AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 2000
REGISTRATION NO.333-43444
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
PRE-EFFECTIVE AMENDMENT NO.2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST SECURITY BANCORP, INC.
--------------------------------------------------- ----------------------------
(Name of Small Business Issuer in Its Charter)
Kentucky 6712/551111 61-1364206
---------------------------- -------------------------------
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number/ Identification
North American Industry Number)
Classification System Number)
400 East Main Street, Lexington, Kentucky 40507 (859) 367-3701
--------------------------------------- ----------------------------------------
(Address and Telephone Number of Principal Executive Offices)
400 East Main Street, Lexington, Kentucky 40507
(Address of Principal Place of Business or Intended Principal Place of Business)
John S. Shropshire, President,
First Security Bancorp, Inc., 400 East Main Street, Lexington, Kentucky 40507
(859) 367-3700
-------------------------------------------------------------------------------
(Name, Address and Telephone Number of Agent for Service)
Copies to:
J. David Smith, Jr.
Stoll, Keenon & Park, LLP
201 E. Main Street, Suite 1000
Lexington, Kentucky 40507
(859) 231-3062
Approximate Date of Commencement of
Proposed Sale to the Public: As soon as practicable
after the effective date of this Registration
Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.___
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box._X__
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.___
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.___
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box.___
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of Each Class Dollar Amount Proposed Proposed Maximum Amount of
Of To Be Maximum Aggregate Offering Registration Fee
Securities To Be Registered Registered Offering Price Price
Per Unit
<S> <C> <C> <C> <C>
------------------------------- ------------------ ---------------------------- ----------------------------- ----------------------
Common stock, no par value $8,000,000 $16.00 $8,000,000 $4,224
------------------------------- ------------------ ---------------------------- ----------------------------- ----------------------
</TABLE>
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8 (a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8 (a),
may determine.
PROSPECTUS
FIRST SECURITY BANCORP, INC.
[LOGO]
500,000 Shares of Common Stock
$16.00 per share
Minimum Purchase - 100 Shares
------------------------------
First Security Bancorp, Inc. First Security Bancorp, Inc. is
400 East Main Street the holding company for First
Lexington, Kentucky 40507 Security Bank of Lexington, Inc.,
(859) 367-3700 Lexington, Kentucky. We are
offering shares of common stock to
fund capital contributions by us to
support the growth of First
Security Bank.
The Offering:
Per
Share Total
----- -----
Public Price $16.00 $ 8,000,000
Sales Agent Fees 1 $ .49 $ 245,000
------- ----------
Proceeds to
First Security Bancorp 2 $15.51 $7,755,000
===== ==========
1 Assumes 187,500 shares are sold to
directors, advisory directors, officers
and employees of First Security Bancorp
and 125,000 shares are sold to current This offering is in part a
First Security Bancorp shareholders apart rights offering where the
from directors, advisory directors, shares are being first made
officers and employees. The per share available to our current
fee shown represents a blended sales shareholders on a pro rata
commission rate to the sales agent, basis. Shares not purchased
Winebrenner Capital Partners, LLC which will by current shareholders on a
will sell the shares on a best efforts basis pro rata basis will then be
and be paid a sales agent fee ranging from made available to the general
2 1/2% to 6 1/2% for the sale of certain public (including any of our
(but not all) of the shares offered. shareholders who may wish to
purchase shares beyond their
pro rata portions under the
2 Before deducting offering expenses rights offering).
estimated to be approximately $110,000.
There is no minimum number of
shares which must be sold in
the offering and we reserve
the right to close sales of
shares respecting
subscriptions we
accept under the offering on a
continuous basis without
holding subscriptions in
escrow until the offering is
concluded. The offering will
continue until November 30,
2000, unless extended in the
discretion of our board of
directors to a date not later
than February 28, 2001.
The offering price for the
shares was determined by our
board of directors in its
discretion principally in
light of recent trading prices
for our common stock. The
market price for our stock has
never been higher than $16.00
and, due to the limited market
for, and thin trading volume
in, our stock, the offering
price may not necessarily
reflect the fair market value
of the shares. See "Market
For Common Stock and
Dividends" on page 35.
OTC Trading Symbol: FSLK
This is a risky investment. It is not a deposit or an account and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Factors that make this investment risky are described under the caption
"Risk Factors" beginning on page 7.
The current public market for our common stock is very thinly traded. You should
not invest in this offering unless you view your investment as a long-term one.
None of the Securities and Exchange Commission, any state securities commission,
any bank regulatory authority, or any other government agency has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
---------------------------
WINEBRENNER CAPITAL PARTNERS, LLC
September 29, 2000
<PAGE>
[INSIDE FRONT COVER]
TABLE OF CONTENTS
Prospectus Summary............................................................1
Risk Factors..................................................................7
Forward-Looking Statements...................................................14
The Offering.................................................................15
Use of Proceeds..............................................................21
Capitalization...............................................................22
Dilution.....................................................................22
Business.....................................................................23
Market for Common Stock and Dividends........................................35
Share and Warrant Ownership of Directors, Executive Officers and
Certain Beneficial Owners...................................................37
Executive Compensation and Certain Transactions..............................40
Management...................................................................42
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................47
Description of Capital Stock.................................................69
Shares Eligible for Future Sale..............................................76
Supervision and Regulation...................................................77
Experts......................................................................91
Legal Matters................................................................91
Where You Can Find More Information..........................................91
Financial Statements.........................................................F-1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is a summary, it may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the portions referred to by the page references
in this summary.
1. Who are we?
First Security Bancorp, Inc. is a one-bank holding company headquartered in
Lexington, Kentucky. We provide general commercial and consumer banking services
through our wholly-owned banking subsidiary, First Security Bank of Lexington,
Inc., Lexington, Kentucky. First Security Bancorp was organized on February 11,
2000 to be the holding company for First Security Bank of Lexington, Inc. and
acquired ownership of First Security Bank of Lexington through a bank holding
company reorganization which became effective on May 31, 2000.
First Security Bank was organized and opened for business in November 1997.
At June 30, 2000, we had consolidated assets of $115 million, deposits of $103
million and shareholders' equity of $8.5 million. See "Selected Financial Data"
below, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 47 and our financial statements beginning on page F-1.
