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 September 30, 2002
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 (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 - 1,456,250
shares outstanding as of November 14, 2002.
Transitional Small Business Disclosure Format (check one):
___ Yes X No
FIRST SECURITY BANCORP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................3
Consolidated Balance Sheets.....................................3
Consolidated Statements of Income...............................5
Consolidated Statement of Changes in Shareholders' Equity.......7
Consolidated Statements of Cash Flows...........................8
Notes to Consolidated Financial Statements ....................10
Item 2. Management's Discussion and Analysis or Plan of Operation...........13
Item 4: Controls and Procedures ............................................20
PART II -OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................20
Signatures.....................................................20
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.....................................21
Exhibit Index..................................................23
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
First Security Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
Assets September 30, December 31,
2002 2001
Cash and due from banks $ 4,706 $ 4,521
Federal funds sold 1,168 4,397
---------- ----------
Total cash and cash equivalents 5,874 8,918
Securities available for sale 52,335 32,309
Mortgage loans held for sale 4,172 0
Loans 160,227 152,422
Less allowance for loan losses (1,675) (1,538)
---------- ----------
Net loans 158,552 150,884
FHLB stock 729 539
Leasehold improvements, premises
and equipment, net 7,993 7,656
Accrued interest receivable 1,164 1,133
Other assets 693 831
---------- ---------
Total Assets $231,512 $202,270
====== ======
Liabilities and Shareholders' Equity
Liabilities
Deposits
Non-interest bearing $ 19,218 $ 12,575
Time deposits $100,000 and over 46,844 44,498
Other interest bearing 120,380 111,671
------------ -------------
Total Deposits 186,442 168,744
Repurchase agreements and
short-term borrowings 11,047 12,957
Federal Home Loan Bank advances 14,271 2,336
Accrued interest payable 608 832
Other liabilities 434 574
------------ -------------
Total Liabilities $ 212,802 $ 185,443
Shareholders' Equity
Common stock, no par value 8,385 8,385
Paid-in capital 8,385 8,385
Retained earnings 1,340 383
Accumulated other comprehensive
income, net of tax 600 (326)
-------- ---------
Total Shareholders' Equity 18,710 16,827
-------- ---------
Total Liabilities and Shareholders' Equity $231,512 $202,270
====== ======
First Security Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Interest Income
Loans, including fees $ 2,822 $ 2,827 $ 8,365 $ 7,792
Securities- taxable 390 230 1,080 713
Securities- nontaxable 138 110 471 185
Federal funds sold 13 21 28 185
Other 9 7 23 30
3,372 3,195 9,967 8,90
Interest Expense
Deposits 1,562 1,854 4,976 5,323
Other Borrowings 156 90 364 196
1,718 1,944 5,340 5,519
Net Interest Income 1,654 1,251 4,627 3,386
Provision for loan losses 272 120 662 321
Net interest income after provision
for loan loss 1,382 1,131 3,965 3,065
Noninterest Income
Service charges and deposit fees 198 73 459 156
Securities gains 303 100 368 195
Gain on sale of loans 211 0 232 0
Other 58 54 173 92
770 227 1,232 443
Noninterest Expense
Salaries and employee benefits 753 492 1,954 1,328
Occupancy and equipment 251 166 705 358
Data processing 38 42 136 124
Advertising 62 46 140 119
Professional fees 55 39 161 107
Taxes other than payroll, property,
and income 48 37 145 104
Other 268 153 694 406
1,475 975 3,935 2,546
Income before income taxes 677 383 1,262 962
Provision for income taxes 206 60 305 60
Net Income $471 $ 323 $ 957 $902
Weighted average common shares outstanding:
Basic 1,456 1,456 1,456 1,455
Diluted 1,521 1,491 1,508 1,490
Earnings per share:
Basic $ 0.32 $ 0.22 $ 0.66 $ 0.62
Diluted 0.31 0.22 0.63 0.61
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, 2002 1,456 $ 8,385 $ 8,385 $ 383 $ (326) $ 16,827
Net Income - - - 957 - 957
Change in unrealized gain (loss)
on securities available for sale, net
of reclassification and tax effects- - - 926 926
Total comprehensive income - - - - 1883
------- -------- -------- -------- -------- --------
Balance September 30, 2002 1,456 $ 8,385 $ 8,385 $1,340 $ 600 $ 18,710
==== ===== ===== ===== ===== =====
First Security Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
