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, 2000
or
_____Transition report pursuant to Section 13 or 15(d) of the Exchange Act
Commission File Number 333-33350
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.)
400 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 - 1,266,717
shares outstanding as of November 8, 2000.
Transitional Small Business Disclosure Format (check one):
___Yes _X_No
<PAGE>
FIRST SECURITY BANCORP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................4
Item 2. Management's Discussion and Analysis or Plan of Operation............10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................18
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
First Security Bancorp, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands)
September 30 December 31
Assets 2000 1999
Cash & due from banks $ 2,795 $2,219
Federal funds sold 14,570 9,053
------ ------
Total cash & cash equivalents 17,365 11,272
Securities available for sale 6,982 4,331
Loans 99,445 78,197
Less allowance for loan losses (1,109) (819)
------ ------
Net loans 98,336 77,378
FHLB stock 220 117
Leasehold improvements, premises
& equipment net 1,375 758
Accrued interest receivable 868 528
Other assets 115 131
------- ------
Total Assets $125,261 $94,515
======= =======
Liabilities & Shareholders' Equity
Liabilities
Deposits
Non-interest bearing $ 8,096 $ 5,157
Time deposits $100,000 and over 22,442 14,397
Other interest bearing 82,895 63,858
------- ------
Total Deposits 113,433 83,412
Other borrowings 1,499 2,382
Accrued interest payable 589 387
Other liabilities 151 119
------- ------
Total Liabilities 115,672 86,300
Shareholders' Equity
Common stock no par value 5,290 4,901
Paid-in Capital 5,290 4,901
Accumulated defecit (947) (1,492)
Accumulated other comprehensive
Income (loss) (44) (95)
------- ------
Total Shareholders' Equity 9,589 8,215
------- ------
Total Liabilities and Shareholders' Equity $125,261 $94,515
======= ======
<PAGE>
First Security Bancorp, Inc.
Consolidated Statements of
Income and Comprehensive Income (Unaudited)
Three Months Ended and
Nine Months Ended September 30, 2000 and 1999
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
Interest Income
Loans, including fees $2,226 $1,313 $6,146 $3,180
Securities - taxable 79 60 194 142
Federal funds sold 213 101 446 338
Other 4 1 10 2
----- ----- ----- -----
2,522 1,476 6,796 3,662
Interest Expense
Deposits 1,541 811 4,010 2,026
Other Borrowings 30 - 56 -
----- --- ----- -----
1,571 811 4,066 2,026
----- --- ----- -----
Net Interest Income 951 664 2,730 1,636
Provision for loan losses 112 180 313 401
----- --- ----- ----
Net interest income after
provision for loan loss 839 484 2,417 1,235
Noninterest Income
Service charges and
fees on deposits 35 23 94 54
Other 16 12 43 32
-- -- -- --
51 35 137 86
Noninterest expense
Salaries and
employee benefits 355 271 980 812
Occupancy 58 54 172 155
Equipment 26 26 76 81
Advertising 14 21 71 53
Professional Fees 32 12 171 42
Bank franchise tax 18 18 55 53
Other 177 101 484 269
--- --- ---- ---
680 503 2,009 1,465
--- --- ---- ---
Net Income (loss) $210 $ 16 $545 $(144)
=== ==== === ===
Other Comprehensive Income (Loss)
Other comprehensive income 68 (14) 51 (73)
---- ---- ---- ----
Comprehensive income $278 $ 2 $596 $(217)
=== ==== === =====
Weighted average shares common outstanding:
Basic 1,001 1,000 1,000 1,000
Diluted 1,032 1,020 1,028 1,020
Earnings per share:
Basic $.21 $.02 $.54 $(.14)
Diluted .20 .02 .53 (.14)
<PAGE>
<TABLE>
First Security Bancorp, Inc.
