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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER 0-27170
CLASSIC BANCSHARES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 61-1289391
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 $15.9 million in gross income for the year ended March
31, 2003.
As of June 27, 2003, there were issued and outstanding 1,334,151 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 27, 2003 was
approximately $32.8 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 2003 Annual Meeting of
Stockholders
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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 primary
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 eight
banking offices in Eastern and Northeastern Kentucky. Its current business
strategy involves attracting deposits from the general public and using such
deposits, together with other funds, to originate commercial, consumer 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
Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB, current reports
on Form 8-K, 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, 2003, the Company had total consolidated assets of $249.9
million, deposits of $190.2 million and stockholders' equity of $25.4 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, 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 differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
2
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.
RECENT DEVELOPMENT
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 will be operated as branch offices
of Classic Bank. Shareholders of First Federal were able to elect to receive
either shares of Classic common stock, $24.00 in cash or a combination of stock
and cash subject to the requirement that 50% of First Federal shares were
exchanged for cash and 50% were exchanged for Classic common stock. 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 $71.5 million and total deposits of $56.9 million.
MARKET AREA
Classic Bank serves its market area through its main office in Ashland,
Kentucky and seven branch offices. Classic Bank's primary market area includes
the Kentucky counties of Boyd, Carter, Greenup, and Johnson Counties and
portions of Martin, Floyd, Magoffin and Lawrence Counties also located in
Kentucky. The economic base in Boyd, Carter and Greenup Counties was in the past
primarily industrial and reliant upon a small number of large employers
particularly in the steel and petroleum industries. Over the last several years,
diversification of the employment base into more retail and service businesses
has resulted in a slowing of previously experienced declines in population. Per
capita income in these counties remains below the national average. Boyd County
exceeds the state average of per capita income while Carter and Greenup Counties
remain below the state average. In addition, the unemployment rate for these
counties exceeds the national and state unemployment rate.
The economy in Johnson, Martin, Floyd, Magoffin and Lawrence Counties
has historically been based on manufacturing and coal mining related industries,
but now also includes retail, medical, and government sectors. Per capita income
for these counties is below the national average and the state average. The
unemployment rate exceeds the national and state unemployment rates.
LENDING ACTIVITIES
GENERAL. The Company generally makes loans in northeastern and eastern
Kentucky where its branches are located and, to a lesser degree, in areas
adjacent to our market area in southeastern Ohio and western West Virginia. The
Company's principal lending activities are (i) commercial loans, (ii) direct
consumer loans and, to a lesser extent, (iii) other loans. At March 31, 2003,
loans receivable net, totaled $187.2 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,
------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- ------------------------
Amount Percent Amount Percent Amount Percent
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
Real Estate Loans
One- to four-family ....... $ 74,233 39.2% $ 74,321 45.9% $ 73,576 52.5%
Commercial ................ 24,869 13.2 23,105 14.3 16,877 12.0
Multi-family .............. 1,042 0.6 1,083 0.7 1,342 1.0
Construction .............. 4,623 2.4 4,823 3.0 3,287 2.3
--------- ------ --------- ------ --------- ------
Total real estate loans 104,767 55.4 103,332 63.9 95,082 67.8
--------- ------ --------- ------ --------- ------
Consumer loans ............ 36,272(1) 19.2 24,966(1) 15.4 18,249 13.0
Commercial business loans . 47,962(2) 25.4 33,448 20.7 26,727 19.1
Other loans ............... 9 -- 74 -- 119 0.1
--------- ------ --------- ------ --------- ------
Total other loans ..... 84,243 44.6 58,488 36.1 45,095 32.2
--------- ------ --------- ------ --------- ------
Total loans ........... 189,010 100.0% 161,820 100.0% 140,177 100.0%
--------- ====== --------- ====== --------- ======
Loans in process .......... -- -- --
Deferred fees and discounts 140 124 92
Allowance for loan losses . (1,975) (1,628) (1,407)
--------- ---------- ---------
Total loans receivable, net $ 187,175 $ 160,316 $ 138,862
========= ========== =========
March 31,
----------------------------------------------------
2000 1999
------------------------ -----------------------
Amount Percent Amount Percent
--------- ---------- --------- ---------
Real Estate Loans
One- to four-family ....... $ 71,928 55.7% $ 61,992 63.0%
Commercial ................ 15,216 11.8 10,136 10.3
Multi-family .............. 1,486 1.2 1,179 1.2
Construction .............. 2,670 2.0 2,513 2.6
--------- ---------- --------- ---------
Total real estate loans 91,300 70.7 75,820 77.1
--------- ---------- --------- ---------
Consumer loans ............ 14,076 10.9 7,801 8.0
Commercial business loans . 23,539 18.3 14,747 14.9
Other loans ............... 148 0.1 17 --
--------- ---------- --------- ---------
Total other loans ..... 37,763 29.3 22,565 22.9
--------- ---------- --------- ---------
Total loans ........... 129,063 100.0% 98,385 100.0%
--------- ========== --------- =========
Loans in process .......... (23) (10)
Deferred fees and discounts 26 44
Allowance for loan losses . (861) (1,289)
--------- ---------
Total loans receivable, net $ 97,527 $ 127,808
========= =========
- -------------------
1. Includes $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, and $10.4 million of automobile loans, $2.4 million of home
equity loans, and $3.8 million of recreational vehicle loans at March
31, 2002.
2. Does not include the unfunded portion of commercial lines of credit of
$5.8 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,
-------------------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
Fixed-Rate Loans:
Real Estate:
One-to-four family ........................ $ 36,445 19.3 $ 43,646 26.9% $ 44,020 31.4%
Commercial ................................ 9,434 5.0 11,039 6.8 9,030 6.4
Multi-family .............................. 442 0.2 625 0.4 832 0.6
Total real estate loans .............. 47,903 25.3 56,958 35.0 55,841 39.8
--------- ------ --------- ------ --------- ------
Consumer ................................. 30,438 16.1 20,967 13.0 16,773 12.0
Commercial business ...................... 9,608 5.1 9,916 6.1 9,916 7.1
Other .................................... 9 -- 74 -- 119 0.1
--------- ------ --------- ------ --------- ------
Total fixed-rate loans ................ 87,958 46.5 87,915 54.3 82,649 59.0
--------- ------ --------- ------ --------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ..................... 37,788 20.0 30,675 18.9 29,556 21.0
Commercial .............................. 15,435 8.2 12,066 7.5 7,846 5.6
Multi-family ............................ 600 0.3 458 0.3 511 0.4
Construction ............................ 3,041 1.6 3,175 2.0 1,328 0.9
--------- ------ --------- ------ --------- ------
Total real estate loans .............. 56,864 30.1 46,374 28.7 39,241 27.9
Consumer ................................. 5,834 3.1 3,999 2.5 1,476 1.1
Commercial business ...................... 38,354 20.3 23,532 14.5 16,811 12.0
--------- ------ --------- ------ --------- ------
Total adjustable-rate loans .......... 101,052 53.5 73,905 45.7 57,528 41.0
--------- ------ --------- ------ --------- ------
Total loans .......................... 189,010 100.0% 161,820 100.0% 140,177 100.0%
--------- ====== --------- ====== --------- ======
Loans in process ......................... -- -- --
Deferred fees and discounts .............. 140 124 92
Allowance for loan losses ................ (1,975) (1,628) (1,407)
--------- ---------- ---------
Total loans receivable, net ........... $ 187,175 $ 160,316 $ 138,862
========= ========= ==========
March 31,
----------------------------------------------------
2000 1999
------------------------ -----------------------
Amount Percent Amount Percent
--------- ------ --------- ------
Fixed-Rate Loans:
Real Estate:
One-to-four family .......................... $ 44,377 34.4% $ 33,944 34.5%
Commercial .................................. 8,829 6.8 5,329 5.4
Multi-family ................................ 903 0.7 850 0.9
Total real estate loans ................ 56,059 43.4 41,938 42.7
--------- ------ --------- ------
Consumer ................................... 12,543 9.7 7,053 7.2
Commercial business ........................ 8,861 6.9 8,137 8.2
Other ...................................... 148 0.1 17 --
--------- ------ --------- ------
Total fixed-rate loans .................. 77,611 60.1 57,145 58.1
--------- ------ --------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family ....................... 27,551 21.3 28,048 28.5
Commercial ................................ 6,387 4.9 4,807 4.9
Multi-family .............................. 583 0.5 329 0.3
Construction .............................. 720 0.6 698 0.7
--------- ------ --------- ------
Total real estate loans ................ 35,241 27.3 33,882 34.4
Consumer ................................... 1,533 1.2 748 0.8
Commercial business ........................ 14,678 11.4 6,610 6.7
--------- ------ --------- ------
Total adjustable-rate loans ............ 51,452 39.9 41,240 41.9
--------- ------ --------- ------
Total loans ............................ 129,063 100.0% 98,385 100.0%
--------- ====== --------- ======
Loans in process ........................... (10) (23)
Deferred fees and discounts ................ 44 26
Allowance for loan losses .................. (1,289) (861)
---------
Total loans receivable, net ............. $ 127,808 $ 97,527
========= =========
5
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at March 31, 2003. 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 Commercial
Family Commercial Construction Consumer Business
----------------- ------------------- ----------------- ----------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due
- ------------------------
Within one year(1)...... $ 1,977 6.1% $ 1,204 5.7% $ 3,598 6.0% $ 7,464 5.6% $23,619 4.9%
One to five years....... 5,426 7.1 5,092 5.7 408 7.0 21,607 7.4 12,080 6.2
Over five years......... 66,830 7.0 19,615 6.0 617 5.8 7,201 8.1 12,263 5.7
------- ------- ------- ------- -------
Totals................ $74,233 $25,911 $ 4,623 $36,272 $47,962
======= ======= ======= ======= =======
Other Total
----------------- ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due
- ------------------------
Within one year(1)...... $-- -- $ 37,862 5.2%
One to five years....... 9 6.0 44,622 6.8
Over five years......... -- -- 106,526 6.7
----- --------
Totals................ $ 9 $189,010
===== ========
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 2004 which have
predetermined interest rates is $79.2 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $71.9
million.
6
COMMERCIAL 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 fully or 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
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 $48.0 million at March
31,2003, and represented 65.9% 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. In particular, 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. In addition, they are generally subject to the same risks as our
commercial business loans. However, unlike our commercial loans, the major
source of repayment is earnings on the underlying real estate with a secondary
repayment being the normal cash of the business.
Also, 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 the type and volume of its consumer
loan portfolio to include secured and unsecured 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 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 2003, consumer loans increased by $11.3 million. At March
31,2003, consumer loans totaled $36.3 million, or 19.2% 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 primarily retains only its adjustable rate originations for its own
portfolio. At March 31, 2003 50.9% 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 $74.2 million at March 31, 2003, and represented 39.2%
of total loans at such date.
OTHER LENDING ACTIVITIES. The Company on a selected basis also makes
loans for multi-family housing units and construction loans for both commercial
buildings and residences. These loans combined represent less than 3.0% of total
loans outstanding at March 31, 2003.
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 limited 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.
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.
8
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, 2003.
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....... 4 $360 .5% 6 $487 .7% 10 $ 847 1.2%
Consumer.................. 4 28 .1 9 69 .2 13 97 .3
Commercial Business....... 1 65 .1 3 113 .2 4 178 .3
- --- -- ----- -- --------
9 $453 .2 18 $669 .4 27 $1,122 .6
= ==== == ==== == ======
CLASSIFICATION OF ASSETS. Federal regulations require that each bank
classify its own assets on a regular basis. There are three classifications for
problem assets: 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, 2003,
the Company had the following classified assets:
At
March 31, 2003
--------------
(In Thousands)
Substandard................................................... $2,100
Doubtful...................................................... 239
Loss.......................................................... --
Special Mention............................................... 1,257
------
Total.................................................... $3,596
======
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,
------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .................... $ 199 $282 $ 423 $ 296 $ 97
Multi-family ........................... -- -- 15 -- --
Commercial real estate ................. -- 50 207 134 --
Commercial business .................... 402 80 -- 190 218
Land ................................... -- -- 17 -- --
------ ---- ------ ------ ----
Total ............................... 601 412 662 620 315
Accruing loans delinquent 90 days or more:
One- to four-family .................... 487 157 75 143 86
Commercial real estate ................. -- -- 43 -- --
Consumer ............................... 69 22 6 10 5
Commercial Business .................... 113 65 -- -- --
Foreclosed assets:
One- to four-family .................... -- 46 17 62 32
Commercial real estate ................. -- 32 194 194 194
Consumer ............................... -- 4 17 40 --
------ ---- ------ ------ ----
Total non-performing assets .............. $1,270 $738 $1,014 $1,069 $632
====== ==== ====== ====== ====
Total as a percentage of total assets .... .5% 0.3% 0.5% 0.6% 0.4%
====== ==== ====== ====== ====
For the year ended March 31, 2003, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $42,000. The amount that was included in
interest income on such loans was $16,000 for the year ended March 31, 2003.
OTHER ASSETS OF CONCERN. In addition to the non-performing assets set
forth in the table above, as of March 31, 2003, 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,
------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period ......................... $1,628 $1,407 $1,289 $ 861 $ 831
------ ------ ------ ------ ------
Acquisition of Citizens Bank ........................... -- -- -- 506 --
Charge-offs:
One- to four-family .................................. 60 33 8 139 23
Commercial real estate ............................... -- -- -- 4 --
Commercial business .................................. 17 69 108 155 8
Consumer ............................................. 32 80 74 71 84
Multi-Family .......................................... -- -- -- 2 2
------ ------ ------ ------ ------
Total charge-offs ................................ 109 182 190 371 117
------ ------ ------ ------ ------
Recoveries:
One- to four-family .................................. 1 5 5 8 15
Commercial business .................................. -- -- 2 27 --
Consumer ............................................. 23 35 40 34 32
Multi-Family .......................................... 4 -- -- 1 --
------ ------ ------ ------ ------
Total recoveries ................................. 28 40 47 70 47
------ ------ ------ ------ ------
Net charge-offs ........................................ 81 142 143 301 70
------ ------ ------ ------ ------
Additions charged to operations ........................ 428 363 261 223 100
------ ------ ------ ------ ------
Balance at end of period ............................... $1,975 $1,628 $1,407 $1,289 $ 861
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
loans outstanding during the period .................... 0.1% 0.1% 0.1% 0.2% 0.1%
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to average
non-performing assets .................................. 8.6% 13.9% 12.4% 30.0% 9.3%
====== ====== ====== ====== ======
The allowances for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of probable
accrued losses in the portfolio, the risk inherent in its entire portfolio and
changes in the nature and volume of its loan activity. 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 circumstances differ substantially
from the assumptions used in making the final determination.
