Company's commercial loans are generally priced based
on the prime rate. The Company's commercial loans are generally personally
guaranteed by one or more of the principals of the borrower.
Commercial business loans are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial business loans
may be substantially dependent on the success of the business itself. Loan
officers review the borrower's financial statements, appraisals and analysis of
collateral, and other related documents before recommending funding of a
commercial loan. The loan officer and approving officer or loan committee then
analyze the projected payment coverage, collateral liquidation value, payment
history and business prospects before making a recommendation regarding the
loan. Other reviews and analyses are done as appropriate based upon the
complexity of the credit request.
Although a risk of nonpayment exists with respect to all loans, certain
specific types of risks are associated with different types of loans. The
primary risks associated with commercial loans are the dependency on the success
of the business itself, the quality of the borrower's management and the impact
of national and regional economic factors. Further, the collateral, if any,
securing the loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business. The Company
mitigates these risks by maintaining a close working relationship with it's
borrowers, by obtaining cross-collateralization and personal guarantees of its
loans, and by diversification within its commercial loan portfolio.
The aggregate amount of the Company's commercial loans without real estate
as the primary collateral totaled approximately $53.7 million at March 31, 2004,
and represented 64.3% of total commercial loans at that date.
COMMERCIAL REAL ESTATE LOANS. Management views the Company's commercial
real estate lending activities as a part of its overall commercial lending
effort. Also, commercial real estate loans are generally made only to businesses
occupying all or most of the underlying premises. These loans are structured and
underwritten in a manner similar to the Company's commercial business loans. Our
commercial real estate loans, are generally subject to the same risks as our
commercial business loans. However, unlike our commercial loans, the major
source of repayment is the earnings stream from the underlying real estate with
a secondary repayment being the normal cash flow of the business.
Included in commercial real estate loans are a number of loans that are
secured by religious facilities as well as loans to landlords that have leased
the underlying commercial properties to unaffiliated third parties.
CONSUMER LOANS. In order to achieve yield and interest rate sensitivity
goals for its loan portfolio and as part of its community bank-oriented
strategy, the Company continues to emphasize consumer loans. Emphasis is placed
on direct automobile, recreational vehicle, home equity and boat financing. To a
lesser degree, the Company makes unsecured loans to creditworthy individuals.
Consumer loan terms vary according to the type and value of collateral, term of
the borrowing and credit worthiness of the borrower. The Company is not involved
in any indirect lending relationships.
7
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Payment
history is verified through in-bank records and credit bureau reports. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the collateral, if any, in
relation to the proposed loan amount.
Consumer loan collections are dependent on the borrower's continuing
financial stability, value of the collateral, if any, and personal circumstances
which can include financial problems, divorce and bankruptcy, which may limit
the amount which can be recovered on such loans. In addition, consumer loans
secured by depreciable assets, such as automobiles, recreational vehicles and
boats, may not provide an adequate source of repayment in the case of
repossession as a result of the greater likelihood of damage, loss or
depreciation. In view of the above and the extent of the Company's consumer
lending activities, there can be no assurances that delinquencies in the
consumer loan portfolio will not increase in the future.
During fiscal 2004, consumer loans increased by $11.2 million. At March 31,
2004, consumer loans totaled $47.5 million, or 18.3% of the Company's total loan
portfolio.
ONE-TO-FOUR-FAMILY REAL ESTATE LOANS. A portion of the Company's lending
program is the origination of loans secured by mortgages on owner-occupied
one-to-four-family residences in its primary market area. The Company has, and
continues to reduce its emphasis on one-to-four-family lending and retains
primarily only its adjustable rate originations for its own portfolio. At March
31, 2004 29.0% of the Company's one-to-four family residential real estate loans
carried adjustable interest rates. In order to satisfy customer requirements for
fixed rate products that the Company does not wish to hold for its own
portfolio, the Company may utilize an arrangement with another lending
institution whereby the Company takes applications and receives an origination
fee on any loan actually funded.
The aggregate amount of the Company's one-to-four family residential real
estate loans totaled $113.1 million at March 31, 2004, and represented 43.6% of
total loans at such date. The increase in these loans in 2004 was due to the
First Federal acquisition.
CONSTRUCTION AND LAND DEVELOPMENT LOANS. The Company makes loans for the
construction of owner-occupied single-family residences and owner-occupied
commercial buildings. On a selected basis the Company also makes loans for
single-family land development properties and single-family construction loans
to established developers for resale. These types of loans are made under
stringent underwriting guidelines that limit the number of units under
construction. The loans combined represent 4.5% of total loans outstanding at
March 31, 2004.
ORIGINATIONS, PURCHASES AND SALES OF LOANS
Loans are originated by the Company's staff of salaried loan officers
through marketing activities and referrals. Monetary incentives are awarded to
lending personnel based on pre-determined production levels, offset by penalties
for delinquency levels in excess of specified percentages. The Company's ability
to originate loans is dependent upon customer demand for loans in its market
area and to a lesser extent, various marketing efforts. Demand is affected by
both the local economy and the interest rate environment. See "Market Area."
Under current policy, all loans originated by the Company are retained in
the Company's portfolio, other than portions of certain large loans which may be
sold (in the form of participations) to other financial institutions in order to
limit our overall exposure to individual borrowers. From time to time, the
Company purchases loans from other financial institutions under the same
underwriting guidelines established for loans it originates.
8
The Company also takes fixed-rate secondary market residential loan
applications for another residential lender. Although the Company does not make
the subject loans, the Company receives an origination fee on any loan actually
funded by the other lender. These loans are generally offered to customers
seeking loans which the Company, either because of rate or type, does not wish
to include in the portfolio.
DELINQUENCIES AND NON-PERFORMING ASSETS
DELINQUENCY PROCEDURES. When a borrower fails to make the required payments
on a loan, the Company attempts to cure the delinquency through established
collection procedures. If a loan becomes contractually delinquent 90 days, the
Company normally initiates appropriate legal action for collection. The decision
as to whether and when to initiate legal action is based upon such factors as
the amount of the outstanding loan in relation to the original indebtedness,
current value of collateral (if secured), the extent and frequency of
delinquency and the borrower's ability and willingness to cooperate in curing
delinquencies. By policy, when a loan becomes delinquent 90 days or more, the
Company will place the loan on non-accrual status unless the loan is both well
secured and in the process of collection, or is guaranteed by an agency of the
U.S. Government, such as the Small Business Administration. When placed on
non-accrual status, the previously accrued interest income on the loan is taken
out of the current income. Future interest income may be applied directly to the
principal balance of the loan. Loans placed on non- accrual are not placed back
on an accruing basis until a satisfactory payment history has been established.
Real estate acquired by the Company as a result of foreclosure or deed in
lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or estimated fair value (as determined by
appraisal) less estimated selling costs. After acquisition, all costs incurred
in maintaining the property are expensed. Costs relating to the development and
improvement of the property are capitalized.
9
The following table sets forth loan delinquencies by type, by amount and by
percentage of type at March 31, 2004.
Loans Delinquent For:
-------------------------------------------------------------------
60 -89 Days 90 Days and Over Total Delinquent Loans
-------------------------------- -------------------------------- ------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
-------- ------------ ---------- -------------------------------- ----------- ----------- --------
(Dollars in Thousands)
Real Estate:
One- to four-family.... 2 $286 .3% 21 $773 .7% 23 $1,059 1.0%
Consumer............... 27 204 .4 11 112 .2 38 316 .6
Commercial Business.... 4 142 .3 4 85 .2 8 227 .5
-- ---- -- ------ -- --------
33 $632 .2 36 $970 .4 69 $1,602 2.1
== ==== == ==== == ======
CLASSIFICATION OF ASSETS. Federal regulations require that each bank
classify its own assets on a regular basis. There are four classifications for
problem assets: Special Mention, Substandard, Doubtful and Loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the Institution will sustain some loss if the deficiencies are
not corrected. Doubtful assets have the weaknesses of Substandard assets, with
the additional characteristics that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets which do not currently expose an institution to sufficient
risk to warrant classification of the aforementioned categories, but possess
weaknesses are required to be designated "Other Assets Especially Mentioned" by
the institution.
On the basis of management's review of its assets, at March 31, 2004,
the Company had the following classified assets:
At
March 31, 2004
(In Thousands)
Substandard............................ $ 3,643
Doubtful............................... 441
Loss................................... --
Special Mention........................ 7,201
-------
Total............................. $11,285
=======
10
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of non- performing assets in the loan portfolio. For all years
presented, the Company had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates). Foreclosed assets included
assets acquired in settlement of loans, whether through judicial procedures,
repossessions or voluntary surrender.
March 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ........................ $ 481 $ 198 $ 282 $ 423 $ 296
Multi-family ............................... -- -- -- 15 --
Commercial real estate ..................... -- -- 50 207 134
Commercial business ........................ 26 402 80 -- 190
Land ....................................... -- -- -- 17 --
------ ------ ------ ------ ------
Total ................................... 507 600 412 662 620
------ ------ ------ ------ ------
Accruing loans delinquent 90 days or more:
One- to four-family ........................ 773 487 157 75 143
Commercial real estate ..................... -- -- -- 43 --
Consumer ................................... 112 69 22 6 10
Commercial Business ........................ 85 113 65 -- --
------ ------ ------ ------ ------
Total ................................... 970 669 244 124 153
------ ------ ------ ------ ------
Total non-performing loans ................... 1,477 1,269 656 786 773
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family ........................ 782 -- 46 17 62
Commercial real estate ..................... -- -- 32 194 194
Consumer ................................... 74 -- 4 17 40
------ ------ ------ ------ ------
Total ................................... 856 -- 82 228 296
------ ------ ------ ------ ------
Total non-performing assets .................. $2,333 $1,269 $ 738 $1,014 $1,069
====== ====== ====== ====== ======
Total as a percentage of total assets ........ .7% .5% 0.3% 0.5% 0.6%
====== ====== ====== ====== ======
Non-performing assets increased during 2004 due to delinquent
one-to-four family loans and real estate owned acquired in connection with the
First Federal acquisition. Management believes that these assets will be
resolved without a material impact on the Company's results of operations.
For the year ended March 31, 2004, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $47,000. The amount that was included in
interest income on such loans was $4,000 for the year ended March 31, 2004.
OTHER ASSETS OF CONCERN. In addition to the non-performing assets set
forth in the table above, as of March 31, 2004, there were no loans or other
assets 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.
Management considers non-performing assets in establishing its
allowances for loan losses.
11
ALLOWANCE FOR LOAN LOSSES. The following table sets forth an analysis
of the allowances for loan losses.
Year Ended March 31,
------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period ........................... $1,975 $1,628 $1,407 $1,289 $ 861
Acquisition of Citizens Bank ............................. -- -- -- -- 506
Acquisition of First Federal ............................. 885 -- -- -- --
------ ------ ------ ------ ------
Charge-offs:
One- to four-family .................................... 311 60 33 8 139
Commercial real estate ................................. -- -- -- -- 4
Commercial business .................................... 248 17 69 108 155
Consumer ............................................... 393 32 80 74 71
Multi-Family ........................................... 2 -- -- -- 2
Construction ........................................... 3 -- -- -- --
Credit Card ............................................ 83 -- -- -- --
------ ------ ------ ------ ------
Total charge-offs .................................. 1,040 109 182 190 371
------ ------ ------ ------ ------
Recoveries:
One- to four-family .................................... 24 1 5 5 8
Commercial business .................................... 106 -- -- 2 27
Consumer ............................................... 36 23 35 40 34
Multi-Family ........................................... -- 4 -- -- 1
------ ------ ------ ------ ------
Total recoveries ................................... 166 28 40 47 70
------ ------ ------ ------ ------
Net charge-offs .......................................... 874 81 142 143 301
------ ------ ------ ------ ------
Additions charged to operations .......................... 223 428 363 261 223
------ ------ ------ ------ ------
Balance at end of period ................................. $2,209 $1,975 $1,628 $1,407 $1,289
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
loans outstanding during the period ...................... .7% 0.1% 0.1% 0.1% 0.2%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
non-performing assets .................................... 33.5% 8.6% 13.9% 12.4% 30.0%
====== ====== ====== ====== ======
The allowances for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of probable
incurred losses in the portfolio. Such evaluation, which includes a formal
review of all loans of which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, the relationship of the allowance to outstanding loans,
historical loss experience, delinquency trends, prevailing economic conditions
and other factors that warrant recognition in providing for an adequate
allowance for loan losses. In determining the general reserves under these
policies, historical charge-offs and recoveries, changes in the mix and level of
the various types of loans, net realizable values, the current loan portfolio
and current economic conditions are considered.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if actual circumstances differ
substantially from the assumptions used in making the final allowance for loan
loss estimates.
12
The distribution of the allowance for loan losses at the dates
indicated is summarized as follows:
March 31,
-------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
-------- -------- ----- -------- -------- ----- -------- -------- -----
(Dollars in Thousands)
One- to four-family ....... $ 666 $113,074 43.6% $ 325 $ 74,233 39.2% $ 207 $ 74,32 45.9%
Multi-family .............. -- 3,701 1.4 -- 1,042 .6 17 1,083 0.7
Commercial real estate .... 221 29,867 11.5 35 24,869 13.2 41 23,105 14.3
Const. and land dev ....... 10 11,802 4.5 -- 4,623 2.4 -- 4,823 3.0
Consumer .................. 326 47,474 18.3 30 36,272 19.2 29 24,966 15.4
Commercial business ....... 504 53,698 20.7 84 47,962 25.4 34 33,448 20.7
Commercial agriculture .... -- 30 -- -- 9 -- -- 74 --
Unallocated ............... 482 -- -- 1,501 -- -- 1,300 -- --
-------- -------- ----- -------- -------- ----- -------- -------- -----
Total ................ $ 2,209 $259,646 100.0% $ 1,975 $189,010 100.0% $ 1,628 $161,820 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====
March 31,
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
-------- -------- ----- -------- -------- -----
(Dollars in Thousands)
One- to four-family ....... $ 197 $ 73,576 52.5% $ 185 $ 71,928 55.7%
Multi-family .............. -- 1,342 1.0 -- 1,486 1.2
Commercial real estate .... 172 16,877 12.0 99 15,216 11.8
Const. and land dev ....... 49 3,287 2.3 -- 2,670 2.0
Consumer .................. 91 18,249 13.0 97 14,076 10.9
Commercial business ....... 150 26,727 19.1 431 23,539 18.3
Commercial agriculture .... -- 119 0.1 -- 148 0.1
Unallocated ............... 748 -- -- 477 -- --
-------- -------- ----- -------- -------- -----
Total ................ $ 1,407 $140,177 100.0% $ 1,289 $129,063 100.0%
======== ======== ===== ======== ======== =====
13
The unallocated portion of the allowance decreased from March 31,
2003 to March 31, 2004 as a result of the acquisition of First Federal and
management's effort to more closely align the allocated portion of the allowance
to anticipated risk exposure. Upon completion of the acquisition, further review
of the acquired loans resulted in a higher allocation, thereby reducing the
unallocated portion of the allowance.
INVESTMENTS. Investment securities primarily satisfy the Company's liquidity
needs and provide a return on residual funds after lending activities, as well
as collateral for public funds deposited with the Company. Pursuant to the
Company's written investment policy, investments may be made in interest-
bearing deposits, U.S. Government and agency obligations, trust preferred
securities, state and local government obligations and government guaranteed
mortgage-backed securities. The Company does not invest in debt securities that
are rated less than investment grade by a nationally recognized statistical
rating organization. A goal of the Company's investment policy is to limit
interest rate risk.
All security-related activity is reported to the Board of Directors.
General changes in investment strategy must be reviewed and approved by the
Investment Committee and ratified by the Board of Directors. The Company's
senior management can purchase and sell securities on behalf of the Company in
accordance with the Company's stated investment policy.
At March 31, 2004, all of the Company's securities were classified as
available-for-sale. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, in a separate
component of retained earnings. At March 31, 2004, the Company did not own any
securities of a single issuer which exceeded 10% of the Company's stockholders'
equity, other than U.S. government securities and federal agency obligations.
The following table sets forth the composition of the Company's
securities at the dates indicated. All investment securities held by the Company
were classified as available for sale.
March 31,
----------------------------------------------------------------
2004 2003 2002
----------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------- ----- ------- ----- ------- -----
(Dollars in Thousands)
Securities:
Federal agency obligations .............. $ 1,312 2.6% $ 564 1.5% $ 2,488 7.1%
State and municipal bonds ............... 18,956 37.2 19,908 52.6 17,042 48.9
Mortgage-backed ......................... 22,497 44.2 9,596 25.4 9,063 26.0
Corporate ............................... 8,151 16.0 7,775 20.5 6,273 18.0
------- ----- ------- ----- ------- -----
Total debt securities ............... $50,916 100.0% $37,843 100.0% $34,866 100.0%
======= ===== ======= ===== ======= =====
Other interest-earning assets:
Interest-bearing deposits with banks ... $ 408 12.1% $ 382 16.2% $ 448 23.2%
Federal Funds Sold ..................... 58 1.7 24 1.0 -- --
FHLB stock ............................. 2,894 86.2 1,949 82.8 1,480 76.8
------- ----- ------- ----- ------- -----
Total ............................... $ 3,360 100.0% $ 2,355 100.0% $ 1,928 100.0%
======= ===== ======= ===== ======= =====
14
The composition and maturities of the securities portfolio are
indicated in the following table. Mortgage-backed securities are reported based
on contractual maturities.