September 30,
2002 2001
Cash Flows from Operating Activities
Net income $ 957 $ 902
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 333 172
Amortization of identified intangibles 6 0
Amortization and accretion on available
for sale securities, net 242 (29)
Provision for loan losses 662 321
Federal Home Loan Bank Stock dividends (21) (15)
Gain on sale of securities (368) (195)
Gain on sale of loans (232) 0
Change in assets and liabilities:
Mortgage loans held for sale (4,172) 0
Accrued interest receivable (31) 25
Other assets (284) (307)
Accrued interest payable (203) 133
Other liabilities (141) 329
-------- -------
Net cash from operating activities (3,252) 1,336
Cash Flows from Investing Activities
Net change in loans (8,098) (38,242)
Activity in available for sale securities
Maturities, Calls,
and principal repayments 5,889 6,792
Purchases (54,089) (27,801)
Sales 29,689 13,351
Leasehold improvements and net purchases
of premises and equipment (670) (1,455)
Purchases of FHLB stock (169) (91)
Cash paid in acquisition (67) 0
----------- -----------
Net cash from investing activities (27,515) (47,446)
Cash Flows from Financing Activities
Net change in deposits 17,698 44,689
Net changes in securities sold under agreements
to repurchase (1,910) 4,205
Repayments on Federal Home Loan Bank advance (565) (8)
Issuance of common stock - 628
Proceeds from Federal Home Loan Bank advances12,500 0
---------- ----------
Net cash from financing activities 27,723 49,514
---------- ----------
Net change in cash and cash equivalents (3,044) 3,404
Cash and cash equivalents at beginning of period 8,918 8,298
--------- ---------
Cash and cash equivalents at end of period $ 5,874 $ 11,702
===== =====
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for: Interest $ 5,564 $ 5,386
Income taxes 530 0
FIRST SECURITY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. The
Company's internal information is reported and evaluated in two segments
(meaning for these purposes parts of an entity evaluated by management using
separate financial information) namely, banking and mortgage banking. These
segments are dominated by transactions of a magnitude for which separate
individual segment disclosures are not required.
Recent Accounting Pronouncements: Beginning January 1, 2002, a new standard
requires all business combinations to be recorded using the purchase method of
accounting for any transaction initiated after June 30, 2001. Under the purchase
method, all identifiable tangible and intangible assets and liabilities of the
acquired company must be recorded at fair value at date of acquisition and the
excess of cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets must be separated from goodwill. Identifiable
intangible assets with finite useful lives will be amortized under the new
standard, whereas goodwill, both amounts previously recorded and future amounts
purchased, will cease being amortized starting in 2002. Annual impairment
testing will be required for goodwill with impairment being recorded if the
carrying amount of goodwill exceeds its implied fair value. The company's
adoption of this standard did not have a material effect.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. 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. Operating results for the
nine-month period ending September 30, 2002 are not necessarily indicative of
the results that are expected for the year ended December 31, 2002.
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
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Securities available for sale:
September 30, 2002
Securities available for sale:
U. S. Government Agency $ 2,190 $40 $ 0 $2,230
State and Municipal 12,496 545 (4) 13,037
Mortgage-backed 36,753 316 (1) 37,068
---------- ----- -------- ----------
Total securities available for
sale $ 51,439 $ 901 $(5) $52,335
====== === ===== ======
December 31, 2001
Securities available for sale:
U. S. Government Agency $ 500 $ 3 - $ 503
State and Municipal 13,381 1 (449) 12,933
Mortgage-backed 18,923 98 (148) 18,873
----------- ------- --------- -----------
Total securities available for $ 32,804 $ 102 $ (597) $ 32,309
sale ====== ==== ===== ======
Securities pledged at September 30, 2002 and year-end 2001 had carrying
amounts of $8.7 million and $13.0 million, respectively, and were pledged to
secure customer repurchase agreements. Proceeds from securities sold during the
nine months ended September 30, 2002 totaled $29.7 million and resulted in a net
gain of $368,000.