12
The distribution of the allowance for loan losses at the dates
indicated is summarized as follows:
March 31,
-------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------ ----------------------------
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 ..... $ 325 $ 74,233 39.2% $ 207 $ 74,321 45.9% $ 197 $ 73,576 52.5%
Multi-family ............ -- 1,042 .6 17 1,083 0 .7 -- 1,342 1.0
Commercial real estate .. 35 24,869 13.2 41 23,105 14.3 172 16,877 12.0
Construction ............ -- 4,623 2.4 -- 4,823 3.0 49 3,287 2.3
Consumer ................ 30 36,272 19.2 29 24,966 15.4 91 18,249 13.0
Commercial business ..... 84 47,962 25.4 34 33,448 20.7 150 26,727 19.1
Commercial agriculture .. -- 9 -- -- 74 -- -- 119 0.1
Unallocated ............. 1,501 -- -- 1,300 -- -- 748 -- --
------ -------- ----- ------ -------- ----- ------ -------- -----
Total .............. $1,975 $189,010 100.0% $1,628 $161,820 100.0% $1,407 $140,177 100.0%
====== ======== ===== ====== ======== ===== ====== ======== =====
March 31,
-------------------------------------------------------------
2000 1999
----------------------------- ------------------------------
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 ..... $ 185 $ 71,928 55.7% $180 $61,992 63.0%
Multi-family ............ -- 1,486 1.2 -- 1,179 1.2
Commercial real estate .. 99 15,216 11.8 34 10,136 10.3
Construction ............ -- 2,670 2.0 -- 2,513 2.6
Consumer ................ 97 14,076 10.9 60 7,801 8.0
Commercial business ..... 431 23,539 18.3 80 14,747 14.9
Commercial agriculture .. -- 148 0.1 -- 17 --
Unallocated ............. 477 -- -- 507 -- --
------ -------- ----- ---- ------- -----
Total .............. $1,289 $129,063 100.0% $861 $98,385 100.0%
====== ======== ===== ==== ======= =====
13
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 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, 2003, all of the Company's investment securities and
mortgage-backed 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, 2003, the Company did not own any investment securities
or mortgage-backed securities of a single issuer which exceeded 10% of the
Company's stockholders' equity, other than U.S. government securities and
federal agency obligations. See Note 4 of the Notes to Consolidated Financial
statements for additional information regarding the Company's investment
securities and mortgage-backed securities portfolio.
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,
------------------------------------------------------------------
2003 2002 2001
-------------------- ------------------- --------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Investment securities:
Federal agency obligations ................... $ 564 1.9% $ 2,488 9.1% $ 3,083 11.8%
Municipal bonds .............................. 19,908 65.9 17,042 62.5 16,356 62.5
Other debt securities ........................ 7,775 25.7 6,273 23.0 5,355 20.4
FHLB stock ..................................... 1,949 6.5 1,480 5.4 1,394 5.3
------- ------- ------- ------- ------- -------
Total securities and FHLB stock .......... $30,196 100.0% $27,283 100.0% $26,188 100.0%
======= ======= ======= ======= ======= =======
Other interest-earning assets:
Interest-bearing deposits with banks ......... $ 382 94.1% $ 448 100.0% $ 113 69.3%
Federal Funds Sold ........................... 24 5.9 -- -- 50 30.7
14
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
March 31, 2003
----------------------------------------------------------------------------------------
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 .. $ -- $ -- $ -- $ 564 $ 564 $ 564
Municipal bonds ............. 709 2,619 3,796 12,784 19,908 19,908
Corporate debt securities ... -- -- -- 7,775 7,775 7,775
---------- ---------- ---------- ---------- ---------- ----------
Total securities ............ $ 709 $ 2,619 $ 3,796 $ 21,123 $ 28,247 $ 28,247
========== ========== ========== ========== ========== ==========
Weighted average yield(1) ... 6.5% 7.2% 7.1% 7.3% 7.2% 7.2%
(1) Yields have been computed on a tax-equivalent basis.
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at March 31, 2003.
Over 1 to 5 Over 5 to Over 10 to Over 20 Balance
Years 10 Years 20 Years Years Outstanding
-------- -------- -------- -------- --------
(In Thousands)
FHLMC ............ $ 325 $--- $ -- $ -- $ 325
FNMA ............. -- -- 7,979 482 8,461
Other ............ 87 -- -- 485 572
CMOs and REMICs .. 239 -- -- -- 239
-------- -------- -------- -------- --------
Total ....... $ 651 $--- $ 7,979 $ 967 $ 9,597
======== ======== ======== ======== ========
The following table sets forth the composition of the mortgage-backed
securities at the dates indicated.
March 31,
------------------------------------------------------------------------
2003 2002 2001
----------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Mortgage-backed securities available for sale:
FHLMC ........................................ $ 305 $ 325 $ 7,602 $ 7,502 $ 1,075 $ 1,091
FNMA ......................................... 8,445 8,461 1,062 1,083 1,841 1,787
Other ........................................ 548 572 108 107 133 131
CMOs/REMICs .................................. 239 239 378 371 440 435
------- ------- ------- ------- ------- -------
Total mortgage-backed securities ...... $ 9,537(1) $ 9,597 $ 9,150 $ 9,063 $ 3,489 $ 3,444
======= ======= ======= ======= ======= =======
(1) Includes $479,000 of mortgage-backed securities with adjustable interest
rates.
15
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, 2003, the amount of public
funds on deposit with the Company was $13.4 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. For additional
information regarding the Company's deposit accounts, see Note 7 of the Notes to
the Consolidated Financial Statements.
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,
----------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ----------------------
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 .. $ 23,158 12.2% $ 20,404 12.8% $ 17,186 11.8%
Interest bearing demand deposits ...... 31,982 16.8 25,075 15.9 23,344 16.1
Savings Accounts ...................... 14,803 7.8 13,893 8.7 11,924 8.2
Money Market Accounts ................. 18,977 1.0 18,466 11.6 13,538 9.3
-------- -------- -------- -------- -------- --------
Total Non-Certificates ........... 88,920 46.8 77,838 49.0 65,992 45.4
-------- -------- -------- -------- -------- --------
Certificates:
0.00 - 4 00% .......................... 89,878 47.1 54,196 34.1 1,193 0.8
4.01 - 6 00% .......................... 10,483 5.6 22,411 14.1 34,938 24.0
6.01 - 8 00% .......................... 874 .5 4,429 2.8 43,307 29.8
-------- -------- -------- -------- -------- --------
Total Certificates .................... 101,235 53.2 81,036 51.0 79,438 54.6
-------- -------- -------- -------- -------- --------
Total Deposits ................... $190,155 100.0% $158,874 100.0% $145,430 100.0%
======== ======== ======== ======== ======== ========
16
The following table shows rate and maturity information for the
Company's certificates of deposit as of March 31, 2003.
0.00- 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, 2003........................ $18,948 $1,218 $ 60 $ 20,226 20.0%
September 30, 2003................... 18,459 484 81 19,024 18.8
December 31, 2003.................... 12,556 280 25 12,861 12.7
March 31, 2004....................... 14,819 705 100 15,624 15.4
June 30, 2004........................ 5,313 775 --- 6,088 6.0
September 30, 2004................... 5,957 526 --- 6,483 6.4
December 31, 2004.................... 831 431 --- 1,262 1.2
March 31, 2005....................... 4,565 226 289 5,080 5.0
June 30, 2005........................ 838 411 96 1,345 1.3
September 30, 2005................... 1,082 259 40 1,381 1.4
December 31, 2005.................... 514 50 153 717 0.7
March 31, 2006....................... 2,914 --- 30 2,944 3.0
Thereafter........................... 3,082 5,118 --- 8,200 8.2%
------- ------- ---- -------- ------
Total............................. $89,878 $10,483 $874 $101,235 100.0%
======= ======= ==== ======== ======
Percent of total.................. 88.7% 10.4 % .9 % 100.0 %
The following table indicates the amount of the certificates of deposit
and other deposits by time remaining until maturity as of March 31, 2003.
Maturity
-----------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- -------- -------- --------
(In Thousands)
Certificates of deposit less than $100,000 ... $ 14,061 $ 12,010 $ 20,323 $ 23,504 $ 69,898
Certificates of deposit of $100,000 or more .. 6,165 7,014 8,162 9,996 31,337
-------- -------- -------- -------- --------
Total certificates of deposit ................ $ 20,226 $ 19,024 $ 28,485 $ 33,500 $101,235
======== ======== ======== ======== ========
For additional information regarding the composition of the Company's
deposits, see Note 7 of the Notes to the Consolidated Financial Statements.
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.
17
FHLB borrowings are also 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, 2003, the
Company had $28.1 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,
----------------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
Maximum Balance:
Repurchase agreements.............. $ 6,020 $ 5,873 $ 3,690
Federal funds purchased............ --- --- 18
Treasury tax and loan note......... 501 467 927
Notes payable...................... --- --- 257
FHLB advances...................... 36,570 27,401 21,894
Average Balance:
Repurchase agreements.............. 5,206 4,553 3,028
Federal funds purchased............ --- --- 2
Treasury tax and loan note......... 322 317 451
Notes payable...................... --- --- 60
FHLB advances...................... 29,781 19,753 19,124
Weighted average interest rate....... 3.0% 3.4% 6.2%
The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
March 31,
----------------------------------------
2003 2002 2001
------- ------- -------
(Dollars in Thousands)
Repurchase agreements................ $ 4,382 $ 5,396 $ 3,180
Other Borrowings
Treasury tax and loan note......... 6 446 234
FHLB advances...................... 28,126 $27,401 $16,636
------- ------- -------
Total Borrowings..................... $32,514 $33,243 $20,050
======= ======= =======
Weighted average interest rate of
repurchase agreements................ 1.1% 1.7% 4.2%
Weighted average interest rate of
other borrowings..................... 3.4% 3.5% 5.5%
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 2003, 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 makes loans to borrowers located in the Company's primary
market area. At March 31, 2003, there were sixteen commercial banks and savings
institutions and five credit unions located in Boyd, Johnson, Carter and Greenup
Counties, Kentucky. The Company competes for loans principally on the basis of
the interest rates and loan 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 an investment opportunity that
satisfies the requirements of investors as to the rate of return, liquidity,
risk, convenient locations, investment products, convenient business hours and a
customer oriented staff. At June 30, 2002, the Company's share of deposits in
the above market area was approximately 8.8%. This is based on the most recent
information available from the Federal Deposit Insurance Corporation.
EMPLOYEES
At March 31, 2003, the Company and its subsidiary had a total of 85
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 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, 2003, Classic Bank's lending limit was
$2.7 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;
o "real time" filing of periodic reports; expedited filing requirements
for Form 4s;
21
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.
At March 31, 2003, Classic Bank had Tier 1 capital equal to $17.8
million, or 7.6% of adjusted total assets, which is $8.4 million above the
minimum leverage ratio requirement of 4% as in effect on that date.
22
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, 2003, Classic Bank had Tier 1 capital of
$17.8 million or 9.7% of risk weighted assets, which was $10.4 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, 2003, Classic Bank had no capital
instruments that qualify as supplementary capital and $2.0 million of general
loss reserves, which was less than 1.25% of risk-weighted assets. At March 31,
2003, 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, 2003, Classic Bank had total capital of $19.8 million
(including $17.8 million in core capital and $2.0 million in qualifying
supplementary capital) and risk-weighted assets of $183.2 million or total
capital of 10.8% of risk-weighted assets. This amount was $5.1 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.
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
23
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.
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.
Classic Bank was examined for CRA compliance in July 1999 and received
a satisfactory rating.
TRANSACTIONS WITH AFFILIATES
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.
Affiliates of Classic Bank include the Company and any other company which is
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.
24
HOLDING COMPANY REGULATION
GENERAL. The Company is a holding company that elected to be treated as
a financial holding company by 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 subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound 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 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
25
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, 2003, the
Company had Tier 1 capital of $19.1 million or 8.1% of average total assets,
which was $9.6 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
10.4%, which was $11.8 million above the 4% requirement, total capital of $21.1
million (including $19.1 million in core capital and $2.0 million in qualifying
supplemental capital) and risk-weighted assets of $183.8 million or total
capital of 11.5% of risk weighted assets. This amount was $6.4 million above the
8.0% requirement in effect on that date.
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.
25
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, 2003, 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, 2003, Classic Bank had $1.9 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 6.2% and were
4.4% for fiscal 2003.
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 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.
26
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 predecessors 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.
DELAWARE TAXATION. As a Delaware holding company, 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 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.
27
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, 2003.
Total
Owned Approximate
Year or Square Book Value at
Location Acquired Leased Footage March 31, 2003
-------- -------- ------ -------- --------------
(Dollars in Thousands)
MAIN OFFICE:
1737 Carter Avenue 1994 Owned 1,200 $ 76
Ashland, Kentucky
344 Seventeenth Street 1963 Owned 6,000 495
Ashland, Kentucky
340 Seventeenth Street N/A Leased 9,400 N/A
Ashland, Kentucky
BRANCH OFFICES:
1500 Diederich Blvd. 1998 Owned 2,000 492
Russell, Kentucky
10700 U.S. 60 1998 Owned 2,000 504
Ashland, Kentucky
575 N. Carol Malone Blvd. 1999 Owned 7,000 478
Grayson, Kentucky
240 Main Street 1959 Owned 11,000 78
Paintsville, Kentucky
603 South Mayo Trail 1971 Owned 2,200 28
Paintsville, Kentucky
440 North Mayo Trail 2001 Owned 2,000 507
Paintsville, Kentucky
1414 Ashland Road 2002 Owned 2,000 553
Greenup, KY
The Company's depositor and borrower customer files are maintained
in-house using our current data processing and computer equipment. The net book
value of the data processing and computer equipment utilized by the Company at
March 31, 2003 was approximately $511,000.
29
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, 2003.