First Security Bank, our sole subsidiary, is an independent,
community-oriented full service financial institution. It conducts a general
commercial and consumer banking business. These services include the usual
deposit functions of commercial banks, including business and personal checking
accounts, "NOW" accounts and savings accounts, business and commercial loans,
residential mortgages and consumer loans and cash management services. First
Security Bank is a Kentucky chartered bank which is not a member of the Federal
Reserve System, and its deposits are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation. See "Business" on page 23.
First Security Bank's primary service area is Fayette County, Kentucky,
and the surrounding counties . First Security Bank operates through its main
office in Lexington, Kentucky, and one branch office, with an additional branch
office currently being constructed.
2. What is the offering?
Securities Offered for Sale Shares of common stock of
First Security Bancorp. For a description
of these shares, see "Description of
Capital Stock" on page 69.
Number of Shares being Offered 500,000 shares. The shares being offered and
Persons to Whom Shares Are will be first made available to our Offered current
shareholders on a pro rata basis,
and then to the general public (including
our current shareholders who may wish to
purchase more than their pro rata
portions). Our directors, advisory
directors and executive officers have
indicated their intention to purchase
293,950 shares in the offering (though in
several instances such persons have
expressed an interest in purchasing more
than their pro rata portion of the rights
offering). See "Risk Factors - Our
Directors, Advisory Directors and
Executive Officers Could Own as Much as
57% of Our Outstanding Common Stock After
the Offering" on page 10, "The Offering"
on page 15, and "Share and Warrant
Ownership of Directors, Executive Officers
and Certain Beneficial Owners "on page
37.
Price to the Public $16.00 per share.
Number of Shares Outstanding
Before the Offering Our current shareholders hold 1,000,000
shares.
Number of Shares to be
Outstanding After the 1,500,000 shares will be outstanding
Offering immediately after offering if all offered
shares are sold.
Dividend Policy We have not (nor has First Security
Bank) paid any dividends and we do not
intend to pay any dividends in the
foreseeable future.
Use of Proceeds Apart from the repayment of indebtedness
of $600,000, we will use the net proceeds
of the offering for capital contributions
to First Security Bank for use as needed
in its lending and investment activities
and other corporate purposes. See "Use of
Proceeds" on page 21.
Risk Factors You should read the "Risk Factors"
section beginning on page 7 before
deciding to invest in the offering.
Trading Market and Symbol OTC:FSLK
3. What Is First Security Bank's business strategy?
First Security Bank emphasizes experienced local management with a strong
commitment to the communities located within its primary market area. First
Security Bank's officers and directors are active in the target area community
and we believe that this community and its business leaders have supported (and
will continue to support) a locally owned and managed financial institution
committed to providing outstanding customer service and banking products. First
Security Bank competes aggressively for banking business through a systematic
program of directly calling on both customers and referral sources such as
attorneys, accountants, mortgage brokers, insurance agents and other business
people.
First Security Bank is committed to developing strong customer
relationships by providing:
* customer access to executive management;
* continuity in officer and staff personnel;
* an active personal call program by officers;
* an understanding of customers' businesses and needs;
* prompt response to customer requests; and
* development of relationships that are durable and that grow as
First Security Bank and its customers continue in business.
We have hired and will continue to hire experienced staff to provide
personalized service and to generate competitively priced loans and deposits.
This experienced staff has access to technology, software and database systems
selected to deliver high-quality products and provide responsive service to
clients. Through an agreement with a third-party service provider to provide
data processing services and customer accounts statement preparation, First
Security Bank reduces the in-house personnel and equipment required to deliver
such services and products.
4. Who is our management?
Julian E. Beard is our Founder and Chairman of the Board of Directors.
Mr. Beard was a founder of First Security Bank and served as its President until
March of this year. Mr. Beard previously served for seven years as president of
a community bank data processing and operations management company and for
thirty-two years prior to that served in various capacities with First Security
National Bank and Trust Company, Lexington, Kentucky.
John S. Shropshire is our President and has been President and Chief
Executive Officer of First Security Bank since March 1 of this year, having
previously served in various executive officer capacities with several Kentucky
banks, including most recently five years with Community Trust Bank, N.A. Greg
Kessinger is Executive Vice-President and Chief Credit Officer of First Security
Bank, having previously served for three years as President and Chief Executive
Officer of Whitaker Bank, N.A., Lexington, Kentucky.
First Security Bank currently has 25 full-time and 4 part-time
employees.
Our Board of Directors is made up of individuals with broad backgrounds
in business, real estate, banking and healthcare, including several individuals
who have served as executive officers of some of Lexington's most prominent
businesses.
5. Selected Financial Data
The following tables set forth selected historical financial
information for First Security Bancorp as of and for the years ending December
31, 1999 and 1998, as well as financial information for the six months ended
June 30, 2000 and 1999. This information should be read in conjunction with the
financial statements of First Security Bancorp beginning on page F-1 and related
notes, as well as "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 47.
First Security Bancorp acquired First Security Bank on May 31, 2000 at
which time each outstanding share of First Security Bank common stock was
converted into two shares of First Security Bancorp common stock. The financial
statements beginning on page F-1 and the following tables are presented as if
First Security Bancorp had existed and owned First Security Bank for all periods
presented.
Historical results do not necessarily indicate the results that you can
expect for any future period.