March 31, 2004
-------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Securities
1 Year Years Years 10 Years ---------------------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Federal agency obligations .... $ -- $ 858 $ 454 $ -- $ 1,312 $ 1,312
State and municipal bonds ..... 1,005 1,993 4,177 11,781 18,956 18,956
Mortgage-backed ............... -- 522 17 21,958 22,497 22,497
Corporate ..................... -- -- -- 8,151 8,151 8,151
------- ------- ------- ------- ------- -------
Total debt securities ........ $ 1,005 $ 3,373 $ 4,648 $41,890 $50,916 $50,916
======= ======= ======= ======= ======= =======
Weighted average yield(1) ..... 7.2% 5.9% 5.9% 5.7% 5.8% 5.8%
(1) Yields have been computed on a tax-equivalent basis.
SOURCES OF FUNDS
GENERAL. The Company's primary sources of funds are deposits,
payments (including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations. Borrowings may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected levels
and may be used on a longer-term basis to support expanded lending activities.
DEPOSITS. The Company offers deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of savings, money
market, various certificate and interest- and noninterest-bearing checking
accounts. The Company currently relies primarily on competitive pricing policies
and product offerings, convenient locations and business hours, customer service
and cross marketing to attract and retain deposits. The Company also cross
markets to current customers and utilizes newspaper, television, billboard and
radio advertisements.
The Company serves as a depository for public funds for various
municipalities and related entities. At March 31, 2004, the amount of public
funds on deposit with the Company was $37.2 million. These accounts are subject
to volatility depending on government funding needs and the Company's desire to
price competitively to attract such funds.
The Company manages the pricing of its deposits in keeping with its
asset/liability management, profitability and growth objectives.
15
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered as of the dates indicated.
As of March 31,
------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Demand, Savings and Money Market:
Non-interest bearing demand deposits .... $ 29,165 11.2% $ 23,159 12.2% $ 20,404 12.8%
Interest bearing demand deposits ........ 61,400 23.6 31,982 16.8 25,075 15.9
Savings Accounts ........................ 29,340 11.3 14,803 7.8 13,893 8.7
Money Market Accounts ................... 19,032 7.3 18,977 10.0 18,466 11.6
-------- ----- -------- ----- -------- -----
Total Non-Certificates ............. 138,937 53.4 88,921 46.8 77,838 49.0
-------- ----- -------- ----- -------- -----
Certificates:
0.00 - 4.00% ............................ 105,278 40.5 89,878 47.1 54,196 34.1
4.01 - 6.00% ............................ 15,157 5.8 10,483 5.6 22,411 14.1
6.01 - 8.00% ............................ 869 .3 874 0.5 4,429 2.8
-------- ----- -------- ----- -------- -----
Total Certificates ...................... 121,304 46.6 101,235 53.2 81,036 51.0
-------- ----- -------- ----- -------- -----
Total Deposits ..................... $260,241 100.0% $190,156 100.0% $158,874 100.0%
======== ===== ======== ===== ======== =====
The following table shows rate and maturity information for the
Company's certificates of deposit as of March 31, 2004.
1.00- 4.01- 6.01- Percent
4.00% 6.00% 8.00% Total of Total
-------- -------- -------- -------- -----
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
June 30, 2004 .............. $ 23,162 $ 1,775 $ 161 $ 25,098 20.8%
September 30, 2004 ......... 20,072 1,111 8 21,191 17.5
December 31, 2004 .......... 13,725 1,298 60 15,083 12.4
March 31, 2005 ............. 19,722 1,717 304 21,743 17.9
June 30, 2005 .............. 5,483 1,371 103 6,957 5.7
September 30, 2005 ......... 5,839 2,285 40 8,164 6.7
December 31, 2005 .......... 3,367 395 163 3,925 3.2
March 31, 2006 ............. 5,160 -- 30 5,190 4.3
June 30, 2006 .............. 986 104 -- 1,090 0.9
September 30, 2006 ......... 684 600 -- 1,284 1.1
December 31, 2006 .......... 679 223 -- 902 0.7
March 31, 2007 ............. 841 605 -- 1,446 1.2
Thereafter ................. 5,558 3,673 -- 9,231 7.6%
-------- -------- -------- -------- -----
Total ................... $105,278 $ 15,157 $ 869 $121,304 100.0%
======== ======== ======== ======== =====
Percent of total......... 86.8% 12.5% .7% 100.0%
16
The following table indicates the amount of the certificates of
deposit and other deposits by time remaining until maturity as of March 31,
2004.
Maturity
-----------------------------------------------
Over Over
3 Month 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- -------- -------- --------
(Dollars in Thousands)
Certificates of deposit less than $100,000 ..... $ 17,805 $ 15,292 $ 27,515 $ 26,434 $ 87,046
Certificates of deposit of $100,000 or more .... 7,293 5,899 9,311 11,755 34,258
-------- -------- -------- -------- --------
Total certificates of deposit .................. $ 25,098 $ 21,191 $ 36,826 $ 38,189 $121,304
======== ======== ======== ======== ========
BORROWINGS. Other available sources of funds include advances from
the FHLB of Cincinnati and other borrowings. As a member of the FHLB of
Cincinnati, Classic Bank is required to own capital stock in the FHLB of
Cincinnati and is authorized to apply for advances from the FHLB of Cincinnati.
Each FHLB credit program has its own interest rate, which may be fixed or
variable, and range of maturities. The FHLB of Cincinnati may prescribe the
acceptable uses for these advances, as well as limitations on the size of the
advances and repayment provisions. The Company also borrowed funds by selling
securities to customers with an agreement to repurchase them within a specified
period of time (generally 30 days or less).
FHLB and other borrowings have been used to fund loan demand and
other investment opportunities, to offset deposit outflows and achieve the
Company's asset/liability management objectives. The Company also has utilized
borrowings when their cost is more favorable than that of deposits. At March 31,
2004, the Company had $34.2 million of FHLB advances outstanding. See Note 8 of
the Notes to the Consolidated Financial Statements.
The following table sets forth the maximum month-end balance and
average balance of the Company's borrowings for the periods indicated.
Year Ended March 31,
------------------------------------
2004 2003 2002
------------------------------------
(Dollars in Thousands)
Maximum Balance:
Repurchase agreements ........... $ 11,252 $ 6,020 $ 5,873
Treasury tax and loan note ...... 554 501 467
FHLB advances ................... 43,002 36,570 27,401
Average Balance:
Repurchase agreements ........... 8,608 5,206 4,553
Treasury tax and loan note ...... 327 322 317
FHLB advances ................... 31,592 29,781 19,753
Weighted average interest rate .... 3.1% 3.0% 3.4%
17
The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
March 31,
------------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in Thousands)
Repurchase agreements ...................................... $ 9,168 $ 4,382 $ 5,396
Other Borrowings
Treasury tax and loan note ............................... 12 6 446
FHLB advances ............................................ 34,218 28,126 27,401
-------- -------- --------
Total Borrowings ........................................... $ 43,398 $ 32,514 $ 33,243
======== ======== ========
Weighted average interest rate of repurchase agreements .... 1.0% 1.1% 1.7%
Weighted average interest rate of
other borrowings ........................................... 3.5% 3.4% 3.5%
18
TRUST SERVICES
The Company has trust powers with its state charter but has chosen to
limit its scope to a small group of customers. Limited services provided include
managing and investing trust assets, disbursing funds as required by trust
agreements and arranging for maintenance at two local cemeteries. For fiscal
year 2004, gross trust fees were less than $1,000.
COMPETITION
The Company faces strong competition from large regional and national
banks, as well as local institutions in originating loans and attracting
deposits. Competition in originating loans comes primarily from commercial banks
(national, regional and local), savings institutions, credit unions and mortgage
bankers, which also make loans to borrowers located in the Company's primary
market area. At March 31, 2004, there were 21 commercial banks and savings
institutions and seven credit unions located in Boyd, Greenup, Carter and
Johnson Counties, Kentucky and Lawrence County, Ohio. The Company competes for
loans principally on the basis of interest rates and fees it charges, the types
of loans it originates and the quality of services it provides to borrowers.
Competition for deposits comes principally from commercial banks,
savings institutions, credit unions, mutual funds and securities firms located
in the same communities. The ability of the Company to attract and retain
deposits depends on its ability to provide competitive deposit products that
satisfies the requirements of consumers and businesses within its market area.
Other requirements include convenient locations, convenient business hours and
customer-oriented staff. With regard to interest bearing deposits, the Company's
ability to attract and retain these deposits are dependent upon the rate of
return, liquidity, risk and investment products.
At June 30, 2003, the Company's share of deposits in the market area
in which it operates was approximately 10.6%, representing the number one market
share of banks and savings institutions operating within the same market areas.
The Company operates seven offices (including its headquarters) in
the Huntington/Ashland (WV-KY-OH) Metropolitan Statistical Area (MSA). At June
30, 2003, the Company operated in four of the six counties located in the MSA,
three counties in Kentucky and one county in Ohio. The Company has no offices in
the two West Virginia counties of the MSA that represent the MSA's largest
population base. At June 30, 2003, the Company's market share in the
Huntington/Ashland MSA was 4.4% and ranked the Company seventh in the MSA
deposit market share. The above information is based upon the most recent
information available from the Federal Deposit Insurance Corporation and is
accessed via the Internet at WWW.FDIC.GOV under Summary of Deposits.
EMPLOYEES
At March 31, 2004, the Company and its subsidiary had a total of 105
full-time employees. None of the Company's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.
19
REGULATION
GENERAL
Classic Bank is a Kentucky chartered commercial bank that converted
from a federally chartered savings association in June 2000. The deposits of
Classic Bank are insured by the FDIC. Accordingly, Classic Bank is subject to
broad state and federal regulation and oversight extending to all its
operations. Classic Bank is a member of the FHLB of Cincinnati and is subject to
certain limited regulation by the Federal Reserve Board.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
STATE AND FEDERAL REGULATION OF CLASSIC BANK
As a Kentucky chartered bank, Classic Bank is subject to the
regulation and supervision of the Kentucky Department of Financial Institutions
("DFI"). The FDIC also has regulatory and examination authority over Classic
Bank as its federal regulator. As part of this authority, Classic Bank is
required to file periodic reports with the DFI and the FDIC, and is subject to
periodic examinations by the DFI and the FDIC. When these examinations are
conducted by the DFI and the FDIC, the examiners may require Classic Bank to
provide for higher general or specific loan loss reserves.
The DFI and the FDIC also have extensive enforcement authority over
their regulated institutions, including Classic Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound banking practices. Other actions or inactions
may provide the basis for enforcement action, including misleading or untimely
reports filed with the FDIC. Except under certain circumstances, public
disclosure of final enforcement actions by the FDIC is required.
In addition, the investment, lending and branching authority of
Classic Bank is prescribed by state and federal laws and it is prohibited from
engaging in any activities not permitted by such laws. Under federal law, a
state bank may not make any equity investment not permitted for a national bank
and may only engage in activities not permitted for a national bank if it
receives prior FDIC approval. Classic Bank is in compliance with the noted
restrictions. Within the Commonwealth of Kentucky, Classic Bank has the express
authority to branch without regard to geographic limitations. See "-- Interstate
Banking and Branching" for restrictions applicable to interstate branching by
Classic Bank.
Classic Bank's general permissible lending limits for
loans-to-one-borrower is equal to 20% of capital stock and surplus (except for
loans fully secured by certain collateral, in which case the limit is increased
to 30% of capital stock and surplus). At March 31, 2004, Classic Bank's lending
limit was $4.1 million and Classic Bank was in compliance with the
loans-to-one-borrower limitation.
The FDIC, as well as other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
20
RECENT LEGISLATION
USA PATRIOT ACT - On October 26, 2001, President Bush signed into law
the USA Patriot Act. The USA Patriot Act gives the federal government new powers
to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. The USA Patriot Act also requires the
federal banking agencies to take into consideration the effectiveness of
controls designed to combat money laundering activities in determining whether
to approve a merger or other acquisition application of a member institution.
Accordingly, if we engage in a merger or other acquisition, our controls
designed to combat money laundering would be considered as part of the
application process. We do not believe the USA Patriot Act will have a material
impact on our operations.
SARBANES-OXLEY ACT - On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002 (the "SOA"). The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.
The SOA is the most far-reaching U.S. securities legislation enacted
in some time. The SOA generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the SEC under
the Securities and Exchange Act (the "Act"). Given the extensive SEC role in
implementing rules relating to may of the SOA's new requirements, the final
scope of many of these requirements remains to be determined.
The SOA includes very specific additional disclosure requirements and
new corporate governance rules, requires the SEC and securities exchange to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of certain issues by the SEC and the
Comptroller General. The SOA represents significant federal involvement in
matters traditionally left to state regulatory systems, such as the regulation
of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of
directors and its committees.
The SOA addresses, among other matters:
o audit committees;
o certification of financial statements by the chief executive officer
and the chief financial officer;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the 12 month period following initial publication
of any financial statements that later require restatement ;
o a prohibition on the sale of stock by directors and executives during
pension plan black out periods;
o disclosure of off-balance sheet transactions;
o a prohibition on certain personal loans to directors and officers;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
21
o "real time" filing of periodic reports; expedited filing requirements
for Form 4s;
o the formation of a public company accounting oversight board;
o auditor independence; and
o various increased criminal penalties for violations of securities
laws.
The SOA contains provisions which became effective upon enactment on
July 30, 2002 and provisions which become effective from within 30 days to one
year from enactment. The SEC has been delegated the task of adopting rules to
implement various provisions of SOA.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The deposits of Classic Bank are insured up to applicable limits by
the FDIC and such insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. including Classic Bank. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the Savings Account Insurance Fund
or the Bank Insurance Fund. The FDIC also has the authority to initiate
enforcement actions against FDIC insured banks, and may terminate an
institution's deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a
ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based
capital") of at least 6% and a risk-based capital ratio of at least 10%) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification of
all insured institutions is made by the FDIC for each semi-annual assessment
period.
REGULATORY CAPITAL REQUIREMENTS OF STATE BANKS
Classic Bank is subject to the capital regulations of the FDIC. The
FDIC's regulations establish three capital standards for FDIC supervised state
banks: a leverage requirement, a Tier 1 risk based capital requirement and a
risk-based capital requirement. In addition, the FDIC may, on a case-by-case
basis, establish individual minimum capital requirements for a state bank that
vary from the requirements which would otherwise apply under FDIC regulations.
The leverage ratio adopted by the FDIC requires a minimum ratio of
"Tier 1 capital" to adjusted total assets of 3% for state banks rated composite
1 under the CAMELS rating system for banks. Banks not rated composite 1 under
the CAMELS rating system for banks are required to maintain a minimum ratio of
Tier 1 capital to adjusted total assets of 4%. For purposes of the FDIC's
leverage requirement, Tier 1 capital generally consists of the common
stockholder's equity and retained income and non- cumulative preferred stock,
except that no intangibles, other than certain purchased mortgage servicing
rights, and purchased credit card receivables may be included in capital.
22
At March 31, 2004, Classic Bank had Tier 1 capital equal to $23.4
million, or 7.0% of adjusted total assets, which is $10.1 million above the
minimum leverage ratio requirement of 4% as in effect on that date.
FDIC regulated banks are also required to maintain a Tier 1 risk
based capital ratio of at least 4%. This requirement is the ratio of Tier 1
capital to risk-weighted assets. At March 31, 2004, Classic Bank had Tier 1
capital of $23.4 million or 10.0% of risk weighted assets, which was $14.1
million above the minimum Tier 1 risk based capital ratio of 4% on that date.
The FDIC's risk-based capital requirements require state banks to
maintain "total capital" equal to at least 8% of total risk-weighted assets. For
purposes of the risk-based capital requirement, "total capital" means Tier 1
capital (as described above) plus "Tier 2 capital" (as described below),
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk- weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
The FDIC is also authorized to require a bank to maintain an additional amount
of total capital to account for concentration of credit risk and the risk of
non-traditional activities. At March 31, 2004, Classic Bank had no capital
instruments that qualify as supplementary capital and $2.2 million in allowance
for loan losses, which was less than 1.25% of risk-weighted assets. At March 31,
2004, Classic Bank was in compliance with its capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources", for additional information
regarding Classic Bank's compliance with its capital requirements.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the FDIC has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
On March 31, 2004, Classic Bank had total capital of $25.6 million
(including $23.4 million in core capital and $2.2 million in qualifying
supplementary capital) and risk-weighted assets of $233.2 million or total
capital of 11.0% of risk-weighted assets. This amount was $6.9 million above the
8% requirement in effect on that date.
