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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 61-1289391
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
344 Seventeenth Street, Ashland, Kentucky 41101
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (606) 326-2800
Check here whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of November 8, 2004, there were 1,408,478 shares of the Registrant's
common stock outstanding.
Transitional Small Disclosure (check one): Yes [ ] No [X]
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CLASSIC BANCSHARES, INC.
INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004
and March 31, 2004 3
Consolidated Statements of Income for the three and six
months ended September 30, 2004 and 2003 4
Consolidated Statements of Comprehensive Income for
the three and six months ended September 30, 2004 and 2003 5
Consolidated Statements of Stockholders' Equity for
the six months ended September 30, 2004 6
Consolidated Statements of Cash Flows for the six
months ended September 30, 2004 and 2003 7-8
Notes to Consolidated Financial Statements 9-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION 19
Signatures 20
Index to Exhibits 21
2
CLASSIC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2004 2004
---------- ----------
(Unaudited)
(In Thouands)
ASSETS
------
Cash and due from banks $ 10,455 $ 9,155
Federal funds sold 57 58
---------- ----------
Cash and cash equivalents 10,512 9,213
Securities available for sale 47,604 50,916
Loans receivable, net 257,943 257,455
Foreclosed assets, net 757 856
Accrued interest receivable 1,491 1,446
Federal Home Loan Bank stock 2,954 2,894
Premises and equipment, net 8,801 8,288
Goodwill 7,681 7,681
Other intangible assets 756 811
Prepaid expenses and other assets 1,367 1,899
---------- ----------
TOTAL ASSETS $ 339,866 $ 341,459
------------ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Non-interest bearing demand deposits $ 30,100 $ 29,165
Savings, NOW, and money market demand deposits 90,342 109,772
Other time deposits 121,828 121,304
---------- ----------
Total deposits 242,270 260,241
Securities sold under agreements to repurchase 11,673 9,168
Advances from Federal Home Loan Bank 46,727 34,218
Other short-term borrowings 9 12
Accrued expenses and other liabilities 2,208 2,287
Accrued interest payable 303 306
---------- ----------
Total Liabilities 303,190 306,232
---------- ----------
Stockholders' Equity
Common stock, $.01 par value, 1,684,443 shares
issued
17 17
Additional paid-in capital 31,169 31,100
Retained earnings 8,043 6,207
Accumulated other comprehensive income (loss) 872 1,350
Unearned ESOP shares (58,741 and 61,061 shares) (534) (555)
Unearned RRP shares (210 and 310 shares) (3) (4)
Treasury stock, at cost (217,014 shares) (2,888) (2,888)
---------- ----------
Total Stockholders' Equity 36,676 35,227
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 339,866 $ 341,459
------------------------------------------ ========== ==========
See accompanying notes.
3
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In Thousands)
INTEREST INCOME
---------------
Loans $ 3,961 $ 3,946 $ 7,906 $ 7,103
Securities 558 463 1,110 942
Dividends on Federal Home Loan Bank stock 31 28 60 49
Other interest 1 18 2 19
---------- ---------- ---------- ----------
Total Interest Income 4,551 4,455 9,078 8,113
---------- ---------- ---------- ----------
INTEREST EXPENSE
----------------
Deposits 931 1,122 1,928 2,070
Federal Home Loan Bank advances 318 313 594 556
Securities sold under repurchase agreements 38 18 63 31
Other short-term borrowings 1 1 -- 3
---------- ---------- ---------- ----------
Total Interest Expense 1,288 1,454 2,585 2,660
---------- ---------- ---------- ----------
Net Interest Income 3,263 3,001 6,493 5,453
Provision for loss on loans 126 46 261 92
---------- ---------- ---------- ----------
Net interest income after
provision for loss on
loans 3,137 2,955 6,232 5,361
---------- ---------- ---------- ----------
NON-INTEREST INCOME
-------------------
Service charges and other fees 541 451 1,058 850
Gain on sale of securities -- 1 17 1
Secondary market commissions 10 49 35 87
Other income 59 78 105 137
---------- ---------- ---------- ----------
Total Non-Interest Income 610 579 1,215 1,075
---------- ---------- ---------- ----------
NON-INTEREST EXPENSES
---------------------
Employee compensation and benefits 1,093 1,016 2,172 1,918
Occupancy and equipment expense 329 312 651 585
Advertising 47 143 91 239
Communications 65 74 136 126
Franchise and deposit taxes 87 63 167 126
Directors fees 25 25 49 49
Professional fees 99 79 189 145
Stationery and supplies 89 111 158 207
Other operating expenses 427 440 830 746
---------- ---------- ---------- ----------
Total Non-Interest Expense 2,261 2,263 4,443 4,141
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,486 1,271 3,004 2,295
--------------------------
Income tax expense 449 366 915 645
---------- ---------- ---------- ----------
NET INCOME $ 1,037 $ 905 $ 2,089 $ 1,650
---------- ========== ========== ========== ==========
Basic earnings per share $ 0.74 $ 0.64 $ 1.48 $ 1.28
Diluted earnings per share $ 0.67 $ 0.59 $ 1.34 $ 1.16
See accompanying notes.