Consolidated Statement of Changes In Shareholders' Equity
(in thousands, except for share data) (unaudited)
<CAPTION>
Accumulated
Additional Other Total
--Common Stock-- Paid-In Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 2000 1,000 $4,901 $4,901 $(1,492) $(95) $8,215
Net change in accumulated
other comprehensive income
(Loss) 51 51
Issuance of Common Stock 54 389 389 778
Net Income 545 545
----- ----- ------ ------ ---- -----
Balance September 30, 2000 1,054 $5,290 $5,290 $ (947) $ (44) $9,589
===== ===== ====== ======= ===== ======
</TABLE>
First Security Bancorp, Inc.
Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 2000 and 1999
(in thousands)
2000 1999
Cash flows from Operating Activities:
Net income (loss) $545 $(144)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation 94 86
Amortization and accretion on available
for sale securities, net 2 4
Provision for loan losses 313 401
Federal Home Loan Bank Stock dividends (10) (2)
Change in assets and liabilities:
Accrued interest receivable (340) (344)
Other assets 16 (23)
Accrued interest payable 202 151
Other liabilities 32 6
--- ----
Net cash from operating activities 854 135
Cash flows from investing activities
Net change in loans (21,271)(33,902)
Activity in available for sale securities
Prepayments 94 73
Maturities 1,500 2,500
Purchases (4,196) (2,002)
Leasehold improvements and net purchases of
premises and equipment (711) (50)
Purchases Federal Home Loan Bank stock (93) (86)
------ ------
Net cash from investing activities (24,677)(33,467)
Cash flows from financing activities
Net change in deposits 30,021 33,906
Net changes in other borrowings (883) -
Issuance of common stock 778
----- -----
Net cash from financing activities 29,916 33,906
------ ------
Net change in cash and cash equivalents 6,093 574
Cash and cash equivalents at beginning of period 11,272 6,917
------ ------
Cash and cash equivalents at end of period $17,365 $ 7,491
====== ======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for: Interest $3,864 $ 1,876
<PAGE>
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
(the"Bank") conform to generally accepted accounting principles and to
predominant practices within the banking industry. The significant policies are
described below.
The Company was formed on February 11, 2000 and on May 31, 2000 became a
bank holding company by acquiring all of the outstanding shares of the Bank.
Each outstanding share of the Bank was converted into two shares of Company
stock. The financial statements are presented as if the Company had existed and
owned the Bank for all periods presented.
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.
Recent Accounting Pronouncements: Beginning January 1, 2001, a new standard
will require all derivatives to be recorded at fair value. Unless designated as
hedges, change in these fair values will be recorded in the income statment.
Fair value changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the fair value of
the hedged item is not otherwise recorded. This is not expected to have a
material effect as the Bank has no derivatives.
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 generally accepted accounting principles 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 September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto, included in the Company's Form S-4
Registration Statement, No.333-33350 or Form SB-2, No. 333-43444.
NOTE 2 - SECURITIES
Securities were as follows: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(in thousands)
Available for Sale
September 30, 2000
U.S. Treasury securities $ 250 $ - $ (1) $ 249
U.S. Government agency securities 5,516 5 (38) 5,183
Mortgage-backed 1,540 12 (22) 1,530
----- --- ---- -----
Total debt securities 7,006 17 (61) 6,962
Equity securities 20 - - 20
------ --- ------ ------
Total $7,026 $17 $ (61) $6,982
===== === ====== ======
December 31, 1999
U.S. Treasury securities $ 250 $ - $ (2) $ 248
U.S. Government agency securities 3,501 - (67) 3,434
Mortgage-backed 655 - (26) 629
----- --- ---- -----
Total debt securities 4,406 - (95) 4,311
Equity securities 20 - - 20
----- --- ---- -----
Total $4,426 $ - $(95) $4,331
===== === ==== =====
Securities pledged at September 30, 2000 and year-end 1999 had carrying amounts
of $2.4 million, and $3.6 million, and were pledged to secure customer
repurchase agreements. There were no securities sales during the first nine
months of 2000 or during 1999.
