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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
Or
__ Transition report pursuant to Section 13 or 15(d) of the Exchange Act
Commission File Number 000-49781
First Security Bancorp, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Kentucky 61-1364206
-------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
318 East Main Street, Lexington, Ky. 40507
(Address of Principal Executive Offices)
(859) 367-3700
(Issuer's Telephone Number, Including Area Code)
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 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X Yes ___ No
---
The number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: Common stock, no par value - 1,484,926
shares outstanding as of July 28, 2003.
Transitional Small Business Disclosure Format (check one):
___ Yes X No
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FIRST SECURITY BANCORP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II -OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
First Security Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
Assets June 30, December 31, June 30,
2003 2002 2002
---- ---- ----
Cash and due from banks $ 13,112 $ 4,744 $ 5,421
Federal funds sold 7,227 4,069 451
--------- --------- ---------
Total cash and cash equivalents 20,339 8,813 5,872
Securities available for sale 37,606 43,046 45,097
Loans held for sale 1,953 3,390 1,688
Loans 164,721 167,458 163,856
Less allowance for loan losses (2,294) (2,459) (1,526)
--------- --------- ---------
Net loans 162,427 164,999 162,330
Federal Home Loan Bank stock 757 742 688
Leasehold improvements, premises
and equipment, net 7,749 7,932 7,922
Accrued interest receivable 993 1,176 1,209
Other assets 1,101 988 589
--------- --------- ---------
Total Assets $ 232,925 $ 231,086 $ 225,395
========= ========= =========
Liabilities and Shareholders' Equity
Liabilities
Deposits
Non-interest bearing $ 21,337 $ 20,478 $ 17,356
Time deposits $100,000 and over 53,964 50,255 52,434
Other interest bearing 117,516 118,222 120,493
-------- -------- --------
Total Deposits 192,817 188,955 190,283
Repurchase agreements and
short-term borrowings 3,699 8,211 2,865
Federal funds purchased 2,689 -- --
Federal Home Loan Bank advances 13,614 14,517 13,490
Accrued interest payable 530 578 659
Other liabilities 259 361 193
-------- -------- --------
Total Liabilities $213,608 $212,622 $207,490
-------- -------- --------
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Shareholders' Equity
Common stock no par value 8,515 8,385 8,385
Paid-in capital 8,515 8,385 8,385
Retained earnings 1,757 1,432 869
Accumulated other comprehensive
income 530 262 266
-------- -------- --------
Total Shareholders' Equity 19,317 18,464 17,905
-------- -------- --------
Total Liabilities and Shareholders' Equity $232,925 $231,086 $225,395
======== ======== ========
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First Security Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
Interest Income
Loans, including fees $2,573 $2,791 $5,220 $5,543
Securities- taxable 172 364 368 690
Securities- nontaxable 139 174 265 333
Federal funds sold and other 27 12 47 29
--------- --------- --------- ---------
2,911 3,341 5,900 6,595
--------- --------- --------- ---------
Interest Expense
Deposits 1,259 1,614 2,598 3,414
Other 151 119 310 208
--------- --------- --------- ---------
1,410 1,733 2,908 3,622
--------- --------- --------- ---------
Net Interest Income 1,501 1,608 2,992 2,973
Provision for loan losses 324 233 469 390
--------- --------- --------- ---------
Net interest income after
provision for loan loss 1,177 1,375 2,523 2,583
Non-Interest Income
Service charges and deposit
fees 186 136 369 261
Gain on sale of loans 314 21 575 21
Gain on sale of securities - net 342 65 342 65
Other 98 76 114 115
--------- -------- -------- --------
940 298 1,400 462
Non-Interest Expense
Salaries and employee benefits 836 614 1,690 1,201
Occupancy and equipment 283 240 555 454
Data processing 86 64 184 131
Advertising 49 31 89 78
Professional fees 196 69 244 106
Taxes other than payroll, property,
and income 58 48 80 97
Other 355 202 700 393
--------- --------- --------- ---------
1,863 1,268 3,542 2,460
Income before income taxes 254 405 381 585
Provision for income taxes 52 79 56 99
--------- --------- --------- ---------
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Net income $202 $326 $325 $486
===== ===== ===== =====
Weighted average common shares outstanding:
Basic 1,476 1,456 1,468 1,456
Diluted 1,518 1,512 1,518 1,504
Earnings per share:
Basic $.14 $.22 $.22 $.33
Diluted $.13 $.22 $.21 $.32
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First Security Bancorp, Inc.