PROMPT CORRECTIVE ACTION
The FDIC is authorized and, under certain circumstances required, to
take certain actions against banks that fail to meet their capital requirements.
The FDIC is generally required to take action to restrict the activities of an
"undercapitalized bank" (generally defined to be one with less than either a 4%
core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such bank must submit a capital restoration plan and until
such plan is approved by the FDIC may not increase its assets, acquire another
institution, establish a branch or engage in any new activities, and generally
may not make capital distributions. The FDIC is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
bank.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized bank must agree that it will enter into
a limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
23
Any bank that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the bank. A bank that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized banks. In addition, the FDIC must appoint a
receiver (or conservator with the concurrence of the FDIC) for a bank, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized bank is also subject to the general
enforcement authority of the FDIC, including the appointment of a conservator or
a receiver.
The FDIC is also generally authorized to reclassify a bank into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the FDIC of any of these measures on Classic Bank
would likely have a substantial adverse effect on Classic Bank's operations and
profitability and the value of the Company's common stock. The Company's
shareholders do not have preemptive rights, and therefore, if the Company is
directed by the FDIC to issue additional shares of common stock, such issuance
may result in the dilution in the percentage of ownership of current
stockholders of the Company.
As discussed in the previous section, the Bank is considered
well-capitalized.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Kentucky banks are generally permitted to pay dividends in any
calendar year equal to net income for that year plus retained earnings for the
preceding two years. Dividends in excess of such amount require prior approval
by the DFI.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution, including Classic Bank, has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low- and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the appropriate Federal
regulator, in connection with the examination of an insured institution, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Classic Bank. An unsatisfactory
rating may be used as the basis for the denial of an application by the FDIC.
In Classic Bank's last CRA compliance examination by the FDIC, it
received a satisfactory rating.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
Generally, transactions between a bank or its subsidiaries and its
affiliates are required to be on terms as favorable to the bank as transactions
with non-affiliates. In addition, certain of these transactions, such as loans
to an affiliate, are restricted to a percentage of the bank's capital and
certain collateral requirements. Affiliates of Classic Bank include the Company
and any other company which is
24
under common control with Classic Bank. The Federal Reserve Board has the
discretion to treat a subsidiary of a bank as an affiliate on a case-by-case
basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the FDIC. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
GENERAL. The Company is a bank holding company that elected to be
treated as a financial holding company with the Federal Reserve Board. Financial
holding companies are subject to comprehensive regulation by the Federal Reserve
Board under the Bank Holding Company Act, and the regulations of the Federal
Reserve Board. As a financial holding company, the Company is required to file
reports with the Federal Reserve Board and such additional information as the
Federal Reserve Board may require, and is subject to regular examinations by the
Federal Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over financial holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest its ownership interest in
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
banking practices.
Under Federal Reserve Board policy, a financial holding company must
serve as a source of strength for its subsidiary banks. Under this policy the
Federal Reserve Board may require, and has required in the past, a holding
company to contribute additional capital to an undercapitalized subsidiary bank.
Under the Bank Holding Company Act, a financial holding company must
obtain Federal Reserve Board approval before: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company.
The Bank Holding Company Act also prohibits a financial holding
company, with certain exceptions, from acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company, or from engaging directly or indirectly in activities
other than those involving banking, securities, insurance or merchant banking.
The Company has no present plans to engage in any of the expanded activities
permissible for a financial holding company.
INTERSTATE BANKING AND BRANCHING. Under Federal law, the Federal
Reserve Board is authorized to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. Federal law also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. This provision does
not affect the authority of
25
states to further limit the percentage of total insured deposits in the state
which may be held or controlled by a bank or bank holding company to the extent
such limitation does not discriminate against out-of- state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit. The Commonwealth of Kentucky currently provides for deposit
concentration limits and reciprocal requirements.
The Federal banking agencies are also authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
has, prior to June 1, 1997, enacted legislation that expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of branches
are permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions are also
subject to the nationwide and statewide insured deposit concentration amounts
described above.
The Act authorizes interstate branching de novo by national and state
banks, only in states which specifically allow for such branching.
DIVIDENDS. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the Company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the Company's capital needs, asset quality and overall
financial condition. The Federal Reserve Board also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized". See "- - Prompt
Corrective Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
CAPITAL REQUIREMENTS. The Federal Reserve Board has established
capital requirements for certain bank and financial holding companies that
generally parallel the capital requirements for FDIC insured banks. On March 31,
2004, the Company had Tier 1 capital of $25.1 million or 7.5% of average total
assets, which was $11.8 million above the 4% minimum requirement on that date.
In addition, on that date the Company had a Tier 1 risk based capital ratio of
10.7%, which was $15.7 million above the 4% requirement, total capital of $27.3
million (including $25.1 million in core capital and $2.2 million in qualifying
supplemental capital) and risk-weighted assets of $235.6 million or total
capital of 11.6% of risk weighted assets. This amount was $8.6 million above the
8.0% requirement in effect on that date.
26
FEDERAL SECURITIES LAW
The Company's common stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC's rules under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At March 31, 2004, Classic Bank was in compliance with these reserve
requirements.
FEDERAL HOME LOAN BANK SYSTEM
Classic Bank is a member of the FHLB of Cincinnati, which is one of
12 regional FHLBs that administer the home financing credit function of banks
and savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long- term advances are required to provide funds for residential home
financing.
As a member, Classic Bank is required to purchase and maintain stock
in the FHLB of Cincinnati. At March 31, 2004, Classic Bank had $2.9 million in
FHLB stock, which was in compliance with this requirement. In past years,
Classic Bank has received substantial dividends on their FHLB stock. Over the
past five fiscal years, such dividends paid to Classic Bank have averaged 5.4%
and were 4.0% for fiscal 2004.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate- income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Classic Bank's FHLB stock may result in a corresponding
reduction in Classic Bank's capital.
CHANGE IN CONTROL REGULATIONS
The Change in Bank Control Act, the Bank Holding Company Act and the
regulations of the Federal Reserve Board promulgated under those acts, require
that the consent of the Federal Reserve Board be obtained prior to any person or
company acquiring "control" of a financial holding company. Control is
conclusively presumed to exist if an individual or company acquires more than
25% of any class of voting stock of a financial holding company. Control is
rebuttably presumed to exist if the person acquires 10% or more of any class of
voting stock of a financial holding company if either (i) the financial holding
company has registered securities under Section 12 of the Exchange Act or (ii)
no other
27
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure to rebut
the rebuttable control presumption. Since the Company's Common Stock is
registered under Section 12 of the Exchange Act, any acquisition of 10% or more
of the Company's Common Stock will give rise to a rebuttable presumption that
the acquirer of such stock controls the Company, requiring the acquirer, prior
to acquiring such stock, to rebut the presumption of control to the satisfaction
of the Federal Reserve Board or obtain Federal Reserve Board approval for the
acquisition of control.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. In addition to the regular income tax,
corporations, including state chartered commercial banks, generally are subject
to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of
20% on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.
The Company and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns through December
31, 1993. With respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established to satisfy
asserted deficiencies. In the opinion of management, any examination of still
open returns (including returns of subsidiary and predeccessors of, or entities
merged into the Company) would not result in a deficiency which could have a
material adverse effect on the financial condition or results of operations of
the Company and its consolidated subsidiaries.
KENTUCKY TAXATION. Classic Bank is subject to a state franchise tax
equal to 1.1% of Classic Bank's average five year equity capital adjusted to
eliminate the effect of certain U.S. Government obligations held by Classic
Bank. The Company is subject to Kentucky income tax at a rate of 4% - 8.25% and
a Kentucky corporate licensing fee equal to .0021 times capital employed.
OHIO TAXATION. Classic Bank is Subject to a state franchise tax equal
to 1.3% of Classic Bank's net value of stock apportioned to Ohio.
DELAWARE TAXATION. As a holding company incorporated under the laws
of the State of Delaware, the Company is exempt from Delaware corporate income
tax but is required to file an annual report with and pay an annual fee to the
State of Delaware. The Company is also subject to an annual franchise tax
imposed by the State of Delaware.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The business experience of the executive officers who are not also
directors is set forth below.
ROBERT S. CURTIS, age 53, is President and Director of Classic Bank,
a position he has held since March 2001. Prior to becoming President, Mr. Curtis
was Executive Vice President and Senior Lending Officer. Mr. Curtis is also
Senior Vice President of the Company, a position he has held since September
1995. Prior to joining Classic Bank in May 1995, Mr. Curtis served as Vice
President and Real Estate Lending Division Manager of First American Bank, a
$225 million bank located in Ashland, Kentucky
28
from 1990 until May 1995. As Vice President and Real Estate Lending Division
Manager, Mr. Curtis was responsible for the bank's residential real estate
portfolio that totaled in excess of $35.0 million. Mr. Curtis began his career
with First American Bank in 1973.
29
ITEM 2. DESCRIPTION OF PROPERTIES
The Company conducts business at its main office located in Ashland,
Kentucky. The following table sets forth information relating to each of our
properties as of March 31, 2004.
Total Book Value
Owned Approximate at
Year or Square March 31,
Location Acquired Leased Footage 2004
-------- -------- ------ ------- --------
(Dollars in
Thousands)
MAIN OFFICE:
1737 Carter Avenue 1994 Owned 1,200 $ 73
Ashland, Kentucky
344 Seventeenth Street 1963 Owned 6,000 497
Ashland, Kentucky
340 Seventeenth Street N/A Leased 9,400 N/A
Ashland, Kentucky
BRANCH OFFICES:
1500 Diederich Blvd 1998 Owned 2,000 479
Russell, Kentucky
10700 U.S. 60 1998 Owned 2,000 489
Ashland, Kentucky
575 N. Carol Malone Blvd 1999 Owned 7,000 465
Grayson, Kentucky
603 South Mayo Trail 1971 Owned 2,200 21
Paintsville, Kentucky
440 North Mayo Trail 2001 Owned 2,000 490
Paintsville, Kentucky
1414 Ashland Road 2002 Owned 2,000 544
Greenup, KY
415 Center Street 2003 Owned 8,756 813
Ironton, OH
420 Park Avenue 2003 Owned 1,944 200
Ironton, OH
201 State Street 2003 Owned 1,995 492
Proctorville, OH
LAND:
Park Avenue & 5th Street
Ironton, OH 2004 Owned 17,424 210
In the opinion of Management, the above properties are adequately
covered by insurance.
30
ITEM 3. LEGAL PROCEEDINGS
The Company, Classic Bank is involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
its businesses. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel, that the resolution of these proceedings should not have a
material effect on the Company's financial condition or results of operations on
a consolidated basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2004.
31
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over the counter and is listed
on the NASDAQ Small- Cap Market under the symbol "CLAS." At June 24, 2004, there
were 1,404,839 shares of the Company's common stock outstanding and
approximately 203 holders of record. The Company's common stock began trading on
December 28, 1995. The price ranges of the Company's common stock and the
dividends paid for each quarter in fiscal 2003 and fiscal 2004 were as follows:
FISCAL 2003 HIGH LOW DIVIDENDS
----------------------------- --------------------------------------------------
First Quarter................ $19.727 $16.005 $.0727
Second Quarter............... $25.363 $19.091 $.0727
Third Quarter................ $23.283 $20.055 $.0727
Fourth Quarter............... $27.273 $23.363 $.0727
FISCAL 2004 HIGH LOW DIVIDENDS
----------------------------- --------------------------------------------------
First Quarter................ $28.645 $24.773 $.0727
Second Quarter............... $31.591 $27.045 $.0727
Third Quarter................ $36.380 $30.564 $.08
Fourth Quarter............... $41.480 $33.050 $.08
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. The closing price of the
Company's common stock on March 31, 2004 was $39.95.
The Company declared and paid cash dividends totaling $.31 per share
during fiscal 2004. The Company paid a 10% stock dividend on November 17, 2003.
The payment of the dividend was in addition to the regular quarterly cash
dividend. Per share amounts have been restated for the impact of this stock
dividend. The Board of Directors intends to continue the payment of quarterly
cash dividends, dependent on the results of operations and financial condition
of the Company, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors. The
Company's ability to pay dividends is dependent on the dividend payments it
receives from its subsidiary, Classic Bank, which is subject to regulations and
continued compliance with all regulatory capital requirements. See Note 15 of
the Notes to the Consolidated Financial Statements for information regarding
limitations of the subsidiary's ability to pay dividends to the Company.
32
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
March 31,
----------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Ratios:
--------------------------
Return on assets (ratio of net income to average
total assets) ...................................... 1.2% 1.3% 1.1% .6% .6%
Return on equity (ratio of net income to average
equity) ............................................ 11.4 12.2 10.3 5.3 5.5
Dividend payout ratio (dividends paid divided by
net income per basic share) ........................ 12.0 11.5 14.0 30.0 30.9
Equity to assets ratio (average equity divided by
average total assets) .............................. 10.1 10.3 10.6 10.8 11.4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Classic Bancshares, Inc. (the "Company"), a Delaware corporation, was
organized in 1995 for the purpose of becoming the savings and loan holding
company of Classic Bank in connection with Classic Bank's conversion from mutual
to stock form of organization on December 28, 1995. The Company acquired First
Paintsville Bancshares, Inc., the former holding company of The First National
Bank of Paintsville ("First National"), on September 30, 1996. The Company
completed the acquisition of Citizen's Bank, Grayson on May 14, 1999, and merged
it into Classic Bank on the same date. The Company maintained Classic Bank and
First National as separate subsidiaries until March 2001 at which time the
Company merged the two subsidiaries into one banking subsidiary known as Classic
Bank.
On June 30, 2003, the Company completed its acquisition 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 are operated as branch offices of
Classic Bank.
Classic Bank serves its market areas through ten banking offices located
in Kentucky and Ohio. The main office and corporate headquarters are located in
Ashland, Kentucky. Seven of the banking offices, five in Kentucky and two in
Ohio, are located in the Huntington, WV/Ashland, KY/Ironton, OH Metropolitan
Statistical Area (MSA). The bank operates three banking offices in Johnson
County, KY, serving parts of Martin, Floyd, Magoffin and Lawrence counties.
Johnson County, KY is approximately 55 miles south of the
Huntington/Ashland/Ironton MSA.
The economic base in the MSA was in the past primarily industrial and
reliant upon a small number of large employers, particularly in the steel and
petroleum industries. A decline in these segments of the
33
local economy has resulted in population loss over the past several years. The
diversification of employment base into more retail, medical and service
businesses has resulted in a slowing of previously experienced declines in
population. Per capita incomes in the counties in which we operate in the MSA
all lag the applicable Kentucky and Ohio State averages, with the exception of
Boyd County, Kentucky where the Company headquarters is located.
The economy in the Johnson County market area has historically been based
on manufacturing and coal related industries, but now includes retail, medical
and government sectors. Per capita income in Johnson County is also below the
Kentucky State average.
The unemployment rate in each of the counties in which we operate banking
offices exceeds the state and national unemployment rates.
The Company's revenues are derived principally from interest earned on
loans and, to a lesser extent, from interest earned on investments. The
operations of the Company are influenced significantly by general economic
conditions and by policies of financial institution regulatory agencies,
including the Kentucky Department of Financial Institutions, the Federal Reserve
and the FDIC. The Company's cost of funds is influenced by interest rates on
competing investments and general market interest rates. Lending activities are
affected by the demand for loans, which in turn is affected by the interest
rates at which such loans may be offered.
The Company's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable, net
and investments and the average rate paid on deposits and borrowings, as well as
the relative amounts of such assets and liabilities. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice at different times, or on a different basis, than its interest-earning
assets.
Management's discussion and analysis of financial condition and results
of operations are intended to assist in understanding the financial condition
and results of operations of the Company. The information contained in this
section should be read in conjunction with the financial statements and
accompanying notes contained elsewhere herein.
FORWARD-LOOKING STATEMENTS
When used in this report, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward- looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, changes in economic
conditions in the Company's market area, changes in real estate values in the
Company's market area, regulatory policies, interest rates (including the
relationship between long and short term interest rates), demand for loans in
the Company's market area and competition that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake -- and specifically declines any
obligation -- to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
34
BUSINESS STRATEGY
The Board's primary vision is the enhancement of shareholder value and
sustained earnings growth through maximation of the net interest margin while
utilizing a low cost operating structure. The Company has strategically
positioned itself to be a high performing, independent, community-focused
financial services organization. This strategic direction will continue as long
as the Board believes, following regular strategic reviews, it is in the best
interest of the shareholders. The Company will continue a focus on internal
growth while exploring acquisition opportunities that are accretive to earnings
and/or create greater franchise and shareholder value.
