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 March 31, 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 - 1,479,566
shares outstanding as of May 13, 2003.
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
Consolidated Balance Sheets........................................2
Consolidated Statements of Income..................................2
Consolidated Statement of Changes in Shareholders' Equity..........2
Consolidated Statements of Cash Flow...............................3
Notes to Consolidated Financial Statements.........................4
Item 2. Management's Discussion and Analysis or Plan of Operation............11
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
First Security Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
Assets
March 31, December 31, March 31,
2003 2002 2002
---- ---- ----
Cash and due from banks $ 3,423 $ 4,744 $ 6,085
Federal funds sold 14,120 4,069 32
-------- -------- ------
Total cash and cash equivalents 17,543 8,813 6,117
Securities available for sale 41,237 43,046 45,163
Loans held for sale 2,865 3,390 --
Loans 160,189 167,458 155,908
Less allowance for loan losses (2,570) (2,459) (1,679)
--------- --------- --------
Net loans 157,619 164,999 154,229
Federal Home Loan Bank stock 750 742 545
Leasehold improvements, premises
and equipment net 7,851 7,932 7,822
Accrued interest receivable 1,108 1,176 1,259
Other assets 1,242 988 840
-------- --------- --------
Total Assets $230,215 $231,086 $215,975
======= ======= =======
Liabilities and Shareholders' Equity
Liabilities
Deposits
Non-interest bearing $ 19,713 $ 20,478 $ 16,091
Time deposits $100,000 and over 51,708 50,255 51,235
Other interest bearing 120,175 118,222 117,054
--------- --------- ---------
Total Deposits 191,596 188,955 184,380
Repurchase agreements and
short term borrowing 4,608 8,211 8,981
Federal Home Loan Bank Advances 14,157 14,517 4,829
Accrued interest payable 607 578 788
Other liabilities 315 361 30
--------- --------- ---------
Total Liabilities $ 211,283 $ 212,622 $ 199,008
Shareholders' Equity
Common stock, no par value 8,457 8,385 8,385
Paid-in Capital 8,457 8,385 8,385
Retained earnings 1,555 1,432 543
Accumulated other comprehensive
income 463 262 (346)
-------- --------- --------
Total Shareholders' Equity 18,932 18,464 16,967
-------- --------- --------
Total Liabilities and Shareholders'Equity $230,215 $231,086 $215,975
======= ======= =======
First Security Bancorp, Inc.
Consolidated Statements of
Income (Unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
2003 2002
---- ----
Interest Income
Loans, including fees $2,647 $ 2,752
Securities - taxable 196 326
Securities - non-taxable 126 159
Federal funds sold 10 11
Other 10 6
----- -----
2,989 3,254
Interest Expense
Deposits 1,339 1,800
Other 159 89
----- -----
1,498 1,889
----- -----
Net Interest Income 1,491 1,365
Provision for loan losses 145 157
----- -----
Net interest income after
provision for loan losses 1,346 1,208
Non-Interest Income
Service charges and
fees on deposits 183 125
Gain on sale of loans 241 -
Other 36 39
------ ------
460 $ 164
Non-Interest expense
Salaries and
employee benefits 854 $ 587
Occupancy and equipment 272 214
Data processing 53 38
Advertising 40 47
Professional fees 48 37
Taxes other than payroll,
property and income 22 49
Other 390 220
----- -----
1,679 1,192
----- -----
Income before income taxes 127 180
Provision for income taxes (4) (20)
----- -----
Net income $ 123 $ 160
===== =====
Weighted average shares common outstanding:
Basic 1,460 1,456
Diluted 1,640 1,493
Earnings per share
Basic $ .08 $ .11
Diluted $ .08 .11
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 - - - 123 - 123
Stock warrants exercised 14 72 72 - - 144
Net change in unrealized gain (loss)
on securities available for sale net
of tax effects - - - 201 201
------- -------- -------- -------- -------- --------
Balance March 31, 2003 1,470 $ 8,457 $ 8,457 $1,555 $ 463 $ 18,932
==== ===== ===== ===== ===== ======
First Security Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited) (in thousands)
Three Months Ended
March 31,
2003 2002
---- ----
Cash flows from Operating Activities:
Net income $123 $ 160
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 121 102
Amortization and accretion on available
for sale securities, net 9 63
Provision for loan losses 145 157
Federal Home Loan Bank Stock dividends (8) (6)
Originations of loans available for sale (19,428) 0
Proceeds from sale of loans 20,194 0