<PAGE>
FIRST SECURITY BANCORP
SELECTED FINANCIAL DATA
As of and for the years ending
December 31,
1999 1998
(in thousands except per share data)
Income Statement Data:
Interest income $ 5,387 $ 2,118
Interest expense 3,010 1,093
Net interest income 2,377 1,025
Provision for loan losses 487 329
Noninterest income 139 41
Noninterest expense 2,007 1,845
Net income 22 (1,261)
Balance Sheet Data:
Total assets $ 94,515 $ 47,135
Total securities 4,331 5,014
Total loans, net 77,378 34,068
Allowance for loan losses 819 335
Total deposits 83,412 38,613
Repurchase agreements and short-term borrowings 2,382 ---
Total shareholders' equity 8,215 8,281
Per Share Data:
Earnings per share - basic $ 0.02 $ (1.26)
Earnings per share - diluted 0.02 (1.26)
Book value 8.21 8.28
Performance Ratios:
Return on average assets 0.03% (4.01)%
Return on average equity 0.27 (14.13)
Net interest margin 3.45 3.44
Efficiency ratio 80% 173%
Asset Quality Ratios:
Nonperforming assets to total loans ---% 0.02%
Net loan charge-offs to average loans --- 0.06
Allowance for loan losses to total loans 1.05 0.97
Capital Ratios:
Leverage ratio 9.39% 19.40%
Tier 1 risk-based capital ratio 10.47 22.40
Total risk-based capital ratio 11.50 23.30
<PAGE>
FIRST SECURITY BANCORP
SELECTED FINANCIAL DATA
(Continued)
As of and for the six months ended
June 30,
2000 1999
(in thousands except per share data)
Income Statement Data:
Interest income $ 4,274 $ 2,187
Interest expense 2,495 1,215
Net interest income 1,779 972
Provision for loan losses 201 221
Noninterest income 86 51
Noninterest expense 1,329 962
Net income 335 (160)
Balance Sheet Data:
Total assets $ 114,966 $ 73,708
Total securities 3,738 4,423
Total loans, net 94,681 51,234
Allowance for loan losses 997 554
Total deposits 102,680 65,303
Repurchase agreements and short-term borrowings 3,158 ---
Total shareholders' equity 8,533 8,057
Per Share Data:
Earnings per share - basic $ 0.34 $ (0.16)
Earnings per share - diluted 0.33 (0.16)
Book value 8.53 8.06
Performance Ratios:
Return on average assets 0.64% (0.53)%
Return on average equity 7.98 (3.92)
Net interest margin 3.52 3.35
Efficiency ratio 71.26 94.04
Asset Quality Ratios:
Nonperforming assets to total loans --- ---
Net loan charge-offs to average loans 0.03 ---
Allowance for loan losses to total loans 1.04 1.08
Capital Ratios:
Leverage ratio 7.84% 11.37%
Tier 1 risk-based capital ratio 8.78 14.71
Total risk-based capital ratio 9.79 15.71
<PAGE>
RISK FACTORS
There is a high degree of risk associated with an investment in the shares. You
should view any purchase of shares as a long-term investment. Our business,
financial condition or results of operation could be materially and adversely
affected by any of the following risks. You should carefully consider the
following factors in addition to the other information set forth in this
prospectus before making an investment in the shares.
The shares are not savings accounts, deposits or other obligations of a
bank and will not be insured by the Federal Deposit Insurance Corporation or by
any other person or entity.
General Business Risks
We Are a Relatively New Business With Limited Operating History For You to
Consider in Making an Investment Decision. We have a very limited history of
operations as a bank holding company, having only acquired First Security Bank
on May 31 of this year. Moreover, First Security Bank has less than three years
of operating history. You do not have information such as extensive historical
financial data in assessing an investment in shares as would be available to the
purchaser of securities of a company with an established history of operations.
We Have Incurred Significant Losses.
First Security Bank did not have a profitable quarter of operating results until
the quarter ended September 30, 1999. For us to continue to be profitable, we
will need to attract a large number of customers to deposit and borrow money,
among other things. It is possible that we may not achieve stable profitability
and that you will lose part or all of your investment.
Our Profitability Will Suffer if We Are Unable to Implement Our Business
Strategy. We cannot assure you that we will continue to be successful in the
implementation of our business strategy. See "Business - Business Strategy" on
page 25. The growth and expansion of First Security Bank's business has placed,
and will continue to place, significant demands on its management and its
operational and financial resources. Successful implementation of our business
strategy requires continued growth and will depend on our ability to:
* attract a significant number of customers;
* profitably manage our assets, liabilities and capital;
* develop necessary business relationships to provide products
and services;
* implement and improve operational, financial and management
information systems and other technology; and
* hire and train additional qualified personnel.
Our Profitability Will Suffer If We Are Unable to Provide Our Customers New
Financial Products and Services. As the banking industry changes, our success
could depend upon First Security Bank's ability to offer new products and
provide new financial services that meet changing customer requirements. If new
products and services are required of us, we cannot assure you that we can
successfully develop and bring new products and services to market in a timely
manner. See "Business - Business Overview" and "Competition" on pages 26 and 32.
Company Specific Risks
An Economic Downturn in the Lexington-Fayette County Economy Would
Negatively Affect Us Through Reduced Growth and Higher Levels of Problem Loans
and Charge-Offs. The operations of First Security Bank are materially
dependent upon and sensitive to the economy of the Lexington-Fayette County
area. An economic downturn or widespread labor management difficulties could
have a significant adverse effect upon our earnings and financial condition.
Since consummation of the Offering is not Subject to the Receipt of
Subscriptions for a Minimum Number of Shares, Subscribers Will Be Required to
Purchase Shares Even if Less than All of the Shares Offered Are Sold. There
is no minimum number of shares that must be sold in the offering and
subscriptions, once received, are irrevocable. The offering may be completed
even if substantially less than the total number of shares offered is sold. If
this happens, our capital would not be increased to the extent it would be if
all of the shares being offered were sold. Once made, subscriptions will not be
revocable by subscribers, and we intend to accept subscriptions even if the
offering has not been fully subscribed.
The Book Value of a Share of Common Stock After the Offering Will be Lower
Than the Price Paid for Shares in the Offering. If all of the shares being
offered are sold, the book value per share at June 30, 2000, after giving effect
to completion of this offering, would be $10.79 per share ($9.80 if half the
shares are sold). Based on these assumptions, the post-offering book value would
be less than the offering price of $16.00 per share, and accordingly, investors
in the offering would experience dilution of $5.21, or 32.56%, per share
($6.20 or 38.75% per share if half the offered shares are sold),calculated on
the basis of the difference between the offering price and pro forma book
value. The following tables illustrate this per share dilution in the event
of the sale of 500,000 and 250,000 shares:
<TABLE>
<S> <C> <C>
Sale of 500,000 shares Sale of 250,000 shares
---------------------- ----------------------
Assumed price to public $16.00 $16.00
Book value per share before offering $8.53 $8.53
Increase per share attributable to new investors 2.26 1.27
----- -----
Pro forma tangible book value per share after offering 10.79 9.80
----- -----
Dilution to new investors $ 5.21 $ 6.20
====== ======
</TABLE>
The Offering Price was Determined by the Board of Directors in its
Discretion, and Does Not Necessarily Reflect the Fair Market Value of the
Shares. Our Board of Directors considered a number of factors in determining the
offering price for the shares, but principally looked to the price of recent
trades known to have occurred. No independent third party or negotiations
were involved in the determination of the offering price, and the price does not
necessarily reflect the market value of our common stock. The price at which our
common stock trades after the offering may be higher or lower than the offering
price.