The Company's focus is on maximizing, to the extent feasible, net
interest income from a balance sheet utilizing variable rate or short and
medium-term fixed rate assets, funded by the most cost effective funding sources
available. While market share increases remain a strategic goal, management
believes that profitability is paramount to asset growth. As a result of this
philosophy management remains focused on the pricing of assets that maximize net
interest income rather than on market share growth. The implementation of this
strategy may require the Company's utilization of borrowings to fund asset
growth, rather than deposits, when the cost of borrowings is more attractive
than the cost of acquiring local deposits
Two basic premises must be employed for the successful execution of the
Company's business strategy. First, non-interest expense must remain at levels
lower than our peers and secondly, sound asset/liability modeling must be
utilized to assure sustainable earnings in varying economic conditions.
Management continues to use an incentive based compensation program that
rewards employees for attaining production and customer service levels and
believes this strategy facilitates profitable growth while containing salary
expense levels.
Strategically, the continued enhancements to our technology
infrastructure will allow the Company to remain competitive with our regional
and national competitors while giving the Company a competitive advantage over
smaller franchises. The implementation of a real time account transaction
platform, coupled with free internet bill pay, free checking and online viewing
of check and deposit images, places the Company in an equal footing with our
national and regional competitors.
While acquisitions remain a consideration for the continued growth of the
Company, internal growth may present the greatest opportunity for expansion of
our franchise in the most profitable manner. Management considers branch
expansion within our market areas as representing the most cost effective method
of internal growth, as well as considering in-market acquisitions as they become
available.
FINANCIAL CONDITION
MARCH 31, 2004 COMPARED TO MARCH 31, 2003. Total assets increased
approximately $91.9 million, or 36.8%, from $249.9 at March 31, 2003 to $341.8
million at March 31, 2004. The increase was due primarily to an increase in
loans of $70.3 million, an increase in securities of $13.1 million, an increase
in goodwill and other intangibles of $3.2 million, an increase in premises and
equipment of approximately $2.0 million, an increase in cash and cash
equivalents of approximately $1.1 million, an increase in FHLB stock of
$945,000, an increase in foreclosed assets of $856,000 and in increase in other
assets of approximately $400,000.
35
Net loans receivable increased $70.3 million, or 37.6%, from $187.2 million
at March 31, 2003 to $257.5 million at March 31, 2004. The increase was due
primarily to net loans acquired from First Federal of approximately $49.5
million and a premium of approximately $600,000 recorded on the acquired loans
based on the market valuation of the loans. The remainder of the increase of
$20.2 million was due to internal loan growth primarily in the consumer and
commercial portfolios.
The allowance for loan losses increased approximately $234,000 from $2.0
million at March 31, 2003 to $2.2 million at March 31, 2004 as a result of a
provision for fiscal 2004 of $223,000, an allowance acquired from First Federal
of $885,000 offset by net charge-offs of $874,000.
Securities increased approximately $13.1 million, or 7.0%, from $37.8
million at March 31, 2003 to $50.9 million at March 31, 2004 primarily due to
the acquisition of $9.5 million of securities in connection with the acquisition
of First Federal, purchases of $11.7 million and an increase in the market value
of the available for sale securities of approximately $1.0 million offset by
maturities, calls, and principal repayments of $9.1 million.
Premises and equipment increased approximately $2.0 million due primarily
to the acquisition of First Federal.
Deposits increased $70.0 million, or 36.8%, from $190.2 million at March
31, 2003 to $260.2 million at March 31, 2004. The increase was due primarily to
the acquisition of First Federal with acquired deposits totaling $56.7 million
and purchase accounting adjustments of $200,000. The remainder of the increase
of $13.1 million was a result of internal deposit growth. The increase in
deposits was used to fund loan growth.
Stockholder's equity increased $9.8 million to $35.2 million at March 31,
2004 as 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. Management from
time to time repurchases shares of its outstanding common stock in the open
market at prevailing market prices depending on market conditions. The
reacquired shares are held as treasury shares and will be used for general
corporate purposes when necessary, including the issuance of shares in
connection with the exercise of stock options. No repurchases were made during
fiscal 2004.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily upon the level of
net interest income, which is the difference between the interest income earned
on its interest-earning assets such as loans and investments, and the costs of
the Company's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Company's
noninterest income, including fee income and service charges, and affected by
the level of its noninterest expenses, including its general and administrative
expenses. Net interest income depends upon the volume of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2004 AND MARCH 31,
2003
NET INCOME. Net income increased by approximately $704,000 from $2.9
million for the fiscal year ended March 31, 2003 to $3.6 million for the fiscal
year ended March 31, 2004. The increase was due to an increase in net interest
income of $2.7 million, an increase in noninterest income of $460,000 and a
36
decrease in the provision for loan losses of $205,000 offset by an increase in
noninterest expense of $2.3 million and an increase in income tax expense of
$356,000.
NET INTEREST INCOME. Net interest income increased $2.7 million from $9.2
million for the fiscal year ended March 31, 2003 to $11.9 million for the fiscal
year ended March 31, 2004 due to an increase in interest income of $3.1 million
offset by an increase in interest expense of $428,000. The increase in interest
income was due to an increase in the average balance of interest-earning assets
offset primarily by a decrease in the yield earned on interest-earning assets.
The average balance of interest-earning assets increased $74.9 million from
$212.8 million for fiscal 2003 to $287.7 million for fiscal 2004.
Interest-earning assets increased primarily due to an increase in the average
balance of loans of $60.9 million and an increase in investment and
mortgage-backed securities of $10.9 million. The increases were primarily due to
the acquisition of First Federal. The average tax equivalent yield on interest-
earning assets was 6.9% at March 31, 2003 compared to 6.2% at March 31, 2004.
The decrease in the yield was due primarily to a decline in market interest
rates during the fiscal year.
The resulting interest rate spread was 4.1% for fiscal 2004 compared to
4.2% for fiscal 2003.
Interest expense increased approximately $428,000 primarily as a result
of 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 $69.2 million from
$186.1 million for fiscal 2003 to $255.3 million for fiscal 2004. The increase
in the average balance was primarily due to an increase in the average balance
of interest-bearing deposits as a result of the acquisition of First Federal.
The average rate paid on interest-bearing liabilities decreased from 2.7% for
the fiscal year ending March 31, 2003 to 2.1% for the fiscal year ending March
31, 2004. The reduction in the cost of interest-bearing liabilities was due to a
decline in market interest rates during the fiscal year.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased by
$205,000 from $428,000 for fiscal 2003 to $223,000 for fiscal 2004 based on
management's overall assessment of probable incurred losses in the loan
portfolio. The decrease in the provision was due to improving trends within the
Company's loan portfolio notwithstanding the acquired First Federal
non-performing loans which covered by the allowance acquired from First Federal.
The provision recorded for the fiscal year was based on management's evaluation
of the Company's current portfolio including such factors 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, the economy in the
Company's market area 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 (including a review of
individual loans) and portfolio diversity dictates. At March 31, 2004, the
allowance for loan losses totaled $2.2 million, or .9% of net loans and 149.7%
of non-performing loans. Non-performing loans increased approximately $207,000
from $1.3 million at March 31, 2003 to $1.5 million at March 31, 2004.
NONINTEREST INCOME. Noninterest income increased approximately $460,000
from $1.7 million for fiscal 2003 to $2.1 million for fiscal 2004 due to an
increase in service charges and other fees on deposits of $367,000, an increase
in other income of $122,000 offset by a decrease in gain on sale of securities
of $29,000. The increase in service charges and other fees on deposits was the
result of an increased deposit base and our effort to limit fee waivers. Other
income increased primarily due to an increase in the commissions earned on
secondary market loans, letter of credit fees and commissions on insurance sold
on loans. Although the commissions earned on the origination of secondary market
loans increased for the fiscal year, these commissions have begun to slow,
therefore decreasing the amount of commissions earned in the last quarter of the
fiscal year and possibly in future periods. The Company's secondary
37
market activity consists only of commissions earned from a third party
originator and represents a small portion of the Company's noninterest income.
NONINTEREST EXPENSE. Noninterest expenses increased $2.3 million from
$6.5 million for fiscal 2003 to $8.7 million for fiscal 2004 due to an increase
in salaries and employee benefits of $1.0 million, an increase in occupancy and
equipment expense of $208,000 an increase in advertising expense of $182,000, an
increase in communications expense of $65,000, an increase in franchise and
deposit taxes of $19,000, an increase in stationery, printing and supplies of
$120,000, an increase in the amortization of intangibles of $112,000, an
increase in professional fees of $113,000 and an increase in other operating
expenses of $436,000.
Employee compensation and benefits increased primarily due to 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 benefit
plans; 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 an increase
in the number of locations, improvements to existing facilities, and upgrades in
equipment. The increase in professional fees was due to increased legal and
accounting costs as a result of increased requirements under updated corporate
governance regulations and guidelines. The increase in accounting costs was also
due to a change in the Company's independent auditors. 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.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2003 AND MARCH 31,
2002
NET INCOME. Net income increased by approximately $721,000 from $2.2
million for the fiscal year ended March 31, 2002 to $2.9 million for the fiscal
year ended March 31, 2003. The increase was due to an increase in net interest
income of $1.6 million, an increase in noninterest income of $221,000 offset by
an increase in noninterest expense of $733,000, an increase in the provision for
loan losses of $65,000, and an increase in income tax expense of $330,000.
NET INTEREST INCOME. Net interest income increased $1.6 million from $7.6
million for the fiscal year ended March 31, 2002 to $9.2 million for the fiscal
year ended March 31, 2003 due to an increase in interest income of $497,000 and
a decrease in interest expense of $1.1 million. The increase in interest income
was due to an increase in the average balance of interest-earning assets offset
primarily by a decrease in the yield earned on interest-earning assets. The
average balance of interest-earning assets increased $30.1 million from $182.7
million for fiscal 2002 to $212.8 million for fiscal 2003. Interest- earning
assets increased primarily due to an increase in the average balance of loans of
$25.8 million and an increase in investment and mortgage-backed securities of
$3.7 million. The average tax equivalent yield on interest-earning assets was
7.7% at March 31, 2002 compared to 6.9% at March 31, 2003. The decrease in the
yield was due primarily to a decline in market interest rates during the fiscal
year.
Interest expense decreased approximately $1.1 million from $6.1 million
for fiscal 2002 to $5.0 million for fiscal 2003 primarily as a result of a
decrease in the average rate paid on interest-bearing liabilities. The average
rate paid on interest-bearing liabilities decreased from 3.9% for the fiscal
year ending March 31, 2002 to 2.7% for the fiscal year ending March 31, 2003.
The reduction in the cost of interest-bearing liabilities was due to a decline
in market interest rates during the fiscal year. The average balance of
interest-bearing liabilities increased $27.8 million from $158.3 million for
fiscal 2002 to
38
$186.1 million for fiscal 2003. The increase in the average balance of
interest-bearing liabilities was due primarily to an increase in the average
balance of interest-bearing deposits and borrowings.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased by
$65,000 from $363,000 for fiscal 2002 to $428,000 for fiscal 2003 based on
management's overall assessment of probable incurred losses in the loan
portfolio. The increase in the provision was due primarily to overall growth of
the loan portfolio and continued diversification of the loan portfolio into
commercial and consumer loans. Management maintains the allowance for loan
losses based on the analysis of various factors, including the market value of
the underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, historical
loss experience, delinquency trends and prevailing economic conditions. Although
the Company maintains its allowance for loan losses at a level it considers
adequate to provide for losses, there can be no assurance that such losses will
not exceed the estimated amounts or that additional substantial provisions for
loan losses will not be required in future periods. At March 31, 2003, the
allowance for loan losses totaled $2.0 million, or 1.0% of net loans and 155.7%
of non-performing loans. Non-performing loans increased approximately $534,000
from $734,000 at March 31, 2002 to $1.3 million at March 31, 2003.
NONINTEREST INCOME. Noninterest income increased approximately $221,000
from $1.5 million for fiscal 2003 to $1.7 million for fiscal 2003 due to an
increase in service charges and other fees on deposits of $149,000, an increase
in other income of $11,000 and an increase in gain on sale of securities of
$65,000. The increase in service charges and other fees on deposits was the
result of an increased deposit base and our effort to limit fee waivers. Other
income increased primarily due to an increase in the fees earned from the
origination of secondary market loans and commissions earned from the sale of
credit life and accident and health insurance on consumer loans. The increase in
these fees reflects in part management's implementation of an incentive-based
compensation program. The incentive program included fees earned on the
origination of secondary market loans and credit life and accident and health
insurance whereby loan officers are compensated for the level of fees generated.
NONINTEREST EXPENSE. Noninterest expenses increased approximately
$733,000 from approximately $5.7 million for the year ended March 31, 2002 to
approximately $6.5 million for the year ended March 31, 2003. The increase in
non-interest expenses was due to an increase in employee compensation and
benefits of $469,000, an increase in occupancy and equipment expense of $65,000,
an increase in federal deposit insurance premiums of $13,000, an increase in
franchise and deposit taxes of $54,000, an increase in stationary and supplies
of $41,000, an increase in professional fees of $22,000, an increase in on-line
banking expenses of $15,000 and an increase in other expenses $92,000 offset by
a decrease in advertising of $38,000.
Compensation and benefit expense increased approximately $469,000 due to
an increase in the number of employees, an increase in the amount of incentive
compensation paid to employees and an increase in ESOP expense due to an
increase in the average market value of the Company's stock.
Occupancy and equipment expense increased approximately $65,000. The
increase was due primarily to the opening of the Company's eighth banking office
in Greenup, Kentucky. Occupancy and equipment expense also increased due to
technological upgrades made to the Company's data processing and other equipment
and the cost of maintenance associate with the upkeep of that equipment.
Professional fees increased due to the utilization of an outside firm for
internal audit and loan review.
Federal insurance deposit premiums increased due to an increased deposit
base and franchise and deposit taxes increased due to a larger capital and
deposit base.
39
INCOME TAX EXPENSE. Income tax expense increased $330,000 due to a higher
income before income taxes.
40
YIELD AND COST DATA. The following table presents for the periods
indicated the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest bearing liabilities, expressed both in dollars and
rates. All average balances are monthly average balances. Yields are reported on
a tax equivalent basis. Non-accruing loans have been included in the table as
loans carrying a zero yield. Included in interest income on loans are loan fees
and other charges on loans totaling $415,000, $319,000, and $261,000 for the
years ended March 31, 2004, 2003 and 2002, respectively.
Year Ended March 31,
-------------------------------------------------------------------------------
2004 2003
-------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
-------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1) ............................ $236,723 $ 15,074 6.4% $175,821 $ 12,253 7.0%
Mortgage-backed securities ..................... 16,821 669 4.0 7,996 414 5.2
Investment securities .......................... 28,417 1,851 6.5 26,384 1,861 7.0
Interest-earning deposits ...................... 2,958 28 .9 328 4 1.2
Federal funds sold ............................. 157 2 1.3 432 5 1.2
FHLB stock ..................................... 2,632 106 4.0 1,884 83 4.4
-------- -------- -------- --------
Total interest-earning assets(1) .............. $287,708 $ 17,730 6.2 $212,845 $ 14,620 6.9
======== -------- ======== --------
Interest-Bearing Liabilities:
Savings accounts and interest-bearing demand ... $ 75,657 926 1.2 $ 42,045 627 1.5
Money market deposits .......................... 19,783 227 1.1 18,935 333 1.8
Certificate accounts ........................... 119,311 3,008 2.5 89,848 2,967 3.3
FHLB advances .................................. 31,592 1,155 3.7 29,781 985 3.3
Other short-term borrowings .................... 8,935 81 .9 5,528 57 1.0
-------- -------- -------- --------
Total interest-bearing liabilities ............ $255,278 5,397 2.1 $186,137 4,969 2.7
======== -------- ======== --------
Net interest income ............................. $ 12,333 $ 9,651
======== ========
Net interest rate spread ........................ 4.1% 4.2%
=== ===
Net earning assets .............................. $ 32,430 $ 26,708
======== ========
Net yield on average interest-earning assets .... 4.3% 4.5%
=== ===
Average interest-earning assets to average
interest- bearing liabilities ............... 1.13x 1.14x
==== ====
Year Ended March 31,
---------------------------------------
2002
---------------------------------------
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
-------- -------- ----------
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1) ............................ $149,979 $ 11,899 7.9%
Mortgage-backed securities ..................... 5,124 281 5.5
Investment securities .......................... 25,511 1,815 7.1
Interest-earning deposits ...................... 185 6 3.2
Federal funds sold ............................. 464 10 2.2
FHLB stock ..................................... 1,438 87 6.1
-------- --------
Total interest-earning assets(1) .............. $182,701 $ 14,098 7.7
======== --------
Interest-Bearing Liabilities:
Savings accounts and interest-bearing demand ... $ 36,380 655 1.8
Money market deposits .......................... 15,274 417 2.7
Certificate accounts ........................... 82,062 4,194 5.1
FHLB advances .................................. 19,753 718 3.6
Other short-term borrowings .................... 4,869 116 2.4
-------- --------
Total interest-bearing liabilities ............ $158,338 6,100 3.9
======== --------
Net interest income ............................. $ 7,998
========
Net interest rate spread ........................ 3.8%
===
Net earning assets .............................. $ 24,363
========
Net yield on average interest-earning assets .... 4.4%
===
Average interest-earning assets to average
interest- bearing liabilities ............... 1.15x
====
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
41
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (I) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended March 31,
----------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
----------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable ......................... $ 3,952 $ (1,132) $ 2,820 $ 1,839 $ (1,484) $ 355
Mortgage-backed securities ............... 371 (115) 256 148 (16) 132
Investment securities .................... 132 (142) (10) 69 (23) 46
Other .................................... 81 (37) 44 26 (37) (11)
-------- -------- -------- -------- -------- --------
Total interest-earning assets ........ $ 4,536 $ (1,426) $ 3,110 $ 2,082 $ (1,560) $ 522
======== ======== -------- ======== ======== ========
Interest-bearing liabilities:
Savings accounts and interest bearing
demand ................................. $ 444 $ (145) $ 299 $ 92 $ (119) $ (27)
Money market accounts .................... 16 (122) (106) 80 (164) (84)
Certificate accounts ..................... 850 (809) 41 366 (1,593) (1,227)
FHLB advances ............................ 57 113 170 332 (65) 267
Other short-term borrowings .............. 30 (7) 23 15 (74) (59)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .... $ 1,397 $ (970) $ 427 $ 885 $ (2,015) ($ 1,130)
======== ======== ======== ======== ======== ========
Net interest income ......................... $ 2,683 $ 1,652
======== ========
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
given period, a significant increase in market rates of interest could adversely
affect net interest income. Similarly, when interest-earning assets mature or
reprice more quickly than interest-bearing liabilities, falling interest rates
could result in a decrease in net interest income. Finally, a flattening of the
"yield curve" (i.e., a decline in the difference between long- and short-term
interest rates) could adversely impact net interest income to the extent that
the Company's assets have a longer average term than its liabilities.