4
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In Thousands)
Net Income $ 1,037 $ 905 $ 2,089 $ 1,650
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax 820 (672) (467) (171)
Reclassification adjustments for realized (gains)
losses included in earnings, net of tax -- 1 (11) 1
---------- ---------- ---------- ----------
Other comprehensive income 820 (671) (478) (170)
---------- ---------- ---------- ----------
Comprehensive Income $ 1,857 $ 234 $ 1,611 $ 1,480
========== ========== ========== ==========
Accumulated Other Comprehensive Income $ 872 $ 581 $ 872 $ 581
========== ========== ========== ==========
See accompanying notes.
5
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
ACCUMULATED
OTHER
COMMON ADDITIONAL COMPREHENSIVE UNEARNED UNEARNED
SHARES COMMON PAID-IN RETAINED INCOME ESOP RRP TREASURY
OUTSTANDING STOCK CAPITAL EARNINGS (LOSS) SHARES SHARES STOCK TOTAL
--------- ------- --------- -------- -------- -------- ------- --------- ---------
Balances at April 1, 2004 1,406,058 $ 17 $ 31,100 $ 6,207 $ 1,350 $ (555) $ (4) $ (2,888) $ 35,227
Net income for the six months
ended September 30, 2004 -- -- -- 2,089 -- -- -- -- 2,089
Dividend paid ($.18 per share) -- -- -- (253) -- -- -- -- (253)
Commitment of shares to be
released under ESOP (2,320) 2,320 -- 69 -- -- 21 -- -- 90
RRP shares earned (100) 100 -- -- -- -- -- 1 -- 1
Change in unrealized gain
(loss) on available for sale
securities, net of applicable
taxes and reclassifications -- -- -- -- (478) -- -- -- (478)
--------- ------- --------- -------- -------- -------- ------- --------- ---------
Balances at September 30, 2004 1,408,478 $ 17 $ 31,169 $ 8,043 $ 872 $ (534) $ (3) $ (2,888) $ 36,676
========= ======= ========= ======== ======== ======== ======= ========= =========
See accompanying notes.
6
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
---------- ----------
OPERATING ACTIVITIES
--------------------
Net Income $ 2,089 $ 1,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 394 346
Provision for loss on loans 261 92
Gain on sale of securities available for sale (17) (1)
Gain on sale of fixed assets (2) (13)
Loss on foreclosed real estate 10 15
Federal Home Loan Bank stock dividends (60) (49)
Net amortization of securities 95 74
ESOP shares earned 90 66
RRP shares earned 1 2
Decrease (increase) in:
Accrued interest receivable (45) (7)
Other assets 472 (77)
Increase (decrease) in:
Accrued interest payable (2) (207)
Accounts payable and accrued expenses 166 (374)
---------- ----------
Net cash provided by operating activities 3,452 1,517
---------- ----------
INVESTING ACTIVITIES
--------------------
Securities:
Proceeds from sale, maturities or calls 1,662 2,237
Purchases (2,087) --
Mortgage-backed securities:
Principal payments 2,932 1,889
Loan originations and principal payments, net (979) (12,888)
Proceeds from the sale of foreclosed assets 203 24
Purchases of software (5) (46)
Purchases of premises and equipment (787) (195)
Proceeds from sale of fixed assets 17 245
Net cash acquired in acquisition -- 3,564
---------- ----------
Net cash provided by investing activities 956 (5,170)
---------- ----------
See accompanying notes.