30
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 27, 2003, there
were 1,334,151 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 2002 and fiscal 2003 were as follows:
FISCAL 2002 HIGH LOW DIVIDENDS
- ----------------------------------------------------- --------------------------------------------------------
First Quarter........................................ $15.500 $12.510 $.08
Second Quarter....................................... $15.420 $ 11.750 $.08
Third Quarter........................................ $17.240 $12.990 $.08
Fourth Quarter....................................... $17.601 $15.100 $.08
FISCAL 2003 HIGH LOW DIVIDENDS
- ----------------------------------------------------- --------------------------------------------------------
First Quarter........................................ $21.700 $18.250 $.08
Second Quarter....................................... $27.800 $21.250 $.08
Third Quarter........................................ $25.500 $22.060 $.08
Fourth Quarter....................................... $29.660 $26.350 $.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, 2003 was $27.60.
The Company declared and paid cash dividends totaling $.32 per share
during fiscal 2003. 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 17 of the Notes to the Consolidated Financial Statements for
information regarding limitations of the subsidiary's ability to pay dividends
to the Company.
31
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
March 31,
--------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Ratios:
Return on assets (ratio of net income to average
total assets)....................................... 1.3% 1.1% .6% .6% .6%
Return on equity (ratio of net income to average
equity)............................................ 12.2 10.3 5.3 5.5 4.3
Dividend payout ratio (dividends paid divided by
net income per basic share)....................... 11.6 15.4 33.0 34.0 41.3
Equity to assets ratio (average equity divided by
average total assets).............................. 10.3 10.6 10.8 11.4 14.6
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.
Originally a federally chartered stock savings bank, Classic Bank
converted on June 30, 2000 to a Kentucky chartered commercial bank. Classic Bank
is headquartered in Ashland, Kentucky and currently serves the financial needs
of communities in its market area through its office located at 344 Seventeenth
Street, Ashland, Kentucky 41101 and seven branch offices located in Boyd,
Carter, Greenup and Johnson Counties. The deposits of Classic Bank are insured
up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The Company's business involves attracting deposits from the general public and
using such deposits, together with other funds, to originate primarily
commercial business, consumer, commercial real estate, one- to four-family
residential mortgages, and to a lesser extent multi-family and construction
loans primarily in the market area of Classic Bank. The Company also invests in
mortgage-backed securities, taxable and tax-exempt investment securities and
other permissible investments.
Classic Bank's primary market area includes the Kentucky counties of Boyd,
Carter, Greenup and Johnson Counties and portions of Martin, Floyd, Magoffin and
Lawrence Counties also located in Kentucky. The economic base in Boyd, Carter
and Greenup counties has primarily been industrial in nature and previously
relied upon a small number of large employers particularly in the steel and
petroleum industries. Over the last several years, diversification of the
employment base to a more retail and service based economy has resulted in a
slowing of previously experienced declines in population. Per capita income in
these counties
32
remains below the national average. Boyd County exceeds the state average of per
capita income while Carter and Greenup Counties remain below the state average.
The unemployment rate for these counties continues to exceed the national and
state unemployment rates.
The economy in Johnson, Martin, Floyd, Magoffin and Lawrence Counties has
historically been based on the manufacturing and coal mining related industries,
but now also includes retail, medical, and government sectors and, to a lesser
extent, manufacturing. Per capita income for these counties is below the
national average and the state average. The unemployment rate exceeds the
national and state 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.
RECENT DEVELOPMENT
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 will be operated as branch offices
of Classic Bank. Shareholders of First Federal were able to elect to receive
either shares of Classic common stock, $24.00 in cash or a combination of stock
and cash subject to the requirement that 50% of First Federal shares were
exchanged for cash and 50% were exchanged for Classic common stock. 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 $71.5 million and total deposits of $56.9 million.
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, 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
33
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.
BUSINESS STRATEGY
The Board's primary vision is the enhancement of shareholder value and
earnings growth. The Company has strategically positioned itself to become a
high performing, independent, community-focused financial services organization.
This strategic direction will continue as long as the Board believes, following
its regular strategic reviews, that it is in the best interest of shareholders.
The Company will continue to maintain 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 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 pricing
assets to maximize net interest income rather than for market share growth.
Furthermore, management may utilize borrowings to fund asset growth, rather than
deposits, when the cost of borrowings is more attractive than the cost of
deposits.
Management has implemented incentive based compensation that rewards
employees for attaining production and customer service levels and believes this
strategy facilitates profitable growth while containing salary expense levels.
Under the program, loan officers are rewarded for loan volume above an
established production level. The program also includes incentives for other
loan related products and penalizes for delinquencies and declines in loan
quality. Other front-line staff, such as customer service representatives and
tellers, are rewarded for sales efforts, accuracy and superior customer service.
The operations staff is incentivized for efficient back room operations and the
delivery of accurate and timely services to the Company's customer base.
The Company seeks to use technology to improve customer service.
Technology improvements have been implemented to the Company's internet banking
service to permit real time balance inquiry and the viewing of check and deposit
images online. An online cash management product has also been introduced. In
addition, the Company has implemented free internet bill pay up to 25 bill pays
per month. While a small increase in expenses may result in the short term,
these technology advancements may offer a competitive advantage to the Company.
While acquisitions of other institutions or branch offices remain a
consideration and opportunity for growth, management continues to seek
opportunities for internal growth within its existing franchise area. As part of
this effort, we opened a banking office in the city of Greenup, Kentucky in
December of 2002 that represents the eighth banking office for the Company and
the second banking office in Greenup County. With the acquisition of First
Federal Financial Bancorp, Inc., the Company has added two banking offices in
Lawrence County, Ohio representing the Company's first entry into Ohio. The
Company's plans include continued growth in the Southeastern Oho market, whether
through branching, further acquisitions or both.
34
During 2002, the Company undertook an aggressive advertising campaign
focusing on image and name recognition utilizing the endorsement of national
celebrity and Ashland, Kentucky native, Naomi Judd. The goal of the campaign is
to stress the importance of hometown values, convenience, and banking with
people that you know and trust. The campaign resulted in increased account
openings in the markets we serve. Management plans to continue to utilize the
endorsement of Naomi Judd in the upcoming year and through the advertising
campaign introduce specific products and services of Classic Bank while still
emphasizing our core values.
FINANCIAL CONDITION
MARCH 31, 2003 COMPARED TO MARCH 31, 2002. Total assets increased
approximately $34.5 million, or 16.0%, from $215.4 million at March 31, 2002 to
$249.9 million at March 31, 2003. The increase was due primarily to an increase
in loans of $26.9 million, an increase in cash and cash equivalents of
approximately $2.7 million, an increase in investment securities of $2.4
million, an increase in premises and equipment of $900,000, an increase in other
assets of $560,000, an increase in mortgage-backed securities of approximately
$532,000, and an increase in FHLB stock of $469,000.
Loans increased $26.9 million, or 16.8%, from $160.3 million at March 31,
2002 to $187.2 million at March 31, 2003. During the fiscal year, we continued
to focus our efforts on originating commercial business, consumer and commercial
real estate loans as prescribed by the Company's strategic plan. These efforts
are evidenced by an increase in commercial business loans of $14.5 million, an
increase in consumer loans of $11.3 million and an increase in commercial real
estate loans of $1.8 million. As evidenced by a decrease of $88,000 in the
one-to-four family portfolio, less emphasis is being placed upon the origination
of this type of loan. Loan increases during the year reflect in part the success
of our incentive compensation for the lending staff which was implemented in
2002.
The allowance for loan losses increased approximately $347,000 from $1.6
million at March 31, 2002 to $2.0 million at March 31, 2003 as a result of a
provision for fiscal 2003 of $428,000, offset by net charge- offs of $81,000.
Investment securities increased approximately $2.4 million, or 26.4%, from
$25.8 million at March 31, 2002 to $28.2 million at March 31, 2003. The increase
was due primarily to purchases of $4.4 million and an increase in the market
value of these available for sale securities of approximately $1.4 million
offset by sales, maturities and calls of $3.4 million. Mortgage-backed
securities increased approximately $532,000 primarily due to purchases of $7.8
million and an increase in the market value of these available for sale
securities of approximately $132,000 offset by sales and principal repayments of
$7.4 million.
Premises and equipment increased approximately $900,000 due primarily to
the construction of a new branch office in Greenup, Kentucky during the fiscal
year and the technological upgrade of some of the Company's data processing and
other equipment.
Deposits increased $31.3 million from $158.9 million at March 31, 2002 to
$190.2 million at March 31, 2003. The increase in deposits reflected an increase
in noninterest-bearing demand deposits of $2.8 million, an increase in savings,
NOW and money market accounts of $8.4 million and an increase in certificates of
deposits of $20.1 million. Federal Home Loan Bank Borrowings increased $700,000
from $27.4 million at March 31, 2002 to $28.1 million at March 31, 2003. The
increase in deposits and borrowings was used to fund the increase in loans.
Borrowings were utilized during the fiscal year to fund loan growth when the
cost of borrowing was more attractive than the cost of deposits.
35
Stockholder's equity increased $3.4 million to $25.4 million at March 31,
2003 as compared to $22.0 million at March 31, 2002 as a result of net income
for the period of approximately $2.9 million, and the release of ESOP shares and
RRP shares earned during the fiscal year of approximately $52,000 and an
increase in the market value of available for sale securities, net of tax of
$1.1 million, offset by stock repurchases of approximately $334,000 and
dividends paid of approximately $336,000. 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.
MARCH 31, 2002 COMPARED TO MARCH 31, 2001. Total assets increased
approximately $27.5 million, or 14.6%, from $187.9 million at March 31, 2001 to
$215.4 million at March 31, 2002. The increase was due primarily to an increase
in loans of $21.4 million, an increase in investment securities of $1.0 million,
an increase in mortgage-backed securities of approximately $5.6 million offset
primarily by a decrease in cash and cash equivalents of approximately $200,000,a
decrease in other real estate owned of $100,000 and a decrease in premises and
equipment of approximately $200,000.
Loans increased $21.4 million, or 15.4%, from $138.9 million at March 31,
2001 to $160.3 million at March 31, 2002. In compliance with the Company's
strategic plan, the increase in loans was primarily in the consumer, commercial
business and commercial real estate portfolios with less emphasis on residential
mortgage loans. The growth in loans reflected an increase in consumer loans of
$6.7 million, an increase in commercial business loans of $6.7 million, an
increase in commercial real estate loans of 6.2 million, an increase in
construction loans of $1.5 million, and an increase in one-to-four family
mortgage loans of $600,000 offset by a decrease in multi-family loans $300,000.
The implementation of an incentive-based compensation program fueled the loan
growth for the fiscal year.
Investment securities increased $1.0 million, or 4.0%, from $24.8 million
at March 31, 2001 to $25.8 million at March 31, 2002. The increase was due
primarily to purchases of $2.5 million offset by sales, maturities and calls of
$1.3 million and a decline in the market value of these available for sale
securities of approximately $200,000. Mortgage-backed securities increased
approximately $5.6 million primarily due to purchases of $7.0 million offset by
principal repayments of approximately $1.3 million and a decline in the market
value of these available for sale securities.
Deposits increased $13.5 million from $145.4 million at March 31, 2001 to
$158.9 million at March 31, 2002. The increase in deposits reflected an increase
in noninterest-bearing demand deposits of $3.3 million, an increase in savings,
NOW and money market accounts of $8.6 million and an increase in certificates of
deposits of $1.6 million. Federal Home Loan Bank Borrowings increased $10.8
million from $16.6 million at March 31, 2001 to $27.4 million at March 31, 2002.
The increase in deposits and borrowings was used to fund the increase in loans.
Borrowings were utilized during the fiscal year to fund loan growth when the
cost of borrowing was more attractive than the cost of deposits.
The allowance for loan losses increased approximately $200,000 from $1.4
million at March 31, 2001 to $1.6 million at March 31, 2002 as a result of a
provision for fiscal 2002 of $363,000, offset by net charge- offs of $142,000.
Stockholder's equity increased $1.5 million to $22.0 million at March 31,
2002 as compared to $20.5 million at March 31, 2001 as a result of net income
for the period of approximately $2.2 million, and the release of ESOP shares and
RRP shares earned during the fiscal year of approximately $100,000 offset by a
decrease in the market value of available for sale securities of $200,000, stock
repurchases of approximately $300,000 and dividends paid of approximately
$300,000. Management tends to repurchase shares of its
36
outstanding common stock in the open market at prevailing market prices from
time to time depending on market conditions. The reacquired shares will be held
as treasury shares and will be used for general corporate purposes, including
the issuance of shares in connection with the exercise of stock options.
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, 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 $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
37
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 2002 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 $7,000 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.
INCOME TAX EXPENSE. Income tax expense increased $330,000 due to a higher
income before income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2002 AND MARCH 31,
2001
NET INCOME. Net income increased by approximately $1.2 million from $1.0
million for the fiscal year ended March 31, 2001 to $2.2 million for the fiscal
year ended March 31, 2002. The increase was due to an increase in net interest
income of $1.3 million, an increase in noninterest income of $369,000 and a
decrease in noninterest expenses of $68,000 offset by an increase in the
provision for loan losses of $102,000, and an increase in income tax expense of
$445,000.
38
NET INTEREST INCOME. Net interest income increased $1.3 million from $6.3
million for the fiscal year ended March 31, 2001 to 7.6 million for the fiscal
year ended March 31, 2002 due to an increase in interest income of $11,000 and a
decrease in interest expense of $1.3 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 $16.6 million from $166.1
million for fiscal 2001 to $182.7 million for fiscal 2002. Interest-earning
assets increased primarily due to an increase in the average balance of loans of
$14.5 million,and an increase in investment and mortgage-backed securities of
$2.1 million. The average tax equivalent yield on interest-earning assets was
8.5% at March 31, 2001 compared to 7.7% at March 31, 2002. The decrease in the
yield was due primarily to a decline in market interest rates during the fiscal
year. Despite the significant decline in interest rates during the fiscal year,
the Company was able to sustain interest income levels as a result of the growth
in loans.
Interest expense decreased approximately $1.3 million from $7.4 million
for fiscal 2001 to $6.1 million for fiscal 2002 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 5.1% for the fiscal
year ending March 31, 2001 to 3.9% for the fiscal year ending March 31, 2002.
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 $13.3 million from $145.0 million for
fiscal 2001 to 158.3 million for fiscal 2002. 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
$102,000 from $261,000 for fiscal 2001 to $363,000 for fiscal 2002 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
consumer and commercial 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 and projected 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, 2002, the allowance for loan losses totaled $1.6 million, or 1.0%
of net loans and 248.0% of non-performing loans. Non-performing loans decreased
$130,000 from $786,000 at March 31, 2001 to $656,000 at March 31, 2002.