The Company is also subject to interest rate risk to the extent that the
value of its net assets fluctuates with interest rates. In general, the value of
a significant portion of the Company's assets will decline in the event of an
increase in interest rates. The Company has historically carried a number of
assets which are not interest rate sensitive and therefore may decline in value
during a period of rising interest rates. Conversely, these assets can increase
in value during a period of decreasing interest rates. As part of the Company's
current business strategy and asset/liability management policy, a primary focus
of lending activity is the acquisition of variable rate and/or shorter term
loans thereby reducing such fluctuations in value.
42
The Company has an asset/liability management policy focused on
maximizing the Company's net interest margin while managing its interest rate
position. Depending upon market conditions, the Company may place more emphasis
on enhancing the net interest margin rather than matching the interest rate
sensitivity of the Company's assets and liabilities. As a result, the Company's
results of operations and the economic value of its equity remain vulnerable to
increases in interest rates and declines in the difference between long- and
short-term interest rates.
Asset/Liability management is monitored at the bank level by a committee
that is comprised of the Company's chief executive officer, chief financial
officer, the president and senior lending officer of the bank and a minimum of
two non-employee directors of the bank. The committee meets periodically to
review the Company's interest rate risk position and product mix and to make
recommendations for adjustments to the Company's Board of Directors. Management
also monitors the Company's interest rate risk position on a monthly basis,
reviews the Company's portfolio, earnings, liquidity and asset quality,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in a most effective
manner.
The principal elements of the Company's asset/liability management policy
are as follows. First, the Company generally requires that one-to-four family
ARM loans be indexed to changes in rates paid on U.S. Treasury securities and
other adjustable rate loans be indexed to the prime rate. Management believes
that U.S. Treasury securities and the prime rate are significantly more interest
rate sensitive than other indices and provides a better opportunity to manage
interest rate risk in a changing rate environment. Second, management has
increased, and intends to continue to increase subject to market conditions the
Company's commercial business, consumer and commercial real estate loans. In
general, such loans carry shorter terms to maturity and/or repricing, and are
more interest rate sensitive than most of the Company's other assets. Third,
management has used marketing and other initiatives to increase the Company's
transaction and other non-certificate deposit accounts and believes that such
accounts generally carry lower interest costs and are more interest rate
resistant than the certificates of deposit. The Company also utilizes FHLB
borrowings in funding assets when the cost of these borrowing is more attractive
than the cost of deposits. There can be no assurance as to whether or when any
or all of the elements of the asset/liability management program will be
successfully implemented.
Economic Value of Equity ("EVE") analysis provides a quantitative measure
of interest rate risk. In essence, this approach calculates the difference
between the market value of assets and liabilities under different interest rate
environments. The degree of change between interest rate shock levels is a
measure of the volatility of value risk. The following table sets forth, as of
March 31, 2004, the estimated changes in the Company's EVE in the event of the
specified instantaneous changes in interest rates.
43
Economic Value of Equity
------------------------------------------------------------------------
Change in
Interest Rates Amount of Percent
(Basis Points) Estimated EVE Change Change
-------------- ------------- ------ ------
(Dollars in Thousands)
+300 $16,930 ($13,486) (44)%
+200 22,375 (8,041) (26)
+100 26,873 (3,543) (12)
0 30,416
-100 33,078 2,662 9
-200 34,715 4,299 14
-300 34,662 4,246 14
Certain assumptions were employed by the Company in preparing the
previous table. These assumptions relate to loan prepayment rates varied by
categories and rate environment, deposit decay rates varied by category and rate
environment and the market values of certain assets under the various interest
rate scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. In the event that interest rates do change in the designated
amounts, there can be no assurance that the Company's assets and liabilities
would perform as set forth above. In addition, a change in Treasury rates in the
designated amounts accompanied by a change in the shape of the Treasury yield
curve would cause significantly different changes to the EVE than indicated
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits and borrowings,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities of investment securities and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, floors and caps
on loan rates, general economic conditions and competition. The Company
generally manages the pricing of its deposits to be competitive and to increase
core deposit relationships, but has from time to time decided not to pay deposit
rates that are as high as those of its competitors and, when necessary, to
supplement deposits with less expensive alternative sources of funds, such as
FHLB borrowings.
The primary investing activities of the Company are originating loans
and, to a much lesser extent, purchasing mortgage-backed and investment
securities. During fiscal years ended March 31, 2004, 2003, and 2002, the
Company had loan originations net of principal repayments of $21.4 million,
$27.4 million and $22.1 million, respectively. A substantial portion of loan
originations were funded by proceeds of loan repayments, the maturity or sale of
securities, deposits and FHLB advances. Securities as of March 31, 2004 maturing
within one year total $1.3 million.
The primary financing activities of the Company are deposits and
borrowings. During the fiscal years ended March 31, 2004, 2003, and 2002, the
Company experienced an increase in deposits of $13.1 million, $31.3 million, and
$13.4 million. The increase in deposits for fiscal 2004 excludes deposits
acquired from the acquisition of First Federal. Certificates of deposits as of
March 31, 2004 maturing within one year total $83.1 million. Management expects
most of these deposits to remain with the Bank. During the fiscal years ended
March 31, 2004, 2003 and 2002, the Company's net financing activity (proceeds
less repayments) through borrowings totaled ($281,000), $725,000, and $10.8
million, respectively.
44
The Company's most liquid assets are cash and cash equivalents, which
consist of short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given period.
At March 31, 2004, cash and cash equivalents totaled $9.2 million.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short- and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If the Company requires funds
beyond its ability to generate them internally, Classic Bank has additional
borrowing capacity with the FHLB of Cincinnati which is, in the opinion of
management, adequate to provide any funds needed. At March 31, 2004, the Company
had $34.2 million in borrowings outstanding with the FHLB and additional
borrowing capacity of $75.1 million.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At March 31, 2004, the Company had outstanding
loan commitments totaling $25.6 million.
Both the Company and Classic Bank are required to maintain minimum levels
of regulatory capital. At March 31, 2004, both the Company and Classic Bank
exceeded all of their capital requirements.
IMPACT OF NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to the Consolidated Financial Statements for
information regarding the effect of implementing new accounting standards.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's Consolidated Financial Statements and Notes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The impact of inflation can be found
in the increased cost of the Company's operations. Nearly all the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. Changes in
interest rates do not necessarily move to the same extent as changes in the
price of goods and services.
ITEM 7. FINANCIAL STATEMENTS
45
CLASSIC BANCSHARES, INC. AND SUBSIDIARIES
-----------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND 2003...............................................49
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED MARCH 31, 2004, 2003 AND 2002.........................................50
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002...........................51
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED MARCH 31, 2004, 2003
AND 2002....................................................................52
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED MARCH 31, 2004, 2003 AND 2002................................53-54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................55-84
46
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Classic Bancshares, Inc.
Ashland, Kentucky
We have audited the accompanying consolidated statement of financial condition
of Classic Bancshares, Inc. and Subsidiary as of March 31, 2003 and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the two years in the period
ended March 31, 2003. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion of these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position fo Classic Bancshares,
Inc. and Subsidiary, as of March 31, 2003, and the results of their operations
and their cash flows for each of the two years in the period ended March 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Smith, Goolsby, Artis & Reams, P.S.C.
-----------------------------------------
Ashland, Kentucky
June 5, 2003
47
Report of Independent Registered Public Accounting Firm
Classic Bancshares, Inc.
Ashland, Kentucky
We have audited the accompanying consolidated balance sheets of Classic
Bancshares, Inc. as of March 31, 2004 and the related consolidated statements of
income, comprehensive income, changes in stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conduct our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Classic Bancshares,
Inc. as of March 31, 2004, and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/Crowe Chizek and Company LLC
-------------------------------
Louisville, Kentucky
May 6, 2004
48
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2004 2003
---------- ----------
ASSETS
------
Cash and due from banks $ 8,747 $ 7,742
Interest-bearing deposits with banks 408 382
Federal funds sold 58 24
---------- ----------
Cash and cash equivalents 9,213 8,148
Securities available for sale 50,916 37,843
Loans, net of allowance of $2,209 and $1,975 257,455 187,175
Foreclosed assets, net 856 --
Accrued interest receivable 1,446 1,157
Federal Home Loan Bank stock 2,894 1,949
Premises and equipment, net 8,288 6,267
Goodwill 7,987 5,555
Other intangible assets 811 --
Other assets 1,899 1,787
---------- ----------
TOTAL ASSETS $ 341,765 $ 249,881
========== ==========
LIABILITIES
-----------
Non-interest bearing demand deposits $ 29,165 $ 23,159
Savings, NOW, and money market demand deposits 109,772 65,762
Other time deposits 121,304 101,235
---------- ----------
Total deposits 260,241 190,156
Repurchase agreements 9,168 4,382
Federal Home Loan Bank advances 34,218 28,126
Other short-term borrowings 12 6
Accrued expenses and other liabilities 2,593 1,445
Accrued interest payable 306 344
---------- ----------
TOTAL LIABILITIES 306,538 224,459
---------- ----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock $.01 par value; authorized,
100,000 shares - none issued -- --
Common stock $.01 par value;
1,700,000 shares authorized; 2004 - 1,684,443
shares issued; 2003 - 1,322,500 shares issued 17 13
Additional paid-in capital 31,100 20,436
Retained earnings 6,207 7,721
Accumulated other comprehensive income (loss) 1,350 751
Unearned ESOP shares (2004 - 61,061 shares, 2003 - 59,857 shares) (555) (599)
Unearned RRP shares (2004 - 310 shares, 2003 - 850 shares) (4) (12)
Treasury stock, at cost (217,014 shares) (2,888) (2,888)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 35,227 25,422
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 341,765 $ 249,881
========== ==========
See accompanying notes.
49
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2004 2003 2002
---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
----------------------------
Loans, including fees $ 15,074 $ 12,253 $ 11,899
Securities:
Taxable 1,201 974 883
Tax exempt 891 886 824
Federal funds sold 2 5 10
Dividends 106 83 87
Other interest 27 4 6
---------- ---------- ----------
TOTAL INTEREST AND DIVIDEND INCOME 17,301 14,205 13,709
---------- ---------- ----------
INTEREST EXPENSE
----------------
Deposits 4,161 3,927 5,266
Federal Home Loan Bank advances 1,155 985 718
Repurchase agreements 77 54 108
Other short-term borrowings 4 3 8
---------- ---------- ----------
TOTAL INTEREST EXPENSE 5,397 4,969 6,100
---------- ---------- ----------
NET INTEREST INCOME 11,904 9,236 7,609
Provision for loan losses (223) (428) (363)
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,681 8,808 7,246
---------- ---------- ----------
NONINTEREST INCOME
------------------
Service charges on deposit accounts 1,705 1,338 1,189
Gain (loss) on sale of securities 43 72 7
Secondary market commissions 109 79 82
Other income 279 187 176
---------- ---------- ----------
TOTAL NONINTEREST INCOME 2,136 1,676 1,454
---------- ---------- ----------
NONINTEREST EXPENSES
--------------------
Salaries and employee benefits 4,237 3,219 2,750
Occupancy and equipment expense 1,237 1,029 964
Federal deposit insurance premiums 36 27 14
Foreclosed assets 72 7 14
Advertising 444 262 300
Communications 254 189 191
Franchise and deposit taxes 259 240 185
Directors fees and benefits 99 96 96
Professional fees 283 170 147
Stationary and supplies 350 230 189
Amortization of intangibles 112 -- --
Other operating expenses 1,349 990 876
---------- ---------- ----------
TOTAL NONINTEREST EXPENSE 8,732 6,459 5,726
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 5,085 4,025 2,974
--------------------------
Income tax expense 1,460 1,104 774
---------- ---------- ----------
NET INCOME $ 3,625 $ 2,921 $ 2,200
---------- ========== ========== ==========
EARNINGS PER SHARE
------------------
Basic $ 2.67 $ 2.53 $ 1.88
========== ========== ==========
Diluted $ 2.43 $ 2.32 $ 1.77
========== ========== ==========
See accompanying notes.
50
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2004 2003 2002
---------- ---------- ----------
NET INCOME $ 3,625 $ 2,921 $ 2,200
OTHER COMPREHENSIVE INCOME
Unrealized gains (losses) on
available-for-sale securities 950 1,704 (228)
Reclassification adjustments for
realized (gains) losses recognized
in income (43) (73) (7)
Tax effect (308) (555) 80
---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 4,224 $ 3,997 $ 2,045
========== ========== ==========
See accompanying notes.
51
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
ADDITIONAL UNEARNED UNEARNED COMPRE-
COMMON PAID-IN RETAINED ESOP RRP TREASURY HENSIVE
STOCK CAPITAL EARNINGS SHARES SHARES STOCK INCOME TOTAL
----- ------- -------- ------ ------ ----- ------ -----
BALANCES, MARCH 31, 2001 $ 13 $ 20,318 $ 3,276 $(689) $(59) $(2,227) $ (171) $20,461
Net income for the year ended March 31, 2002 2,200 2,200
Cash dividends paid ($.29 per share) (340) (340)
ESOP shares earned 55 46 101
RRP shares earned 44 44
RRP shares granted 1 (4) 3 --
Purchased 24,000 treasury shares (330) (330)
Change in unrealized gain (loss) on available
for sale securities net of applicable deferred
taxes and reclassifications (155) (155)
------- -------- ------- ----- ---- ------- ------- -------
BALANCES, MARCH 31, 2002 13 20,374 5,136 (643) (19) (2,554) (326) 21,981
Net income for the year ended March 31, 2003 2,921 2,921
Cash dividends paid ($.29 per share) (336) (336)
ESOP shares earned 61 44 105
RRP shares earned 1 7 8
Purchased 15,100 treasury shares (334) (334)
Change in unrealized gain (loss) on available
for sale securities net of applicable
taxes reclasifications 1,077 1,077
------- -------- ------- ----- ---- ------- ------- -------
BALANCES, MARCH 31, 2003 13 20,436 7,721 (599) (12) (2,888) $ 751 $25,422
Net income for the year ended March 31, 2004 3,625 3,625
Stock dividend - 10% 1 4,723 (4,729) (5)
Common stock issued in acquisition (228,665) 3 5,829 5,832
Cash dividends paid ($.31 per share) (410) (410)
ESOP shares earned 112 44 156
RRP shares earned 8 8
Change in unrealized gain (loss) on available
for sale securities net of applicable
taxes and reclassifications 599 599
------- -------- ------- ----- ---- ------- ------- -------
BALANCES, MARCH 31, 2004 $ 17 $ 31,100 $ 6,207 $(555) $ (4) $(2,888) $ 1,350 $35,227
======= ======== ======= ===== ==== ======= ======= =======
See accompanying notes.