An Active Public Market for our Common Stock Does Not Currently Exist, and
Will Probably Not Exist After the Offering, Making It More Difficult for
Shareholders to Sell Their Shares. While the common stock will be freely
transferable by most shareholders, we do not expect that there will be an active
market for trading the common stock following the offering. There has not been
active trading in our common stock and we cannot be sure that an active or
established trading market will develop following completion of the offering, or
if one develops, that it will continue, or whether the price of our common stock
will be higher or lower than the offering price. The common stock will not be
listed on The Nasdaq National Market, The Nasdaq SmallCap Market or any other
securities market upon completion of the offering. See "The Offering - Limited
Market for Common Stock" on page 19.
The sales agent has told us that it intends to make quotations of our
common stock on the NASD OTC Bulletin Board and to facilitate market makers of
the common stock following the offering. The sales agent is not obligated to do
this and the development of a public trading market depends upon the existence
of willing buyers and sellers which is not within our control or that of the
sales agent. Market makers are not required to maintain a continuous two-sided
market and are free to withdraw firm quotations at any time.
Even with a market maker, the limited size of this offering, our lack
of earnings history and the absence of dividends within the foreseeable future
will impede the development of an active and liquid market for common stock. You
should carefully consider the limited liquidity of your investment in the
shares.
In the event that there are a small number of nonaffiliate purchasers and
our directors and executive officers purchase a large number of shares , the
marketability of our stock may be further limited due to the reselling
restrictions imposed upon certain individuals, including our directors and
executive officers, under federal securities laws. Under Rule 144 of the SEC,
during any three month period, a director or executive officer may sell no more
than the greater of (i) 1% of outstanding shares, or (ii) the average weekly
trading volume for our stock during the preceding four weeks. If these
restrictions on resale are applicable to the holders of a large percentage of
our shares or a large percentage of our shareholders (as is the case now), the
marketability of our shares may be further reduced.
No Underwriter Has Agreed to Purchase Any of the Common Stock and We May
Not be Able to Sell All the Shares in the Offering. Our Results May Be Adversely
Affected if Less Than All of the Offered Shares Are Sold. The common stock is
being sold through the efforts of the sales agent as well as our directors and
executive officers. Neither the sales agent nor any other person has any
obligation to purchase, or find purchasers for, any shares of common stock. See
"The Offering - Manner of Distribution" on page 20.
Because the offering is not underwritten, there can be no assurance
that any particular number of shares will be sold. If less than all of the
shares offered are subscribed for, we will have less capital to fund operations
and growth, which could result in restricted or slower growth for First Security
Bank, slower expansion of activities and lower shareholder returns. We could be
required to raise additional capital earlier than if all of the shares offered
are sold.
Our Directors, Advisory Directors and Executive Officers Could Own as Much
as 57% of Our Outstanding Common Stock After the Offering. As a Result of Their
Ownership, They Could Make It More Difficult For Certain Matters to be Approved
by Shareholders. Following completion of the offering, our directors, advisory
directors and executive officers and their affiliates could own as much as 57%
of our outstanding shares of common stock, assuming that they purchase the
number of shares in the offering which they currently intend to purchase (though
in several instances such intentions exceed the pro rata portions under the
rights offering which such persons are entitled to purchase). These persons may
purchase a greater or lesser number of shares in the offering and currently own
56% of our outstanding common stock.
By voting against a proposal submitted to shareholders, the directors,
advisory directors and executive officers, as a group, may be able to make
approval more difficult for proposals requiring the vote of shareholders (such
as mergers, share exchanges, certain asset sales and certain amendments to our
Articles of Incorporation). See "Share and Warrant Ownership of
Directors, Executive Officers and Certain Beneficial Owners"on page 37 and
"Description of Capital Stock- Anti-Takover Provisions Generally" on page 69.
Our Board of Directors Can Dilute Your Shares Through the Issuance of
Additional Stock. If all shares are sold under this offering, 1,500,000 shares
of common stock will be outstanding following the conclusion of the offering.
Our Board of Directors may issue additional shares up to the authorized maximum
of 5,000,000 without prior shareholder approval and without allowing
shareholders the right to purchase their pro rata portion of such shares. The
issuance of any new shares of common stock for whatever purpose would cause
dilution in your percentage ownership of common stock and perhaps in the value
of your shares. See "Description of Capital Stock - Preemptive Rights" on page
70.
We Can Elect to Delay Closing of The Offering Until as Late as February 28,
2001, and Can Decide to Not Accept All or a Part of Your Subscription. Until
that Decision is Made, You will Not Have the Use of Your Funds. We reserve the
right to extend the offering until as late as February 28, 2001. We will have
broad discretion in determining which subscriptions, other than those of our
current shareholders under the rights offering, to accept, in whole or in part,
including if the offering is oversubscribed. In deciding which subscriptions to
accept, we may consider the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct business to, First
Security Bank, and the desire to have a broad distribution of stock ownership.
As a result, a subscriber cannot be assured of receiving the full number of
shares subscribed for, and may forego use of all or a portion of such
subscriber's funds pending allocation of available shares. See "The Offering -
General" and - "Acceptance and Refunding of Subscriptions" on pages 15 and 18.