NONINTEREST INCOME. Noninterest income increased approximately $369,000
from $1.1 million for fiscal 2001 to $1.5 million for fiscal 2002 due to an
increase in service charges and other fees on deposits of $275,000, an increase
in other income of $119,000 offset by a decrease in gain on sale of securities
of $25,000. The increase in service charges and other fees on deposits was the
result of an increased deposit base and a continual adherence to charging fees
in accordance with the established fee schedule. 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 was
fueled by the 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 decreased approximately $68,000
from approximately $5.8 million for the year ended March 31, 2001 to
approximately $5.7 million for the year ended March 31, 2002. The decrease in
non-interest expenses was due to a decrease in federal deposit insurance
premiums of $13,000, a decrease in franchise and deposit taxes of $57,000, a
decrease in directors fees of $18,000, a decrease in the
39
amortization of goodwill of $254,000, and a decrease in other operating expenses
of $98,000 offset by an increase in employee compensation and benefits of
$131,000, an increase in occupancy and equipment expense of $77,000, an increase
in advertising expense of $78,000, an increase in communications expense of
$72,000 and an increase in stationary and supplies of $14,000.
The decrease in franchise and deposit taxes, directors fees and other
operating expenses was due primarily to the consolidation of the Company's two
subsidiaries in March 2001. The decrease in the amortization of goodwill was due
to the implementation of the Financial Accounting Standards Board Statement No.
142, Goodwill and Other Intangibles. Because the company has a fiscal year end
in March, the statement was applied effective April 1, 2001 and resulted in the
discontinuance of the amortization of goodwill.
Compensation and benefit expenses increased $131,000 due to the
implementation of an incentive compensation program, the payments of bonuses for
the fiscal year 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 $77,000. The
increase was due primarily to the opening of an additional banking office in the
Paintsville Market in March 2001. Advertising expense increased approximately
$78,000 due to the launching of an aggressive advertising campaign that utilized
the endorsement of a national celebrity. Communications expense increased
$72,000 as a result of the installation of a state-of-the-art telephone and
communication system that allows voice and data to be carried simultaneously
over frame relay enabling a central operator to answer calls originating from
any of the Company's market areas.
INCOME TAX EXPENSE. Income tax expense increased $445,000 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 $319,000, $261,000, and $193,000 for the years
ended March 31, 2003, 2002 and 2001, respectively.
Year Ended March 31,
-----------------------------------------------------------------------
2003 2002
---------------------------------- ------------------------------------
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) ................................... $175,821 $12,254 7.0% $149,979 $11,899 7.9%
Mortgage-backed securities ............................ 7,996 413 5.2 5,124 281 5.5
Investment securities ................................. 26,384 1,861 7.0 25,511 1,815 7.1
Interest-earning deposits ............................. 328 4 1.2 185 6 3.2
Federal funds sold .................................... 432 5 1.2 464 10 2.2
FHLB stock and FRB stock .............................. 1,884 83 4.4 1,438 87 6.1
-------- ------- ---- -------- ------- ----
Total interest-earning assets(1) .................... $212,845 14,620 6.9 $182,701 14,098 7.7
======== ------- ==== ======== ------- ====
Interest-Bearing Liabilities:
Savings accounts and interest-bearing demand .......... $ 42,045 627 1.5 $ 36,380 654 1.8
Money market deposits ................................. 18,935 333 1.8 15,274 417 2.7
Certificate accounts .................................. 89,848 2,967 3.3 82,062 4,194 5.1
FHLB advances ......................................... 29,781 985 3.3 19,753 718 3.6
Other short-term borrowings ........................... 5,528 58 1.0 4,869 117 2.4
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities ................... $186,137 4,970 2.7 $158,338 6,100 3.9
======== ------- ==== ======== ------- ====
Net interest income .................................... $ 9,650 $ 7,998
======== =======
Net interest rate spread ............................... 4.2% 3.8%
--- ---
Net earning assets ..................................... $ 26,708 $ 24,363
======== ========
Net yield on average interest-earning assets ........... 4.5% 4.4%
=== ===
Average interest-earning assets to average interest-
bearing liabilities ................................ 1.14x 1.15x
==== ====
Year Ended March 31,
----------------------------------------
2001
----------------------------------------
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
-------- ------- ----
Interest-Earning Assets:
Loans receivable(1) ................................... $135,627 $11,904 8.8%
Mortgage-backed securities ............................ 3,258 216 6.6
Investment securities ................................. 25,300 1,800 7.1
Interest-earning deposits ............................. 125 6 4.8
Federal funds sold .................................... 311 14 4.5
FHLB stock and FRB stock .............................. 1,512 109 7.2
-------- ------- ----
Total interest-earning assets(1) .................... $166,133 14,049 8.5
-------- ======= ----
Interest-Bearing Liabilities:
Savings accounts and interest-bearing demand .......... $ 34,431 1,233 3.6
Money market deposits ................................. 10,892 366 3.4
Certificate accounts .................................. 77,054 4,343 5.6
FHLB advances ......................................... 19,124 1,193 6.2
Other short-term borrowings ........................... 3,540 214 6.0
-------- ------- ----
Total interest-bearing liabilities ................... $145,041 7,349 5.1
-------- ======= ----
Net interest income .................................... $ 6,700
========
Net interest rate spread ............................... 3.4%
====
Net earning assets ..................................... $ 21,092
========
Net yield on average interest-earning assets ........... 4.0%
====
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,
--------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
-------------------------------- -------------------------------
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 ......................... $1,839 $(1,484) $ 355 $1,239 $(1,244) $ (5)
Mortgage-backed securities ............... 148 (16) 132 106 (41) 65
Investment securities .................... 69 (23) 46 15 -- 15
Other .................................... 26 (37) (11) 8 (34) (26)
------ ------- ------- ------ ------- -------
Total interest-earning assets ........ $2,082 $(1,560) $ 522 $1,368 $(1,319) $ 49
====== ======= ------- ====== ======= =======
Interest-bearing liabilities:
Savings accounts and interest bearing
demand ................................. $ 92 $ (119) $ (27) $ 67 $ (646) $ (579)
Money market accounts .................... 80 (164) (84) 134 (83) 51
Certificate accounts ..................... 366 (1,593) (1,227) 261 (410) (149)
FHLB advances ............................ 332 (65) 267 38 (513) (475)
Other short-term borrowings .............. 15 (74) (59) 60 (157) (97)
------ ------- ------- ------ ------- -------
Total interest-bearing liabilities .... $ 885 $(2,015) $(1,130) $ 560 $(1,809) $(1,249)
====== ======= ======= ====== ======= =======
Net interest income ......................... $ 1,652 $ 1,298
======= =======
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, 2003, 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 $15,486 $(8,429) (35)%
+200 18,552 (5,363) (22)
+100 21,607 (2,308) (8)
0 23,915
-100 25,701 1,786 7
-200 27,172 3,257 14
-300 28,383 4,468 19
Certain assumptions were employed by the Company in preparing the previous
table. These assumptions relate to interest rates, 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, 2003, 2002, and 2001, the Company had loan
originations net of principal repayments of $27.4 million, $22.1 million and
$11.3 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.
The primary financing activities of the Company are deposits and
borrowings. During the fiscal years ended March 31, 2003, 2002, and 2001, the
Company experienced an increase in deposits of $31.3 million, $13.4 million, and
$10.5 million. Certificates of deposits as of March 31, 2003 maturing within one
year total $67.7 million. Management expects most of these deposits to remain
with the Bank. During the fiscal years ended March 31, 2003, 2002 and 2001, the
Company's net financing activity (proceeds less repayments) with the FHLB
totaled $700,000, $10.8 million, and $0 million, respectively.
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
44
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, 2003, cash and cash equivalents totaled $8.1 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.
The Company anticipates that it will have sufficient funds available to
meet current loan commitments. At March 31, 2003, the Company had outstanding
loan commitments totaling $20.5 million.
Both the Company and Classic Bank are required to maintain minimum levels
of regulatory capital. At March 31, 2003, both the Company and Classic Bank
exceeded all of their capital requirements. See Note 17 of the Notes to the
Consolidated Financial Statements for information regarding the effect of
implementing new accounting standards.
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.
45
ITEM 7. FINANCIAL STATEMENTS
REPORT OF AUDIT
CLASSIC BANCSHARES, INC.
ASHLAND, KENTUCKY
MARCH 31, 2003
CLASSIC BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT.................................................47
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2003 AND 2002..............................................48
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED MARCH 31, 2003, 2002 AND 2001........................................49
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001..........................50
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED MARCH 31, 2003, 2002
AND 2001...................................................................51
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED MARCH 31, 2003, 2002 AND 2001...............................52-53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................54-85
46
SMITH, GOOLSBY, R.MILTON GOOLSBY, C.P.A.
ARTIS & REAMS, P.S.C. JOHN W. ARTIS, C.P.A.
LARRY J. WITHERS, C.P.A.
STEPHEN W. KANOUSE, C.P.A.
DELMAR H. FRALEY, C.P.A.
CERTIFIED PUBLIC ACCOUNTANTS RODNEY M. ROBINETTE, C.P.A.
P.O. BOX 551 1330 CARTER AVE. -----------
ASHLAND, KENTUCKY 41105-0551
(606) 329-1171 FAX (606) 325-0590 G. DALE SWENTZEL, C.P.A.
STUART T. BLEVINS, C.P.A.
Board of Directors DAVID K. WHALEY, C.P.A.
Classic Bancshares, Inc. SHARON K. KRETZER, C.P.A.
Ashland, Kentucky THERESA C. LYONS, C.P.A.
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated statements of financial condition
of Classic Bancshares, Inc. and Subsidiary as of March 31, 2003 and 2002, and
the related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the three 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 on 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 of Classic Bancshares,
Inc. and Subsidiary, as of March 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2003, in conformity with accounting principles generally accepted in
the United States of America.
As more fully explained in Note 1-G, the Corporation changed its method of
accounting for goodwill as of April 1, 2001.
Ashland, Kentucky
June 5, 2003
47
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2003 AND 2002
2003 2002
------------ ------------
ASSETS
- ------
Cash and due from banks $ 7,742,876 $ 4,952,009
Interest-bearing deposits with banks 382,216 448,037
Federal funds sold and securities purchased
under agreements to resell 23,768 --
------------ ------------
Cash and cash equivalents 8,148,860 5,400,046
Securities available for sale 28,246,870 25,803,491
Mortgage-backed and related securities
available for sale 9,596,082 9,063,617
Loans, net of allowance for loan losses of
$1,974,839 in 2003 and $1,628,242 in 2002 187,174,520 160,315,663
Real estate acquired in the settlement of loans -- 77,622
Accrued interest receivable 1,156,839 1,158,144
Federal Home Loan Bank stock 1,948,900 1,480,300
Premises and equipment, net 6,267,376 5,366,126
Goodwill net of accumulated amortization
of $864,636 5,554,549 5,554,549
Other assets 1,787,454 1,227,518
------------ ------------
TOTAL ASSETS $249,881,450 $215,447,076
============ ============
LIABILITIES
- -----------
Non-interest bearing demand deposits $ 23,158,669 $ 20,404,210
Savings, NOW, and money market demand deposits 65,761,590 57,433,787
Other time deposits 101,234,763 81,036,439
------------ ------------
Total deposits 190,155,022 158,874,436
Federal funds purchased and securities sold
under agreements to repurchase 4,382,494 5,395,941
Advances from Federal Home Loan Bank 28,126,225 27,401,157
Other short-term borrowings 6,244 445,806
Accrued expenses and other liabilities 419,951 501,744
Accrued interest payable 344,399 374,276
Deferred income taxes 1,024,374 472,761
------------ ------------
TOTAL LIABILITIES 224,458,709 193,466,121
------------ ------------
Commitments
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock $.01 par value; authorized,
100,000 shares - none issued -- --
Common stock $.01 par value; authorized
1,700,000 shares; issued and outstanding,
1,322,500 shares 13,225 13,225
Additional paid-in capital 20,435,502 20,373,556
Retained earnings, substantially restricted 7,721,067 5,136,114
Accumulated other comprehensive income (loss) 751,069 (325,896)
Unearned ESOP shares (598,570) (643,310)
Unearned RRP shares (11,550) (18,812)
Treasury stock, at cost (217,014 shares at 2003
and 201,914 shares at 2002) (2,888,002) (2,553,922)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 25,422,741 21,980,955
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $249,881,450 $215,447,076
============ ============
NOTE: The accompanying notes are an integral part of these consolidated financial statements.
- ----
48
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 12,253,595 $ 11,898,779 $ 11,903,366
Securities:
Taxable 560,858 601,770 622,063
Tax exempt 886,164 824,196 825,893
Mortgage-backed securities 413,079 281,119 215,871
Federal funds sold and securities
purchased under agreements to resell 4,942 10,414 14,236
Dividends 83,206 86,500 109,186
Other interest 3,633 5,754 6,453
------------ ------------ ------------
TOTAL INTEREST AND DIVIDEND INCOME 14,205,477 13,708,532 13,697,068
------------ ------------ ------------
INTEREST EXPENSE
Deposits 3,926,661 5,265,668 5,935,475
Federal Home Loan Bank advances 985,212 718,011 1,199,312
Federal funds purchased and securities
sold under repurchase agreements 54,499 107,816 182,559
Other short-term borrowings 3,285 8,365 31,786
------------ ------------ ------------
TOTAL INTEREST EXPENSE 4,969,657 6,099,860 7,349,132
------------ ------------ ------------
NET INTEREST INCOME 9,235,820 7,608,672 6,347,936
Provision for loss on loans 428,000 (363,000) (261,000)
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOSS ON LOANS 8,807,820 7,245,672 6,086,936
------------ ------------ ------------
NONINTEREST INCOME
Service charges 1,338,183 1,188,699 915,129
Gain (loss) on sale of securities 72,076 7,015 31,520
Other income 265,370 258,693 139,383
------------ ------------ ------------
TOTAL NONINTEREST INCOME 1,675,629 1,454,407 1,086,032
------------ ------------ ------------
NONINTEREST EXPENSES
Employee compensation and benefits 3,219,245 2,750,305 2,619,021
Occupancy and equipment expense 1,028,997 963,814 886,365
Federal deposit insurance premiums 27,421 14,168 27,420
Advertising 261,511 299,693 221,767
Communications 189,298 191,048 119,299
Franchise and deposit taxes 239,648 185,221 242,173
Directors fees and benefits 96,250 96,068 114,050
Amortization of goodwill -- -- 254,225
Stationary and supplies 229,551 188,515 174,427
Other operating expenses 1,167,416 1,037,827 1,135,986
------------ ------------ ------------
TOTAL NONINTEREST EXPENSE 6,459,337 5,726,659 5,794,733
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,024,112 2,973,420 1,378,235
Income tax expense 1,103,573 773,533 329,990
------------ ------------ ------------
NET INCOME $ 2,920,539 $ 2,199,887 $ 1,048,245
============ ============ ============
EARNINGS PER SHARE
Basic $ 2.77 $ 2.08 $ .97
============ ============ ============
Diluted $ 2.55 $ 1.94 $ .96
============ ============ ============
NOTE: The accompanying notes are an integral part of these consolidated financial statements.