52
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
2004 2003 2002
---------- ---------- ----------
OPERATING ACTIVITIES
--------------------
Net income $ 3,625 $ 2,921 $ 2,200
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 854 438 460
Provision for loan losses 223 428 363
Loss (gain) on sale of investment
securities (43) (72) (7)
Net amortization of securities 243 83 54
Federal Home Loan Bank stock
dividend (106) (83) (86)
Loss (gain) on sale of foreclosed
real estate 20 (1) (3)
Loss (gain) on disposal of fixed assets (10) 2 (10)
ESOP shares earned 156 105 69
RRP shares earned 8 7 44
Decrease (increase) in:
Accrued interest receivable 36 1 29
Other assets 714 (457) (32)
Increase (decrease) in:
Accrued interest payable (228) (30) (219)
Other liabilities (249) (85) (273)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 5,243 3,257 2,589
---------- ---------- ----------
INVESTING ACTIVITIES
--------------------
Investment securities:
Available for sale:
Proceeds from sales, maturities and calls 5,397 3,405 1,292
Purchased (971) (4,391) (2,517)
Mortgage-backed securities
Available for sale:
Proceeds from sales -- 4,140 --
Principal payments 3,603 3,258 1,306
Purchased (10,698) (7,768) (6,991)
Purchased Federal Home Loan Bank stock -- (386) --
Loan originations and principal payments, net (21,426) (27,362) (22,105)
Proceeds from sale of foreclosed real estate 145 155 424
Purchased fixed assets (948) (1,317) (190)
Proceeds from sale of fixed assets 245 -- 25
Purchased software (259) (125) (8)
Net cash acquired in acquisition 3,564 -- --
---------- ---------- ----------
NET CASH USED BY INVESTING
ACTIVITIES (21,348) (30,391) (28,764)
---------- ---------- ----------
53
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(Continued)
2004 2003 2002
---------- ---------- ----------
FINANCING ACTIVITIES
--------------------
Net change in deposits $ 13,070 $ 31,280 $ 13,445
Federal Home Loan Bank borrowings 99,800 117,539 137,955
Repayment of Federal Home Loan
Bank borrowings (100,081) (116,814) (127,189)
Increase(decrease)in securities sold
under agreements to repurchase 4,785 (1,013) 2,216
Increase(decrease)in short term borrowings 6 (440) 211
Dividends paid (410) (336) (339)
Treasury shares purchased -- (334) (330)
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 17,170 29,882 25,969
---------- ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,065 2,748 (206)
Cash and Cash Equivalents, Beginning
of Year 8,148 5,400 5,606
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF
YEAR $ 9,213 $ 8,148 $ 5,400
========== ========== ==========
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY
INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 4,199 $ 3,957 $ 5,485
Income taxes $ 900 $ 1,180 $ 828
Assets acquired in settlement of
loans $ 907 $ 76 $ 288
See accompanying notes.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------- ------------------------------------------
ORGANIZATION
Classic Bancshares, Inc. (the "Company") was organized as a savings
and loan holding company primarily for the purpose of acquiring and
owning all of the outstanding common stock of Classic Bank (formerly
Ashland Federal Savings Bank). Effective September 30, 1996, Classic
Bancshares, Inc. became a bank holding company upon its acquisition of
100% of the outstanding common stock of First National Bank of
Paintsville (First National).
Classic Bank (the "Bank") conducts a general commercial banking
business in eastern Kentucky and southeastern Ohio which consists of
attracting deposits from the general public and using those funds,
together with other funds, to originate residential, consumer and
nonresidential loans, primarily in its market area.
The Bank's revenues are derived principally from interest earned on
loans and to a lesser extent, from interest earned on investments and
service fees on loans and deposit accounts. The operations of the Bank
is influenced significantly by general economic conditions and by
policies of financial institutions regulatory agencies. The Bank's
cost of funds are influenced by interest rates on competing
investments and general market rates. Lending activities are affected
by the demand for financing real estate and other types of loans,
which in turn is affected by the interest rates at which such
financing may be offered.
The consolidated financial information presented herein has been
prepared in accordance with accounting principles generally accepted
in the United States of America and general accounting practices
within the financial services industry. In preparing consolidated
financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Material estimates that are particularly susceptible
to significant change in the near term relate to the determination of
the allowance for loan losses and fair values of financial
instruments.
The following is a summary of the Company's significant accounting
policies which have been consistently applied in the preparation of
the accompanying consolidated financial statements.
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Classic Bancshares, Inc.
and its wholly- owned subsidiary, Classic Bank, together referred to
as "the Company". Intercompany balances and transactions are
eliminated in consolidation.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
B. SECURITIES
The Company accounts for debt securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investment securities be categorized as
held-to-maturity, trading, or available-for-sale. Securities
classified as held-to-maturity are carried at amortized cost only if
the Company has the positive intent and ability to hold these
securities to maturity. Equity securities with readily determinable
fair values are classified as available for sale. Securities available
for sale are carried at fair value, with unrealized holding gains and
losses reported in other comprehensive income. Trading securities are
carried at fair value, with changes in unrealized holding gains and
losses included in income. Securities are classified according to
management's intent upon acquisition. Other securities such as Federal
Home Loan Bank stock are carried at cost. At March 31, 2004, all of
the Company's securities were classified as available-for-sale.
Interest income includes amortization of purchase premium or discount.
Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a
decline in fair value is not temporary.
C. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, deferred loan
fees and costs, and an allowance for loan losses. Interest income is
reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term. Interest income on
mortgage and commercial loans is discontinued at the time the loan is
90 days delinquent unless the loan is well-secured and in process of
collection. Consumer loans are typically charged off no later than 120
days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest
is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual
is reversed against interest income. Interest received on such loans
is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
The allowance for loan losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Loan losses are charged
against the allowance when management believes the uncollectibility of
a loan balance is confirmed. Subsequent recoveries, if any, are
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
C. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)
credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's
judgment, should be charged-off.
The allowance consists of specific and general components. The
specific component relates to loans that are individually classified
as impaired or loans otherwise classified as substandard or doubtful.
The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors.
A loan is impaired when full payment under the loan terms is not
expected. Commercial and commercial real estate loans are individually
evaluated for impairment. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan's existing
rate or at the fair value of collateral if repayment is expected
solely from the collateral. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures.
D. FORECLOSED ASSETS
Assets acquired through, or in lieu of, loan foreclosure are to be
sold and are initially recorded at the lower of the loan's unpaid
principal balance (cost) or fair value at the date of foreclosure less
estimated selling expenses.
A valuation allowance is recorded if the fair value declines below the
fair value initially determined at the acquisition date. Costs after
acquisition are expensed.
E. PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed principally by the
straight-line method over estimated useful lives of the assets,
estimated to be 10 to 40 years for buildings and 3 to 10 years for
furniture, fixtures and equipment.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
F. COMPANY OWNED LIFE INSURANCE
The Company has purchased life insurance policies on certain key
executives. Company owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
G. GOODWILL AND OTHER INTANGIBLES
Goodwill results from business acquisitions and represents the excess
of the purchase price over the fair value of acquired tangible assets
and liabilities and identifiable intangible assets. Upon adopting new
accounting guidance in 2002, the Company ceased amortizing goodwill.
Goodwill is assessed at least annually for impairment and any such
impairment will be recognized in the period identified.
H. LONG-TERM ASSETS
Premises and equipment, core deposit and other intangible assets, and
other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair
value.
I. STOCK COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair-value based method for valuing
stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which
is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue to account for stock options and similar equity
instruments under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to
make pro forma disclosures of net earnings and earnings per share, as
if the fair-value based method of accounting defined in SFAS No. 123
had been applied.
The Company utilizes APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation
cost has been recognized for the plans as all options granted had an
exercise price equal to or greater than the market price of the
underlying common stock at the date of the grant.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
I. STOCK COMPENSATION (Continued)
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under
the plans consistent with the accounting method utilized in SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
MARCH 31
----------------------------------------
2004 2003 2002
---------- ---------- ----------
Net income as reported $ 3,625 $ 2,921 $ 2,200
Deduct:
Stock-based compensation
expense determined under fair
value-based method 431 230 28
---------- ---------- ----------
Pro forma net income $ 3,194 $ 2,691 $ 2,172
========== ========== ==========
Earnings per share
Basic:
As reported $ 2.67 $ 2.53 $ 1.88
Pro forma $ 2.35 $ 2.33 $ 1.86
Diluted:
As reported $ 2.43 $ 2.32 $ 1.77
Pro forma $ 2.14 $ 2.14 $ 1.75
The pro forma effects are computed using option pricing models, using
the following assumptions used for grants during the years ended March
31, 2004, 2003 and 2002: dividend yield of 2.00%, 1.35% and 3.00%,
respectively; expected volatility of 23.14%, 23.81% and 31.80%,
respectively, a risk-free interest rate of 3.80%, 3.74% and 4.91%,
respectively; and an expected life of seven years for all grants.
J. INCOME TAXES
The Company accounts for federal income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Pursuant to the provisions of
SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements that
will result in taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be
utilized against current period earnings, carried back against prior
years' earnings, offset against taxable temporary differences
reversing in future periods, or utilized to the extent of management's
estimate of future taxable income. A
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
J. INCOME TAXES (Continued)
valuation allowance is provided for deferred tax assets to the extent
that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes
payable on future taxable income. Deferred tax liabilities are
provided on the total amount of net temporary differences taxable in
the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods
of accounting for deferred loan origination fees, Federal Home Loan
Bank stock dividends, the general loan loss allowance, and certain
components of retirement expense. A temporary difference is also
recognized for depreciation expense computed using accelerated methods
for federal income tax purposes.
K. EMPLOYEE STOCK OWNERSHIP PLAN
The cost of shares issued to the ESOP, but not yet allocated to
participants, is shown as a reduction of stockholders' equity.
Compensation expense is based on the market price of shares as they
are committed to be released to participant accounts. Dividends on
allocated ESOP shares reduce retained earnings, dividends on unearned
ESOP shares reduce debt and accrued interest.
L. EARNINGS PER SHARE
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. ESOP
shares are considered outstanding for this calculation unless
unearned. Diluted earnings per common share includes the dilutive
effect of potential common shares issuable under stock options.
Earnings and dividends per share are restated for all stock splits and
dividends through the date of issue of the financial statements.
M. COMPREHENSIVE INCOME
Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as
separate components of equity.
N. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
During 2004, the Company adopted FASB Statement 149, AMENDMENT OF
STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,FASB
Statement 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITIES,
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
N. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
FASB Statement 132 (revised 2003), EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS, FASB Interpretation 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, and
FASB Interpretation 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES.
Adoption of the new standards did not materially affect the Company's
operating results or financial condition.
O. LOAN COMMITMENTS AND FINANCIAL INSTRUMENTS
Financial instruments include off-balance sheet credit instruments
such as commitments to make loans and commercial letters of credit,
issued to meet customer financing needs. The face amount for these
items represents the exposure to loss, before considering consumer
collateral or ability to repay. Such financial instruments are
recorded when they are funded.
P. LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial statements.
Q. DIVIDEND RESTRICTION
Banking regulations require maintaining certain capital levels and may
limit the dividends paid by the bank to the holding company or by the
holding company to shareholders. These restrictions pose no practical
limit on the ability of the bank or holding company to pay dividends
at historical levels.
R. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are estimated using relevant
market information and other assumptions, as more fully disclosed in a
separate note. Fair value estimates involve uncertainties and matters
of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
------ ------------------------------------------
S. OPERATING SEGMENTS
While the chief decision makers monitor the revenue streams of the
various products and services, the identifiable segments are not
material and operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, all of the financial
service operations are considered by management to be aggregated in
one reportable operating segment.
T. CASH FLOWS
For the purposes of reporting consolidated cash flows, the Company
considers cash, balances with banks, federal funds sold, securities
purchased under agreements to resell and interest-bearing cash
deposits in other depository institutions with initial maturities of
three months or less to be cash equivalents. Net cash flows are
reported for loan and deposit transactions.
U. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
2004 consolidated financial statements. Such reclassifications had no
effect on net income or stockholders' equity as previously reported.
NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS
------- ---------------------------------------
The Bank is required to maintain reserve funds in cash or on deposit
with a designated depository financial institution. The required
reserve as of March 31, 2004 and 2003 was $1,816 and $175,
respectively.
NOTE 3: SECURITIES
------- ----------
The amortized cost, gross unrealized gains, gross unrealized losses
and estimated fair values of investment securities at March 31, 2004
and 2003 are as follows:
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 3: SECURITIES (Continued)
------ ----------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
AVAILABLE-FOR-SALE
MARCH 31, 2004:
U. S. Government Agency
Securities $ 1,304 $ 8 $ -- $ 1,312
Obligations of state and
political subdivisions 17,886 1,070 -- 18,956
Mortgage-backed 22,202 339 (44) 22,497
Corporate debt securities 7,477 674 -- 8,151
---------- ---------- ---------- ----------
$ 48,869 $ 2,091 $ (44) $ 50,916
---------- ========== ========== ==========
MARCH 31, 2003:
U. S. Government Agency
Securities $ 564 $ -- $ -- $ 564
Obligations of state and
political subdivisions 19,099 823 (14) 19,908
Mortgage-backed 9,537 60 (1) 9,596
Corporate debt securities 7,505 276 (6) 7,775
---------- ---------- ---------- ----------
$ 36,705 $ 1,159 $ (21) $ 37,843
========== ========== ========== ==========
Sales of available for sale securities were as follows:
2004 2003 2002
---------- ---------- ----------
Proceeds $ 5,397 $ 7,545 $ 1,292
Gross gains 43 72 7
Gross losses -- -- --
The estimated fair value of investment and mortgage-backed securities
at March 31, 2004 and 2003 by contractual term to maturity are shown
below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
2004 2003
---------- ----------
ESTIMATED ESTIMATED
FAIR FAIR
VALUE VALUE
---------- ----------
Due in one year or less $ 1,005 $ 710
Due after one year through five years 2,851 2,619
Due after five years through ten years 4,631 3,796
Due after ten years 19,932 21,122
---------- ----------
28,419 28,247
Mortgage-backed securities-not
due at a single maturity date 22,497 9,596
---------- ----------
TOTAL $ 50,916 $ 37,843
========== ==========
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 3: SECURITIES (Continued)
------ ----------
Securities carried at approximately $25,800 at March 31, 2004, and
$12,900 at March 31, 2003, were pledged to secure deposits of public
funds and for other purposes required or permitted by law.
Securities with unrealized losses at March 31, 2004 not recognized in
income are as follows:
12 MONTHS OR MORE
-------------------------
FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSS
---------- ----------
Mortgage-backed securities $ 2,649 $ 44
---------- ----------
Total temporarily impaired $ 2,649 $ 44
========== ==========
Unrealized losses have not been recognized into income because the
securities are issued by government sponsored entities, management has
the intent and ability to hold for the foreseeable future, and the
decline in fair value is largely due to a potential increase in market
interest rates. The fair value is expected to recover as the
securities approach their maturity date.
NOTE 4: LOANS
------- -----
The components of loans in the consolidated statements of financial
condition were as follows:
MARCH 31
--------------------------
2004 2003
---------- ----------
Real estate loans:
One-to-four family $ 113,074 $ 74,233
Commercial 29,867 24,869
Multi-family 3,701 1,042
Construction 11,802 4,623
Consumer loans 47,474 36,272
Commercial loans 53,728 47,971
---------- ----------
Total loans receivable 259,646 189,010
Less: Unearned discounts and loan
origination costs (18) (140)
Allowance for loan losses 2,209 1,975
---------- ----------
Total loans receivable, net $ 257,455 $ 187,175
========== ==========
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 4: LOANS (Continued)
------ -----
Activity in the allowance for loan losses is summarized as follows for
the years ended March 31:
2004 2003 2002
---------- ---------- ----------
Balance at beginning of year $ 1,975 $ 1,628 $ 1,407
Acquisition of First Federal 885 -- --
Provision for losses 223 428 363
Charge-offs (1,040) (109) (182)
Recoveries 166 28 40
---------- ---------- ----------
Balance at end of year $ 2,209 $ 1,975 $ 1,628
========== ========== ==========
The following is a summary of non-performing loans at March 31:
2004 2003 2002
---------- ---------- ----------
Accruing loans past due 90 days
or more $ 970 $ 669 $ 244
Nonaccrual loans 507 600 412
---------- ---------- ----------
Total non-performing loan
balances at year end $ 1,477 $ 1,269 $ 656
========== ========== ==========
Non-performing loans as a
percentage of loans .57% .68% .41%
========== ========== ==========
The Company had no impaired loans for all periods presented.
In the normal course of business and subject to normal credit
policies, the Bank makes loans to officers, directors, their immediate
family and business interests of such persons. At March 31, 2004 and
2003, the balances of loans to such parties were as follows:
2004 2003
---------- ----------
Aggregate amount of indebtedness
at beginning of year $ 13,758 $ 14,123
New loans 43,153 33,537
Repayments (40,736) (33,902)
---------- ----------
Aggregate amount of indebtedness
at end of year $ 16,175 $ 13,758
========== ==========
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 5: PREMISES AND EQUIPMENT
------- ----------------------
Premises and equipment at March 31, 2004 and 2003 by major
classifications are as follows:
2004 2003
---------- ----------
Land $ 2,192 $ 1,596
Buildings and improvements 6,123 4,694
Furniture and equipment 3,246 3,348
---------- ----------
Total 11,561 9,638
Less: Accumulated depreciation 3,273 3,371
---------- ----------
$ 8,288 $ 6,267
========== ==========
Depreciation expense charged to operations for the years ended March
31, 2004, 2003, and 2002 totaled $498, $414, and $430, respectively.