We Depend on Messrs. Beard, Shropshire and Kessinger and They Would Be
Difficult To Replace. Our business is a service oriented business and we are
substantially dependent upon the continuing services of executives such as John
Shropshire and Greg Kessinger and our directors, including our chairman, Julian
Beard. We do not intend to carry key man life insurance on any of our
executives. The loss of the services of any member of our senior management, or
the inability to attract and retain other experienced banking personnel, could
have a material adverse effect on our business. See "Management - Directors and
Executive Officers"on page 42.
We Have Not Historically Paid Cash Dividends and There Can Be No Assurance
That We Will Have Sufficient Earnings to Be Legally Able to Pay Dividends. First
Security Bank is currently our sole revenue producing operation. As a result,
our ability to pay dividends depends on receiving dividends from First Security
Bank. The amount of dividends that First Security Bank may pay is limited by
state and federal laws and regulations. Even if First Security Bank or First
Security Bancorp has earnings in an amount sufficient to pay dividends, our
Board of Directors may decide to retain earnings for the purpose of financing
growth. We have not (nor had First Security Bank before we acquired it) ever
paid cash dividends. No assurance can be given that First Security Bank's
earnings will permit the payment of dividends to shareholders. See "Description
of Capital Stock - Dividends" on page 75, "The Offering - Limited Market for
Common Stock" on page 19, and "Market for Common Stock and Dividends" on page
35. You should not purchase shares if you are depending upon dividend income
from this investment.
We Cannot Be Certain That the Capital of First Security Bank Will Be
Adequate to Support the Bank's Growth. We anticipate that our existing
capital resources, including the net proceeds of this offering, will adequately
satisfy the foreseeable capital requirements of First Security Bank. However,
one of the principal reasons for the offering is that the capital raised in the
initial public offering of First Security Bank has proven insufficient to
support its growth and satisfy minimum capital requirements imposed by bank
regulators upon First Security Bank when it was chartered. Future capital
requirements depend on many factors, including the ability to successfully
attract new customers and provide additional services. Any necessary future
equity or debt financing, if available at all, may be on terms which are not
favorable to us and, in the case of equity financing, could result in dilution
to your share ownership. If adequate capital is not available, First Security
Bank will be subject to an increased level of regulatory supervision and our
business, operating results and financial condition could be adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 47 and "Supervision and Regulation - First Security Bank:
Prompt Corrective Action for Capital Deficiencies" on page 87.
Banking Risks
There is No Assurance that First Security Bank Can Compete Successfully
Against Larger, More Established Institutions. Commercial banking is a highly
competitive business. We cannot assure you that First Security Bank will
continue to be able to compete successfully or profitably in its primary market
area. First Security Bank will continue to be competing for customers and
employees with more established banks, as well as with savings and loan
associations, credit unions, brokerage firms and mutual fund companies with
substantially greater financial resources and operating experience. Recent
legislation expanding the array of firms that can own banks may result in
increased competition for us. The differences in resources and regulatory
oversight may make it harder for us to compete profitably, reduce the rates that
we can earn on loans and investments, increase the rates we must offer on
deposits and other funds and adversely affect our overall financial condition
and earnings. Larger, more experienced institutions can use economies of scale
available to them because of their greater size and offer customers greater
convenience through the number of branches and automatic teller machines made
available by such entities. See "Business - Competition" on page 32.
Because There Is No Precise Method of Predicting Loan Losses, Our Allowance
for Loan Losses May Not Be Sufficient To Absorb Actual Losses. There is no
precise method of predicting loan losses. We can not assure you that our
allowance for loan losses will be sufficient to absorb our actual loan losses.
Excess loan losses will harm our business. We will attempt to maintain an
appropriate allowance for loan losses to absorb the losses we expect to
experience in our loan portfolio. We will periodically determine the amount of
the allowance for loan losses based upon consideration of several factors,
including:
*an ongoing review of the quality, mix and size of our overall loan
portfolio;
*historical and peer loan loss experience;
*evaluation of non-performing loans;
*assessment of economic conditions and their effects on our existing
portfolio; and
*the amount and quality of collateral, including guarantees, securing
loans
Potential Defaults by First Security Bank Borrowers Would Negatively Affect
Our Profitability. Credit losses can cause the insolvency and failure of First
Security Bank, and in such event, you could lose your entire investment. The
risk of nonpayment of loans is inherent in commercial banking. Because First
Security Bank has limited operating history, few of First Security Bank's
customers have an established credit history with First Security Bank (though
they may have such history with other lenders). We make various types of loans,
including commercial, consumer, residential mortgage and construction loans, of
which approximately 60% have been real estate loans (both commercial and
residential). Commercial lending is more risky than residential lending because
loan balances are greater and the borrower's ability to repay is dependent on
the success of the borrower's operations. Moreover, these concentrations expose
us to the risk that adverse developments in the real estate market could
increase the levels of nonperforming loans and charge-offs and reduce loan
demand and deposit growth. We try to limit our exposure to default risk by
carefully monitoring the amount of loans we make within specific industries and
through prudent lending practices, but we cannot eliminate the risk.
The Relatively Low First Security Bank Lending Limits Restrict Our
Ability to Compete. Our lending limits are significantly lower than most of our
competitors and affect our ability to seek relationships with larger businesses
in our market area. Our current legal lending limits are approximately $2.5
million and $1.7 million for secured and unsecured loans, respectively, and
(assuming all proceeds are contributed immediately to First Security Bank) would
be approximately $5.2 million and $3.5 million, respectively, following
completion of the offering if all shares are sold. We accommodate loans in
excess of our lending limits through the sale of participations in those loans
to other banks, but we can not always rely on participations to make larger
loans.
Our Aggressive Pricing Strategies Can Cause Our Profits to Be Below
Peer. In order to achieve the critial mass necessary to achieve profitability,
we have priced loans and deposits in a fashion that could be considered
aggressive. To the extent we continue to price in a fashion which could be
considered aggressive, our profits could be below those of comparable
institutions. Moreover, to the extent our pricing becomes less agressive, the
growth we have enjoyed could decrease and our deposits could diminish.