Consolidated Statement of Changes In Shareholders' Equity (Unaudited)
(in thousands)
Accumulated
Additional Other Total
--Common Stock-- Paid-In Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
Balance January 1, 2003 1,456 $ 8,385 $ 8,385 $ 1,432 $ 262 $ 18,464
Net Income - - - 325 - 325
Stock warrants exercised 26 130 130 260
Net change in unrealized gain (loss)
on securities available for sale, net
of reclassification and tax effects - - - 268 268
----- ------ ------ ------ ----- -------
Balance June 30, 2003 1,482 $8,515 $8,515 $1,757 $530 $19,317
===== ====== ====== ====== ===== =======
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First Security Bancorp, Inc.
Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended
June 30
2003 2002
---- ----
Cash flows from Operating Activities:
Net income $ 325 $ 486
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 234 215
Amortization of identified intangibles 4 2
Amortization and accretion on available for sale
securities, net 382 136
Provision for loan losses 469 390
Federal Home Loan Bank Stock dividends (15) (13)
Gain on sale of securities (342) (65)
Gain on sale of mortgage loans (575) (21)
Originations of loans held for sale (39,806) --
Proceeds from sale of loans held for sale 41,818 --
Change in assets and liabilities:
Accrued interest receivable 183 (76)
Other assets (117) (66)
Accrued interest payable (48) (173)
Other liabilities (254) (381)
-------- --------
Net cash from operating activities 2,258 434
-------- --------
Cash flows from investing activities
Net change in loans 2,102 (13,503)
Activity in available for sale securities
Maturities, Calls, and principal repayments 8,980 3,434
Purchases (7,424) (24,788)
Sales 4,265 9,393
Leasehold improvements and net purchases
of premises and equipment (51) (414)
Purchases of FHLB Stock -- (136)
Cash paid in acquisition -- (67)
-------- --------
Net cash from investing activities 7,872 (26,081)
-------- --------
Cash flows from financing activities
Net change in deposits 3,862 21,539
Net changes in repurchase agreements (4,512) (10,092)
Net changes in federal funds purchased 2,689
Proceeds from Federal Home Loan Bank
advances -- 11,300
Repayments on Federal Home Bank advances (903) (146)
Stock warrants exercised 260 --
-------- --------
Net cash from financing activities 1,396 22,601
-------- --------
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Net change in cash and cash equivalents 11,526 (3,046)
Cash and cash equivalents at beginning of period 8,813 8,918
-------- --------
Cash and cash equivalents at end of period$ 20,339 $ 5,872
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,947 $ 3,795
Income taxes $ 260 $ 530
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accounting and reporting policies of First Security Bancorp, Inc.
(the "Company") and its wholly-owned subsidiary First Security Bank of
Lexington, Inc. (the "Bank") conform to accounting principles generally accepted
in the United States of America and to predominant practices within the banking
industry. The significant policies are described below.
The Bank is a Kentucky corporation incorporated to operate as a
commercial bank under a state bank charter. The Bank generates commercial,
mortgage, and installment loans, and receives deposits from customers located
primarily in the Fayette County, Kentucky area. The majority of the Bank's
income is derived from lending activities. The majority of the Bank's loans are
secured by specific items of collateral including business assets, real estate,
and consumer assets, although borrower cash flow may also be a primary source of
repayment.
Operating Segments: Internal financial information is primarily
recorded and aggregated in two lines of business, banking and mortgage banking.
While management monitors the revenue streams of the various products and
services, the identifiable segments are not material and operations are managed
and financial performance is evaluated on a Company-wide basis. Accordingly, all
financial service operations are considered by management to be aggregated
within one reportable operating segment.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions for Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Where
appropriate, some items in the prior period financial statements have been
reclassified to conform to the current presentation.
Operating results for the three-month and six-month periods ending June 30, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003.
Compensation expense under Company stock option arrangements is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation were followed.
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except for per share data)
Net income as reported $ 202 $ 326 $ 325 $ 486
Deduct: Stock based compensation
expense determined under fair
market value based method (12) (242) (133) (254)
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------ -------- ------- -------
Pro forma net income $ 190 $ 84 $ 192 $ 232
====== ======== ======= =======
Basic earning per share as reported $ .14 $ .11 $ .22 $ .33
Pro forma basic earnings per share $ .13 $ .06 $ .13 $ .16
Diluted earnings per share as reported $ .13 $ .22 $ .21 $ .32
Pro forma diluted earnings per share $ .13 $ .06 $ .13 $ .15
NOTE 2 - SECURITIES
The amortized cost and fair value of available for sale securities and the
related unrealized holding gains and losses were as follows:
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- ------------- ------
(in thousands)
Available for Sale
June 30, 2003
U. S. Government and
Federal Agency $ 4,880 $ 105 $ -- $4,985
State and Municipal 9,922 498 -- 10,420
Mortgage-backed 22,000 201 -- 22,201
------- --------- -------- ------
Total debt securities $36,802 $ 804 $ -- $37,606
======= ========== ========== =======
December 31, 2002
U. S. Government and
Federal Agency $ 1,009 $ 8 $ -- $1,017
State and Municipal 14,072 241 (62) 14,251
Mortgage-backed 27,580 200 (2) 27,778
-------- ---------- --------- ------
Total debt securities $ 42,661 $ 449 $ (64) $43,046
======== ========== ======== =======
Securities pledged at June 30, 2003 and year-end 2002 had carrying
amounts of $5.0 million and $4.8 million, respectively, and were pledged to
secure customer repurchase agreements.