NOTE 3 - LOANS
Loans were as follows:
September 30 December 31
2000 1999
---- ----
(in thousands)
Commercial $28,794 $26,596
Mortgage loans on real estate:
Commercial 48,655 35,855
Residential 11,053 7,450
Consumer 10,943 8,296
------ -----
$99,445 $78,197
====== ======
Changes in the allowance for loan losses were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
Beginning balance $ 997 $ 554 $ 819 $ 335
Loans charged off (0) 1 (23) (3)
Recoveries - - - -
Provision for loan losses 112 180 313 401
---- ---- ---- ----
Ending Balance $1,109 $ 733 $1,109 $ 733
==== ==== ===== =====
The Bank did not have any impaired or non-performing loans during any of the
periods presented.
NOTE 4 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share data)
Basic
Net Income $ 210 $ 16 $ 545 $(144)
Weighted average common shares 1,001 1,000 1,000 1,000
Basic earnings per common share .21 .02 $ .54 $(.14)
Diluted
Net income $210 $ 16 $ 545 $(144)
Weighted average common shares 1,000 1,000 1,001 1,000
Add: Dilutive effects of assumed exercises
of stock warrents 31 20 28 20
----- ----- ----- -----
Average shares and dilutive potential
common shares 1,032 1,020 1,028 1,020
===== ===== ===== =====
Diluted earnings per common share .20 .02 $ .53 $(.14)
NOTE 5 - STOCK OPTIONS
On March 1, 2000 the Bank hired a new President/Chief Executive Officer. In
addition to salary, bonus, and other benefits, the five year employment
agreement includes annual grants of 4,000 options (at market) to purchase
Company stock and severance of 125% of salary upon change in control.
Additionally, on July 27, 2000, the Company granted 4,000 options (at market) to
purchase stock to an executive officer.
NOTE 6 - REAL ESTATE PURCHASE
On September 14, 2000, the Company entered into a contract to purchase an
existing 24,000 square foot banking facility in downtown Lexington which will
serve to replace the current main office which is leased. The acquisition is
expected to cost $3.5 million and to be consummated prior to year end 2000.
Management also intends to invest an additional $350,000 to equip and prepare
the building for its use.
NOTE 7 - STOCK OFFERING
On September 29, 2000, the Company obtained approval from the Securities
and Exchange Commission to offer for sale an additional 500,000 shares of common
stock at $16.00 per share. The subscription period of the offering is at the
Board of Directors' discretion, but cannot be extended beyond February 28, 2001.
The Company sold 54,000 shares as of September 30, 2000. If all shares of the
offering are sold, issuance proceeds, net of direct costs, will total $7.6
million.
<PAGE> Part I Item 2.
Management's Discussion and Analysis or Plan of Operation
General.
First Security Bancorp Inc. (the "Company"), headquartered in Lexington,
Kentucky was formed on February 11, 2000 and on May 31, 2000 became a bank
holding company by acquiring all of the outstanding shares of common stock of
First Security Bank of Lexington, Inc.)(the "Bank") through a 2 for 1
conversion. The transaction, approved by the Board of Governors of the Federal
Reserve System, will permit us to offer a broader range of financial products
and services than would otherwise be available.
The Bank is a commercial banking organization 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 two 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.
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 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; and the extent and timing of
legislative and regulatory actions and reforms.
<PAGE>
Overview
Net income for the nine months ending September 30, 2000 was $545,000, up from a
net loss of $144,000 for the same period in 1999. Earning assets increased from
$90.9 million as of December 31, 1999, to $120.1 million as of September 30,2000
contributing to the increase in net income. Net loans increased from $77.4
million as of December 31, 1999 to $98.3 million as of September 30, 2000. Net
loans represent the largest earning asset for the Bank. The growth in earning
assets was funded by new deposits. Total deposits increased from $83.4 million
as of December 31, 1999 to $113.4 million as of September 30, 2000.
A third location, scheduled to open during the fourth quarter of 2000, is
anticipated to significantly expand deposits, establish a broader market area
within the community, and support the growth of an even larger earning asset
base. Also, the Company is in process of offering for sale 500,000 shares of
common stock the proceeds of which will be used to support our continuing growth
and the purchase of a new main office. See Note 6 and 7 in the financial
statements and "Capital" for additional discussion.