Our Profitability Depends On Economic Policies and Factors Beyond Our
Control. We operate in a highly regulated environment and are subject to
supervision by several governmental regulatory agencies. These regulations are
beyond our control, may change rapidly and unpredictably and can be expected to
influence our earnings and growth. For example, our profitability depends in
substantial part upon the spread between the interest rates earned on
investments and loans and the interest rates paid on deposits and other
interest-bearing liabilities. Changes in interest rates affect our operating
performance and financial condition in diverse ways. Our net interest spread
depends on many factors that are partly or entirely outside our control,
including competition, federal economic, monetary and fiscal policies, and
economic conditions generally. See "Supervision and Regulation - First Security
Bank: Effects of Governmental Policies and Economic Conditions" on page __.
Proposed Legislation Which Would Permit Banks to Pay Interest on Business
Checking Accounts Could Have a Negative Impact On Our Earnings and Financial
Performance. A pending bill in Congress, if enacted into law, would permit banks
to pay interest on checking and demand deposit accounts established by
businesses, which is currently prohibited by regulation. 6.8% of First Security
Bank's deposits at June 30, 2000, were noninterest bearing business demand
deposits. If the proposed legislation is enacted, it is likely that we would be
required to pay interest on at least a portion of these deposits in order to
compete successfully against other banks. This could have a significant negative
effect on our net interest income, net income, net interest margin, return on
assets and return on equity.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that can be
identified by the use of words like "expect", "may", "could", "intend",
"project", "estimate," "believe" or "anticipate". These forward-looking
statements reflect our current views about future events, but they are based on
assumptions and are subject to risks, uncertainties and other factors,
including:
*deposit attrition, customer loss or revenue loss is greater than expected;
*competitive pressure in the banking industry increases significantly;
*changes in the interest rate environment reduce margins;
*general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a deterioration
in credit quality;
*changes occur in the regulatory environment;
*changes occur in business conditions and inflation; and
*changes occur in the securities markets.
Our actual results, performance or achievements could differ materially from
those expressed or implied in these forward-looking statements.
THE OFFERING
General
Securities Offered. We are offering to sell 500,000 newly issued shares of
our common stock at a price of $16.00 per share. If the volume of subscriptions
exceeds the number of shares offered, we may allocate offered shares among
excess subscriptions in any amount we see fit.
Rights Offering. The shares offered under this offering are being first
offered to our shareholders as of the date of this prospectus, each of whom
shall be entitled to purchase a number of the offered shares equal to one-half
of their current shareholdings. Our current shareholders must exercise their
rights under the rights offering by delivery to the escrow agent of a
subscription agreement offer on or before October 23, 2000. After that
date, shares may be sold (in such fashion as determined by us in our sole
discretion) to the general public, as well as to our current shareholders who
either didn't exercise their rights under the rights offering or who may desire
to purchase more than their pro rata portions of the shares offered.
No Minimum Offering. There is no minimum number of shares which must be
sold in the offering. The offering will be consummated if any valid
subscriptions are received, unless our Board of Directors has terminated the
offering in its entirety.
Expiration Time. Subscriptions by current shareholders to purchase shares
under the rights offering must be received no later than 5:00 p.m. eastern time
on October 23, 2000. Subscriptions to purchase shares by the general
public, by current shareholders not exercising their rights under the rights
offering or by current shareholders who may desire to purchase more than their
pro rata portions of the offered shares must be received no later than 5:00
p.m., eastern time, on November 30, 2000, unless we terminate the offering
earlier or extend it. We reserve the right to terminate the offering at any time
prior to November 30, 2000, or to extend the termination date for up to three
periods of thirty (30) days each, without notice to subscribers. Under no
circumstances will we extend the offering beyond February 28, 2001. See
"Procedure for Subscribing for Shares " and " Acceptance and Refunding of
Subscriptions" below.
Minimum and Maximum Subscription. Investors must subscribe for the purchase
of a minimum of 100 shares (for a minimum investment of $1,600), subject to our
right to permit smaller subscriptions in our discretion. There is no maximum
number of shares which any person or group of affiliated persons will be
permitted to purchase, subject to our right to reject any subscription in whole
or in part. Subscriptions from our current shareholders will be accepted first
on a pro rata basis as described under "Rights Offering" above. In considering
whether to accept subscriptions from persons other than current shareholders
properly and timely exercising their rights under the rights offering, we may
consider the number of shares purchased by a subscriber in other capacities, the
potential of the subscriber to do business with, or direct business to, First
Security Bank, and other factors relating to a particular subscription, and the
number of shares which have not been subscribed for at the time a subscription
is accepted. In determining whether to permit a larger subscription, we may also
consider the identity of the subscriber and the subscriber's intentions with
respect to the operations, management and direction of First Security Bancorp.
Apart from current shareholders exercising their rights under the
rights offering on or before October 23, 2000, we reserve the right to accept or
reject any subscription in whole or in part. In determining whether to accept
any subscription, in whole or in part, our directors may, in their sole
discretion, take into account the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct customers to, First
Security Bank and our desire to have a broad distribution of stock ownership, as
well as legal or regulatory restrictions. Nothwithstanding our unfettered right
of rejection, once we receive a subscription, it is irrevocable by the
subscriber.
Procedure for Subscribing for Shares
Investors who wish to participate in the offering and invest in the shares
may do so by completing and signing the subscription agreement offer
accompanying this prospectus and delivering the completed subscription prior to
the termination of the offering, together with payment in full of the offering
price of all shares for which you have subscribed. Payment in full must be made
by:
* check or bank draft drawn upon a U.S. bank;
* postal, telegraphic or express money order; or
* electronic transfer,
in any case, payable to "FSB Escrow".
The offering price will be deemed to have been received only upon (i)
clearance of any uncertified check, or (ii) receipt of any certified check or
bank draft drawn upon a U.S. bank, of any postal, telegraphic or express money
order or of electronically transferred funds. A postage paid, addressed envelope
is included with this prospectus for the return of the subscription agreement
offer. If paying by uncertified personal check, please note that the funds paid
thereby may take at least five business days to clear. Accordingly, investors
who wish to pay the offering price by means of uncertified personal checks are
urged to make payment sufficiently in advance of the termination of the offering
to insure that such payment is received and clears by such date. All funds
received in payment of the subscription price will be deposited in an escrow
account with USAccess Bank,Inc., Louisville, Kentucky, as designee of the escrow
agent, Peoples Bank & Trust Company, Inc., Greensburg, Kentucky until acceptance
of such subscriptions (which can occur in our discretion at any time prior to
the closing or termination of the offering), and will be invested at our
direction.