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NOTE 3 - LOANS
Loans at June 30, 2003 and December 31, 2002 consisted of the following:
June 30, 2003 December 31, 2002
------------- ------------------
(in thousands)
Commercial $ 40,458 $ 47,612
Real Estate:
Commercial 67,991 64,325
Residential 16,051 17,871
Construction 23,423 20,664
Home Equity 10,634 10,180
Consumer Credit Card 819 1,033
Consumer 5,345 5,773
--------- ----------
$ 164,721 $ 167,458
========= ==========
Changes in the allowance for loan losses were as follows:
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Beginning balance $2,570 $1,679 $2,459 $1,538
Provision 324 233 469 390
Recoveries 2 2 11 4
Loans charged off (602) (388) (645) (406)
-------- -------- -------- --------
Ending balance $2,294 $1,526 $2,294 $1,526
====== ====== ====== ======
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NOTE 4: EARNINGS PER SHARE
Earnings per share were computed as follows:
Three Months Ended Six Months Ended
June 30 June 30
2003 2002 2003 2002
-------- -------- --------- --------
(in thousands, except for per share data)
Basic
Net Income $ 202 $ 326 $ 325 $ 486
Weighted average common
shares outstanding 1,476 1,456 1,468 1,456
Basic earnings per common share $ .14 $ .22 $ .22 $ .33
Diluted
Net Income $ 202 $ 326 $ 325 $ 486
Weighted average common
shares outstanding 1,476 1,456 1,468 1,456
Add: Dilutive effects of assumed
exercises of stock warrants
and options 42 56 49 48
----- ------ ------ ------
Average shares and dilutive
potential common shares 1,518 1,512 1,518 1,504
===== ===== ===== =====
Diluted earnings per common share $ .13 $ .22 $ .21 $ .32
Stock options for 65,500 shares of common stock were excluded from the
calculations for the three and six month periods ended June 30, 2003 because
their impact was antidilutive.
NOTE 5 - STOCK OPTIONS
The Company maintains a stock option plan whereby certain employees of
the Company are eligible to receive incentive stock options. The Plan is
accounted for in accordance with Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees", and related interpretations.
Under the Plan, a maximum of 200,000 shares of the Company's common stock may be
issued through the exercise of these options. The option price is the fair
market value of the Company's shares at the date of the grant. The options are
exercisable in five to ten years from the date of grant and vest either
immediately or over a five-year period.
During the first quarter of 2003 the Company awarded each external
(non-employee) member of the Board of Directors one thousand (1,000) options to
purchase shares of the Company's common stock. These options were granted in
recognition of services to the Company in lieu of directors fees for the
preceding year and were established at an exercise price of $19.55 per share,
which equaled the most
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recent market price of the stock at the date of the grant. An aggregate to
twenty-two thousand (22,000) options were granted at that time.
NOTE 6 - ACQUISTION
On June 3, 2002, the Bank acquired certain assets of First Mortgage
Company, Inc. ("First Mortgage") in Lexington, Kentucky. First Mortgage
originated mortgage loans for sale into the secondary market. The purchase
agreement included a purchase price of up to $476,000, $69,000 of which was due
at closing. The remainder of the purchase price is payable contingent upon the
earnings of the mortgage division of the Bank over the next four years. During
2003, no additional contingent liability has been accrued, based on the minimum
profitability levels required for such additional contingent payments. The
agreement also requires the Bank to enter into a four-year employment agreement
with First Mortgage's former shareholder and president at a salary level similar
to that of other executives of the Bank.
NOTE 7 - SUBSEQUENT EVENT
On July 11, 2003, the Company's president (who also held the position
of chairman of the board of directors) resigned effective September 1, 2003.
Coincident with the acceptance of his resignation, the Company and the president
entered into a termination agreement which provides for a continuation of salary
and benefits for a limited period in exchange for, among other benefits to the
Company, a non-competition agreement covering a period of one year. The cost to
the Company is approximately $90,000 and was recorded as a liability in the
Company's financial statements in the third quarter of 2003 such that the
present value of the contract was expensed commensurate with the signing and
effective date of the agreement.
Part I Item 2.