Results of Operations
Net Interest Income
Year- to- date net interest income increased from $1.6 million as of September
30, 1999, to $2.7 million as of September 30, 2000. This represents an increase
of $1.1 million or 68.8%. Net interest income increased from $664,000 for the
quarter ending September 30, 1999 to $951,000 for the quarter ending September
30, 2000. The increases in net interest income resulted in part, from volume
increases in earning assets, supplemented to a lesser degree, by an upward
movement in yields on earning assets. Net earning assets increased $22.1 million
from December 31, 1999, to September 30, 2000. The weighted average yield on
earning assets increased from 7.68% to 8.41% for the same period.
Non Interest Income and Expenses
Non interest income is comprised primarily of service charges on deposit
accounts. Total non-interest income increased from $86,000 to $137,000 for the
nine months ending September 30, 1999 and 2000, respectively. Amounts were
$51,000 and $35,000 for the quarters ending September 30, 2000 and 1999,
respectively. We anticipate that service charge income will continue to grow
commensurate with the growth in our deposit base.
Non Interest Expense
Total non interest expense was $2.0 million for the nine months ended September
30, 2000, versus $1.5 million for the nine months ended September 30, 1999.
Total non-interest expense for the quarter ending September 30, 2000, was
$680,000 versus $503,000 for the quarter ending September 30, 1999. The primary
components of non-interest expense are salaries and benefits and costs
associated with occupancy and equipment.
Salaries and employee benefits were $980,000 and $812,000 for the nine months
ended September 30, 2000, and 1999, respectively. The quarterly amounts were
$355,000 and $271,000, respectively. The number of full time equivalent
employees increased from 22 at September 30, 1999, to 27 at September 30, 2000.
The additional employees were hired in order to staff the third location
scheduled to open later this year.
Occupancy and equipment expenses increased $12,000 for the nine month period
ended September 30, 2000 verses the nine month period ended September 30, 1999
at $236,000 and $248,000, respectively. These expenses were relatively stable
for the quarter ending September 30, 2000 and September 30, 1999 at $84,000 and
$80,000, respectively.
Expenses for professional fees have increased significantly when comparing the
nine month period ended September 30, 1999 to the same period in 2000. The
$129,000 increase is primarily due to the formation of the holding company,
registering our stock with the SEC, and preparing for a secondary stock
offering.
Securities Available for Sale
Our investment portfolio consists primarily of U.S. Government agency
securities. The amortized cost of investment securities increased from $4.4
million as of December 30, 1999 to $7.0 million as of September 30, 2000. Excess
liquidity was transferred from lower yielding federal funds to higher yielding
investment securities. The weighted average maturity of our investment portfolio
was 4.1 years at September 30, 2000 and 2.7 years at December 31, 1999.
Loans
Net loans increased $21.0 million from December 31, 1999 to September 30, 2000.
The largest growth, $16.4 million, occurred in the real estate portfolios.
Please refer to note 3 of the financial statements to see the outstanding loans
by type, at September 30, 2000 and December 31, 1999.
We have a significant amount of our loans to commercial and commercial real
estate borrowers. At September 30, 2000, approximately 77.9% of our loan
portfolio was in loans to commercial businesses and commercial real estate
borrowers. The growth of commercial loans and commercial real estate loans is a
result of increased marketing and competitive pricing in our primary market. We
expect to continue attracting new commercial and commercial real estate
borrowers, but future loan growth in these areas of our portfolio will likely
not be at a pace consistent with past increases. Our loan portfolio is primarily
to customers within the Fayette County area. We wish to increase our penetration
in the consumer loan market and believe that our third location will build new
consumer relationships.
Allowance and Provision for Loan Losses
Comparing nine months ended September 30, 2000 and 1999, the provision for loan
losses declined from $401,000 to $313,000. The provision for loan losses also
declined from $180,000 to $112,000 comparing the third quarter 2000 with the
same period in 1999. The decline in the provision for loan losses resulted
primarily from the lower rate in commercial loan growth in 2000 over 1999, and
the continued low level of delinquent and non-accrual loans. Additionally, year
to date net charge-offs for 2000 remained low at $23,000.