NOTE 6: GOODWILL AND INTANGIBLE ASSETS
------- ------------------------------
GOODWILL
The change in the balance for goodwill during the years ended March
31, 2004 and 2003 is as follows:
2004 2003
---------- ----------
Beginning of year $ 5,555 $ 5,555
Acquired goodwill 2,432 --
---------- ----------
End of year $ 7,987 $ 5,555
========== ==========
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets were as follows as of March 31:
2004 2003
----------------------- -----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- -------- -------- --------
Amortized intangible assets:
Core deposit intangibles $ 668 $ 85 $ -- $ --
Other customer relationship
intangibles 255 27 -- --
-------- -------- -------- --------
Total $ 923 $ 112 $ -- $ --
======== ======== ======== ========
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 6: GOODWILL AND INTANGIBLE ASSETS (Continued)
------ ------------------------------
Aggregate amortization expense was $112, $0 and $0 for the years ended
March 31, 2004, 2003, and 2002, respectively.
Estimated amortization expense for each of the next five years is as
follows:
2005 $ 108
2006 123
2007 127
2008 111
2009 94
NOTE 7: DEPOSITS
------- --------
The aggregate amount of short-term jumbo certificates of deposit each
with a minimum denomination of $100 thousand or more was approximately
$34,258 and $31,337 at March 31, 2004 and 2003, respectively.
The scheduled maturities of certificates of deposit were as follows
for the years ending March 31:
2005 $ 83,115
2006 24,236
2007 4,722
2008 6,933
2009 1,910
2010 and thereafter 388
---------
$ 121,304
=========
The Bank held related party deposits of approximately $6,597 and
$5,400 at March 31, 2004 and 2003, respectively.
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES
------- -------------------------------
Advances from the Federal Home Loan Bank of Cincinnati totaled $34,218
at March 31, 2004. In addition, the Federal Home Loan Bank had issued
for the account of Classic Bank, $25,622 in standby letters of credit
for the benefit of depositors of public funds. The advances and
letters of credit are collateralized with the Bank's Federal Home Loan
Bank stock with a carrying value of $2,894 and certain residential
real estate mortgage loans in the amount of $105,321.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES (Continued)
------ -------------------------------
At March 31, 2004, advances with a remaining term of 90 days or less,
and a weighted average interest rate of 1.18% totaled $8,000. Advances
requiring monthly principal reductions with a weighted average
maturity of 3.6 years and a weighted average interest rate of 4.05%
totaled $26,218.
Scheduled principal payments are due as follows:
Due in fiscal year ending:
March 31, 2005 $14,575
March 31, 2006 6,027
March 31, 2007 6,093
March 31, 2008 1,135
March 31, 2009 1,620
After March 31, 2009 4,768
-------
$34,218
=======
NOTE 9: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
------- ----------------------------------------------
Securities sold under agreements to repurchase at March 31, 2004 and
2003 totaled $9,168 and $4,382, respectively.
Securities sold under agreements to repurchase are financing
arrangements that mature within three months. At maturity, the
securities underlying the agreements are returned to the Company.
Information concerning securities sold under agreements to repurchase
is summarized as follows:
2004 2003
---------- ----------
Average balance during the year $ 8,608 $ 5,206
Average interest rate during the year .90% 1.05%
Maximum month-end balance during the year $ 11,252 $ 6,020
Weighted average interest rate at year-end .98% 1.02%
Mortgage-backed securities underlying the agreements at year-end:
Carrying amount $ 14,194 $ 4,539
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 10: OTHER BORROWINGS
-------- ----------------
Other short-term borrowings at March 31, 2004 and 2003 consist of term
treasury tax and loan deposits and are generally repaid within one to
twenty days from the date of the transaction.
NOTE 11: INCOME TAXES
-------- ------------
The provision for income taxes consists of:
YEARS ENDED MARCH 31
-----------------------------------
2004 2003 2002
-------- -------- --------
Currently payable $ 930 $ 1,107 $ 754
Deferred 530 (3) 20
-------- -------- --------
$ 1,460 $ 1,104 $ 774
======== ======== ========
Effective tax rates differ from the federal statutory rate of 34%
applied to income before income taxes due to the following:
2004 2003 2002
-------- -------- --------
Federal statutory rate times
financial statement income $ 1,729 $ 1,369 $ 1,011
Effect of:
Tax-exempt income (298) (298) (276)
Other, net 29 33 39
-------- -------- --------
Total $ 1,460 $ 1,104 $ 774
======== ======== ========
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 11: INCOME TAXES (Continued)
------- ------------
The components of the Company's net deferred tax asset (liability) as
of March 31, 2004 and 2003, are summarized as follows:
2004 2003
-------- --------
DEFERRED TAX ASSETS:
Allowance for loan losses $ 328 $ 368
Deferred loan fees 17 --
Other 65 19
-------- --------
410 387
-------- --------
DEFERRED TAX LIABILITIES:
Federal Home Loan Bank stock dividends 542 319
Premises and equipment 393 370
Net unrealized gains on available-for-sale securities 696 387
Retirement and incentive programs 196 182
Purchase accounting adjustments 455 83
Prepaid expenses 73 --
Deferred loan origination costs -- 47
Other 66 23
-------- --------
2,421 1,411
-------- --------
NET DEFERRED TAX LIABILITY $ (2,011) $ (1,024)
======== ========
For years prior to 1996, savings institutions (formerly Classic Bank)
were allowed a statutory bad debt deduction of otherwise taxable
income of 8%, subject to limitations based on aggregate loans and
savings balances. If the amounts that qualify as deductions for
federal income taxes are later used for purposes other than for bad
debt losses, including distributions in liquidation, such
distributions will be subject to federal income taxes at the then
current corporate income tax rate. The percentage of earnings bad debt
deductions for Classic Bank had accumulated to approximately $2,800 at
March 31, 2004. The estimated deferred tax liability on such amount is
approximately $952, which has not been recorded in the accompanying
consolidated financial statements. The Bank does not have any
significant post 1987 increases in the percentage of earnings bad debt
deduction subject to recapture. Banks can no longer utilize the
percentage of earnings method to compute their bad debt deduction. If
the Bank were liquidated or otherwise ceased to be a Bank or if tax
laws were to change, this liability would be recorded with an offset
to income tax expense.
NOTE 12: OFF BALANCE SHEET ACTIVITIES
-------- ----------------------------
Some financial instruments, such as loan commitments, credit lines,
letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to
support the credit of others, as long as conditions established in the
contract are met, and usually have expiration dates. Commitments may
expire without being used. Off-balance-sheet risk to credit loss
exists up to the face amount of these instruments, although material
losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral
at exercise of the commitment.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 12: OFF BALANCE SHEET ACTIVITIES (Continued)
------- ----------------------------
The contractual amount of financial instruments with off-balance-sheet
risk was as follows at year end.
2004 2003
--------------------- ---------------------
FIXED VARIABLE FIXED VARIABLE
RATE RATE RATE RATE
-------- -------- -------- --------
Commitments to make loans $ 1,851 $ 5,046 $ 935 $ 2,889
Unused lines of credit and
letters of credit 2,533 16,207 978 15,696
The Company has entered into lease agreements for office premises and
equipment under operating leases which expire at various dates through
2020. The following table summarizes minimum payments due under lease
agreements by year:
YEAR ENDING MARCH 31 (DOLLARS IN THOUSANDS)
-------------------- ----------------------
2005 $ 98
2006 105
2007 79
2008 48
2009 48
2010 and thereafter 537
----
$915
====
Total rental expense under operating leases was approximately $97,
$87, and $98, for the years ended March 31, 2004, 2003 and 2002,
respectively.
NOTE 13: BENEFIT PLANS
-------- -------------
The Company and its subsidiary participate in the Pentegra
multi-employer pension plan. This non-contributory defined benefit
plan covers all eligible employees of the Company and its subsidiary
meeting certain service and age requirements. The plan operates on a
fiscal year ending June 30, and it is the policy of the Company to
fund the normal cost of the plan. Contributions to the plan for the
year ended March 31, 2004 totaled $58. No contributions were required
for the years ended March 31, 2003 or 2002.
Prepaid pension expense of $719 and $777 is included in other assets
in the consolidated statement of financial condition at March 31, 2004
and 2003, respectively. This prepaid expense represents, as of July 1,
1998, the excess of the fair value of pension plan assets over the
accrued actuarial pension liability resulting from the termination of
the First National Bank's defined benefit pension plan and is reduced
by the amortization for normal pension plan costs for the year ended
March 31, 2004.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 13: BENEFIT PLANS (Continued)
------- -------------
The Company also has a 401(k) Savings and Profit Sharing Plan covering
substantially all employees. Contributions by the employees are
voluntary and are subject to matching contributions by the employer
under a fixed percentage, which may be increased at the discretion of
the Board of Directors. Total expense under this plan was $75, $60,
and $51 for the years ended March 31, 2004, 2003 and 2002,
respectively.
The Bank has a non-contributory supplemental executive retirement plan
for its chief executive officer. The Bank's obligations under the plan
are accrued. The Bank recorded expense related to the plan totaling
approximately $20, $15, and $15 during the years ended March 31, 2004,
2003 and 2002, respectively.
In conjunction with the stock conversion in 1995, the Company
established an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. The ESOP borrowed $1,058 from the
Corporation and purchased 105,800 common shares, equal to 8.0% of the
total number of shares issued in the conversion. The Bank makes
scheduled discretionary contributions to the ESOP sufficient to
service the debt. Shares are allocated to participants' accounts under
the shares allocated method. The cost of shares not committed to be
released and unallocated shares is reported as a reduction of
stockholders' equity.
Dividends on unallocated ESOP shares are recorded as a reduction of
debt and accrued interest; dividends on allocated ESOP shares are
recorded as a reduction of retained earnings. Allocated ESOP shares
become outstanding for earnings-per-share computations. Compensation
expense is recorded based on the average fair market value of the ESOP
shares when committed to be released. The expense under the ESOP for
the years ended March 31, 2004, 2003, and 2002, was $156, $105, and
$69, respectively.
The ESOP shares at March 31, 2004 and 2003 were as follows:
2004 2003
-------- --------
Allocated shares 52,747 43,606
Unearned shares 61,061 59,857
-------- --------
Total ESOP shares 113,808 103,463
======== ========
Fair value of unearned shares $ 2,439 $ 1,652
======== ========
On July 29, 1996, stockholders of the Corporation approved the 1996
Recognition and Retention Plan ("RRP"). Under the RRP, restricted
stock awards of the Company's common stock may be awarded to the
directors, officers and key employees of the Company and its
subsidiary. At March 31, 2004, vested, unvested and unawarded RRP
shares totaled 57,723, 341 and 114, respectively.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 13: BENEFIT PLANS (Continued)
------- -------------
The holders of the restricted shares have all of the rights of a
shareholder, except that they cannot sell, assign, pledge or transfer
any of the restricted shares during the restricted period. The
restricted shares vest at a rate of 20% on each anniversary of the
grant date. RRP expense of $5, $6, and $48, was recorded for the years
ended March 31, 2004, 2003, and 2002 respectively.
NOTE 14: STOCK OPTION PLAN
-------- -----------------
Stockholders of the Company have approved four stock option plans,
under which shares of the Company's common stock has been reserved for
issuance to officers, directors and key employees of the Company and
its subsidiary. The shares reserved for issuance under the plans are
as follows:
SHARES RESERVED
FOR ISSUANCE
------------
1996 Stock Option and Incentive Plan 145,475
1998 Premium Price Stock Option Growth Plan 55,000
2001 Premium Price Stock Option Growth Plan 55,000
2003 Premium Price Stock Option Growth Plan 66,000
All grants under the 1996 Plan are exercisable at the fair market
value at the date of the grants. These options vest with the grantees
at the rate of 20% per year and are available for exercise, subject to
the vesting schedule, for up to ten years from the grant date.
All grants under the Premium Price Plans are exercisable at 110% of
the fair market value at the date of the grants. These options vest
immediately and may be exercised at any time up to ten years.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 14: STOCK OPTION PLAN (Continued)
------- -----------------
A summary of the status of the Company's stock option plans as of
March 31, 2004, 2003 and 2002 and changes during the years ending on
these dates is presented below:
2004 2003 2002
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
Options outstanding at
beginning of year 253,935 $ 14.38 198,935 $ 10.67 200,295 $ 10.67
Granted during the year 66,000 31.81 55,000 27.78 440 15.23
Forfeited 0 -- 0 -- (1,800) 11.13
------- ------- -------
Options outstanding at end of year 319,935 $ 17.97 253,935 $ 14.38 198,935 $ 10.67
======= ======= =======
Eligible for exercise at end of year 319,385 $ 17.99 252,070 $ 14.41 195,712 $ 10.67
======= ======= =======
Weighted average fair value of
options granted during the year $ 6.49 $ 6.91 $ 5.05
The following information applies to options outstanding at March 31,
2004:
OUTSTANDING EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE PRICE NUMBER PRICE
$ 9.83 - $12.50 181,940 3.4 yrs. $10.36 181,654 $10.36
$12.51 - $15.23 16,995 4.9 yrs. 13.76 16,731 13.73
$20.50 7,700 8.2 yrs. 20.50 7,700 20.50
$28.97 47,300 9.0 yrs. 28.97 47,300 28.97
$31.81 66,000 9.5 yrs. 31.81 66,000 31.81
------- -------
319,935 319,385
======= =======
NOTE 15: CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
-------- ----------------------------------------------------------
Banks and bank holding companies are subject to regulatory capital
requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective
action regulations involve quantitative measures of assets,
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 15: CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
-------- ----------------------------------------------------------
(Continued)
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators. Failure to
meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications:
well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
although these terms are not used to present overall financial
condition. If adequately capitalized, regulatory approval is required
to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and
capital restoration plans are required. At March 31, 2004 and 2003,
the most recent regulatory notifications categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that
management believes have changed the institution's category.
Actual and required capital amounts and ratios are presented below at
year-end.
TO BE WELL
----------
CAPITALIZED UNDER
-----------------
FOR CAPITAL PROMPT CORRECTIVE
----------- -----------------
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
MARCH 31, 2004
Total Capital to risk
weighted assets
Consolidated $27,326 11.7% >=$18,766 >=8.0% >=$23,457 >=10.0%
Bank $25,655 11.0% >=$18,723 >=8.0% >=$23,404 >=10.0%
Tier I (Core) Capital
to risk weighted assets
Consolidated $25,117 10.7% >=$ 9,383 >=4.0% >=$14,074 >= 6.0%
Bank $23,446 10.0% >=$ 9,361 >=4.0% >=$14,042 >= 6.0%
Tier I (Core) Capital
to average assets
Consolidated $25,117 7.5% >=$13,317 >=4.0% >=$16,646 >= 5.0%
Bank $23,446 7.0% >=$13,318 >=4.0% >=$16,648 >= 5.0%
MARCH 31, 2003
Total Capital to risk
weighted assets
Consolidated $21,099 11.5% >=$14,704 >=8.0% >=$18,380 >=10.0%
Bank $19,738 10.8% >=$14,654 >=8.0% >=$18,317 >=10.0%
Tier I (Core) Capital
to risk weighted assets
Consolidated $19,116 10.4% >=$ 7,352 >=4.0% >=$11,028 >= 6.0%
Bank $17,763 9.7% >=$ 7,327 >=4.0% >=$10,990 >= 6.0%
Tier I (Core) Capital
to average assets
Consolidated $19,116 8.1% >=$ 9,485 >=4.0% >=$11,857 >= 5.0%
Bank $17,763 7.6% >=$ 9,388 >=4.0% >=$11,735 >= 5.0%
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 15: CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
-------- ----------------------------------------------------------
(Continued)
The Company's principal source of funds is dividends received from the
subsidiary bank. Regulations limit the amount of dividends that may be
paid by the Company's banking subsidiary without prior approval.
During the fiscal year March 31, 2005, approximately $1,764 plus any
fiscal year 2005 net profits can be paid by the Company's banking
subsidiary without prior regulatory approval.