Management's Discussion and Analysis or Plan of Operation
General
First Security Bancorp is a one bank holding company that conducts
business through its wholly-owned subsidiary, First Security Bank, a commercial
banking organization organized under the laws of the Commonwealth of Kentucky.
First Security Bank offers a variety of products and services through four full
- -service offices including the acceptance of deposits for checking, savings and
time deposit accounts; extension of secured and unsecured loans to corporations,
individuals and others; issuance of letters of credit; and rental of safe
deposit boxes. First Security Bank's lending activities include commercial and
industrial loans, real estate, installment, and other consumer loans and
revolving credit plans. Operating revenues are derived primarily from interest
and fees on loans and from interest on investment securities. The Bank also
engages in mortgage banking activities originating loans for sale in the
secondary market.
On July 11, 2003 the Bank's president resigned, with an effective date
of September 1, 2003. The president also resigned as chairman of the board of
directors, but remains as a member of the board. The chairman of the Bank's
Executive Committee of the Board was elected as the new Chairman of the Board on
July 15, 2003. The board of directors is presently evaluating candidates to
succeed the president on or before his departure date of September 1, 2003.
The Company has made, and may continue to make, various forward-looking
statements with respect to credit quality (including delinquency trends and the
allowance for loan losses), corporate objectives and other financial and
business matters. When used in this discussion the words "anticipate,"
"project," "expect," "believe," and similar expressions are intended to identify
forward-looking statements. In addition to factors disclosed by First Security
Bancorp, the following factors, among
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others, could cause actual results to differ materially from such
forward-looking statements: Pricing pressures on loan and deposit products;
competition; changes in economic conditions both nationally and in our market;
the extent and timing of actions of the Federal Reserve Board; customers'
acceptance of our products and services; the extent and timing of legislative
and regulatory actions and reforms; and other factors disclosed periodically in
the Company's filings with the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking
statements, readers of this report on Form 10-QSB are cautioned not to place
undue reliance on such statements, whether included in this report or made
elsewhere from time to time by the Company or on its behalf. The Company assumes
no obligation to update any forward-looking statements.
Overview
The mission of First Security Bank is to firmly establish itself in
Lexington, Kentucky as a full-service bank providing traditional products and
services typically offered by commercial banks. The Lexington banking market is
highly competitive with 19 commercial banks and thrift institutions currently
serving the market. Most of the banks in Lexington are part of larger bank
holding companies headquartered outside of the Lexington/Fayette County market
and Kentucky. Promoting local management has proven effective for the Bank in
attracting customers, fostering loyalty and establishing and maintaining strong
asset quality.
Results of Operations
Net Income
Net income for the three months ended June 30, 2003 was $202,000, as
compared to $326,000 for the same period in 2002. Net income for the six month
period ended June 30, 2003 was $325,000, as compared to $486,000 for the same
period in 2002. The decline in net income for both comparable periods resulted
primarily from increases in the provision for loan losses and increases in
non-interest expenses. Also impacting the current quarter was a decline in net
interest income.
Decreases in net interest income are attributable primarily to
decreases in investment income caused by the rapid decline in interest rates
over the last four quarters. Over this time span, the bank had made substantial
investments in mortgage backed securities, in the form of investments in
mortgage pools, often paying a premium for the investments. As general interest
rates have fallen, borrowers whose mortgage debt was included in the pools,
refinanced their debt to obtain lower rates. This caused these investments to be
repaid much faster than anticipated. With the faster repayment, the premiums on
the investments were written off against investment income, causing the yields
to decline. In addition, the proceeds from the repayments were reinvested into
lower yielding investments, such as federal funds sold and other U.S. Government
and Agency bonds.
For the six months ended June 30, the bank's provision for loan losses
was $469,000 as compared to $390,000 for the comparable period of 2002. The
majority of this increase between 2002 and 2003 was attributable to two problem
credits relationships in the bank, one of which was both fully reserved for and
charged off during the second quarter of 2003.
Net Interest Income
The Company's principal source of revenue is net interest income. Net
interest income is the difference between interest income on interest-earning
assets, such as loans and securities, and the interest expense on liabilities
used to fund those assets, such as interest-bearing deposits and borrowings. Net
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interest income is impacted by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities as well as market
interest rates.
The change in net interest income is typically measured by changes in
net interest spread and net interest margin. Net interest spread is the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities. Net interest margin is determined by
dividing net interest income by interest-earning assets.
Net interest income was $1,501,000 for the three months ended June 30,
2003, as compared to $1,608,000 in 2002, resulting in a decline of $107,000 or
6.65%. On a year-to-date basis through June 30, net interest income totaled
$2,992,000 for 2003, essentially unchanged from the $2,973,000 for the same
period in 2002.