NOTE 3 - LOANS
Loans were as follows: September 30, 2002 December 31, 2001
(in thousands)
Mortgage loans on real estate $78,971 $68,584
Commercial 36,868 46,106
Consumer mortgage 39,097 32,349
Other consumer 5,291 5,383
------------ ------------
$ 160,227 $ 152,422
======= =======
Changes in the allowance for loan losses were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
In thousands
2002 2001 2002 2001
Beginning balance $ 1,526 $ 1,373 $ 1,538 $ 1,221
Loans charged off (124) (1) (530) (50)
Recoveries 1 0 5 0
Provision for loan
losses 272 120 662 321
Ending balance $ 1,675 $ 1,492 $ 1,675 $ 1,492
Note 4: STOCK OPTIONS
On August 23, 2002, the Company granted options to purchase 1,500 shares of
Company common stock to certain of its advisory directors and those members of
its Board of Directors not employed by the Company or the Bank. The option price
for these options to purchase in the aggregate 30,000 shares of Company common
stock is $20.25, the market price at the time of the grant. The options are
exercisable immediately and must be exercised on or before August 23, 2007.
On August 23, 2002, the Company granted options to purchase 3,500 shares of
Company common stock to an Executive Officer. The options vest over five years
and are exercisable at a price of $20.25, the market price at the time of the
grant, and must be exercised on or before August 23, 2007.
Note 5: EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Basic
Net Income $ 471 $ 323 $ 957 $ 902
Weighted average common shares 1,456 1,456 1,456 1,455
Basic earnings per share $ .32 $ .22 $ .66 $ .62
Diluted
Net Income $ 471 $ 323 $ 957 $ 902
Weighted average common shares 1,456 1,456 1,456 1,455
Add: Dilutive effects of assumed exercises
of stock warrants 65 35 52 35
Average shares and dilutive potential
common shares 1,521 1,491 1,508 1,490
Diluted earnings per common share $ .31 $ .22 $ .63 $ .61
Note 6: ACQUISITION
On June 3, 2002, the Bank acquired certain assets of First Mortgage Company,
Inc., in Lexington, Kentucky. The operations were assumed by the Bank promoted
and conducted as a division of the bank under the name "First Security Mortgage
Company", the purpose of which is to originate mortgage loans for sale into the
secondary market. The acquisition agreement included a purchase price of up to
$476,000, $67,000 of which was paid at closing. The remainder of the purchase
price is payable contingent upon the division's earnings over the next four
years. The acquisition also included a four-year employment agreement with First
Mortgage's shareholder and president at a salary level similar to that of other
executives of the Bank.
PART I - Item 2. Management's Discussion and Analysis or Plan of Operation
General
First Security Bank of Lexington, Inc. is a commercial banking organization
organized under the laws of the Commonwealth of Kentucky, and is a wholly-owned
subsidiary of First Security Bancorp, Inc. 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.
We have 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 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; and the extent and timing of
legislative and regulatory actions and reforms.
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 First Security
Bank in attracting customers, fostering loyalty and establishing and maintaining
strong asset quality.
Results of Operations
Net income for the nine months ended September 30, 2002 was $957,000,
compared to $902,000 for the nine months ended September 30, 2001. Net income
for the three months ended September 30, 2002 and September 30, 2001 was
$471,000 and $323,000, respectively. Net income has been favorably impacted by
an increase in net interest income and noninterest income, an increase which
outpaced expense increases associated with facilities, personnel, and federal
income taxes. Earning assets increased from $189.7 million as of December 31,
2001 to $218.6 million as of September 30, 2002. Net loans increased from $150.9
million as of December 31, 2001 to $158.6 million as of September 30, 2002.
Securities available for sale increased from $32.3 million to $52.3 million for
the same periods. Total deposits increased from $168.7 million as of December
31, 2001 to $186.4 million as of September 30, 2002.
In December, 2000 First Security Bank purchased a former banking facility
at 318-320 East Main Street in downtown Lexington for $3.5 million to replace
its main office. First Security Bank moved its downtown offices to the new
facility in September, 2001. The new location features drive-through windows, an
ATM and innovative interior design features. A total of $1.2 million was
invested on the new facility in addition to its purchase price. A fourth
location was also opened during the fourth quarter of 2001. A building was
purchased and was opened for this purpose at a total cost of $906,000. The land
for this facility was leased for $5,600 per month. Growth in net income and book
value per share will be negatively impacted until the growth in earnings
resulting from these new locations covers the additional costs. First Security
Bancorp believes, however, that the potential longer term benefits, including
prospects for new loan and deposit growth, outweigh the potential near term
costs. On June 3, 2002, First Security Bank of Lexington purchased certain
assets of First Mortgage Company, Inc. in an effort to expand its penetration of
the Central Kentucky residential mortgage loan market. This acquisition has
enhanced the bank's products and service offerings and benefited its customers.