7
CLASSIC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
---------- ----------
FINANCING ACTIVITIES
--------------------
Net (decrease) increase in deposits $ (17,868) $ 14,065
Net proceeds from FHLB borrowings 12,509 (7,155)
Increase in securities sold under agreements to repurchase 2,506 4,899
Net increase in short-term borrowings (3) 264
Dividends paid (253) (185)
---------- ----------
Net cash (used) provided by financing activities (3,109) 11,888
---------- ----------
Increase in cash and cash equivalents 1,299 8,235
Cash and cash equivalent at beginning of period 9,213 8,148
---------- ----------
Cash and cash equivalents at end of period $ 10,512 $ 16,383
========== ==========
Additional cash flows and supplementary information
Cash paid during the period for:
Interest on deposits and borrowings $ 2,588 $ 2,678
Taxes $ 300 $ 600
Assets acquired in settlement of loans $ 113 $ 425
See accompanying notes.
8
CLASSIC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The accompanying Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the Consolidated Financial Statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of Classic Bancshares, Inc.
as of September 30, 2004, and the results of operations for all interim periods
presented. Operating results for the six months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2005.
Certain financial information and footnote disclosures normally
included in annual financial statements prepared in conformity with generally
accepted accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The unaudited interim
consolidated financial statements presented herein should be read in conjunction
with the annual consolidated financial statements of the Company as of and for
the fiscal year ended March 31, 2004.
STOCK OPTION PLANS
------------------
Employee compensation expense under stock option plans is reported
using the intrinsic value method. No stock-based compensation cost is reflected
in net income, as all options granted had an exercise price equal to or greater
than the market price of the underlying common stock at date of grant. The
following table illustrates the effect on net income and earnings per share if
expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income as reported $ 1,037 $ 905
Deduct:
Stock-based compensation
expense determined under fair
value based method -- 429
---------- ----------
Pro forma net income $ 1,037 $ 476
========== ==========
Basic earnings per share as reported $ 0.74 $ 0.64
Pro forma basic earnings per share 0.74 0.34
Diluted earnings per share as reported 0.67 0.59
Pro forma diluted earnings per share 0.67 0.31
9
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income as reported $ 2,089 $ 1,650
Deduct:
Stock-based compensation
expense determined under fair
value based method -- 430
---------- ----------
Pro forma net income $ 2,089 $ 1,220
========== ==========
Basic earnings per share as reported $ 1.48 $ 1.28
Pro forma basic earnings per share 1.48 .94
Diluted earnings per share as reported 1.34 1.16
Pro forma diluted earnings per share 1.34 .86
Options to purchase 60,000 shares of common stock were granted on
September 18, 2003 at an exercise price of $34.991 per share.
PRINCIPLES OF CONSOLIDATION
---------------------------
The financial statements include the accounts of Classic Bancshares,
Inc. (the "Company") and its wholly owned subsidiary, Classic Bank. All
significant intercompany balances and transactions have been eliminated.
(2) EARNINGS PER SHARE
Earnings per share are presented pursuant to the provisions of SFAS
No. 128, "Earnings Per Share." Basic earnings per share are calculated based on
the weighted average number of common shares outstanding during the respective
periods.
Diluted earnings per share are computed taking into consideration
common shares outstanding and dilutive potential common shares to be issued
under the Company's stock option plans and recognition and retention plan.