The address to which subscription agreements and payment of the
offering price should be delivered is:
USAccess Bank, Inc.
8620 Biggin Hill Lane
Louisville, Kentucky 40220-4009
(502) 495-1373
If the amount you send with your subscription is insufficient to
purchase the number of shares that you indicate are being subscribed for, or if
you do not specify the number of shares to be purchased, then you will be deemed
to have subscribed to purchase shares to the full extent of the payment tendered
(subject only to reduction to the extent necessary to comply with any regulatory
limitation or conditions we impose in connection with the offering). If the
amount you send with your subscription exceeds the amount necessary to purchase
the number of shares that you indicate are being subscribed for, then you will
be deemed to have subscribed to purchase shares to the full extent of the excess
payment tendered (subject only to reduction to the extent necessary to comply
with any regulatory limitation or conditions we impose in connection with the
offering). Notwithstanding the foregoing, we reserve the right to reject, in
whole or in part, any subscription apart from timely rights offering
subscription agreement offers from current shareholders. In determining whether
to accept any subscription, in whole or in part, our directors may, in their
sole discretion, take into account the order in which subscriptions are
received, a subscriber's potential to do business with, or to direct customers
to, First Security Bank and our desire to have a broad distribution of stock
ownership, as well as legal or regulatory restrictions. We may also consider the
identity of the subscriber and the subscriber's intentions with respect to the
operations, management and direction of First Security Bancorp.
Failure to include the full offering price with your subscription agreement
may cause us to reject your subscription. The method of delivery of subscription
agreement offers and payment of the offering price will be at your election and
risk. If you send your subscription by mail, we recommend that you use
registered mail, return receipt requested, and that you allow a sufficient
number of days to ensure delivery and clearance of payment prior to the
termination date. Broker/dealers will transmit any such checks directly to the
escrow agent by noon of the business day following receipt.
We will decide all questions concerning the timeliness, validity, form and
eligibility of subscription agreement offers, and our decisions will be final
and binding. In our sole discretion, we may waive any defect or irregularity in
any subscription, may permit any defect or irregularity to be corrected within
such time as we may allow or may reject the purported subscription. Subscription
agreement offers will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we determine in our
sole discretion. None of First Security Bancorp, its officers, directors and
agents (including, without limitation, the sales agent), the escrow agent or any
other person will be under any duty to give a subscriber notice of any defect or
irregularity in the submission of subscription agreement offers, or incur any
liability for failure to give such notice.
SUBSCRIPTIONS FOR SHARES MAY NOT BE REVOKED BY SUBSCRIBERS.
Escrow Account; Release of Funds
All funds received in payment of the offering price will be promptly
deposited into an escrow account at USAccess Bank Inc., designee of the escrow
agent Peoples Bank & Trust Company, Inc., Greensburg, Kentucky, until acceptance
or rejection by us of such subscriptions. Funds in the escrow account will be
invested only in investments permissible under SEC Rule 15c2-4 (including
short-term obligations of the United States government or a sweep account
collateralized by US government or agency securities). Subscription funds will
be released from the escrow account to us only upon receipt by the escrow agent
of the certification of our president that subscriptions relating to such funds
have been accepted and that shares of common stock will be issued to subscribers
in respect of such subscriptions. Earnings on funds in the escrow account will
be retained by us if the offering is consummated.
Subscriptions for common stock which are received by USAccess Bank as
depository for the escrow agent may not be revoked. Interest accrued on such
funds (if any), less escrow agent fees, will be paid to subscribers on
subscription funds which are returned.
Acceptance and Refunding of Subscriptions
Subscription agreement offers are not binding on us until accepted
by us. We reserve the right to reject, in whole or in part, in our sole
discretion, any subscription agreement offer apart from offers received from
timely rights offering subscription agreement offers from current shareholders
or, if the offering is oversubscribed, to allot a lesser number of shares than
the number for which a person has subscribed. In determining the number of
shares to allot to each subscriber in the event the offering is oversubscribed,
our directors, in their sole discretion, may take into account the fact that a
subscriber is a current shareholder, the order in which subscriptions are
received, a subscriber's potential to do business with, or to direct customers
to, First Security Bank, and our desire to have a broad distribution of stock
ownership, as well as legal or regulatory restrictions. We will decide which
subscription agreement offers to accept within ten days after the termination of
the offering if we have not previously made such determination. Once made, a
subscription is irrevocable by the subscriber during the period of the offering,
including extensions, if any.
We may elect, at any time and from time to time, to accept any or all
of the subscriptions which have been received to date, issue shares of common
stock for those subscriptions and continue the offering with respect to any
remaining shares not yet purchased under the offering.
In the event that we reject all or a portion of any subscription, the
escrow agent will promptly refund to the subscriber by check sent by first-class
mail all, or the appropriate portion, of the amount submitted with the
subscription agreement offer, with accrued interest (if any), less escrow agent
fees. If the offering is not completed, all subscription funds will be promptly
refunded with interest (if any), less escrow agent fees.
After all refunds have been made, the escrow agent, the sales agent,
First Security Bancorp, First Security Bank and their respective directors,
officers, and agents will have no further liabilities to subscribers.
Certificates representing shares duly subscribed and paid for will be issued as
soon as practicable after funds are released to us by the escrow agent.
Limited Market For Common Stock
Except for common stock held by our directors, executive officers and
certain shareholders, the shares offered under this prospectus will be freely
transferable immediately upon issuance and will not be subject to any transfer
restrictions. There does not currently exist an active or organized public
market for our common stock. No broker-dealers currently offer to make a market
in our common stock. Our common stock has been the subject of only sporadic
trades. There can be no assurance that an over-the-counter market will develop
for our common stock. It is not anticipated that our common stock will be listed
on any stock exchange or be designated for trading on the Nasdaq system upon
completion of the offering or in the immediate future.