NOTE 16: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
------- -----------------------------------------------------
The following condensed financial statements summarize the financial
position of the Company as of March 31, 2004 and 2003 and the results
of its operations and its cash flows for each of the years ended March
31, 2004, 2003, and 2002:
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 16: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
------- -----------------------------------------------------
(Continued)
MARCH 31, MARCH 31,
STATEMENTS OF FINANCIAL CONDITION 2004 2003
--------------------------------- -------- --------
ASSETS
* Cash $ -- $ 10
Temporary investments 2 27
Securities available for sale 549 540
Accrued interest receivable 6 11
* Note receivable - ESOP 640 677
* Equity in net assets of Bank
Subsidiary 33,527 24,046
* Income taxes and other receivables
due from subsidiary 166 137
Other assets 428 18
-------- --------
TOTAL ASSETS $ 35,318 $ 25,466
======== ========
LIABILITIES
Accounts payable and accrued expenses $ 91 $ 31
Deferred income taxes -- 13
-------- --------
TOTAL LIABILITIES 91 44
-------- --------
STOCKHOLDERS' EQUITY
Common stock 17 13
Additional paid-in capital 31,100 20,436
Retained earnings 6,207 7,721
Accumulated other comprehensive
income 1,350 751
Treasury stock (2,888) (2,888)
Unearned ESOP shares (555) (599)
Unearned RRP shares (4) (12)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 35,227 $ 25,422
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,318 $ 25,466
======== ========
* These accounts eliminate upon consolidation.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------
NOTE 16: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
------- -----------------------------------------------------
(Continued)
YEARS ENDED MARCH 31,
------------------------------------
STATEMENTS OF INCOME 2004 2003 2002
-------------------- -------- -------- --------
INCOME
* Dividends from bank subsidiaries $ 6,196 $ 100 $ 1,241
* Other income - management fees 60 60 60
* Interest income - ESOP loan 41 43 46
Interest and dividend income 53 43 45
-------- -------- --------
TOTAL INCOME 6,350 246 1,392
-------- -------- --------
EXPENSES
Salaries and benefits -- -- 10
Interest expense 2 -- 3
Legal and accounting fees 120 63 61
* Corporate management fees 186 186 186
Printing and supplies 16 8 20
Other professional services 81 41 35
Directors fees 64 62 62
Other expenses 67 34 46
-------- -------- --------
TOTAL EXPENSES 536 394 423
-------- -------- --------
INCOME BEFORE INCOME TAX AND
UNDISTRIBUTED SUBSIDIARY INCOME 5,814 (148) 969
Income tax benefit (expense) 128 84 92
Equity in undistributed subsidiary income -- 2,985 1,139
Dividends in excess of subsidiary income (2,317) -- --
-------- -------- --------
NET INCOME $ 3,625 $ 2,921 $ 2,200
======== ======== ========
* These accounts eliminate upon consolidation.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------
NOTE 16: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
-------- -----------------------------------------------------
(Continued)
YEARS ENDED MARCH 31,
------------------------------------
STATEMENTS OF CASH FLOWS 2004 2003 2002
------------------------ -------- -------- --------
OPERATING ACTIVITIES
Net income $ 3,625 $ 2,921 $ 2,200
Adjustments:
Depreciation 12 4 4
Equity in undistributed subsidiary income -- (2,985) (1,139)
Dividends in excess of subsidiary income 2,317 -- --
Earned RRP shares 8 7 44
Decrease (increase) in:
Accrued interest receivable 5 (5) 2
Receivables due from subsidiary (29) (137) --
Other assets (36) 99 68
Increase (decrease)
Accounts payable and accrued expenses 44 (4) (30)
Other increases -- -- 80
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 5,946 (100) 1,229
-------- -------- --------
INVESTING ACTIVITIES:
Repayment on loan receivable from ESOP 37 37 37
Purchased equipment (63) -- --
Purchased First Federal (5,545) -- --
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,571) 37 37
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid (410) (336) (340)
Treasury shares purchased -- (334) (330)
-------- -------- --------
NET CASH USED BY FINANCING ACTIVITIES (410) (670) (670)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (35) (733) 596
Cash and Cash Equivalents at
Beginning of Year 37 770 174
-------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2 $ 37 $ 770
======== ======== ========
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------
NOTE 17: BUSINESS COMBINATIONS
-------- ---------------------
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 are 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.
Cash $ 9,573
Loans, net 49,474
Securities 9,490
Other assets 4,088
Deposits (56,682)
FHLB borrowings (6,373)
Other liabilities (813)
--------
Net assets acquired $ 8,757
========
First Federal is located in the market area of the Company and thus,
the acquisition enables the Bank to gain market share and affords the
Company the opportunity to reduce costs through economies of scale.
The aggregate purchase price was $11,400, including $5,600 of cash and
common stock valued at $5,800 and resulted in goodwill and other
intangibles of $3,355. 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 share was exchanged was .9797.
The purchase price resulted in approximately $2,432 in goodwill and
$923 in core deposit and customer relationship intangible. The
intangible assets will be amortized over a period of 7-15 years.
Goodwill will not be amortized, but instead evaluated periodically for
impairment.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------
NOTE 17: BUSINESS COMBINATIONS (Continued)
------- ---------------------
Presented below is pro-forma information as if the acquisition had
occurred at the beginning of 2004 and 2003. The pro-forma information
includes adjustments for interest income on loans and securities
acquired, amortization of intangibles arising from the transaction,
depreciation expense on property acquired, interest expense on
deposits acquired, and the related income tax effects. The pro-forma
financial information is not necessarily indicative of the results of
operations as they would have been had the transaction been effected
on the assumed dates.
MARCH 31
-------------------------
2004 2003
---------- ----------
Net interest income $ 12,409 $ 11,470
Net income $ 2,610 $ 3,062
Basic income per share $ 1.86 $ 2.18
Diluted income per share $ 1.69 $ 2.01
The pro-forma information for 2004 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, and merger expenses of $499. 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 $660.
NOTE 18: EARNINGS PER SHARE
-------- ------------------
The factors used in the earnings per share computation follow.
2004 2003 2002
------ ------ ------
Basic
Net income $3,625 $2,921 $2,200
====== ====== ======
Weighted average common shares
outstanding 1,356 1,155 1,168
====== ====== ======
Basic earnings per common share $ 2.67 $ 2.53 $ 1.88
====== ====== ======
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------
NOTE 18: EARNINGS PER SHARE (Continued)
------- ------------------
2004 2003 2002
------ ------ ------
Diluted
Net income $3,625 $2,921 $2,200
====== ====== ======
Weighted average common shares
outstanding for basic earnings
per common share 1,356 1,155 1,168
Add: Dilutive effects of assumed
exercises of stock options 136 103 76
------ ------ ------
Average shares and dilutive potential
common shares 1,492 1,258 1,244
====== ====== ======
Diluted earnings per common share $ 2.43 $ 2.32 $ 1.77
====== ====== ======
Stock options for 10,950 shares of common stock were not considered in
computing diluted earnings per common share for 2002 because they were
antidilutive.
NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS
-------- -----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values for its
financial instruments. In accordance with SFAS No. 107, fair values
are based on estimates using present value and other valuation
techniques in instances where quoted prices are not available. These
techniques are significantly affected by the assumptions used,
including discount rates and estimates of future cash flows. As such,
the derived fair value estimates cannot be substantiated by comparison
to independent markets and, further, may not be realizable in an
immediate settlement of the instruments. SFAS No. 107 also excludes
certain items from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent, and should
not be construed to represent, the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments.
CASH AND CASH EQUIVALENTS - The carrying amounts of cash and
short-term instruments approximate their fair value.
SECURITIES AVAILABLE FOR SALE - Fair values for investment securities
and mortgage-backed and related securities, excluding restricted
equity securities, are based on quoted market prices. The carrying
values of restricted equity securities (Federal Home Loan Bank stock)
represents redemption value and approximates fair value.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------
NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
------- -----------------------------------
LOANS - The fair values for loans are estimated using discounted cash
flow analysis, based on interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality. Loan
fair value estimates include judgments regarding future expected loss
experience and risk characteristics. Fair values for impaired loans
are estimated using discounted cash flow analysis or underlying
collateral values, where applicable.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying amounts of
accrued interest receivable and payable approximate their fair values.
DEPOSIT LIABILITIES - The fair values disclosed for demand deposits
are, by definition, equal to the amount payable on demand at the
reporting date (that is, their carrying amounts). The carrying amount
of variable-rate, fixed-term money market accounts and certificates of
deposit approximate their fair values at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
FEDERAL HOME LOAN BANK ADVANCES - The fair value of FHLB advances was
estimated by discounting the expected future cash flows using current
interest rates for advances with similar terms and remaining
maturities.
SHORT-TERM BORROWINGS - The carrying amounts of borrowings under
repurchase agreements and other short-term borrowings approximates
their fair value.
OFF-BALANCE-SHEET INSTRUMENTS - Fair values for off-balance sheet
lending commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties credit standing. The fair value of
such off-balance-sheet instruments are immaterial and, therefore, not
disclosed.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
-----------------
NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
------- -----------------------------------
Based on the methods and assumptions set forth above, the estimated
fair value of the Company's financial instruments as of March 31, 2004
and 2003 are as follows:
2004 2003
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
FINANCIAL ASSETS:
Cash and due from banks $ 9,155 $ 9,155 $ 8,125 $ 8,125
Federal funds sold and securities
purchased under agreements to resell 58 58 24 24
Securities available-for-sale 50,916 50,916 37,843 37,843
Federal Home Loan Bank stock 2,894 2,894 1,949 1,949
Loans receivable, net 257,455 255,828 187,175 198,196
Accrued interest receivable 1,446 1,446 1,157 1,157
FINANCIAL LIABILITIES:
Certificates of deposit $121,304 $121,791 $101,235 $101,470
Other deposit accounts 138,937 138,937 88,920 88,920
Federal funds purchased and securities
sold under agreements to repurchase 9,168 9,168 4,382 4,383
Advances from the Federal Home Loan Bank 34,218 34,888 28,126 28,729
Other short-term borrowings 12 12 6 6
Accrued interest payable 306 306 344 344
84
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective July 14, 2003, Smith, Goolsby, Artis & Reams, P.S.C. ("Smith
Goolsby") resigned as the Company's independent auditor. On the same day, the
Company's audit committee engaged Crowe Chizek and Company LLC ("Crowe Chizek")
to audit the Company's financial statements for fiscal 2004.
During the period from April 1, 2001 until the date hereof (i) Smith
Goolsby's reports on the Company's financial statements contained no adverse
opinion or disclaimer of opinion and were not modified as to uncertainty, audit
scope or accounting principles, and (ii) there have been no disagreements with
Smith Goolsby on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which was not resolved to
the satisfaction of Smith Goolsby which would have caused it to make reference
to the subject matter of the disagreement in its reports.
ITEM 8A. 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 within the 90 days prior to
the filing of 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 that has materially been affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2004, which will be filed with the SEC by July 29,
2004.
EXECUTIVE OFFICERS
Information concerning the executive officers of the Company who are not
directors is incorporated by reference from Part I of this Form 10-KSB under the
caption "Executive Officers of the Registrant Who Are Not Directors."
85
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information concerning compliance with Section 16(a) reporting requirements
by the Company's directors and executive officers is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2004, which will be filed with the SEC by July 29,
2004.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held in 2004, which will be filed with the SEC by July 29,
2004.
86
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 2004, which will
be filed with the SEC by July 29, 2004.
The following table sets forth information with respect to securities to be
issued under the Company's equity compensation plans as of March 31, 2004. All
amounts have been adjusted to reflect the stock dividend paid on November 17,
2003.
Equity Compensation Plan Information
====================================================================================================================================
(a) (b) (c)
====================================================================================================================================
Plan Category Number of securities to be issued Weighted-average Number of securities
upon exercise of outstanding exercise price of remaining available
options, warrants and rights outstanding options, for future issuance
warrants and rights under equity
compensation plans
(excluding securities
reflected in column
(a))
====================================================================================================================================
Equity compensation plans approved by
security holders:
1. 1996 Recognition and Retention Plan 1. 341 (Awarded but unvested) 1. N/A 1. 114
2. 1996 Stock Option and Incentive Plan 2. 145,145(1) 2. $10.26 2. 330
3. 1998 Premium Price Stock Option 3. 53,790 3. $11.38 3. 1,210
Growth Plan
4. 2001 Premium Price Stock Option 4. 55,000(1) 4. $27.78 4. --
Growth Plan
5. 2003 Premium Price Stock Option 5. 66,000 5. $31.81 5. --
Growth Plan
====================================================================================================================================
Equity compensation plans not approved
by security holders N/A N/A N/A
====================================================================================================================================
Total 320,276(1) N/A 1,654
====================================================================================================================================
(1) Includes issued but unvested options
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 2004, which will be filed with the
SEC by July 29, 2004.
87
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
REGULATION S-B
EXHIBIT NUMBER DOCUMENT
3.1 Certification of Incorporation of Classic Bancshares, Inc.
(incorporated herein by reference to Classic Bancshares,
Inc.'s Registration Statement on Form S-1 initially filed on
December 19, 1995, Registration No. 33-87580).
3.2 Bylaws of Classic Bancshares, Inc. (incorporated herein by
reference to Current Report on Form 8-K filed February 25,
2003).
4 Specimen Stock Certificate of Classic Bancshares, Inc.
(incorporated by reference to Registration Statement on Form
S-4 filed on April 14, 2003, Registration No. 333-104524).
10.1 Employment Agreement between Classic Bancshares, Inc. and
David B. Barbour (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
10.2 Employment Agreement between Classic Bancshares, Inc. and
Lisah M. Frazier (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
10.3 Employment Agreement between Classic Bancshares, Inc. and
Robert S. Curtis (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
10.4 1996 Stock Option and Incentive Plan (incorporated herein by
reference to Classic Bancshares, Inc.'s Proxy Statement
dated June 28, 1996 to which it is attached as Exhibit A).
10.5 1996 Recognition and Retention Plan (incorporated herein by
reference to Classic Bancshares, Inc.'s Proxy Statement
dated June 28, 1996 to which it is attached as Exhibit B.)
10.6 1998 Premium Price Stock Option Growth Plan (incorporated
herein by reference to Classic Bancshares, Inc.'s Proxy
Statement dated June 26, 1998 to which it is attached as
Exhibit A).
10.7 2001 Premium Price Stock Option Growth Plan (incorporated
herein by reference to Classic Bancshares, Inc.'s Proxy
Statement dated July 13, 2001 to which it is attached as
Exhibit A).
10.8 2003 Premium Price Stock Option Growth Plan (incorporated
herein by reference to Classic Bancshares, Inc.'s Proxy
Statement dated July 22, 2003 to which it is attached as
Appendix B).
10.9 Form of Supplemental Retirement Agreement with David B.
Barbour (incorporated herein by reference to Registration
Statement on Form S-4 filed on April 14, 2003, Registration
No. 333-104524).
14 Code of Ethics (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
88
21 List of Subsidiaries
23 Consents of Independent Auditors
31.1 Certification of David B. Barbour pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Lisah M. Frazier pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 2004, the Company filed a Current
Report on Form 8-K dated January 28, 2004 to report under Item 12 for Form 8-K
the issuance of a press release announcing its earnings for the quarter ended
December 31, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held in 2004, which will be filed
with the SEC by July 29, 2004.
89
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CLASSIC BANCSHARES, INC.
Date: July 19, 2004 By: /s/ David B. Barbour
------------------ ----------------------------------------
David B. Barbour, President, Chief Executive
Officer and Director (Duly Authorized
Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons in the capacities and on the dates indicated.
Signature and Title: /s/ David B. Barbour /s/ C. Cyrus Reynolds
------------------------ ------------------------
David B. Barbour, President, Chief Executive C. Cyrus Reynolds, Chairman of the Board
Officer and Director (Principal Executive and
Operating Officer)
Date: July 19, 2004 Date: July 19, 2004
/s/ Lisah M. Frazier /s/ John W. Clark
------------------------------------------ ------------------------------------------
Lisah M. Frazier, Chief Operating Officer John W. Clark, Director
and Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
Date: July 19, 2004 Date: July 19, 2004
/s/ Robert L. Bayes /s/ E. B. Gevedon
------------------------------------------ ------------------------------------------
Robert L. Bayes, Executive Vice President E. B. Gevedon, Jr., Vice Chairman of the Board
and Director
Date: July 19, 2004 Date: July 19, 2004
/s/ Robert B. Keifer, Jr. /s/ David A. Lang
------------------------------------------ ------------------------------------------
Robert B. Keifer, Jr., Director David A. Lang, Director
Date: July 19, 2004 Date: July 19, 2004
/s/ Jeffrey P. Lopez /s/ Robert A. Moyer
------------------------------------------ ------------------------------------------
Jeffrey P. Lopez, Director Robert A. Moyer, Jr., Director
Date: July 19, 2004 Date: July 19, 2004
90
INDEX TO EXHIBITS
Number
10.1 Employment Agreement between Classic Bancshares, Inc. and
David B. Barbour (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
10.2 Employment Agreement between Classic Bancshares, Inc. and
Lisah M. Frazier (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
10.3 Employment Agreement between Classic Bancshares, Inc. and
Robert S. Curtis (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
14 Code of Ethics (incorporated by reference to Annual Report
on Form 10-KSB filed on June 29, 2004).
21 Subsidiaries of the Registrant
23 Consents of Independent Auditors
31.1 Certification of David B. Barbour pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Lisah M. Frazier pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
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.
91