For the Three Months Ended For the Three Months Ended
September 30, 2004 September 30, 2003
(In thousands, except per share data) (In thousands, except per share data)
--------------------------------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS $ 1,037 1,408 $ 0.74 $ 905 1,403 $ 0.64
Effect of Dilutive
Securities-Options -- 148 (0.07) -- 135 (0.05)
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $ 1,037 1,556 $ 0.67 $ 905 1,538 $ 0.59
========== ========== ========== ========== ========== ==========
10
For the Six Months Ended For the Six Months Ended
September 30, 2004 September 30, 2003
(In thousands, except per share data) (In thousands, except per share data)
--------------------------------------------------------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS $ 2,089 1,408 $ 1.48 $ 1,650 1,292 $ 1.28
Effect of Dilutive
Securities-Options -- 149 (0.14) -- 132 (0.12)
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $ 2,089 1,557 $ 1.34 $ 1,650 1,424 $ 1.16
========== ========== ========== ========== ========== ==========
Options to purchase 319,935 shares of common stock were outstanding
at September 30, 2004. Options to purchase 319,935 shares of common stock were
outstanding at September 30, 2003 but 66,000 of those shares were not included
in the computation of diluted earnings per share due to their anti-dilutive
effect.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
-------------------
The Company's total assets decreased $1.6 million from $341.5
million at March 31, 2004 to $339.9 million at September 30, 2004. The decrease
was due primarily to a decrease in securities of $3.3 million partially offset
by an increase in cash and cash equivalents of $1.3 million and an increase in
loans of approximately $488,000.
Net loans receivable increased approximately $488,000 from $257.5
million at March 31, 2004 to $257.9 million at September 30, 2004. The Company
experienced little growth in loans during the period due to a slowing of loan
demand within the Company's market area as a result of management's assessment
of a temporary softening of the local economy which could be attributable to
higher energy prices and increases in interest rates.
Securities decreased approximately $3.3 million from $50.9 million
at March 31, 2004 to $47.6 million at September 30, 2004 primarily due to the
maturities, calls and principal repayments of $4.6 million and a decline in the
market value of these available for sale securities offset by purchases of $2.1
million.
Deposits decreased approximately $17.9 million from $260.2 million
at March 31, 2004 to $242.3 million at September 30, 2004. The decrease was due
primarily to the loss of one public fund account, which amounted to $15.2
million at June 30, 2004. Retention of the deposit was based upon pricing and
management felt the cost to retain the deposit was too high. Management chose to
replace the deposit with FHLB borrowings at a lower cost. The remainder of the
decrease was due to the outflow of deposits in the normal course of business as
well as pricing discipline in an environment of soft loan demand and rising
interest rates. Borrowings from FHLB increased $12.5 million and repurchase
agreements increased $2.5 million.
Total stockholders' equity was $36.7 million at September 30, 2004
compared to $35.2 million at March 31, 2004. The increase was due primarily to
net income recorded for the period offset by a decrease in the market value of
available for sale securities and cash dividends paid.
FORWARD-LOOKING STATEMENTS
--------------------------
When used in this Form 10-QSB and in future filings by the Company
with the Securities and Exchange Commission (the "SEC"), in the Company's press
releases or other public or shareholder communications, and in oral statements
made with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions in the Company's market
area including unemployment levels and plant closings, changes in real estate
values in the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition and the failure to achieve anticipated merger cost savings or
difficulty in merger integration, that could cause actual results to differ
materially from historical earnings and those
12
presently anticipated or projected. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake - and specifically declines any
obligation - to publicly release the result of any revisions, which may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
RESULTS OF OPERATIONS - COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX
-----------------------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
----------------------------------------
GENERAL. The Company's results of operations depend primarily upon
the level of net interest income, which is the difference between the interest
income earned on its interest-earning assets such as loans and investments, and
the costs of the Company's interest-bearing liabilities, primarily deposits and
borrowings. Results of operations are also dependent upon the level of the
Company's non-interest income, including fee income and service charges, and
affected by the level of its non-interest expenses, including its general and
administrative expenses. Net interest income depends upon the volume of
interest-earning assets and interest-bearing liabilities and the interest rates
earned or paid on them, respectively.