Gains on sale of mortgage loans (241) 0
Change in assets and liabilities:
Accrued interest receivable 68 (126)
Other assets (254) (9)
Accrued interest payable 29 (44)
Other liabilities (148) (534)
-------- -------
Net cash from operating activities 610 (237)
Cash flows from investing activities
Net change in loans 7,235 (3,502)
Activity in available for sale securities
Maturities, calls,
and principal repayments 3,989 1,837
Purchases (1,886) (14,784)
Sales 0 0
Leasehold improvements and net purchases
of premises and equipment (40) (268)
------- -------
Net cash from investing activities 9,298 (16,717)
Cash flows from financing activities
Net change in deposits 2,641 15,636
Net changes in repurchase agreements
and short-term borrowings (3,603) (3,976)
Proceeds from Federal Home Loan Bank advance - 2,500
Payments on Federal Home Loan Bank advances (360) (7)
Stock warrants exercised 144 -
------ -------
Net cash from financing activities (1,178) 14,153
------ -------
Net change in cash and cash equivalents 8,730 (2,801)
Cash and cash equivalents at beginning of period 8,813 8,918
------ -------
Cash and cash equivalents at end of period $17,543 $ 6,117
====== ======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for: Interest 1,469 1,933
Income Taxes 260 450
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 Generally Accepted Accounting Principles in the
United States of America. 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. All of
the Bank's operations are considered by management to be aggregated into one
reportable operating segment.
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 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. Operating
results for the three-month period ending March 31, 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
expense was measured using the fair value recognition provisions of Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation.
Three months ended
March 31,
(in thousands, except per share data)
2003 2002
____ ____
Net income as reported $ 123 $ 160
Deduct: Stock-based compensation expense
determined under fair value based method (121) (45)
_____ _____
Pro forma net income $ 2 $ 115
===== ====
Basic earnings per share as reported $ .08 $ .11
Pro forma basic earnings per share -- .08
Diluted earnings per share as reported $ .08 $ .11
Pro forma diluted earnings per share -- .08
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
March 31, 2003
U. S. Government and federal agency $2,079 7 $ - $ 2,086
State and municipal 14,059 506 (19) 14,546
Mortgage-backed 24,411 194 - 24,605
------ --- ----- ------
Total debt securities $ 40,549 $ 707 $ (19) $ 41,237
====== === ===== ======
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 March 31, 2003 and year-end 2002 had carrying amounts
of $5.4 million and $4.8 million, respectively, and were pledged to secure
customer repurchase agreements and advances from the Federal Reserve Discount
window.
NOTE 3 - LOANS
Loans at March 31, 2003 and December 31, 2002 consisted of the following:
March 31, 2003 December 31, 2002
-------------- ------------------
(in thousands)
Commercial $ 42,712 $ 48,159
Mortgage loans on real estate:
Commercial 64,061 64,025
Residential 17,110 17,871
Construction 21,696 20,664
Home Equity 9,821 10,180
Consumer credit card 727 885
Consumer 4,062 5,674
------- -------
$ 160,189 $ 167,458
======= =======
Changes in the allowance for loan losses were as follows:
Three Months Ended
March 31,
(in thousands)
2003 2002
---- ----
Beginning balance $ 2,459 $ 1,538
Loans charged off (43) (18)
Recoveries 9 2
Provision for loan losses 145 157
------ ------
Ending balance $ 2,570 $ 1,679
====== ======
NOTE 4 - EARNINGS PER SHARE
Earnings per share were computed as follows:
Three Months Ended
March 31,
(in thousands, except per share data)
2003 2002
---- ----
Basic
Net Income $ 123 $ 160
Weighted average common shares outstanding 1,460 1,456
Basic earnings per common share $.08 $.11
Diluted
Net Income $123 $160
Weighted average common shares outstanding 1,460 1,456
Add: Dilutive effects of assumed
exercises of stocks warrants and options 180 37
--------- ---------
Average shares and dilutive potential
common shares 1,640 1,493
===== =====
Diluted earnings per common share $.08 $ .11
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 recent market price of the stoock at the date of the
grant. An aggregate of twenty-two thousand (22,000) options were granted at that
time.