The allowance for loan losses increased to $1.1 million at September 30, 2000,
from $819,000 at December 31, 1999. Please refer to Note 3 of the financial
statements for a summary of the changes in the allowance for loan losses
accounts for the nine months and three months ended September 30, 2000 and 1999.
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 us. 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 we are a newly organized bank, 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 local and
Kentucky peer data 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, 2000 and December
31, 1999 was adequate. The relationship between the allowance for loan losses
and loans did not change signficiantly during the periods presented as, based on
the best information available, the overall credit quality of our loan portfolio
has not changed. 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.
Asset Quality
As of September 30, 2000 and December 31, 1999, there were no loans 90 or more
days past due. The level of loans 30 to 89 days past due decreased from .12% at
December 31, 1999, to .04% at September 30, 2000. We consider the delinquency
levels to be nominal and not reflective of any adverse trends in
overall asset quality.
Deposit and Other Borrowings
The deposit base provides the major funding source for earning assets. The
following table shows that the deposit growth we have experienced has been
consistent across all categories of deposits. We operate in a highly competitive
market for deposits. As is often the case with newly chartered banks, in order
to attract depositors, we sometimes pay above market rates on a portion of
transaction deposit accounts, savings deposits and time deposits.
The table below illustrates our deposits by major categories as of
September 30, 2000 and December 31, 1999;
DEPOSITS
September 30 December 31
2000 1999
--------- ------------
(in thousands)
Interest-bearing demand deposits $15,743 $17,499
Savings deposits 11,386 6,598
Time deposits 55,766 39,772
Time deposits $100,000 and over 22,442 14,397
-------- -----------
Total interest-bearing deposits 105,337 78,255
Total noninterest-bearing deposits 8,096 5,157
-------- -----------
Total $113,433 $83,412
======== ===========
<PAGE>
Liquidity.
The Company maintains sufficient liquidity in order to fund loan demand and
routine deposit withdrawal activity. Liquidity is managed by retaining
sufficient liquid assets in the form of investment securities and core deposits
to meet demand. Funding and cash flows can also be realized from the available-
for-sale portion of the securities portfolio and paydowns from the loan
portfolio. We have established a limited number of alternative or secondary
sources to provide additional liquidity and funding sources when needed to
support lending activity. These alternative funding sources currently include
unsecured federal funds lines of credit from two correspondent banks aggregating
approximately $6.0 million; secured repurchase agreement line of credit from a
correspondent bank based upon the market value of pledged securities; and a
secured line of credit in the amount of approximately $1 million from the
Federal Reserve Bank of Cleveland. Additionally, the Bank is a member of the
Federal Home Loan Bank of Cincinnati ("FHLB"). Although the Bank has not, as
yet, borrowed from the FHLB, the Bank has the ability to borrow approximately
$9.4 million based on the level of residential loans in the Bank's portfolio as
of September 30, 2000 which serve as collateral for this type of borrowing. The
only borrowings on our balance sheet at December 31, 1999 were in the form of
customer repurchase agreements totaling $2.4 million. Borrowings at Setpember
30, 2000, totaled approximately $1.5 million. Of this amount $900,000 was in the
form of customer repurchase agreements. The remainder of the borrowings
consisted of a $600,000 unsecured note in the name of the Company utilized to
meet the Bank's short-term capital needs (See also "Capital"). These repurchase
agreements provide our customers cash management services. The need for future
borrowing arrangements above current levels will be evaluated by management,
with consideration given to the growth prospects of our loan portfolio,
liquidity needs, cost 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. The Company's capital to total assets was 7.66% at
September 30, 2000, compared to 8.69% at December 31, 1999.
The order of Federal Deposit Insurance Corporation, dated October 14, 1997
authorizing deposit issuance for the Bank, was approved subject to the capital
condition that beginning paid in capital funds of not less than $7.7 million be
provided, and that a ratio of "Tier 1" capital to "average total assets" of not
less than 8 percent, in addition to a fully funded loan loss reserve, shall be
maintained during the first three years of operation.