The Company reported net income of $1.0 million for the three months
ended September 30, 2004 compared to net income of $905,000 for the three months
ended September 30, 2003. The increase in net income of $132,000 between the two
periods was primarily the result of an increase in net interest income of
$262,000, an increase in non-interest income of $31,000 and a decrease in
non-interest expense of $2,000 offset by an increase in provision for loss on
loans of $80,000 and an increase in income taxes of $83,000.
The Company reported net income of $2.1 million for the six months
ended September 30, 2004 compared to net income of $1.7 million for the six
months ended September 30, 2003. The increase in net income of $439,000 between
the two periods was primarily the result of an increase in net interest income
of $1.0 million and an increase in non-interest income of $140,000 offset by an
increase in provision for loss on loans of $169,000, an increase in non-interest
expense of $302,000 and an increase in income taxes of $270,000.
INTEREST INCOME. Total interest income increased $96,000 for the
three months ended September 30, 2004 and $965,000 for the six months ended
September 30, 2004 as compared to the three and six months ended September 30,
2003. The increase in interest income for the three and six-month period was due
to an increase in the average balance of interest-earning assets of $7.2 million
for the three months ended September 30, 2004 and an increase of $42.7 million
for the six-month period offset by a decrease in the yield earned on
interest-earning assets. The increase in the average balance of interest-earning
assets for the three months was due primarily to an increase in the average
balance of loans. The increase in the average balance of interest-earning assets
for the six months was due primarily to an increase in the average balance of
loans and securities primarily as a result of the acquisition of First Federal
Financial Bancorp, Inc. ("First Federal") completed in June 2003. The average
tax equivalent yield on
13
interest-earning assets was 6.0% for the three and six months ended September
30, 2004 compared to 6.1% and 6.3% for the three and six months ended September
30, 2003.
INTEREST EXPENSE. Interest expense decreased $166,000 and $75,000
for the three and six months ended September 30, 2004 as compared to the same
periods in 2003. Interest expense decreased for the three-month period primarily
due to a decrease in the average rate paid on interest-bearing liabilities and a
decrease in the average balance of interest-bearing liabilities. The average
rate paid on interest-bearing liabilities was 1.9% for the three months ended
September 30, 2004 compared to 2.2% for the same period in 2003 due primarily to
a disciplined deposit pricing structure and replacing some higher costing
deposits with lower costing FHLB borrowings. The average balance of
interest-bearing liabilities decreased $1.7 million for the three months ended
September 30, 2004 primarily as a result of a decline in the average balance of
interest-bearing deposits.
Interest expense decreased for the six-month period primarily due to
a decrease in the average rate paid on interest-bearing liabilities offset by an
increase in the average balance of interest-bearing liabilities. The average
rate paid on interest-bearing liabilities was 1.9% for the six months ended
September 30, 2004 compared to 2.3% for the six months ended September 30, 2003
due primarily to a disciplined pricing structure and replacing some higher
costing deposits with lower costing FHLB borrowings. The average balance of
interest-bearing liabilities increased $33.5 million for the six months ended
September 30, 2004 compared to the same period in 2003. The increase in these
balances is primarily the result of an increase in the average balance of
interest-bearing deposits and FHLB borrowings due primarily to the acquisition
of First Federal.
