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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