- ----
49
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
NET INCOME $ 2,920,539 $ 2,199,887 $ 1,048,245
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains (losses) on
securities during the period, net
of tax 1,124,535 (150,193) 1,129,254
Reclassification adjustments for
realized gains (losses) included in
earnings, net of tax of $24,506,
$2,385, and $10,717, for 2003, 2002
and 2001, respectively (47,570) (4,630) (20,803)
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 3,997,504 $ 2,045,064 $ 2,156,696
============ ============ ============
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) $ 751,069 $ (325,896) $ (171,073)
============ ============ ============
NOTE: The accompanying notes are an integral part of these consolidated financial statements.
- ----
50
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
NET UNREALIZED
GAIN (LOSS) ON
ADDITIONAL UNEARNED UNEARNED SECURITIES
PAID-IN RETAINED ESOP RRP TREASURY AVAILABLE
COMMON STOCK CAPITAL EARNINGS SHARES SHARES STOCK FOR SALE TOTAL
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, MARCH 31, 2000 $ 13,225 $20,316,731 $ 2,575,731 $ (736,600) $ (174,146) $(1,716,771) $(1,279,524) $18,998,646
Net income for the year
ended March 31, 2001 1,048,245 1,048,245
Cash dividends paid
($.32 per share) (348,260) (348,260)
ESOP shares earned 4,797 47,280 52,077
RRP shares earned 117,167 117,167
RRP shares granted (450) (3,075) 3,525 --
RRP shares forfeited (210) 1,620 (1,410) --
Tax expense from RRP (3,483) (3,483)
Purchased 47,800
treasury shares (512,536) (512,536)
Change in unrealized
gain (loss) on
available for sale
securities net of
applicable deferred
income taxes of
$571,019 1,108,451 1,108,451
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, MARCH 31, 2001 13,225 20,317,385 3,275,716 (689,320) (58,434) (2,227,192) (171,073) 20,460,307
Net income for the year
ended March 31, 2002 2,199,887 2,199,887
Cash dividends paid
($.32 per share) (339,489) (339,489)
ESOP shares earned 22,519 46,010 68,529
RRP shares earned 43,810 43,810
RRP shares granted 1,230 (4,188) 2,938 --
Tax (expense) benefit
from RRP 32,402 32,402
Purchased 24,000
treasury shares (329,668) (329,668)
Change in unrealized
gain (loss) on
available for sale
securities net of
applicable deferred
income taxes of
$79,757 (154,823) (154,823)
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, MARCH 31, 2002 13,225 20,373,556 5,136,114 (643,310) (18,812) (2,553,922) (325,896) 21,980,955
Net income for the year
ended March 31, 2003 2,920,539 2,920,539
Cash dividends paid
($.32 per share) (335,586) (335,586)
ESOP shares earned 61,286 44,740 106,026
RRP shares earned 7,262 7,262
Tax (expense) benefit
from RRP 660 660
Purchased 15,100
treasury shares (334,080) (334,080)
Change in unrealized
gain (loss) on
available for sale
securities net of
applicable deferred
income taxes of
$554,800 1,076,965 1,076,965
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCES, MARCH 31, 2003 $ 13,225 $20,435,502 $ 7,721,067 $ (598,570) $ (11,550) $(2,888,002) $ 751,069 $25,422,741
============ =========== =========== =========== =========== =========== =========== ===========
NOTE: The accompanying notes are an integral part of these consolidated financial statements.
- ----
51
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
OPERATING ACTIVITIES
- --------------------
Net income $ 2,920,539 $ 2,199,887 $ 1,048,245
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 437,634 459,900 511,561
Provision for loan losses 428,000 363,000 261,000
Loss (gain) on sale of investment securities (72,076) (7,015) (31,520)
Net amortization (accretion) of mortgage-backed
and investment securities 82,774 53,873 34,951
Federal Home Loan Bank stock dividend (83,000) (86,300) (95,300)
Deferred income tax expense (benefit) (3,187) 19,812 6,221
Loss (gain) on sale of foreclosed real estate (1,453) (2,934) (1,477)
Loss (gain) on disposal of equipment and software 2,076 (9,513) 30,308
ESOP shares earned 106,026 68,529 52,900
RRP shares earned 7,262 43,810 117,167
Amortization of goodwill -- -- 254,225
Decrease (increase) in:
Accrued interest receivable 1,305 29,098 (48,230)
Other assets (457,448) (31,488) 276,904
Increase (decrease) in:
Accrued interest payable (29,877) (219,077) 41,888
Accrued income taxes -- (57,919) 15,500
Other liabilities (81,793) (234,932) 308,626
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,256,782 2,588,731 2,782,969
------------ ------------ ------------
INVESTING ACTIVITIES
- --------------------
Investment securities:
Available for sale:
Proceeds from sales, maturities and calls 3,404,600 1,292,300 6,798,717
Purchased (4,390,612) (2,516,975) (6,251,155)
Mortgage-backed securities:
Available for sale:
Proceeds from sales 4,140,349 -- --
Principal payments 3,258,074 1,306,397 548,677
Purchased (7,767,188) (6,991,295) (756,694)
Purchased Federal Home Loan Bank stock (385,600) -- (142,600)
Purchased Federal Reserve Bank stock -- -- (10,550)
Redemption of Federal Reserve Bank stock -- -- 316,800
Loan originations and principal payments, net (27,362,357) (22,104,949) (11,349,482)
Proceeds from sale of foreclosed real estate 154,575 424,150 80,978
Purchased premises and equipment (1,317,375) (190,596) (1,035,170)
Proceeds from sale of equipment and fixtures -- 24,885 1,622
Purchased software (125,413) (7,763) (16,218)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (30,390,947) (28,763,846) (11,815,075)
------------ ------------ ------------
52
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(Continued)
2003 2002 2001
------------ ------------ ------------
FINANCING ACTIVITIES
- --------------------
Net change in deposits $ 31,280,586 $ 13,444,521 $ 10,533,119
Federal Home Loan Bank borrowings 117,539,126 137,955,000 130,326,000
Repayment of Federal Home Loan Bank borrowings (116,814,058) (127,189,433) (130,765,790)
Increase(decrease)in federal funds purchased and
securities sold under agreements to repurchase (1,013,447) 2,216,352 491,875
Increase(decrease)in short term borrowings (439,562) 211,487 (339,432)
Dividends paid (335,586) (339,489) (348,260)
Treasury shares purchased (334,080) (329,668) (512,536)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,882,979 25,968,770 9,384,976
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,748,814 (206,345) 352,870
Cash and Cash Equivalents, Beginning of Year 5,400,046 5,606,391 5,253,521
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,148,860 $ 5,400,046 $ 5,606,391
============ ============ ============
ADDITIONAL CASH FLOWS AND SUPPLEMENTARY INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 1,989,248 $ 1,828,913 $ 2,430,009
Income taxes $ 1,180,000 $ 828,481 $ 310,982
Assets acquired in settlement of loans $ 75,500 $ 288,093 $ 35,000
Net unrealized gain (loss) on
securities available-for-sale $ 1,076,965 $ (154,823) $ 1,108,451
NOTE: The accompanying notes are an integral part of these consolidated financial statements.
- ----
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------ ------------------------------------------
ORGANIZATION
Classic Bancshares, Inc. (the "Corporation") 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).
Effective June 30, 2000, Classic Bank converted from a federal savings
bank to a state chartered commercial bank.
Effective March 16, 2001, First National Bank was merged into Classic
Bank in a consolidation of subsidiaries accounted for in a manner
similar to a pooling-of-interest. The former First National Bank
continues in operation as a branch of Classic Bank. Restructuring
charges related to the merger and charged to operations during the
fiscal year 2001 totaled $112,834 ($74,470 net of tax) consisting of
employee related charges of $19,643 and other charges of $93,191.
Classic Bank (the "Bank") conducts a general commercial banking
business in eastern Kentucky 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 Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans and
investments and the average rate paid on deposits, as well as the
relative amounts of such assets and liabilities. The Bank, like most
financial institutions, 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.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
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 particulary susceptible
to significant change in the near term relate to the determination of
the allowance for loan losses, the valuation of foreclosed real
estate, deferred tax assets, and goodwill impairment.
The following is a summary of the Corporation'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 the accounts of the
Corporation and the Banks. All significant intercompany balances and
transactions have been eliminated.
B. INVESTMENT SECURITIES AND MORTGAGE-BACKED AND RELATED SECURITIES
The Corporation accounts for investment and mortgage-backed 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 Corporation has the positive intent and ability to
hold these securities to maturity. Trading securities and securities
available-for-sale are carried at fair value with resulting unrealized
gains or losses recorded to operations or stockholders' equity,
respectively. Investment and mortgage-backed securities are classified
according to management's intent upon acquisition. The Corporation's
stockholders' equity reflected net unrealized gains of $751,069 at
March 31, 2003 and net unrealized losses of $325,896 at March 31,
2002. Realized gains and losses on sales of securities are recognized
using the specific identification method.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
C. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable, net are stated at unpaid principal balances, less
the allowance for loan losses, plus or minus net deferred loan
origination costs or fees, and the undisbursed portion of loans in
process.
Interest is accrued as earned unless the collectibility of the loan is
in doubt. Uncollectible interest on loans that are contractually past
due is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued,
and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
It is the Corporation's policy to establish an allowance for loan
losses for the purpose of absorbing losses associated with the loan
portfolio. All actual loan losses are charged to the related allowance
and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to operations based on 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 and projected economic
conditions. Management evaluates the carrying value of loans
periodically in order to evaluate the adequacy of the allowance. While
management uses the best information available to make these
evaluations, future adjustments to the allowance may be necessary if
the assumptions used in making the evaluations require material
revision.
The Corporation accounts for impaired loans in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan". SFAS No.
114 requires that impaired loans be measured based upon the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as an alternative, at the loans observable market
price or fair value of the collateral.
Under SFAS No. 114, a loan is defined as impaired when, based on
current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms
of the loan agreement. In applying the provisions of SFAS No. 114, the
Corporation considers its investment in one-to-four-family residential
loans and consumer installment loans to be homogeneous and therefore
excluded from separate identification for evaluation of impairment.
With respect to the Corporation's investment in multi-family and
nonresidential loans, and its evaluation of any impairment thereon,
such loans are collateral dependent and as a result are carried as a
practical expedient at the lower of cost or fair value.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
C. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (Continued)
At March 31, 2003 and 2002, the Corporation had no loans that would be
defined as impaired under SFAS No. 114.
D. LOAN ORIGINATION FEES
Loan fees are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91. SFAS No. 91 requires loan
origination fees and certain related direct loan origination costs be
offset and the resulting net amount be deferred and amortized over the
contractual life of the related loans as an adjustment to the yield on
such loans, using the level yield method.
E. FORECLOSED REAL ESTATE
Real estate properties 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.
Real estate loss provisions are recorded if the fair value declines
below the fair value initially determined at the acquisition date.
Revenue and expenses from operations and changes in the valuation
allowance are included in loss on foreclosed real estate. The
historical average holding period for such properties is six months.
F. 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 ten to fifty years for buildings and five to ten years
for furniture, fixtures and equipment. An accelerated method of
computing depreciation is primarily used for tax reporting purposes.
G. GOODWILL AND OTHER INTANGIBLES
Prior to April 1, 2001, goodwill resulting from the acquisition of
First National and Citizens Bank totaling approximately $6.4 million
was being amortized over a twenty-five year period using the
straight-line method.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
142 "Goodwill and Intangible Assets," which prescribes accounting for
all purchased goodwill and intangible assets. Pursuant to SFAS No.
142, acquired goodwill is not amortized, but is tested for impairment
at the reporting unit level on an annual basis and between annual
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
G. GOODWILL AND OTHER INTANGIBLES (Continued)
tests whenever an impairment indicator arises. Impairment is the
condition that exists when the carrying amount of goodwill exceeds its
implied fair value. The annual goodwill impairment test may be
performed any time during the fiscal year provided the test is
performed at the same time every year.
The corporation adopted SFAS No. 142 effective April 1, 2001 as
permitted, and the transitional goodwill impairment tests of the
Corporation's Banking segment was performed in the second quarter of
the Company's 2003 fiscal year end. As a result of the adoption of
this Statement, the Corporation will discontinue the amortization of
goodwill and will record impairment losses only when required by the
application of SFAS No. 142. The impact of the adoption of Statement
No. 142 on net income for the Corporation is as follows:
FOR THE YEARS ENDED MARCH 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands, except for
per share amounts)
Reported net income $ 2,921 $ 2,200 $ 1,048
Add back: Goodwill amortization 0 0 254
---------- ---------- ----------
Adjusted net income $ 2,921 $ 2,200 $ 1,302
========== ========== ==========
BASIC EARNINGS PER SHARE:
Reported net income $ 2.77 $ 2.08 $ 0.97
Goodwill amortization 0 0 .24
---------- ---------- ----------
Adjusted net income $ 2.77 $ 2.08 $ 1.21
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Reported net income $ 2.55 $ 1.94 $ 0.96
Goodwill amortization 0 0 .23
---------- ---------- ----------
Adjusted net income $ 2.55 $ 1.94 $ 1.19
========== ========== ==========
The changes in the carrying amount of goodwill for the
fiscal years ended March 31, 2003 and 2002 were as follows:
BANKING SEGMENT
-----------------------
(In thousands)
2003 2002
---------- ----------
Balance, Beginning of year $ 5,555 $ 5,555
Goodwill acquired -- --
Impairment losses -- --
Goodwill written off related to disposal
of reporting unit -- --
---------- ----------
Balance, End of year $ 5,555 $ 5,555
========== ==========
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
G. GOODWILL AND OTHER INTANGIBLES (Continued)
The fair value of the reporting unit was estimated using a multiple of
earnings as determined by current industry information. The testing
indicated that the fair value of the reporting unit exceeded the
carrying amount of the net assets (including goodwill).