The resulting interest rate spread was 4.1% for the three and six
months ended September 30, 2004 compared to 3.9% and 4.0% for the three and six
months ended September 30, 2003. The resulting net interest margin was 4.4% for
the three and six months ended September 30, 2004 compared to 4.1% and 4.3% for
the three and six months ended September 30, 2003.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
totaled $126,000 and $261,000 for the three and six months ended September 30,
2004 compared to $46,000 and $92,000 for the three and six months ended
September 30, 2003. The provision for the three and six-month period increased
as result of specific consumer credits identified during the periods requiring
additional coverage. Management does not feel that this is necessarily a trend
in the total consumer portfolio but is specific to the credits identified. The
provision recorded for the three and six-month period was based on management's
evaluation of the Company's current portfolio including factors such as the
quality of the portfolio, the increase in loans that are not secured by 1-4
family real estate, the level of non-performing loans, charge-off history and
the economy in the Company's market area. Management continually monitors the
Company's allowance for loan losses and makes adjustments as economic
conditions, portfolio quality and portfolio diversity dictates. Although the
Company maintains its allowance for loan losses at a level which the Board
considers to be adequate to provide for probable incurred losses on existing
loans, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required for
future periods.
NON-INTEREST INCOME. Non-interest income increased approximately
$31,000 and $140,000 for the three and six months ended September 30, 2004
compared to the same period in
14
2003. Non-interest income increased for the three-month period due to an
increase in service charges and other fees on deposits of $90,000, offset by a
decrease in gain on sale of securities of $1,000, a decrease in secondary market
commissions of $39,000 and a decrease in other income $19,000.
The increase for the six-month period is primarily the result of an
increase in service charges and other fees on deposits of $208,000 and an
increase in gain on sale of securities of $16,000, offset by a decrease
secondary market commissions of $52,000, and a decrease in other income of
$32,000. The increase in service charges and other fees on deposits for the
periods is the primarily result of increased deposit accounts.
NON-INTEREST EXPENSE. Non-interest expenses decreased $2,000 for the
three months ended September 30, 2004 compared to the same period in 2003.
Non-interest expenses decreased for the three-month period due to a decrease in
advertising expense of $96,000 reflecting a 2003 advertising campaign utilizing
a national celebrity, a decrease in communications expense of $9,000, a decrease
in stationery and supplies of $22,000, and a decrease in other operating
expenses of $13,000 offset by an increase in employee compensation and benefits
of $77,000, an increase in occupancy and equipment expense of $17,000, an
increase in franchise and deposit taxes of $24,000, and an increase in
professional fees of $20,000.
Non-interest expense increased $302,000 for the six-month period due
to an increase in employee compensation and benefits of $254,000, an increase in
occupancy and equipment expense of $66,000, an increase in communications
expense of $10,000, an increase in franchise and deposit taxes of $41,000, an
increase in professional fees of $44,000, an increase in ATM expense of $13,000,
an increase in postage expense of $13,000, an increase in charitable
contributions of $19,000 and an increase in other operating expense of $39,000
offset by a decrease in advertising expense of $148,000, and a decrease in
stationery and supplies of $49,000.
Employee compensation and benefits increased primarily due to an
increase in the number of employees as a result of the First Federal acquisition
and an increase in ESOP expense attributable to the increase in the Company's
stock price between the periods. Occupancy and equipment expense increased
primarily due the additional locations from the acquisition of First Federal.
Professional fees increased primarily as a result of the Company's efforts to
upgrade its corporate governance and comply with new regulatory requirements.
INCOME TAX EXPENSE. Income tax expense increased $83,000 and $270,00
for the three and six months ended September 30, 2004 primarily due to an
increase in income before income taxes for the period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
---------------------------------------------------
The allowance for loan losses is calculated based upon management's
evaluation and assessment of pertinent factors underlying the types and
qualities of the Company's loans. The assessment includes internal risk grading
of all commercial credits and based upon this evaluation, a specific allocation
allowance may be assigned to individual loans. Consumer and residential mortgage
loans are not specifically graded unless apparent weakness is determined through
payment history at which time a specific allowance allocation may be made.
15
Additionally, a general reserve is assigned to each lending segment in
recognition of probable incurred losses based upon historical loss and peer loss
information, while taking into consideration current delinquency trends, current
economic trends both local and national, strength of supervision and
administration of the loan portfolio, trends of non-performing assets to the
allowance and concentrations within commercial credits. These factors are
weighed quarterly and adjusted as deemed appropriate by management. The Company
has not materially changed any aspect of its overall approach in the
determination of the allowance for loan losses and there have been no material
changes in assumptions or estimations as compared to prior years that have
impacted the basis of the current year allowance.