These mortgage products and services, now offered through First Security Bank
under the name of First Security Mortgage Company, is a new source of
noninterest income.
Net Interest Income
First Security Bancorp'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 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 $1.654 million for the three months ended September
30, 2002 compared to $1.251 million for the same period in 2001, resulting in an
increase of $403,000, or 32.2%. The increase in net interest income was
primarily the result of a decline in the cost of funding deposits (leading to a
reduction in interest expense), and to a lesser extent, volume increases in
earning assets. Net interest margin increased to 3.08% for the quarter ended
September 30, 2002, versus 2.99% for the quarter ended September 30, 2001.
Year-to-date net interest margin decreased to 3.01% from 3.03% for the nine
month period ended September 30, 2001. The increase in the third quarter margin
was caused by the repricing of rate sensitive liabilities (precipitated by a
decline in the general level of interest rates) at a faster rate than rate
sensitive assets which had already repriced in prior quarters. The decrease in
the year-to-date net interest margin was caused by a change in the mix of
earning assets, with higher yielding loans decreasing from 82.5% of earning
assets at September 30, 2001, to 77.0% at September 30, 2002. A weakening in
general economic conditions has led to a decrease in the proportion of loans to
total earning assets. In order to improve net interest margin, First Security
Bank previously deployed available funding by investing in mortgage-backed
securities and federally tax-exempt bonds. In addition, loan pricing strategies
have been adjusted and features such as interest rate floors have been added.
The results of these strategies are reflected in the increase in net interest
margin in the third quarter.
Noninterest Income and Expenses
Noninterest income increased from $443,000 to $1,232,000 for the nine month
periods ended September 30, 2001 and 2002, respectively. Amounts were $227,000
and $770,000 for the quarters ended September 30, 2001 and 2002, respectively.
Components of noninterest income include service charges and fees on deposit
accounts, securities gains, gains on the sale of loans, and other fees. The
primary increase in noninterest income was the result of service charges and
fees on deposit accounts increasing from $156,000 to $459,000 for the year to
date ending September 30, 2002. Securities gains and gain on the sale of loans
of $203,000 and $211,000, respectively, were the primary cause of the quarterly
increases. The increase in year to date fees resulted from the introduction of a
new checking product and growth in total deposit accounts. Securities gains were
taken on investments sold, with the proceeds subsequently reinvested. Securities
gains were incurred as a result of the repositioning of the investment portfolio
effected in order to reduce interest rate risk and for tax planning. Gains of
this nature are infrequent and irregular in amount, and are not anticipated to
regularly increase earnings in significant amounts going forward. Gain on sale
of loans for the nine months ended September 30, 2002 was $232,000. This is a
new source of revenue for First Security Bank, resulting from its First Security
Mortgage Company operations. Management anticipates that this revenue source
will grow going forward, fluctuating with cycles experienced in the secondary
mortgage market caused by changes in interest rates.
Total noninterest expense was $3.94 million for the nine months ended
September 30, 2002, versus $2.55 million for the nine months ended September 30,
2001. Total noninterest expense for the quarter ended September 30, 2002 was
$1.48 million versus $975,000 for the quarter ended September 30, 2001. The
largest component of total noninterest expense is salaries and benefits.
Salaries and benefits were $1.95 million and $1.33 million for the nine months
ended September 30, 2002 and 2001, respectively, and $753,000 and $492,000 for
the three months ended September 30, 2002 and 2001, respectively. The number of
full-time equivalent employees increased from 45 at September 30, 2001 to 59 at
September 30, 2002. Staffing levels increased as a result of the addition of a
fourth branch office in the fourth quarter of 2001, the relocation to the new
main office facility in September 2001, and the acquisition of First Mortgage
Company, Inc. in June 2002.
Occupancy and equipment expense, net of rental revenue, was $705,000 and
$358,000 for the nine months ended September 30, 2002 and 2001, respectively,
and $251,000 and $166,000 for the three months ended September 30, 2002 and
2001, respectively. The increase resulted primarily from operating costs
associated with the fourth branch office, the new main office facility, and
costs associated with the acquisition and operations of First Mortgage Company,
Inc.