Net interest margin was 2.76% for the quarter ended June 30, 2003
versus 3.14% for the quarter ended June 30, 2002. The net interest margin for
the quarter ended June 30, 2003 was essentially unchanged from the 2.74% for the
first quarter of 2003.
Net interest spread was 1.97% for the three months ended June 30, 2003,
as compared to 2.27% for the same period in 2002. The net interest spread for
the second quarter of 2003 improved slightly from the 1.94% level of the first
quarter of 2003. Net interest spread increased during the quarter as a result of
rates paid on deposits decreasing faster than the decrease in yields on interest
bearing assets.
The decrease in net interest margin and net interest spread on a year
to year comparison and the decrease in net interest income during the quarter
resulted from the steep declines in the general interest rate environment that
have occurred over the last three quarters. During this time frame, the bank has
reinvested maturities and repayments of investment securities and loans into
highly liquid, lower yielding federal funds sold and other U.S. Government and
Agency obligations. During this time frame, the cost of deposits and other
funding sources has not declined as rapidly as the yield on loans and
investments, because a large portion of the deposit base and other funding
sources, such as advances from the Federal Home Loan Bank, were previously
entered into with original maturities greater than one year. Thus, while income
yields have fallen dramatically, rate adjustments to funding costs are
essentially on a delayed basis, with the benefits of a falling interest rate
environment to be realized over the next several quarters.
Non-Interest Income and Expenses
Non-interest income is made up of several income categories, including
service charges, fees on deposit accounts, gain on sale of loans, gains on sale
of securities, and other fees. Non-interest income increased to $940,000 for the
three months ended June 30, 2003, as compared to $298,000 earned in the same
period in 2002. On a year-to-date basis, non-interest income increased to
$1,400,000 from $462,000 for the same period in 2002. The increase in
non-interest income is primarily attributable to increases in gains from the
sale of mortgage loans and securities.
Total non-interest expense increased to $1,863,000 for the three months
ended June 30, 2003 as compared to $1,268,000 for the same period in 2002. On a
year-to-date basis, total non-interest expense increased to $3,542,000 as
compared to $2,460,000 for the same period in 2002. The increase in non-interest
expense for these comparable periods is primarily attributable to increases in
salaries and benefits and occupancy and equipment expenses relating to the
operation of the Bank's mortgage banking division (see Note 6) and increases in
legal and professional fees relating to strategic planning matters and problem
loan administration.
Salaries and benefits increased to $836,000 for the three months ended
June 30, 2003 as compared to $614,000 for the same period in 2002. On a
year-to-date basis, salaries and benefits increased to $1,690,000 as compared to
$1,201,000 for the same period in 2002. As previously noted, the
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primary cause of this increase is the cost of additional staff in the mortgage
banking division, which was started in May, 2002. The number of full-time
equivalent employees at June 30, 2003 was 63, as compared to 53.5 at June 30,
2002 and 56.5 at December 31, 2002. The increase in staffing levels is a result
of the continued expansion of customer services and the acquisition of First
Mortgage (see Note 6).
Occupancy and equipment expenses totaled $283,000 for the three months
ended June 30, 2003, as compared to $240,000 for the same period in 2002. On a
year-to-date basis, occupancy and equipment expenses totaled $555,000, as
compared to $454,000 for the same period in 2002.
Financial Condition
Total assets increased slightly during the quarter, from $230.2 million
at March 31, 2003 to $232.9 million at June 30, 2003. On a year-to-date basis,
total assets remained essentially flat, increasing from $231.1 million at
December 31, 2002 to $232.9 million at June 30, 2003.
Earning assets before deduction for the allowance for loan losses as of
June 30, 2003 were $212.3 million, as compared to $219.2 million at March 31,
2003 and $218.7 million at December 31, 2002. The decline in the measurement of
the one-day balance is attributable to excess funds held in a non-interest
bearing correspondent account pending investment. For the three month and six
month periods ended June 30, 2003, average earning assets totaled $217.7 million
and $217.1 million, respectively.
Investment Securities
First Security Bank's investment portfolio consists primarily of state
and municipal bonds and mortgage backed bonds. The amortized cost of investment
securities decreased from $40.5 million as of March 31, 2003 to $36.8 million at
June 30, 2003. The decrease in investment securities was primarily the result of
the sale of approximately $3.8 million in state and municipal bonds and
principal repayments on mortgage-backed securities.
Loans
Loans, net of the allowance for loan losses, increased $4.8 million
during the quarter from $157.6 million as of March 31, 2003 to $162.4 million as
of June 30, 2003. For the six month period ended June 30, 2003, loans, net of
the allowance for loan losses, decreased by $2.6 million, from $165 million at
December 31, 2002 to the $162.4 million balance at June 30, 2003.