The Company's allowance for loan losses as of September 30, 2004 was $2.2
million or .9% of total loans. The March 31, 2004 allowance for loan loss was
$2.2 million, or .9% of total loans and 91% of total non-performing loans.
Activity in the allowance for loan losses is summarized as follows:
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
---------- ----------
(IN THOUSANDS)
Balance at beginning of year $ 2,209 $ 1,975
Acquisition of First Federal -- 885
Provision for losses 261 92
Charge-offs 279 343
Recoveries 53 21
---------- ----------
Ending balance $ 2,244 $ 2,630
========== ==========
The ratio of non-performing assets to total assets is an indicator
of exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans, accruing loans delinquent 90 days or more, and foreclosed
assets, which have been acquired as a result of foreclosure or deed-in-lieu of
foreclosure. For all periods presented the Company had no troubled debt
restructurings. The following table sets forth the amount of non-performing
assets at the periods indicated.
SEPTEMBER 30, MARCH 31,
2004 2004
---------- ----------
(IN THOUSANDS)
Non-Accruing Loans $ 1,331 $ 507
Accruing Loans Delinquent 90 Days
or More 1,132 969
Foreclosed Assets 683 856
---------- ----------
Total Non-Performing Assets $ 3,146 $ 2,332
========== ==========
Total Non-Performing Assets as a
Percentage of Total Assets .9% .7%
Total non-performing assets increased $814,000 from March 31, 2004
to September 30, 2004 due partially to a commercial credit that was part of the
First Federal portfolio at the time of acquisition. This problem credit was
identified through pre-acquisition due diligence and reserved for appropriately.
The remainder of the increase was due to 1-4 family mortgages.
OTHER ASSETS OF CONCERN. Other than the non-performing assets set
forth in the table above, as of September 30, 2004, there were no loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties
16
have caused management to have concerns as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's most liquid assets are cash and cash equivalents. The
levels of these assets are dependent on the Company's operating, financing, and
investing activities. At September 30, 2004 and March 31, 2004, cash and cash
equivalents totaled $10.5 million and $9.2 million, respectively. The Company's
primary sources of funds include principal and interest payments on loans (both
scheduled and prepayments), maturities of and interest payments on investment
securities and principal and interest payments from mortgage-backed securities,
deposits and Federal Home Loan Bank of Cincinnati advances and other borrowings.
While scheduled loan and mortgage-backed security repayments and proceeds from
maturing investment securities are relatively predictable, deposit flows and
early repayments are more influenced by interest rates, general economic
conditions and competition. Certificates of deposit as of September 30, 2004
maturing within one year totaled $80.0 million. Management believes based on
experience that most of these funds will remain with the Company.
Liquidity management is both a short- and long-term responsibility
of management. The Company adjusts its investments in liquid assets based upon
management's assessment of expected loan demand, projected purchases of
investment and mortgage-backed securities, expected deposit flows, yields
available on other assets, and the liquidity goals of its asset/liability
management program. Excess liquidity is generally invested in interest-bearing
overnight deposits and other short-term liquid asset funds. If funds are
required beyond the funds generated internally, the subsidiary of the Company
has the ability to borrow funds from the FHLB and other third parties. At
September 30, 2004, the Company had $46.7 million in borrowings outstanding with
the FHLB and additional borrowing capacity of $72.6 million. The Company at
times utilizes repurchase agreements for the generation of additional funds from
our established relationship business customers. At September 30, 2004, the
Company had $11.7 million of repurchase agreements with existing relationship
based business customers.
At September 30, 2004, the Company had outstanding commitments to
fund loans of $33.2 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments principally through
the use of current liquid assets and through its borrowing capacity with the
FHLB.