We have enjoyed significant growth during our nearly three years of
operation. Total assets have grown over $30 million or 32.5% from December 31,
1999 to Setptember 30, 2000. The growth in deposits has provided the necessary
volume to fund new loans. Loan demand has remained consistently strong over the
past 9 months. Management anticipates that past growth trends will continue and
be intensified with the opening of a third location in the fourth quarter of
2000. In addition, a contract has been signed for the purchase of a facility in
downtown Lexington at a cost of $3.5 million. This location will replace our
(and the Bank's) existing main office which is leased and significantly improves
our downtown presence through both increased office space to support future
growth and a drive through which we do not have at our current main office
location. The transaction is anticipated to close prior to December 13, 2000.
Management anticipates additional expenditures of approximately $350,000 to
equip and prepare the building for use. Management believes we have sufficient
capital to support the third location and new main office. However, growth
caused First Security Bank's "Tier 1" capital ratio to fall slightly below the
8% level stipulated by the order granting FDIC insurance. In order to remedy the
situation we have taken both short term and long term action. We borrowed
$600,000 from a correspondent bank and injected these funds as a permanent
capital addition to First Security Bank. This capital injection moved First
Security Bank's Tier 1 capital ratio above the 8% level, thus meeting the
requirements of the Federal Deposit Insurance Corporation. The indebtedness is
evidenced by a note at the prime rate of interest and matures December 30, 2000,
and is on an unsecured basis. A contemporaneous stock offering allowed us to
retire the $600,000 in debt on November 7, 2000 and will support the continued
growth in total assets of First Security Bank. Additionally, the requirement to
maintain 8% in Tier 1 capital to total assets will expire in November 2000 after
which the Bank then is only required to maintain 5% to be classified as well
capitalized.
Asset/Liability Management and Market Risk
Asset liability management control is designed to insure safety and
soundness, maintain liquidity and regulatory capital standards and achieve
acceptable net interest income. We consider interest rate risk to be our most
significant market risk. Interest rate risk is the exposure to adverse changes
in the net interest income as a result of market fluctuations in interest rates.
Our interest rate sensitivity position is influenced by the distribution of
interest-earning assets and interest-bearing liabilities among the maturity
categories. Changes in interest rates can affect the rate at which pre-payments
occur. Should interest rates rise, the rate of pre-payments, particularly on
fixed rate loans, may slow, whereas a falling rate environment could have the
opposite effect.
We regularly monitor interest rate risk in relation to prospective market
and business conditions. Our board of directors sets policy guidelines
establishing minimum limits on our interest rate risk exposure. The
Asset/Liability Management Committee of our board of directors monitors and
manages interest rate risk to maintain an acceptable level of change to net
interest income resulting from market interest rate changes. We monitor and
adjust exposure to interest rate fluctations as influenced by our loan and
deposit protfolios.
On a quarterly basis, we use an earnings simulation model to analyze net
interest income sensitivity and the resulting net interest margin. Net interest
margin ("NIM") expresses net interest income as a percentage of average earning
assets. This model projects the effect of instantaneous movements in interest
rates (rate shock) 100 basis point increments up to a 400 basis point movement
in either direction. Rate shock is a method for stress testing the net interest
spread and NIM over the next four quarters using certain growth assumptions
under several rate change levels. Potential changes in market interest rates and
their subsequent effect on interest income are the evaluated. We use these
financial models to measure and interpret the degree of interest rate risk
environments. The reults of these analyses are reported to the Bank's board of
directors quarterly.
New Accounting Pronouncements
See NOTE 1 to financial statements for a discussion of recent accounting
pronouncements.
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 part of this report.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K disclosing the Company's
announcement of it's second quarter earnings through a press release
on October 16, 2000.