The decline for the six month period was a result of several large
commercial repayments in the first quarter of 2003. Most of these repayments
were expected. The increase during the second quarter was the result of efforts
by the bank to replenish the paid off loans.
As of December 31, 2002, March 31, 2003 and June 30, 2003,
approximately 67% of the Bank's loan portfolio was in loans to commercial
businesses and commercial real estate borrowers. Loans in the consumer sector of
the portfolio, which includes consumer mortgage and other consumer loans,
comprised approximately 33% of the portfolio as of the end of both periods. The
Bank desires increased penetration within the consumer loan market and believes
its new branch locations should help build new customer relationships.
Allowance and Provision for Loan Losses
The provision for loan losses for the three month period ended June 30,
2003 and 2002, respectively, was $324,000 and $233,000. The provision for the
six month year-to-date period ended June 30, 2003 and 2002 was $469,000 and
$390,000, respectively. Net loans charged off for the six month periods June 30,
2003 and 2002, respectively, was $634,000 and $402,000. Included in the net
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loan charge-offs in 2003 was approximately $418,000 relating to one customer. In
addition to that charge off of $418,000, the Bank recognized a loss of $100,000
on the disposition of collateral pledged by that customer. The allowance for
loan losses to total loans was 1.39% as of June 30, 2003 as compared to 1.47% at
December 31, 2002 and .93% at June 30, 2002.
The level of non-performing assets is an important element in assessing
asset quality and the relevant risk in the Bank's credit portfolio.
Non-performing assets include non-accrual loans, loans delinquent 90 days or
more, restructured loans and repossessed assets. Loans are classified as
non-accrual when management believes that collection of interest is doubtful,
but for which principal is considered collectible. A loan is defined as impaired
when full payment under the terms is not expected. Impaired loans also include
troubled debt restructurings. Impairment is evaluated on an aggregate basis for
smaller balance loans of similar nature such as residential mortgage and
consumer loans, and on an individual basis for larger balance commercial loans.
The Bank's policy is to charge off all or a portion of an impaired loan upon
determination that it is probable the full amount will not be collected. As of
June 30, 2003, nonperforming assets totaled $4.6 million compared to $6 million
at March 31, 2003 and $6.7 million as of December 31, 2002. Non-performing
assets as a percentage of total loans was 2.80% at June 30, 2003, as compared to
3.77% at March 31, 2003 and 3.97% at December 31, 2002. These decreases were due
to an increased effort by management to identify problem credits, to charge off
credits deemed to be uncollectible and to enforce collection on delinquent
loans.
Included in non-performing assets are loans that are considered to be
troubled debt restructurings in the amount of approximately $3.3 million. These
loans to a troubled franchise restaurant operator were restructured as of
December 31, 2002 in an effort by the Bank to gain additional security in the
form of cash, liens on business assets and certain franchise rights and
mortgages. However, there can be no assurance as to the value of such additional
collateral, nor assurance as to the immunity of the Bank's security position in
the event of a bankruptcy proceeding involving such borrower.
The allowance for loan losses is regularly evaluated by management and
reported monthly to the Board of Directors. Management maintains the allowance
for loan losses at a level believed to be sufficient for probable incurred
losses in the portfolio at a point in time. Management's allowance for loan
losses estimate consists of specific and general reserve allocations as
influenced by various factors. Such factors include changes in lending policies
and procedures; underwriting standards; collection, charge-off and recovery
history; changes in national and local economic business conditions and
developments; changes in the characteristics of the portfolio; ability and depth
of lending management and staff; changes in the trend of the volume and severity
of past due, non-accrual and classified loans; troubled debt restructuring and
other loan modifications; and results of regulatory examinations.
During the second half of 2002, in an effort to improve its collection
process and loan review, the Bank hired a Chief Credit Officer, a Credit Manager
and an independent consultant to perform review of loans. As a result of this
increased attention and increased effort to analyze credit risk and collateral,
a few loans have received a downgrade on their risk ratings. These downgrades
have led to additional provisions to the allowance for loan losses. Management
believes this process has been effective and that no further provisions for loan
losses related to these loans are necessary based on information currently
available.
To evaluate the loan portfolio, management has also established loan
grading procedures. These procedures establish a grade for each loan upon
origination which is periodically reassessed throughout the term of the loan.
Grading categories include highest quality, above average, average, low average,
watch, substandard, doubtful, and loss. Loans graded watch or worse also include
loans severely past-due and those not accruing interest. Specific reserve
allocations are calculated for individual loans having been graded watch,
substandard, doubtful, and loss based on the specific estimated collectability
(and by reference, estimated inherent risk of loss) of each loan. The aggregate
of the estimated inherent risk of loss then becomes a portion of the allowance
for loan losses to be specifically allocated to that loan. These calculations
are referred to as specific allocations.