In the third quarter of 2001, First Security Bancorp, Inc. began recording
federal income tax expense, which for the nine months ended September 30, 2002,
was $305,000. Income tax expense was not previously recorded due to both
historical losses and concern about First Security Bancorp's ability to utilize
certain deferred tax assets. Going forward, income tax expense will continue to
be recorded at approximately 34% of taxable income.
Investment Securities
Through all reported periods, First Security Bank's investment portfolio
consisted primarily of mortgage backed bonds and state and municipal bonds. The
amortized cost of investment securities increased from $32.8 million as of
December 31, 2001 to $51.4 million as of September 30, 2002. Excess liquidity
was redeployed into investment securities in order to attain higher yields.
Loans
Net loans increased $7.7 million from $150.9 million as of December 31,
2001, to $158.6 million as of September 30, 2002. As of the end of each period,
over 70% of First Security 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 the remainder of the portfolio as of the end of both periods. First
Security Bank desires increased penetration within the consumer loan market and
believes the new locations should help build new customer relationships.
Allowance and Provision for Loan Losses
The provision for loan losses increased from $321,000 for the nine months
ended September 30, 2001 to $662,000 for the same period in 2002. Quarterly
amounts increased from $120,000 to $272,000 for the quarters ended September 30,
2001 and 2002, respectively. The increase in the provision for loan losses
resulted from an increase in the level of nonperforming loans and a related
increase in net charge-offs, a growth in the level of outstanding loans, and a
decline in the local and national economy.
Net charge-offs for the nine months ended September 30, 2002 were $525,000
as compared to $50,000 for the same period in 2001. The level of charge-offs for
the first nine months of 2002 was significantly impacted by a charge-off
involving two borrowers in the amounts of $335,000 and $100,000.
As of September 30, 2002, nonperforming assets (which includes non-accrual
loans, loans past due 90 days or more and still accruing, and other real estate
owned) totaled $3.1 million, as compared to $789,000 at December 31, 2001.
Nonperforming assets as a percentage of total loans were 1.94% at September 30,
2002, as compared to 0.52% at December 31, 2001. One commercial account in the
amount of $1.3 million is expected to be fully secured and amortized, enhancing
First Security Bank's position and causing this credit to be removed from the
nonperforming category. Another commercial real estate account in the amount of
$518,000 is expected to be brought current or paid in full by the owner,
removing it from non-accrual status. If these anticipated actions occur
respecting these two credits, and these two credits were removed from First
Security Bank's total nonperforming assets as of September 30, 2002, total
nonperforming assets to total loans would have yielded a ratio of 0.81%.
Management continues to emphasize evaluation of loan portfolio risks and will
pursue all available means of collection.
The allowance for loan losses is regularly evaluated by management and
reported quarterly to our board of directors. Our management and board of
directors maintain the allowance for loan losses at a level believed to be
sufficient to absorb inherent losses in the portfolio at a point in time.
Management's allowance for loan loss 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 and
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. 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 prime, good, satisfactory, fair, watch,
substandard, doubtful, and loss. Specific reserve allocations are calculated for
individual loans having been graded watch or worse based on the specific
collectability of each loan. Loans graded watch or worse also include loans
severely past-due and those not accruing interest. Loss estimates are assigned
to each loan, which results in a portion of the allowance for loan losses to be
specifically allocated to that loan.
The general reserve allocation is computed by loan category reduced by
loans with specific reserve allocations and loans fully secured by certificates
of deposit with First Security Bank. Loss factors are applied to each category
for which the cumulative product represents the general reserve. These loss
factors are typically developed over time using actual loss experience adjusted
for the various factors discussed above. As First Security Bank was organized in
1997, our historical loss experience is less reliable as a future predictor of
inherent losses than that of a bank with a mature loss history. Until our own
experience becomes fully developed, we have computed these factors utilizing
selected peer data and from the Uniform Bank Performance Reports which we
believe is representative of our loan customer base and is therefore a
reasonable predictor of inherent losses in our portfolio.
We believe the allowance for loan losses at September 30, 2002 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 $17.7 million from December 31, 2001 to September
30, 2002. Deposits have grown at historically consistent levels. Noninterest
bearing deposits were up from 7.45% of total deposits as of December 31, 2001,
to 10.31% of total deposits as of September 30, 2002. Growth in noninterest
bearing deposits as a percentage of total deposits will continue to be
encouraged.