NOTE 6 - Acquisition
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. 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.
Part I Item 2.
Management's Discussion and Analysis of Plan of Operation
General
The Bank is a commercial banking corporation organized under the laws of
the Commonwealth of Kentucky, and is a wholly-owned subsidiary of the Company.
The 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. The 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.
During the first quarter of 2003, the employment of the Bank's Chief
Financial Officer and Controller was terminated (Refer to Part II, Item 6). An
interim consultant was retained to assist with the daily operations, and in
April 2003, the Company and the Bank hired to a Chief Financial Officer.
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 the Company, 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; 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 behlaf. The Company assumes
no obligation to update any forward-looking statements.
Overview
The mission of the 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.
Result of Operations
Net Income
Net income for the three months ended March 31, 2003 was $123,000, down
from $160,000 for the same period in 2002. The decline in net income in the
first quarter of 2003 as compared to the first quarter of 2002 resulted
primarily from decreases in investment income and increases in non-interest
expenses.
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
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 $1.491 million for the three months ended March 31,
2003 compared to $1.365 million in 2002, resulting in an increase of $126,000 or
9.23%. The increase in net interest income was primarily the result of volume
increases in earning assets. Net interest margin declined to approximately 2.74%
for the quarter ended March 31, 2003 versus 2.78% for the quarter ended March
31, 2002. Net interest spread increased to 2.32% for the three months ended
March 31, 2003 from 2.27% for the same period in 2002. Net interest margin
decreased due to the reinvestment of maturities and paydowns of investment
securities and loans into highly liquid, lower yielding federal funds sold and
other U.S. Government and Agency obligations. Net interest spread increased as a
result of rates paid on deposits decreasing faster than the decrease in yields
on interest bearing assets.
Non-Interest Income and Expense
Other non-interest income increased from $164,000 to $460,000 for the three
months ended March 31, 2002, as compared to the same period in 2003. Components
of other non-interest income include service charges, fees on deposit accounts,
gain on sale of loans, gains on sale of securities, and other fees. The increase
from 2002 to 2003 in non-interest income is a result of the $241,000 of gains on
sale of loans held for sale and solo through the Bank's mortgage division.
Management anticipates that service charge income on deposit accounts will
continue to grow commensurate with the Bank's deposit base and as a result of
the introduction of a new checking product.
Total non-interest expense increased from $1,192,000 to $1,679,000 for the
three months ended March 31, 2002 as compared to the same period in 2003. The
primary cause of the increase in non-interest expense were increases in salaries
and benefits and occupancy and equipment expenses relating to the operation of
the Bank's mortgage banking division (see Note 6).
Salaries and benefits increased from $587,000 to $854,000 for three months
ended March 31, 2003 as compared to the same period in 2002. The number of
full-time equivalent employees increased from 41 at March 31, 2002, to 61 at
March 31, 2003. Staffing levels increased as a result of the continued expansion
of customer services and the acquisition of First Mortgage.
Occupancy and equipment expenses, net of rental revenue, were $214,000 and
$272,000 for the three months ended March 31, 2002, and 2003, respectively.
Building lease revenue was down from $ 62,000 to $20,000 for the three months
ended March 31, 2002 as compared to the same period in 2003. The decline is a
result of the Bank subleasing its old main office facility for a portion of
2002.