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For loans not individually graded watch, substandard, doubtful or loss,
an estimated loss factor is calculated and applied to each category, after
reducing the category amounts for cash equivalent collateral held by the bank
(such as certificates of deposit issued by the bank and held as collateral) and
guaranties from the federal government (such as SBA guaranties). A general
allowance allocation is computed using totals of each loan grading category (as
adjusted) multiplied by an estimated loss factor applied to each grading
category. The sum of the calculation for each grading category represents the
general allowance. These loss factors are typically developed over time using
actual loss experience adjusted for the various factors discussed above.
The sum of the specific allocations and the general allocation
represents management's best estimate of the probable incurred losses contained
in the loan portfolio at the measurement date.
Management believes the allowance for loan losses at June 30, 2003 was
adequate. Although we believe we use the best information available to make
allowance provisions, future adjustments which could be material may be
necessary if the assumptions used to determine the allowance differ from future
loan portfolio performance.
Deposits and Other Borrowings
The deposit base provides the major funding source for earning assets.
Total deposits increased by $3.9 million from December 31, 2002 to June 30,
2003. Non-interest bearing demand deposits increased as a percentage of total
deposits from 10.3% as of December 31, 2002, to 11.1% as of June 30, 2003.
The table below illustrates our deposits by major categories as of June
30, 2003 and December 31, 2002:
DEPOSITS
June 30, December 31
2003 2002
---- ----
(in thousands)
Interest-bearing demand deposits $ 20,014 $ 19,472
Savings deposits 20,847 20,634
Time deposits less than $100,000 76,655 78,116
Time deposits $100,000 and over 53,964 50,255
--------- --------
Total interest-bearing deposits 171,480 168,477
Total non-interest-bearing deposits 21,337 20,478
-------- --------
Total $192,817 $188,955
======== ========
Liquidity
Liquidity management is the process by which management attempts to
ensure that adequate liquid funds are available to meet financial commitments on
a timely basis. These commitments include
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withdrawals by depositors, funding credit obligations to borrowers, servicing
long-term obligations, paying operating expenses, funding capital expenditures
and maintaining reserve requirements. Liquidity is monitored closely by the
Asset/Liability Management Committee of the First Security Bank Board of
Directors, which monitors interest rates and liquidity risk while implementing
appropriate funding and balance sheet strategies.
The Bank has established a limited number of alternative or secondary
sources to provide additional liquidity and funding sources when needed to
support lending activity or other liquidity needs. These alternative funding
sources currently include unsecured federal funds lines of credit from five
correspondent banks aggregating approximately $24 million; a secured repurchase
agreement line of credit from a correspondent bank based upon the market value
of pledged securities; and a secured repurchase agreement arrangement with an
agency of the Commonwealth of Kentucky. Additionally, First Security Bank is a
member of the Federal Home Loan Bank of Cincinnati which allows First Security
Bank to borrow based on the level of qualifying residential loans which serve as
collateral for this type of borrowing. At June 30, 2003, First Security Bank
could borrow an additional $24 million based on available collateral.
The Bank had total other borrowings of $20 million as of June 30, 2003
as compared to $22.7 million as of December 31, 2002. Borrowings at June 30,
2003 were in the form of customer repurchase agreements and federal funds
purchased in the aggregate amount of $6.4 million, and Federal Home Loan Bank
advances in the amount of $13.6 million. Customer repurchase agreements and
federal funds purchased are all deemed to be short term in nature. The Federal
Home Loan Advances consist of nine advances, with maturities ranging from May
28, 2004 through December 1, 2016. The aggregate repayment requirement on these
advances is as follows:
Amount
Repayment Terms (in thousands)
--------------- --------------
0 - 1 Year $ 4,225
1 - 2 Years 2,307
2 - 3 Years 2,154
3 - 4 Years 445
5 Years and beyond 4,483
----------
Total $13,614
======
The need for future borrowing arrangements above current levels will be
evaluated by management with consideration given to the growth prospects of the
loan portfolio, liquidity needs, costs of deposits, market conditions and other
factors. Short-term liquidity needs for periods of up to one year may be met
through federal funds lines of credit, borrowings and short-term Federal Home
Loan Bank advances. The Federal Home Loan Bank additionally offers advance
programs of varying maturities for terms beyond one year.
Capital
Under generally accepted accounting principles, total shareholders'
equity as of December 31, 2002 was $18.5 million or 8.00% of assets. Total
shareholders' equity as of June 30, 2003 increased to $19.3 million or 8.29% of
assets.
Regulatory agencies measure capital adequacy within a framework that
makes capital requirements, in part, dependent on the individual risk profiles
of financial institutions. These measurements of "risk based capital" include
equity capital, the allowance for loan losses in the capital base, and assess
risk levels to various assets, depending upon their individual risk assignment.