Classic Bank is subject to the regulatory capital requirements of
the Federal Deposit Insurance Corporation (the "FDIC"). The following table
summarizes, as of September 30, 2004, the capital requirements applicable to
Classic Bank and its actual capital ratios. As of September 30, 2004, Classic
Bank was in compliance with its capital requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANK
-------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $ 18,695 8.0% $ 28,151 12.1%
Tier 1 Capital
(to Adjusted Total Assets) 13,145 4.0 25,907 7.9
17
The Company is subject to the regulatory capital requirements of the
Federal Reserve Board that generally parallels the capital requirements for FDIC
insured banks. The following table summarizes, as of September 30, 2004, the
capital requirements applicable to the Company and its actual capital ratios. As
of September 30, 2004, the Company was in compliance with its capital
requirements.
REGULATORY ACTUAL CAPITAL
CAPITAL REQUIREMENT CLASSIC BANCSHARES, INC.
-------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
(Dollars in Thousands)
Total Capital
(to Risk Weighted Assets) $ 18,703 8.0% $ 29,610 12.7%
Tier 1 Capital
(to Adjusted Total Assets) 13,149 4.0 27,366 8.3
IMPACT OF INFLATION AND CHANGING PRICES
---------------------------------------
The consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
ITEM 3 - CONTROLS AND PROCEDURES
The Company has adopted disclosure controls and procedures designed
to facilitate the Company's financial reporting. The disclosure controls
currently consist of communications among the Chief Executive Officer, the Chief
Operating and Financial Officer and each department head to identify any
transactions, events, trends, risks or contingencies which may be material to
the Company's operations. The Company's disclosure controls also contain certain
elements of its internal controls adopted in connection with applicable
accounting and regulatory guidelines. Finally, the Chief Executive Officer,
Chief Operating and 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 disclosure controls
as of the end of the period covered by this report and found them to be
adequate.
The Company maintains internal control over financial reporting.
There have not been any significant changes in such internal control over
financial reporting in the last quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Shareholders (the "Meeting") of Classic
Bancshares, Inc. was held on August 26, 2004. The matters approved by
shareholders at the Meeting and the number of votes cast for, against
or withheld (as well as the number of abstentions) as to each matter
are as follows:
PROPOSAL NUMBER OF VOTES
-------- ---------------
Broker
For Withheld Non-votes
--- -------- ---------
Election of the following directors for the terms indicated:
C. Cyrus Reynolds (three years) 1,187,985 210 0
David B. Barbour (three years) 1,188,095 100 0
Jeffrey P. Lopez 1,187,136 1,059 0
For Against Abstain
--- ------- -------
The ratification of the appointment of Crowe Chizek and
Company LLC as the Company's auditors for the fiscal year
ending March 31, 2005. 1,187,129 1,010 56
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit 31.1 Certification of David B. Barbour pursuant to Rule
13a-14 under the Securities Exchange Act of 1934.
Exhibit 31.2 Certification of Lisah M. Frazier pursuant to Rule
13a-14 under the Securities Exchange Act of 1934.
Exhibit 32.1 Certification of David B. Barbour pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Lisah M. Frazier pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
19
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLASSIC BANCSHARES, INC.
REGISTRANT
Date: November 12, 2004 /s/ David B. Barbour
----------------------- --------------------------------------
David B. Barbour, President, Chief
Executive Officer and Director (Duly
Authorized Officer)
Date: November 12, 2004 /s/ Lisah M. Frazier
----------------------- --------------------------------------
Lisah M. Frazier, Chief Operating
Officer, Treasurer and Chief Financial
Officer (Principal Financial Officer)
20
INDEX TO EXHIBITS
Exhibit
Number
------
11 Statement regarding computation of Per Share Earnings in the
Notes to the Consolidated Financial Statements in Part I of
this Report . For such computation, see Note 2 "Earnings Per
Share."
31.1 Certification of David B. Barbour pursuant to Rule 13a-14
under the Securities Exchange Act of 1934
31.2 Certification of Lisah M. Frazier pursuant to Rule 13a-14
under the Securities Exchange Act of 1934
32.1 Certification of David B. Barbour Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Lisah M. Frazier Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
21