H. FEDERAL INCOME TAXES
The Corporation 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 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 Corporation'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.
I. EARNINGS PER SHARE
Basic earnings per share is calculated based on 1,052,477, 1,056,882,
and 1,080,469, weighted average number of common shares outstanding
for the years ended March 31, 2003, 2002, and 2001, respectively.
Diluted earnings per share is computed taking into consideration
common shares outstanding and dilutive potential common shares to be
issued under the Corporation's stock option and recognition and
retention plan. Weighted average common shares deemed outstanding for
purpose of computing diluted earnings per share totaled 1,144,676,
1,132,974, and 1,087,788, for the years ended March 31, 2003, 2002,
and 2001, respectively. There were 91,513, 76,092, and 1,915,
incremental shares related to the assumed exercise of stock options,
and 686, 0, and 5,404, incremental shares related
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
I. EARNINGS PER SHARE (Continued)
to the assumed issuance of recognition and retention plan shares for
the years ended March 31, 2003, 2002, and 2001, respectively.
Options to purchase 43,000, 400 and 75,476 shares of common stock with
a weighted- average exercise price of $31.87, $16.75, and $13.02 per
share were outstanding at March 31, 2003, 2002, and 2001,
respectively, but were not included in the computation of diluted
earnings per share for those years because the exercise price was
greater than the average market price of the common shares. These
options expire between February 1, 2007 and March 17, 2013.
J. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143 addresses
the financial and reporting obligations associated with the retirement
of tangible long-lived assets and the associated retirement costs.
This statement applies to all entities. It applies to legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the
normal operation of a long-lived asset, except for certain obligations
of lessees. This statement defines a legal obligation as an obligation
that a party is required to settle as a result of an existing or
enacted law, statute, ordinance or written or oral contract, or by
legal construction of a contract under the doctrine of promissory
estoppel. This statement amends FASB Statement No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies". FASB No.
143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No. 143 is not expected to have a
material effect on the Corporation's financial condition or results of
operations.
In August 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 carries over the recognition and measurement provisions in
SFAS No. 121. Accordingly, an entity must recognize an impairment loss
if the carrying value of a long-lived asset or asset group (a) is not
recoverable, and (b) exceeds its fair value. Similar to SFAS No. 121,
SFAS No. 144 requires an entity to test an asset or asset group for
impairment whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. SFAS No. 144 differs from
SFAS No. 121 in that it provides guidance on estimating future cash
flows to test recoverability. An entity may use either a
probability-weighted approach or best-estimate approach in developing
estimates of cash flows to test recoverability. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years.
Management adopted
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
J. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS No. 144 effective April 1, 2002, without material effect on the
Corporation's financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 provides
financial accounting and reporting guidance for costs associated with
exit or disposal activities, including one-time termination benefits,
contract termination costs other than for a capital lease, and costs
to consolidate facilities or relocate employees. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31,
2002. SFAS No. 146 is not expected to have a material effect on the
Corporation's financial condition or results of operations.
The FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions: An amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", which removes acquisitions of financial
institutions from the scope of SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", except for
transactions between mutual enterprises. SFAS No. 147 also requires
that the acquisition of a less-than-whole financial institution, such
as a branch, be accounted for as a business combination if the
transferred assets and activities constitute a business. The adoption
of SFAS No. 147 did not have a material impact on the Corporation's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
or stock-based employee compensation and the effect of the method used
on reported results. SFAS No. 148 is effective for fiscal years
beginning after December 15, 2002. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal
years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material effect on the
Corporation's financial position or results of operations.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
K. FINANCIAL INSTRUMENTS
OTHER OFF-BALANCE-SHEET INSTRUMENTS. In the ordinary course of
business the Bank has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit, commitments
under credit-card arrangements, and standby letters of credit. Such
financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
L. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Corporation 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
Corporation.
The following methods and assumptions were used by the Corporation 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,
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.
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE FOR SALE - Fair
values for mortgage- backed and related securities are based on quoted
market prices or dealer quotes.
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.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
L. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying amounts of
accrued interest 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.
Based on the methods and assumptions set forth above, the estimated
fair value of the Corporation's financial instruments as of March 31,
2003 and 2002 are as follows:
2003 2002
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(In thousands)
FINANCIAL ASSETS:
Cash and due from banks $ 8,125 $ 8,125 $ 5,400 $ 5,400
Federal funds sold and securities
purchased under agreements to resell 24 24 -- --
Securities available-for-sale 28,247 28,247 25,803 25,803
Mortgage-backed securities
available-for-sale 9,596 9,596 9,064 9,064
Federal Home Loan Bank stock 1,949 1,949 1,480 1,480
Loans receivable, net 187,175 198,196 160,316 168,221
Accrued interest receivable 1,157 1,157 1,158 1,158
FINANCIAL LIABILITIES:
Certificates of deposit $101,235 $101,470 $ 81,036 $ 81,329
Other deposit accounts 88,920 88,920 77,731 77,731
Federal funds purchased and securities
sold under agreements to repurchase 4,382 4,383 5,396 5,398
Advances from the Federal Home Loan Bank 28,126 28,729 27,401 27,071
Other short-term borrowings 6 6 446 446
Accrued interest payable 344 344 374 374
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
- ------ ------------------------------------------
M. CASH AND CASH EQUIVALENTS
For the purposes of reporting consolidated cash flows, the Corporation
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.
N. ADVERTISING COSTS
Advertising costs are expensed when incurred.
O. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
2003 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, 2003 and 2002 was $175,000.
NOTE 3: MERGER AGREEMENT
- ------ ----------------
On December 30, 2002, Classic Banchshares, Inc. entered into a merger
agreement with First Federal Financial Bancorp, Inc. Under the terms
of the agreement, Classic Bancshares, Inc. will exchange a combination
of its common stock and cash with an approximate value of $11,748,000
for 100% of the outstanding common stock of First Federal Financial
Bancorp, Inc. The transaction, which is scheduled to close on June 20,
2003, is subject to regulatory and shareholder approval.
NOTE 4: INVESTMENT AND MORTGAGE-BACKED SECURITIES
- ------ -----------------------------------------
Investment securities and mortgage-backed securities have been
classified in the consolidated statements of financial condition
according to management's intent. The amortized cost, gross unrealized
gains, gross unrealized losses and estimated fair values of investment
securities at March 31, 2003 and 2002 are as follows:
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 4: INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
- ------ -----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
AVAILABLE-FOR-SALE
MARCH 31, 2003:
U. S. Government Agency
Securities $ 564,062 $ -- $ (438) $ 563,624
Obligations of state and
political subdivisions 19,099,172 823,406 (13,932) 19,908,646
Corporate debt securities 7,504,917 276,180 (6,497) 7,774,600
------------ ------------ ------------ ------------
$ 27,168,151 $ 1,099,586 $ (20,867) $ 28,246,870
------------ ------------ ------------ ------------
MARCH 31, 2002:
U. S. Government Agency
Securities $ 2,500,000 $ 6,946 $ (19,265) $ 2,487,681
Obligations of state and
political subdivisions 17,177,903 284,343 (419,812) 17,042,434
Corporate debt securities 6,532,480 21,814 (280,918) 6,273,376
------------ ------------ ------------ ------------
$ 26,210,383 $ 313,103 $ (719,995) $ 25,803,491
------------ ------------ ------------ ------------
The amortized cost, gross unrealized gains, gross unrealized losses,
and estimated fair values of mortgage-backed securities at March 31,
2003 and 2002 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
MARCH 31, 2003:
FHLMC $ 8,444,766 $ 16,632 $ (727) $ 8,460,671
FNMA 765,511 43,601 809,112
Other 87,580 83 87,663
REMICS:
FHLMC 238,961 -- (325) 238,636
------------ ------------ ------------ ------------
$ 9,536,818 $ 60,316 $ (1,052) $ 9,596,082
============ ============ ============ ============
MARCH 31, 2002:
FHLMC $ 7,602,117 $ 35,810 ($ 135,458) $ 7,502,469
FNMA 1,061,986 20,779 -- 1,082,765
Other 108,408 -- (1,372) 107,036
REMICS:
FHLMC 377,996 -- (6,649) 371,347
------------ ------------ ------------ ------------
$ 9,150,507 $ 56,589 ($ 143,479) $ 9,063,617
============ ============ ============ ============
Gross realized gains and gross realized losses on the sale of
available-for-sale investment and mortgage-backed securities were
$72,076 and $0, respectively for the year ended March 31, 2003, $7,015
and $0, respectively for the year ended March 31, 2002, and $33,227
and $1,707, respectively for the year ended March 31, 2001.
The amortized cost and estimated fair value of investment and
mortgage-backed securities at March 31, 2003 and 2002 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.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 4: INVESTMENT AND MORTGAGE-BACKED SECURITIES (Continued)
- ------ -----------------------------------------
2003 2002
------------------------- -------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(In Thousands)
Due in one year or less $ 700 $ 710 $ 150 $ 152
Due after one year through five years 2,460 2,619 2,511 2,618
Due after five years through ten years 3,615 3,796 4,095 4,140
Due after ten years 20,393 21,122 19,454 18,893
---------- ---------- ---------- ----------
27,168 28,247 26,210 25,803
Mortgage-backed securities-not
due at a single maturity date 9,537 9,596 9,151 9,064
---------- ---------- ---------- ----------
TOTAL $ 36,705 $ 37,843 $ 35,361 $ 34,867
========== ========== ========== ==========
Securities carried at approximately $12,946,196 at March 31, 2003, and
$14,781,917 at March 31, 2002, were pledged to secure deposits of
public funds and for other purposes required or permitted by law.
The amortized cost of mortgage-backed securities includes unamortized
premiums of $287,238 and $108,564 and unearned discounts of $7,222 and
$12,299 at March 31, 2003 and 2002, respectively.
Mortgage-backed securities with adjustable rates totaled $808,176 and
$1,130,735 at March 31, 2003 and 2002, respectively.
Accrued interest receivable includes $365,761 and $378,000, at March
31, 2003 and 2002, respectively, related to investment and
mortgage-backed securities.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 5: LOANS RECEIVABLE
- ------ ----------------
The components of loans in the consolidated statements of financial
condition were as follows:
MARCH 31
--------------------------
2003 2002
---------- ----------
(In Thousands)
Real estate loans:
One-to-four family $ 74,233 $ 74,321
Commercial 24,869 23,105
Multi-family 1,042 1,083
Construction 4,623 4,823
Consumer Loans 36,272 24,966
Commercial loans 47,971 33,522
---------- ----------
Total loans receivable 189,010 161,820
Less: Unearned discounts and loan
origination costs (140) (124)
Allowance for loan losses 1,975 1,628
---------- ----------
Total loans receivable, net $ 187,175 $ 160,316
========== ==========
Loans with adjustable rates totaled $101.1 million and $73.9 million
March 31, 2003 and 2002, respectively.
Accrued interest receivable includes $791,077 and $780,144 at March
31, 2003 and 2002, respectively, related to loans receivable.
Activity in the allowance for loan losses is summarized as follows for
the years ended March 31:
2003 2002 2001
------------ ------------ ------------
Balance at beginning of year $ 1,628,242 $ 1,406,908 $ 1,289,302
Provision for losses 428,000 363,000 261,000
Charge-offs (109,385) (181,876) (190,821)
Recoveries 27,982 40,210 47,427
------------ ------------ ------------
Balance at end of year $ 1,974,839 $ 1,628,242 $ 1,406,908
============ ============ ============
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 5: LOANS RECEIVABLE (Continued)
- ------ ----------------
The following is a summary of non-performing loans at March 31:
2003 2002 2001
------ ------ ------
(In Thousands)
Accruing loans past due 90 days or more $ 669 $ 244 $ 124
Nonaccrual loans 600 412 662
------ ------ ------
Total non-performing loan balances at year end $1,269 $ 656 $ 786
====== ====== ======
Non-performing loans as a percentage of loans .68% .41% .56%
====== ====== ======
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, 2003 and
2002, the balances of loans to such parties were as follows:
2003 2002
------------ ------------
Aggregate amount of indebtedness
at beginning of year $ 14,122,718 $ 8,108,287
New loans 33,536,723 42,573,962
Repayments (33,901,761) (36,559,531)
------------ ------------
Aggregate amount of indebtedness
at end of year $ 13,757,680 $ 14,122,718
============ ============
NOTE 6: PREMISES AND EQUIPMENT
- ------ ----------------------
Premises and equipment at March 31, 2003 and 2002 by major
classifications are as follows:
2003 2002
---------- ----------
Land $1,596,706 $1,267,198
Buildings and improvements 4,693,764 4,094,683
Furniture and equipment 3,347,811 2,965,557
---------- ----------
TOTAL 9,638,281 8,327,438
-----
Less: Accumulated depreciation 3,370,905 2,961,312
---------- ----------
$6,267,376 $5,366,126
========== ==========
Depreciation expense charged to operations for the years ended March
31, 2003, 2002, and 2001 totaled $414,049, $430,032, and $445,235,
respectively.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 7: DEPOSITS
- ------ --------
The aggregate amount of short-term jumbo certificates of deposit each
with a minimum denomination of $100,000 or more was approximately
$31,337,275 and $26,529,516 at March 31, 2003 and 2002, respectively.
The scheduled maturities of certificates of deposit were as follows
for the years ending March 31:
2004 $ 67,734,967
2005 18,913,271
2006 6,438,784
2007 1,890,178
2008 5,985,825
2009 and thereafter 271,738
------------
$101,234,763
============
Interest expense on deposits is summarized as follows for the years
ended March 31:
2003 2002 2001
------ ------ ------
(In Thousands)
Certificates of deposit $2,967 $4,034 $4,336
NOW accounts and money
market demand accounts 772 973 1,265
Passbook and club accounts 188 259 334
------ ------ ------
$3,927 $5,266 $5,935
====== ====== ======
The Bank held related party deposits of approximately $5.4 million and
$4.0 million at March 31, 2003 and 2002, respectively.
NOTE 8: ADVANCES FROM FEDERAL HOME LOAN BANK
- ------ ------------------------------------
Advances from the Federal Home Loan Bank of Cincinnati totaled
$28,126,225 at March 31, 2003. In addition, the Federal Home Loan Bank
had issued for the account of Classic Bank, $10,600,000 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 $1,948,900 and
certain residential real estate mortgage loans in the amount of
$52,839,750.
At March 31, 2003, advances with a remaining term of 90 days or less,
and a weighted average interest rate of 1.56% totaled $3,500,000.