These capital measurements are referred to as tier 1 capital, tier two capital
and total capital.
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The Company and the Bank exceed the regulatory requirements for all
three capital ratios. First Security Bancorp intends to maintain a capital
position that meets or exceeds the "well-capitalized" requirements as defined by
these regulations by exploring opportunities to raise new capital or moderate
its growth rate at levels sustaining a well capitalized position.
In addition to capital regulations, state banking regulations may limit
the Bank's ability to pay dividends to the Company without prior approval. Under
these regulations, the Bank may pay dividends in any calendar year only to the
extent of current year's net profits plus the retained net profits of the
preceding two years and not in excess of the balance of retained earnings then
on hand. The Company also has regulatory limits on dividends, but less
restrictive. The Company does not anticipate paying dividends to shareholders
for the next several years as any earnings generated will be retained to support
future growth opportunities.
Part I. Item 3.
Controls and Procedures
Company management has evaluated, with the participation of the Chief
Executive Officer and the Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the quarter
covered by the report. Based on the evaluation, the Chief Executive Officer and
the Chief Financial Officer have concluded that the disclosure controls and
procedures were effective as of the end of the quarter, in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion.
No change in the Company's internal control over financial reporting
was identified in connection with the evaluation that occurred during the
quarter ended June 30, 2003, that materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of First Security Bancorp, Inc. was
held May 20, 2003. Matters submitted to, and approved by, shareholders are
listed below, as is a tabulation of voting. There were no broker non-votes.
(1) Election of Directors: The following persons nominated as directors
were elected:
Withheld
Votes For Authority
John S. Shropshire 1,212,444 41,650
Dennis R. Anderson 1,252,094 2,000
John D. Barlow 1,252,094 2,000
Erle L. Levy 1,252,094 2,000
David R. McCulloch 1,252,094 2,000
Ira P. Mersack, M.D. 1,252,094 2,000
D. Woodford Webb, Jr. 1,252,094 2,000
The names of the other directors whose term of office as a director
continued after the meeting are as follows:
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Len Aldridge Kenneth L. Gerson, M.D. Harold G. Campbell
A. F. Dawahare Ronald J. Saykaly, M.D. Kathy E. Walker
Julian E. Beard Tommy R. Hall Robert J. Rosenstein
Richard S. Trontz William T. Vennes William A. Combs
Nick O. Rowe*
* Mr. Rowe resigned subsequent to June 30, 2003.
(2) Proposal to approve an amendment to the First Security Bancorp, Inc.
Stock Award Plan to increase the number of shares subject to awards
granted under the Stock Award Plan:
Votes For Against Abstain
--------- ------- -------
974,187 23,450 14,672
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index of this Form 10-QSB are
filed or furnished as a part of this report.
(b) Reports on Form 8-K
A report on Form 8-K dated April 22, 2003 was filed by the
registrant reporting under Item 5 the appointment of John G.
Sullivan as the registrant's Executive Vice President and Chief
Financial Officer.
A report on Form 8-K dated May 22, 2003 was filed by the
registrant reporting the registrant's earnings for the quarter
ending March 31, 2003.
A report on Form 8-K dated July 11, 2003 was filed by the
registrant reporting under Item 5 the resignation effective
September 1, 2003 of the Company's President and Chief Executive
Officer, John S. Shropshire.
A report on Form 8-K dated July 28, 2003 was filed by the
registrant reporting under Item 5 the announcement that Len
Aldridge had been elected as Chairman of the Board of Directors.
A report on Form 8-K dated August 6, 2003 was furnished by the
registrant on August 18, 2003, to furnish, pursuant to Item 12,
the registrant's earnings release for the quarter ending June 30,
2003.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First Security Bancorp, Inc.
By: /s/ John S. Shropshire
Date: August 19, 2003 ________________________________
John S. Shropshire
President and Chief Executive Officer
By: /s/ John G. Sullivan
Date: August 19, 2003 _________________________________
John G. Sullivan
Chief Financial Officer andE xecutive Vice-President
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EXHIBITS
Exhibit 10.1 First Security Bancorp, Inc. Stock Award Plan, as amended and
restated as of March 18, 2003 is incorporated by reference to
Exhibit 10.9 to the Form 10-K of First Security Bancorp, Inc.
for the year ended December 31, 2002 (Commission File No.
000-49781).
Exhibit 10.2 Severance Agreement for John S. Shropshire
Exhibit 11. Statement regarding computation of Per Share Earnings in
the Notes to Consolidated Financial Statements in Part 1 of
this Report for such computation (see Note 4 "Earnings Per
Share").
Exhibit 31. Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1. Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.2 Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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