Financial Condition
Total assets decreased slightly during the quarter from $231 million at
December 31, 2002 to $230.2 million at March 31, 2003. However, on a
year-to-year basis, total assets increased approximately 6% from $216 million at
March 31, 2002 to $230 million at March 31, 2003.
Earning assets increased from $216.2 million as of December 31, 2002 to
$219.4 million as of March 31, 2003. Net loans decreased from $165.0 million as
of December 31, 2002 to $157.6 million as of March 31, 2003. Total deposits
increased from $189.0 million as of December 31, 2002 to $191.6 million as of
March 31, 2003.
Investment Securities
The Bank's investment portfolio consists of state and municipal bonds and
mortgage-backed bonds. The amortized cost of investment securities decreased
from $43.0 million as of December 31, 2002 to $40.5 million as of March 31,
2003. The decrease in investment securities was a result of principal paydowns
on mortgage-backed securities and payments on state and municipal securities.
These amounts were invested in federal funds sold until April 2003 when the Bank
purchased an additional $8 million of investment securities.
Loans
Net loans decreased $7.4 million from $165.0 million as of December 31,
2002, to $157.6 million as of March 31, 2003. The decline was a result of large
commercial paydowns in the first quarter of 2003. Most of these paydowns were
expected. As of December 31, 2002 and March 31, 2003, approximately 66% 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 34% 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 was $157,000 and $145,000 for the periods
ending March 31, 2002, and 2003 respectively. Year to date net charge-offs were
$34,000 for the three months ended March 31, 2003 and $16,000 for the three
months ended March 31, 2002. The allowance for loan losses to total loans was
1.60% as of March 31, 2003 as compared to 1.47% at December 31, 2002 and 1.08%
at March 31, 2002.
The level of non-performing loans is an important element in assessing
asset quality and the relevent risk in the Bank's credit portfolio.
Non-performing loans include non-accrual loans, loans delinquent 90 days or more
and restructured loans. 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 March 31, 2003,
nonperforming assets totalled $5.2 million compared to $6.3 million as of
December 31, 2002. Non-performing assets as a percentage of total loans was
3.28% at March 31, 2003 as compared to 3.75% at December 31, 2002. The decrease
was due to an increased effort by management to collect 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
from challenges in the event of a bankruptcy proceeding involving such borrower.
The allowance for loan losses is regularly evaluated by management and
reported quarterly to the Board of Directors. Management maintains the allowance
for loan losses at a level believed to be sufficient for probable 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 reviews 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 prime, good, satisfactory, fair, watch, substandard,
doubtful, and loss. Specific allowance 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 assinged to each loan, which
results in a portion of the allowance for loan losses to be specifically
allocated to that loan.
For loans not individually graded and assigned loss estimates, as described
above, a general allowance allocation is computed using totals of each loan
grading category (reduced by loans fully secured by certificates of deposit with
the Bank and accounts receivable financing with established reserve accounts)
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.
Management believes the allowance for loan losses at March 31, 2003 was
adequate. Although the Bank believes it uses 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 $2.6 million from December 31, 2002 to March 31,
2003. Deposits have grown at historically consistent levels. Interest-bearing
demand deposits were up from 10.3% of total deposits as of December 31, 2002, to
11.0% of total deposits as of March 31, 2003.
The table below illustrates the Bank's deposits by major categories as of
March 31, 2003 and December 31, 2002;
DEPOSITS
March 31, December 31,
2003 2002
---- ----
(in thousands)
Interest-bearing demand deposits $ 21,102 $ 19,472
Savings deposits 21,418 20,634
Time deposits less than $100,000 77,655 78,116
Time deposits $100,000 and over 51,708 50,255
-------- --------
Total interest-bearing deposits 171,883 168,477
Total noninterest-bearing deposits 19,713 20,478
-------- --------
Total $ 191,596 $ 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 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 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, the Bank is a member of
the Federal Home Loan Bank of Cincinnati which allows the Bank to borrow based
on the level of qualifying residential loans which serve as collateral for this
type of borrowing. At March 31, 2003, the Bank could borrow an additional $27
million based on available collateral.