<PAGE>
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 13, 2000 John S. Shropshire
President and CEO
(Principal Executive Officer)
/s/Ben A. New
Date: November 13, 2000 Ben A. New
Vice President/Controller
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBITS
1 Form of Sales Agency Agreement between First Security Bancorp,
Inc. and Winebrenner Capital Partners, LLC (incorporated by
reference to exhibit 1 of the corporation's registration statement
on Form SB-2 [333-43444])
3.1 Articles of Incorporation of First Security Bancorp, Inc.
(incorporated by reference to exhibit 3.1 of the corporation's
registration statement on Form SB-2 [333-43444])
3.2 Articles of Amendment to Articles of Incorporation of First
Security Bancorp, Inc (incorporated by reference to exhibit 3.2
of the corporation's registration statement on Form SB-2
[333-43444])
3.3 Bylaws of First Security Bancorp, Inc.(incorporated by
reference to exhibit 3.3 of the corporation's registration
statement on Form SB-2 [333-43444])
4.1 Articles of Incorporation of First Security Bancorp, Inc.
(included in Exhibit 3.1)(incorporated by reference to exhibit 4.1
of the corporation's registration statement on Form SB-2
[333-43444])
4.2 Articles of Amendment of Articles of Incorporation of First
Security Bancorp, Inc., (included in Exhibit 3.2)(incorporated by
reference to exhibit 4.2 of the corporation's registration
statement on Form SB-2 [333-43444])
10.1 Employment Agreement between First Security Bancorp, Inc. and
John S. Shropshire (incorporated by reference to exhibit 10.1 of
the corporation's registration statement on Form SB-2 [333-43444])
10.2 Contract for Electronic Data Processing Services between BSC, Inc.
and First Security Bank of Lexington, Inc. (incorporated by
reference to exhibit 10.2 of the corporation's registration
statement on Form SB-2 [333-43444])
10.3 Outsource Contract between BSC, Inc. and First Security Bank of
Lexington, Inc. (incorporated by reference to exhibit 10.3 of the
corporation's registration statement on Form SB-2 [333-43444])
10.4 Business/Manager(R)License Agreement between Private Business, Inc.
and First Security Bank of Lexington, Inc.(incorporated by
reference to exhibit 10.4 of the corporation's registration
statement on Form SB-2 [333-43444])
10.5 Agreement for Administration of Credit Card Program between
Crittson Financial, LLC and First Security Bank of Lexington, Inc.
(incorporated by reference to exhibit 10.5 of the corporation's
registration statement on Form SB-2 [333-43444])
10.6 Lease 400 East Main Street between Isaac and Teresa C. Lawrence
and First Security Bank of Lexington, Inc. (incorporated by
reference to exhibit 10.6 of the corporation's registration
statement on Form SB-2 [333-43444])
10.7 Lease between THOMCO, Inc.and First Security Bank of Lexington,Inc.
(incorporated by reference to exhibit 10.7 of the corporation's
registration statement on Form SB-2 [333-43444])
10.8 Ground lease between Cherrywood Development, LLC and First Security
Bank of Lexington, Inc.(incorporated by reference to exhibit 10.8
of the corporation's registration statement on Form SB-2
[No.333-43444])
10.9 First Security Bank of Lexington, Inc. Stock Award Plan
(incorporated by reference to exhibit 10.9 of the corporation's
registration statement on Form SB-2 [No.333-43444])
10.10 Form of Escrow Agreement between First Security Bancorp, Inc. and
Peoples Bank and Trust Company, Inc.(incorporated by reference to
exhibit 10.10 of the corporation's registration statement on Form
SB-2 [No.333-43444])
11 Statement regarding Earnings per shares (See Part 1 Item 1 Note 4
"Earnings Per Share" for calculations.)
21 Subsidiaries of First Security Bancorp, Inc.(incorporated by
reference to exhibit 21 of the corporation's registration statement
on Form SB-2 [No.333-43444])
27 Financial Data Schedule for the nine months ended September 30,2000
<PAGE>
Exhibit 11 Statment regarding Computation of Per Share Earnings
See Item 1, Note 4 "Earnings Per Share" for calculations