Advances requiring monthly principal reductions with a weighted
average maturity of 4.1 years and a weighted average interest rate of
3.76% totaled $24,626,225.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 8: ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
- ------ ------------------------------------
Scheduled principal payments are due as follows:
Due in fiscal year ending:
March 31, 2004 $ 9,740,185
March 31, 2005 6,071,025
March 31, 2006 5,512,105
March 31, 2007 5,367,095
March 31, 2008 261,723
After March 31, 2008 1,174,092
------------
$ 28,126,225
============
NOTE 9: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- ------ ----------------------------------------------
Securities sold under agreements to repurchase at March 31, 2003 and
2002 totaled $4,382,494 and $5,395,941, respectively.
Information concerning securities sold under agreements to repurchase
is summarized as follows:
2003 2002
---------- ----------
Average balance during the year $5,206,431 $4,552,598
Average interest rate during the year 1.05% 2.37%
Maximum month-end balance during the year $6,020,271 $5,872,828
U.S. Government Agency securities underlying the agreements at
year-end:
Amortized cost $4,538,532 $5,396,000
Estimated fair value $4,538,621 $5,287,000
Securities sold under agreements to repurchase at March 31, 2003 and
2002 had maturities ranging from one day to three months.
NOTE 10: OTHER BORROWINGS
- ------- ----------------
Other short-term borrowings at March 31, 2003 and 2002 consist of term
treasury tax and loan deposits and are generally repaid within one to
twenty days from the date of the transaction. Securities with an
amortized cost of $564,062 and $450,000 and estimated fair value of
$563,125 and $453,125, were pledged at March 31, 2003 and 2002,
respectively, as collateral for treasury tax and loan deposits.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 11: INCOME TAXES
- ------- ------------
The provision for income taxes consists of:
YEARS ENDED MARCH 31
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Currently payable - Federal $ 1,106,100 $ 721,320 $ 327,252
Deferred - Federal (3,187) 19,812 6,221
----------- ----------- -----------
$ 1,102,913 $ 741,132 $ 333,473
Federal tax benefit (expense) from RRP
credited (charged) to paid in capital 660 32,401 (3,483)
----------- ----------- -----------
$ 1,103,573 $ 773,533 $ 329,990
=========== =========== ===========
The following tabulation reconciles the federal statutory
tax rate to the effective rate of taxes provided for income
taxes:
YEARS ENDED MARCH 31
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Tax at statutory rate 34.0% 34.0% 34.0%
Tax exempt income (7.4) (9.4) (20.4)
Non-deductible expenses 0.8 1.3 10.1
Other 0.0 0.1 0.2
----------- ----------- -----------
27.4% 26.0% 23.9%
=========== =========== ===========
The components of the Corporation's net deferred tax asset
(liability) as of March 31, 2003 and 2002, are summarized
as follows:
2003 2002
------------ ------------
DEFERRED TAX ASSETS:
Loans and loan loss allowance $ 368,035 $ 239,218
Retirement and incentive programs 82,269 51,495
Net unrealized loss on available for sale securities 0 167,886
Other assets 19,011 27,183
------------ ------------
469,315 485,782
------------ ------------
DEFERRED TAX LIABILITIES:
Federal Home Loan Bank stock dividends (319,192) (290,972)
Premises and equipment (452,922) (340,791)
Net unrealized gains on available-for-sale securities (386,914) --
Retirement and incentive programs (264,195) (264,195)
Accretion on securities (22,983) (19,616)
Deferred loan origination costs (47,483) (42,969)
------------ ------------
(1,493,689) (958,543)
------------ ------------
NET DEFERRED TAX ASSET (LIABILITY) $ (1,024,374) $ (472,761)
============ ============
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 11: INCOME TAXES (Continued)
- ------- ------------
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 $1.9
million at March 31, 2003. The estimated deferred tax liability on
such amount is approximately $646,000, 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.
NOTE 12: OFF BALANCE SHEET ACTIVITIES
- ------- ----------------------------
CREDIT-RELATED FINANCIAL INSTRUMENTS. The Bank is a party to credit
related financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit and commercial letters of credit.
Such commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of these commitments. The Bank follows the same credit policies
in making commitments as it does for on-balance-sheet instruments.
At March 31, 2003 and 2002, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
--------------------------
MARCH 31 MARCH 31
2003 2002
----------- -----------
(In thousands)
Commitments to grant loans $ 5,907 $ 2,966
Unfunded commitments under lines of credit $ 14,117 $ 11,982
Commercial and standby letters of credit $ 474 $ 323
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 12: OFF BALANCE SHEET ACTIVITIES (Continued)
- ------- ----------------------------
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The commitments
for equity lines of credit may expire without being drawn upon.
Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if it is
deemed necessary by the Bank, is based on management's credit
evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving
credit lines and overdraft protection agreements are commitments for
possible future extensions of credit to existing customers. These
lines-of-credit are uncollateralized and usually do not contain a
specified maturity date and may not be drawn upon to the total extent
to which the Bank is committed.
Commercial and standby letters-of-credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Those letters-of-credit are primarily issued to support
public and private borrowing arrangements. Essentially all letters of
credit issued have expiration dates within one year. The credit risk
involved in issuing letters-of-credit is essentially the same as that
involved in extending loan facilities to customers. The Bank generally
holds collateral supporting those commitments if deemed necessary.
The Corporation 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)
-------------------- ----------------------
2004 $ 84
2005 79
2006 79
2007 73
2008 42
2009 and thereafter 578
------
$ 935
======
Total rental expense under operating leases was approximately $87,099,
$98,017, and $61,363, for the years ended March 31, 2003, 2002 and
2001, respectively.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 13: LEGAL CONTINGENCIES
- ------- -------------------
Various legal claims arise from time to time in the normal
course of business which, in the opinion of management,
will have no material effect on the Corporation's
consolidated financial statements.
NOTE 14: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT
- ------- ------------------------------------------
All of the Bank's loans, commitments and standby letters of
credit have been granted to customers in the Bank's market
area. Investments in state and municipal securities
primarily involve government entities within the Bank's
market area. The concentration of credit by type of loan
are set forth in Note 5.
The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby
letters of credit were granted primarily to commercial
borrowers.
The contractual amounts of credit-related financial
instruments such as commitments to extend credit and
letters of credit represent the amounts of potential
accounting loss should the contract be fully drawn upon,
the customer default and the value of any existing
collateral become worthless.
The Bank's credit policies and procedures for credit
commitments and financial guarantees are the same as those
for extension of credit that are recorded on the
consolidated statements of financial condition. Because
these instruments have fixed maturity dates and because
many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to the
Bank.
The Bank had deposits with other financial institutions
which exceeded the federally insured limits at March 31,
2003 by approximately $76,000. The Bank does not have a
policy for requiring collateral on such deposits.
NOTE 15: BENEFIT PLANS
- ------- -------------
The Corporation and its subsidiary participate in the
Pentegra multi-employer pension plan. This non-contributory
defined benefit plan covers all eligible employees of the
Corporation 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 Corporation to fund
the normal cost of the plan. Contributions to the plan have
not been required for the years ended March 31, 2003, 2002
and 2001. The data available from the plan administrators
is not sufficient to determine the Corporation's share of
the pension plan's accumulated benefit obligation or the
net assets attributable to the Corporation.
Effective July 1, 1997, First National's defined benefit
plan was terminated and its plan assets were merged into
the Corporation's Pentegra multi-employer pension plan. All
eligible employees of First National became participants in
the Corporation's
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 15: BENEFIT PLANS (Continued)
- ------- -------------
multi-employer pension plan. Prepaid pension expense of $777,045,
representing the excess of the fair value of pension plan assets over
the accrued actuarial pension liability at July 1, 1998, is included
in other assets in the consolidated statement of financial condition
at March 31, 2003 and 2002.
Effective September 30, 1995, Classic Bank entered into a
non-qualified supplemental executive retirement agreement (agreement)
with the Bank's chief executive officer which provides for the payment
of a monthly supplemental retirement benefit equal to up to 24% of his
average monthly compensation during the three highest 12-month periods
in the ten years prior to retirement. Such benefit shall be payable
upon normal retirement at age 65 or under certain circumstances, after
age 55, if his termination is without cause. Upon the officer's death,
50% of the amount payable under the agreement shall be payable to his
spouse until her death.
The following table sets forth the supplemental executive retirement
plan's funded status and amounts recognized in the consolidated
financial statements at March 31, 2003 and 2002, and 2001:
2003 2002 2001
---------- ---------- ----------
Accumulated vested benefit obligation $ (89,209) $ (65,116) $ (47,928)
========== ========== ==========
Projected benefit obligation $ (168,747) $ (120,279) $ (98,052)
Under (over) accrual 66,075 32,769 24,656
---------- ---------- ----------
Accrued retirement cost $ (102,672) $ (87,510) $ (73,396)
========== ========== ==========
Net retirement cost includes the
following components:
Service cost - benefits earned
during the year $ 19,713 $ 16,058 $ 15,273
Interest cost 9,660 6,745 5,346
Other (14,211) (7,976) (7,262)
---------- ---------- ----------
Net retirement cost $ 15,162 $ 14,827 $ 13,357
========== ========== ==========
Discount rate 7.0% 7.0% 7.0%
========== ========== ==========
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
========== ========== ==========
In conjunction with the stock conversion in 1995, the Corporation
established an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. The ESOP borrowed $1,058,000 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
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 15: BENEFIT PLANS (Continued)
- ------- -------------
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, 2003, 2002, and 2001, was $106,025, $68,529,
and $52,077, respectively.
The ESOP shares at March 31, 2003 and 2002 are as follows:
2003 2002
---------- ----------
Allocated shares 45,943 41,469
Unearned shares 59,857 64,331
---------- ----------
Total ESOP shares 105,800 105,800
========== ==========
Fair value of unearned shares $1,690,302 $1,098,194
========== ==========
On July 29, 1996, stockholders of the Corporation approved the 1996
Recognition and Retention Plan ("RRP"). Under the RRP, restricted
stock awards of up to 4% of the common stock sold in the conversion
may be awarded to the directors, officers and key employees of the
Corporation and its subsidiary. The Corporation completed the funding
of the plan in September 1996 by purchasing 52,900 shares of common
stock in the open market at a total cost of $621,575, which reduced
consolidated stockholders equity. At March 31, 2003, vested, unvested
and unawarded RRP shares totaled 51,936 shares, 850 shares and 114
shares, respectively.
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 $6,425, $48,131, and $117,166, was recorded
for the years ended March 31, 2003, 2002, and 2001 respectively.
During the fiscal year ended March 31, 1998, the Corporation adopted a
401(k) Savings and Profit Sharing Plan covering substantially all
employees. Under the plan, the Corporation matches 50.0% of the
employee's contribution up to 3.0% of the employee's salary. Total
expense under this plan was $59,968, $51,487, and $52,900, for the
years ended March 31, 2003, 2002, and 2001, respectively.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 16: STOCK OPTION PLAN
- ------- -----------------
On July 29, 1996, stockholders of the Corporation approved the 1996
Stock Option and Incentive Plan ("SOP"). Under the 1996 SOP 132,250
shares were reserved for issuance to officers, directors, and key
employees of the Corporation and its subsidiary.
The following tabulation shows the number of shares and the exercise
price of options awarded to officers, directors, and key employees by
date of grants, net of subsequent forfeitures:
SHARES GRANTED EXERCISE PRICE
-------------- --------------
July 29, 1996 106,774 $10.8125
February 1, 1997 19,000 $13.3750
September 14, 1998 4,500 $13.8750
October 12, 1998 626 $13.7500
April 19, 1999 200 $13.6250
March 12, 2001 450 $12.3130
February 15, 2002 400 $16.7500
All grants under the 1996 "SOP" are exercisable at the fair market
value at the date of the grants. The options vest with the grantees at
the rate of 20% per year on each anniversary date of the grants and
are available for exercise, subject to the vesting schedule, for up to
ten years from the grant date.
A summary of the status of the Corporation's 1996 stock option plan as
of March 31, 2003, 2002, and 2001, and changes during the periods
ending on those dates is presented below:
2003 2002 2001
---------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at
beginning of year 131,950 $11.33 132,250 $11.32 131,800 $11.32
Granted 0 -- 400 $16.75 450 $12.31
Exercised 0 -- 0 -- 0 --
Forfeited 0 -- (700) 0 --
------- ------- -------
Options outstanding at
end of year 131,950 $11.33 131,950 $11.33 132,250 $11.32
======= ======= =======
Eligible for exercise at
year end 130,255 $11.33 129,020 $11.33 103,109 $11.32
======= ======= =======
Weighted average fair value
of options granted during
the year N/A $ 5.05 $ 3.71
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 16: STOCK OPTION PLAN (Continued)
- ------- -----------------
The following information applies to the 1996 Stock Option and
Incentive Plan options outstanding at March 31, 2003:
AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE
-------------- ----------- ------------ -----
$10.8125 to $16.7500 131,950 3.5 $11.33
On July 27, 1998, the stockholders of the Corporation approved the
1998 Premium Price Stock Option Growth Plan. Under the 1998 SOP,
50,000 shares were reserved for issuance to officers, directors, and
key employees of the Corporation and its subsidiary.
The following tabulation shows the number of shares and the exercise
price of options awarded to officers, directors, and key employees by
date of grants, net of subsequent forfeitures:
SHARES GRANTED EXERCISE PRICE
-------------- --------------
February 15, 1999 5,000 $16.2950
April 19, 1999 5,550 $14.9880
April 24, 2000 24,000 $11.2750
March 12, 2001 14,350 $13.5440
These grants vest immediately with the grantees and may be exercised
at any time up to ten years.
A summary of the Corporation's 1998 Premium Price Stock Option Growth
Plan as of March 31, 2003, 2002 and 2001 and changes during the
periods ending on those dates is presented below:
2003 2002 2001
---------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding at
beginning of year 48,900 $ 12.88 50,000 $ 12.84 11,300 $ 15.57
Granted during the year 0 -- 0 -- 39,450 $ 12.10
Exercised 0 -- 0 -- 0 --
Forfeited 0 -- 1,100 $(11.28) (750) $(14.99)
------ ------ ------
Options outstanding at
end of year 48,900 $ 12.88 48,900 $ 12.88 50,000 $ 12.84
====== ====== ======
Eligible for exercise at
year end 48,900 $ 12.88 48,900 $ 12.88 50,000 $ 12.84
====== ====== ======
Weighted-average fair value of
options granted during the year N/A N/A $ 2.64
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 16: STOCK OPTION PLAN (Continued)
- ------- -----------------
The following information applies to the 1998 Premium Price Stock
Option Growth Plan at March 31, 2003:
AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE
-------------- ----------- ------------ -----
$11.2750 to $16.2950 48,900 6.0 $12.88
On August 13, 2001, the stockholders of the Corporation approved the
2001 Premium Price Stock Option Growth Plan. Under the 2001 SOP,
50,000 shares were reserved for issuance to officers, directors and
key employees of the Corporation and its subsidiary.