The Bank had total short-term borrowings of $22.7 million and $18.8 million
as of December 31, 2002, and March 31, 2003, respectively. Borrowings at March
31, 2003 were in the form of customer repurchase agreements in the amount of
$4.6 million, and Federal Home Loan Bank advances in the amount of $14.2
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 of December 31, 2002 was $18.5 million
or 8.00% of assets. Total capital as of March 31, 2003 increased to $18.9
million or 8.22% of assets.
The Company and the Bank exceed the regulatory requirements for all capital
ratios. The Company 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 growth rates at levels sustaining
a well capitalized position. In addition to capital regulations, state banking
regulations limit the Bank's ability to pay dividends 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 these are 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, including the Chief Executive Officer and the Chief
Financial Officer, has 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
have 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. Notwithstanding such
conclusion, it should be noted that the Company's former Chief Financial Officer
and Assistant Controller were terminated on March 2, 2003. The Company's current
Chief Financial Officer was hired on April 7, 2003. While there have been no
significant changes in internal controls subsequent to the date that the Chief
Executive Officer and the Chief Financial Officer completed their evaluation of
such controls, the fact that the Company operated approximately one month
without a Chief Financial Officer may have an impact on the effectiveness of the
Company's internal controls during the period from March 2, 2003 to April 7,
2003.
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
A report on Form 8-K dated February 24, 2003 was filed by the
registrant reporting the registrant's earnings for the year ending
December 31, 2002.
A report on Form 8-K dated March 10, 2003 was filed by the
registrant reporting the termination on March 2, 2003 of the
employment of Chief Financial Officer, Ben A. New.
A report on Form 8-K dated April 22, 2003 was filed by the
registrant reporting John G. Sullivan had been named Chief Financial
Officer and Executive Vice-President effective April 7, 2003.
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.
Date: May 14, 2003 First Security Bancorp, Inc.
By:/s/John S. Shropshire
________________________
John S. Shropshire
President and Chief Executive Officer
Date: May 14, 2003 By:/s/John G. Sullivan
______________________
John G. Sullivan
Chief Financial Officer and
Executive Vice-President
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: May 14, 2003 By: /s/ John S. Shropshire
___________________________
John S. Shropshire
Chairman, President, and CEO
CERTIFICATION
I, John G. Sullivan, 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: May 14, 2003 By:/s/ John G. Sullivan
_______ _______________
John G. Sullivan
Chief Financial Officer and
Executive Vice-President
EXHIBIT INDEX
Exhibit 11. Statement Regarding Computation of Per Share Earnings
(see Note 4 "Earnings Per Share" in the Notes to Consolidated
Financial Statements in Part I, Item 1 of this Report for such
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 the
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-QSB of First Security Bancorp, Inc.
for the quarter ended March 31, 2003, I, John S. Shropshire, Chief Executive
Officer of First Security Bancorp, Inc., hereby certify pursuant to 18
U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) Such Form 10-QSB for the quarter ended March 31, 2003 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-QSB for the quarter ended March
31, 2003 fairly presents, in all material respects, the financial condition and
results of operation of First Security Bancorp, Inc.
Date: May 14, 2003. By:/s/ John S. Shropshire
_________________________
John S. Shropshire
Chief Executive Officer
Exhibit 99.2
CERTIFICATION OF CHIEF 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-QSB of First Security Bancorp, Inc.
for the quarter ended March 31, 2003, I, John G. Sullivan, Chief Financial
Officer of First Security Bancorp, Inc., hereby certify pursuant to 18
U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) Such Form 10-QSB for the quarter ended March 31, 2003 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-QSB for the quarter ended March
31, 2003 fairly presents, in all material respects, the financial condition and
results of operation of First Security Bancorp, Inc.
Date: May 14, 2003. By:/s/ John G. Sullivan
_______________________
John G. Sullivan
Chief Financial Officer