The table below illustrates our deposits by major categories as of
September 30, 2002 and December 31, 2001:
DEPOSITS
September 30, December 31,
2002 2001
(in thousands)
Interest-bearing demand deposits $ 20,865 $ 18,886
Savings deposits 22,330 17,113
Time deposits less than $100,000 77,185 75,672
Time deposits $100,000 and over 46,844 44,498
------------- ------------
Total interest-bearing deposits 167,224 156,169
Total noninterest-bearing deposits 19,218 12,575
------------ ------------
Total $ 186,442 $ 168,744
Liquidity
Liquidity management is the process by which management attempts to insure
that adequate liquid funds are available to meet financial commitments on a
timely basis. These commitments include 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.
First Security 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 $25 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
September 30, 2002, First Security Bank could borrow an additional $7.5 million
based on available collateral.
First Security Bank had total borrowings of $15.3 million and $25.3 million
as of December 31, 2001, and September 30, 2002 respectively. Borrowings at
September 30, 2002 were in the form of customer repurchase agreements in the
amount of $6.1 million and federal funds purchased in the amount of $4.9
million. First Security Bank additionally had Federal Home Loan Bank advances in
the amount of $14.3 million. 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
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. Total capital (as determined under accounting principles
generally accepted in the United States of America) as of December 31, 2001 was
$16.8 million or 8.31% of assets. Total capital as of September 30, 2002
increased to $18.7 million, but because assets increased at a faster rate, total
capital (as determined under accounting principles generally accepted in the
United States of America) to assets declined to 8.08% of assets. Total risk
based capital to risk weighted assets increased to 11.02% as of September 30,
2002 from 10.90% as of December 31, 2001.
First Security Bancorp and First Security 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 limit
First Security Bank's ability to pay dividends without prior approval. Under
these regulations, First Security 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. First Security Bancorp also has regulatory limits on dividends,
but less restrictive. First Security Bancorp does not anticipate paying
dividends to shareholders for at least the next several years as any earnings
generated will need to be retained to support future growth opportunities.
PART I - Item 4. Controls and Procedures
Company management, including the Chief Executive Officer (serving as the
principal executive officer) and Chief Financial Officer, have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective in ensuring that all material information required
to be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
Part II - Other Information
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 as a part of this report.
(b) Reports on Form 8-K
First Security Bancorp filed a report on Form 8-K dated July 30, 2002
reporting earnings for the three months ended June 30, 2002.
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.
/s/John S. Shropshire
Date: November 14, 2002 John S. Shropshire
Chairman, President and CEO
(Principal Executive Officer)
/s/Ben A. New
Date: November 14, 2002 Ben A. New
Chief Financial Officer
(Principal Financial and
Accounting Officer)
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, John S. Shropshire, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of First Security
Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ John S. Shropshire
John S. Shropshire
Chairman, President, and CEO
CERTIFICATION
I, Ben A. New, certify that:
1) I have reviewed this quarterly report on Form 10-QSB of First Security
Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material
fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Ben A. New
Ben A. New
Chief Financial Officer
EXHIBIT INDEX
Exhibit 11. Statement Regarding Computation of Per Share Earnings
(see Part I, Note 5 "Earnings Per Share" for computation)
Exhibit 99.1 Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 99.2 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
Exhibit 99.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Form 10-Q of First Security Bancorp, Inc.
for the quarter ended September 30, 2002, I, John S. Shropshire, Chief Executive
Officer of First Security Bancorp, Inc., hereby certify pursuant to 18
U.S.C.ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
that:
(1) Such Form 10-Q for the quarter ended September 30, 2002 fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in such Form 10-Q for the quarter ended September
30, 2002 fairly presents, in all material respects, the financial condition and
results of operation of First Security Bancorp, Inc.
By: /s/ John S. Shropshire
John S. Shropshire
Chief Executive Officer
Date: November 14, 2002.
Exhibit 99.2
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
In connection with the accompanying Form 10-Q of First Security Bancorp, Inc.
for the quarter ended September 30, 2002, I, Ben A. New, Chief Financial Officer
of First Security Bancorp, Inc., hereby certify pursuant to 18 U.S.C.ss.1350, as
adopted pursuant toss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) Such Form 10-Q for the quarter ended September 30, 2002 fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in such Form 10-Q for the quarter ended September
30, 2002 fairly presents, in all material respects, the financial condition and
results of operation of First Security Bancorp, Inc.
By: /s/ Ben A. New
Ben A. New
Chief Financial Officer
Date: November 14, 2002.