The following tabulation shows the number of shares and the exercise
price of options awarded to officers, directors, and key employees by
date of grants, net of subsequent forfeitures:
SHARES GRANTED EXERCISE PRICE
-------------- --------------
May 20, 2002 7,000 $22.5489
March 17, 2003 43,000 $31.8670
These grants vest immediately with the grantees and may be exercised
at any time up to ten years.
A summary of the Corporation's 2001 Premium Price Stock Option Growth
Plan as of March 31, 2003 and changes during the period ending on that
date is presented below:
MARCH 31, 2003
--------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Options outstanding at beginning of year 0 --
Granted during the year 50,000 $ 30.56
Exercised 0 --
Forfeited 0 --
------
Options outstanding at end of year 50,000 $ 30.56
======
Eligible for exercise at year end 50,000 $ 30.56
======
Weighted-average fair value of options
granted during the year $ 6.91
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 16: STOCK OPTION PLAN (Continued)
- ------- -----------------
The following information applied to the 2001 Premium Price Stock
Option Growth Plan at March 31, 2003:
AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE
-------------- ----------- ------------ -----
$22.5489 to $31.8670 50,000 9.9 $30.56
The Corporation 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 Corporation 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. Had
compensation cost for the Corporation'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 Corporation's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
MARCH 31
--------------------------------------
2003 2002 2001
---- ---- ----
Net earnings
As reported $2,920,539 $2,199,887 $1,048,245
Pro forma $2,691,386 $2,172,325 $ 894,619
Earnings per share
Basic:
As reported $ 2.77 $ 2.08 $ .97
Pro forma $ 2.56 $ 2.05 $ .83
Diluted:
As reported $ 2.55 $ 1.94 $ .96
Pro forma $ 2.35 $ 1.92 $ .82
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 16: STOCK OPTION PLAN (Continued)
- ------- -----------------
The fair value of each option grant is estimated on the date of grant
using the modified Black-Scholes option-pricing model with the
following weighted average assumptions used for grants: dividend yield
1.79%; expected volatility of 27.48%; risk free interest rate of
5.68%; and expected lives of 7 years.
NOTE 17: REGULATORY CAPITAL REQUIREMENTS
- ------- -------------------------------
As of March 31, 2000, Classic Bank was subject to minimum regulatory
capital standards promulgated by the Office of Thrift Supervision (the
"OTS"), and the former First National Bank was subject to the
regulatory capital requirements of the Federal Deposit Insurance
Corporation (the "FDIC"). During the 2001 fiscal year, Classic Bank
converted to a state chartered bank and First National Bank was merged
into Classic Bank in a consolidation of subsidiaries. The surviving
entity, Classic Bank, is now subject to the regulatory capital
requirements of the "FDIC". Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy requires the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to adjusted total assets (as defined).
As of March 31, 2003, the most recent notification from regulatory
agencies categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since those dates that
management believes have changed the bank's category. The following
table sets forth the Bank's minimum capital requirements and actual
capital as of March 31, 2003 and 2002.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 17: REGULATORY CAPITAL REQUIREMENTS (Continued)
- ------- -------------------------------
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
MARCH 31, 2003
Total Capital
(to Risk Weighted Assets) $19,738 10.8% >=$14,654 >=8.0% >=$18,317 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $17,763 9.7% >=$ 7,327 >=4.0% >=$10,990 >= 6.0%
Tier I Capital
(to Adjusted Total Assets) $17,763 7.6% >=$ 9,388 >=4.0% >=$11,735 >= 5.0%
MARCH 31, 2002
Total Capital
(to Risk Weighted Assets) $16,277 10.6% >=$12,274 >=8.0% >=$15,342 >=10.0%
Tier I Capital
(to Risk Weighted Assets) $14,649 9.5% >=$ 6,137 >=4.0% >=$ 9,205 >= 6.0%
Tier I Capital
(to Adjusted Total Assets) $14,649 7.1% >=$ 8,234 >=4.0% >=$10,293 >= 5.0%
The Corporation's principal source of funds is dividends received from
the subsidiary bank. Regulations limit the amount of dividends that
may be paid by the Corporation's banking subsidiary without prior
approval. During the fiscal year March 31, 2004, approximately
$4,123,533 plus any fiscal year 2004 net profits can be paid by the
Corporation's banking subsidiary without prior regulatory approval.
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
- ------- -----------------------------------------------------
The following condensed financial statements summarize the financial
position of the Corporation as of March 31, 2003 and 2002 and the
results of its operations and its cash flows for each of the years
ended March 31, 2003, 2002, and 2001:
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
- ------- -----------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION MARCH 31, 2003 MARCH 31, 2002
--------------------------------- -------------- --------------
ASSETS
* Cash $ 9,795 $ 688,821
Temporary investments 27,383 81,701
Securities available for sale 540,000 512,500
Accrued interest receivable 10,625 5,625
* Note receivable - ESOP 676,726 713,306
* Equity in net assets of Bank
Subsidiary 24,046,484 19,896,270
* Income taxes and other receivables
due from subsidiary 137,176 --
Other assets 18,584 121,351
------------ ------------
TOTAL ASSETS $ 25,466,773 $ 22,019,574
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 31,270 $ 34,955
Deferred income taxes 12,762 3,664
------------ ------------
TOTAL LIABILITIES 44,032 38,619
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 13,225 13,225
Additional paid-in capital 20,435,502 20,373,556
Retained earnings 7,721,067 5,136,114
Net unrealized gain (loss) on available
for sale securities 751,069 (325,896)
Treasury stock (2,888,002) (2,553,922)
Unearned ESOP shares (598,570) (643,310)
Unearned RRP shares (11,550) (18,812)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 25,422,741 $ 21,980,955
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,466,773 $ 22,019,574
============ ============
* These accounts eliminate upon consolidation.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
- ------- -----------------------------------------------------
YEARS ENDED MARCH 31,
----------------------------------------
STATEMENTS OF INCOME 2003 2002 2001
-------------------- ---- ---- ----
INCOME
* Equity in undistributed earnings
of bank subsidiaries $2,984,714 $1,138,819 $ --
* Dividends from bank subsidiaries 100,000 1,241,077 1,292,691
* Other income - management fees 60,000 60,000 127,000
* Interest income - ESOP loan 43,444 45,716 47,988
Interest and dividend income 43,332 45,164 32,797
---------- ---------- ----------
TOTAL INCOME 3,231,490 2,530,776 1,500,476
---------- ---------- ----------
EXPENSES
Salaries and benefits -- 9,731 112,499
Interest expense -- 2,579 6,612
Legal and accounting fees 62,715 60,695 65,699
* Corporate management fees 186,000 186,000 179,095
Printing and supplies 8,831 19,752 29,690
Other professional services 40,612 35,698 65,855
Directors fees 62,400 62,400 61,200
Other expenses 33,934 46,454 55,883
---------- ---------- ----------
TOTAL EXPENSES 394,492 423,309 576,533
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,836,998 2,107,467 923,943
Federal and state income
tax benefit (expense) 83,541 92,420 124,302
---------- ---------- ----------
NET INCOME $2,920,539 $2,199,887 $1,048,245
========== ========== ==========
* These accounts eliminate upon consolidation.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------
NOTE 18: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
- ------- -----------------------------------------------------
YEARS ENDED MARCH 31,
--------------------------------------------
STATEMENTS OF CASH FLOWS 2003 2002 2001
------------------------ ---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,920,539 $ 2,199,887 $ 1,048,245
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 3,541 4,094 2,745
Equity in undistributed net income
of subsidiary (2,984,714) (1,138,819) --
Earned RRP shares 7,262 43,810 105,920
Deferred income taxes - (benefit) expense (252) 331 267
Decrease (increase) in:
Accrued interest receivable (5,000) 1,667 (1,667)
Receivables due from subsidiary (137,176) -- --
Other assets 99,227 67,934 (63,889)
Increase (decrease)
Accounts payable and accrued expenses (3,685) (29,803) 14,098
Other increases -- 79,865 --
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (100,258) 1,228,966 1,105,719
----------- ----------- -----------
INVESTING ACTIVITIES:
Repayment on loan receivable from ESOP 36,580 36,580 36,579
Purchased equipment -- -- (12,910)
Dividend distribution from subsidiary in
excess of current year's earnings -- -- 10,465
Purchased securities available for sale -- -- (255,000)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 36,580 36,580 (220,866)
----------- ----------- -----------
FINANCING ACTIVITIES
Dividends paid (335,586) (339,489) (348,262)
Treasury shares purchased (334,080) (329,668) (512,536)
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (669,666) (669,157) (860,798)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (733,344) 596,389 24,055
Cash and Cash Equivalents at
Beginning of Year 770,522 174,133 150,078
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 37,178 $ 770,522 $ 174,133
=========== =========== ===========
85
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no changes in the Company's independent accountants
during the Company's two most recent fiscal years.
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 2003, which will be filed with the SEC by
July 29, 2003.
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."
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 2003, which will be filed with the SEC by July 29,
2003.
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 2003, which will be filed with the SEC by July 29,
2003.
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 2003, which will
be filed with the SEC by July 29, 2003.
The following table sets forth information with respect to securities to be
issued under the Company's equity compensation plans as of March 31, 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. 850 (Awarded but unvested) 1. N/A 1. 114
2. 1996 Stock Option and Incentive Plan 2. 131,950(1) 2. $11.29 2. 300
3. 1998 Premium Price Stock Option 3. 48,900 3. $12.88 3. 1,100
Growth Plan
4. 2001 Premium Price Stock Option 4. 50,000(1) 4. $30.56 4. ---
Growth Plan
- -----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved
by security holders
N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Total 231,700(1) N/A 1,514
- -----------------------------------------------------------------------------------------------------------------------------------
(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 2003, which will be filed with the
SEC.
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 herein by reference to Classic
Bancshares, Inc. Annual Report on Form 10-KSB for fiscal year
ended March 31, 2001).
10.2 Employment Agreement between Classic Bank and Lisah M. Frazier
(incorporated herein by reference to Classic Bancshares, Inc.'s
Annual Report on Form 10-KSB for fiscal year ended March 31,
2001).
10.3 Employment Agreement between Classic Bancshares, Inc. and Robert
S. Curtis (incorporated herein by reference to Classic
Bancshares, Inc.'s Annual Report on Form 10-KSB for fiscal year
ended March 31, 2001).
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).
88
10.8 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)
21 List of Subsidiaries
23 Consent of Smith, Goolsby, Artis & Reams, P.S.C.
99.1 Certification of David B. Barbour Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Lisah M. Frazier Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(B) REPORTS ON FORM 8-K
During the quarter ended March 31, 2003, the Company filed a Current
Report on Form 8-K dated February 25, 2003 to file amended and restated by-laws
and on February 25, 2003 to report under Item 5 for Form 8-K the issuance of a
press release announcing its earnings for the quarter ended December 31, 2002.
ITEM 14. 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 controls and has evaluated such controls
within ninety days of the filing of this report. There have not been any
significant changes in such internal controls subsequent to the date of this
evaluation.
89
ITEM 15. 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 2003, which will be filed
with the SEC by July 29, 2003.
90
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.
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
--------------------------------------- ---------------------------------------
Date: June 27, 2003 C. Cyrus Reynolds, Chairman of the Board
--------------------------------------
David B. Barbour Date: June 27, 2003
President & CEO -----------------------------
David B. Barbour, President, Chief Executive
Officer and Director (PRINCIPAL EXECUTIVE AND
OPERATING OFFICER)
Date: June 27, 2003
--------------------
/s/ Lisah M. Frazier /s/ Robert L. Bayes
--------------------------------------- ---------------------------------------
Lisah M. Frazier, Chief Operating Officer Robert L. Bayes, Executive Vice President and
and Chief Financial Officer and Director (PRINCIPAL Director
FINANCIAL AND ACCOUNTING OFFICER)
Date: June 27, 2003 Date: June 27, 2003
---------------------- ----------------------
/s/ John W. Clark /s/ E. B. Gevedon
--------------------------------------- ---------------------------------------
John W. Clark, Director E. B. Gevedon, Jr., Vice Chairman of the Board
Date: June 27, 2003 Date: June 27, 2003
---------------------- ----------------------
/s/ Robert B. Keifer, Jr. /s/ David A. Land
--------------------------------------- ---------------------------------------
Robert B. Keifer, Jr., Director David A. Lang, Director
Date: June 27, 2003 Date: June 27, 2003
---------------------- ----------------------
/s/ Jeffrey P. Lopez /s/ Robert A. Moyer
--------------------------------------- ---------------------------------------
Jeffrey P. Lopez, Director Robert A. Moyer, Jr., Director
Date: June 27, 2003 Date: June 27, 2003
---------------------- ----------------------
Certification of Principal Executive Officer and Principal Financial Officer
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-KSB
I, David B. Barbour, certify that:
1) I have reviewed this annual report on Form 10-KSB of Classic
Bancshares, Inc.:
2) Based on my knowledge, this annual report does not contain any untrue
statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statement and other financial
information included in this annual report, fairly present in all
material respects the financial condition , results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditor any material
weaknesses in internal controls; and
b) any fraud, whether material or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Signature and Title: /s/ David B. Barbour Date: June 27, 2003
------------------------------ ---------------
David B. Barbour
President & CEO
Certification of Principal Executive Officer and Principal Financial Officer
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-KSB
I, Lisah M. Frazier, certify that:
1) I have reviewed this annual report on Form 10-KSB of Classic
Bancshares, Inc.:
2) Based on my knowledge, this annual report does not contain any untrue
statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statement and other financial
information included in this annual report, fairly present in all
material respects the financial condition , results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditor any material
weaknesses in internal controls; and
b) any fraud, whether material or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Signature and Title: /s/ Lisah M. Frazier Date: June 27, 2003
------------------------------ ---------------
Lisah M. Frazier
COO/CFO
INDEX TO EXHIBITS
Number
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
99.1 Certification of David B. Barbour Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Lisah M. Frazier Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.