Determination of Offering Price
The offering price has been determined by our Board of Directors after
consideration of various factors which it deemed relevant, principally recent
trades of our common stock. Neither the board of directors nor management has
expressed an opinion or has made any recommendation as to whether anyone should
purchase shares of common stock in the offering. Any decision to invest in our
common stock must be made by you based upon your own evaluation of the offering
in the context of your best interests.
There can be no assurance that, following completion of the offering
and the issuance of the shares, you will be able to sell shares purchased in the
offering at a price equal to or greater than the offering price. Moreover, until
certificates for shares of common stock are delivered, you may not be able to
sell the shares of common stock that you have purchased in the offering. See
"Issuance of Common Stock" below.
Intentions of Directors, Executive Officers And Others
Our directors, advisory directors and executive officers have indicated
that they intend to subscribe for an aggregate of 293,950 shares of common stock
in the offering. Any shares purchased by directors and executive officers are
intended to be held as an investment. These intentions are not commitments and
could change based upon individual circumstances. See "Share and Warrant
Ownership of Directors, Executive Officers and Certain Beneficial Owners" on
page 37.
Regulatory Limitations
If you would own ten percent (10%) or more of our common stock after
the offering (five percent (5%) in some circumstances), you may be required to
provide certain information to, or seek the prior approval of, state and federal
bank regulators. We will not be required to issue shares of common stock in the
offering to any person who, in our opinion, would be required to obtain prior
clearance or approval from any state or federal bank regulatory authority to own
or control such shares if, at the termination date, such clearance or approval
has not been obtained or any required waiting period has not expired. We reserve
the right to reduce or reject, in whole or in part, any subscription which would
require prior regulatory application or approval if such has not been obtained
prior to the termination date. See "Acceptance and Refunding of Subscriptions"
above.
Right to Amend or Terminate The Offering
We expressly reserve the right to amend the terms and conditions of the
offering. In the event of a material change to the terms of the offering, we
will file an amendment to the registration statement, of which this prospectus
is a part, and resolicit subscribers to the extent required by the SEC. In the
event of such a resolicitation, all proceeds received will be returned promptly
to any subscriber who does not provide the escrow agent with an affirmative
reconfirmation of the subscription. We expressly reserve the right, at any time
prior to delivery of shares of common stock offered hereby, to terminate the
offering if the offering is prohibited by law or regulation or if our board of
directors concludes, in its sole judgment, that it is not in our best interests
to complete the offering under the circumstances. The offering may be terminated
by us giving oral or written notice thereof to the escrow agent and/or making a
public announcement thereof. If the offering is so terminated, all funds
received will be promptly refunded, without interest.
Issuance of Common Stock
Certificates representing shares of common stock purchased in the
offering will be delivered to purchasers, via registered or certified mail, as
soon as practicable after subscriptions for such shares have been accepted by
us. No fractional shares will be issued in the offering.
Requests For Additional Information
If you have questions or require additional information concerning the
offering, contact Julian E. Beard, Chairman and Founder, First Security Bancorp,
telephone (859) 367-3701.
Manner of Distribution
Winebrenner Capital Partners, LLC, will serve as sales agent for the
offering. For its services in attempting to sell shares on a "best efforts"
basis, the sales agent will receive a commission fee equal to the greater of
$155,000 or the sum of six and one-half percent (6 1/2%) of the proceeds from
sales of shares to persons or entities other than current shareholders and two
and one-half percent (2 1/2%) of the proceeds from sales of shares to current
shareholders other than First Security Bank organizers and our (and First
Security Bank's) directors, advisory directors, officers and other employees. We
are obligated to pay the reasonable accountable out-of-pocket expenses incurred
by the sales agent in connection with the offering (whether consummated or
terminated) up to an aggregate of $20,000 in expenses. In addition, we are
obligated to indemnify the sales agent for losses and damages to the sales agent
arising in connection with this prospectus which are not the result of the sales
agent's actions or negligence.
If any of our directors or executive officers assist in the offering they
will receive no compensation for such services. The sales agent and any such
directors and officers are not authorized to make statements about First
Security Bancorp or First Security Bank unless such information is set forth in
this prospectus, nor will they render investment advice. None of our directors
or executive officers are registered as securities brokers or dealers under the
federal or applicable state securities laws. Because they are not in the
business of either effecting securities transactions for others or buying and
selling securities for their own account, they are not required to register as
brokers or dealers under the federal securities laws. In addition, any such
activities of our directors and executive officers would be exempted from
registration pursuant to a specific safe-harbor provision under Rule 3a4-1 under
the Securities Exchange Act of 1934, as amended. Substantially similar
exemptions from registration are available under applicable state securities
laws.
Neither the sales agent nor any other person is obligated to purchase any
of the shares offered, or to find purchasers for any shares. There can be no
assurance that any minimum number of shares will be sold.
USE OF PROCEEDS
The proceeds to First Security Bancorp, net of sales agent fees, from the
sale of the common stock offered hereby will be $7.76 million if all of the
shares being offered are sold, in each case before deducting expenses of the
offering (not including commissions payable to the sales agent), which are
estimated at approximately $110,000.
The proceeds of the offering will be used to strengthen First Security
Bank's capital base and position it to continue to exceed minimum regulatory
capital ratios, which will allow for future growth through expansion of its
existing business. Apart from the repayment of indebtedness in the amount of
$600,000, we plan to use the net proceeds in their entirety for capital
contributions to First Security Bank as needed for use in its lending and
investment activities. The offering will enable First Security Bank to
establish and support an additional branch location currently under
construction, to purchase and support a new main office site, to expand into
desirable market areas, and to provide increased lending services to its
existing customers and markets.
CAPITALIZATION
The following table shows (i) the consolidated capitalization of First
Security Bancorp at June 30, 2000; and (ii) the consolidated capitalization of
First Security Bancorp on a pro forma basis giving effect to the issuance of
500,000 shares at a price of $16.00 per share and the receipt of the net
proceeds from the offering of such shares, after deduction of estimated expenses
of the offering of approximately $110,000, as if the sale of the shares had been
consummated on June 30, 2000:
At June 30, 2000
-------------------------------------------
Actual Pro Forma
------ ---------
(Dollars in thousands except per share amounts)
Shareholders' Equity:
Common stock, no par value per share;
5,000,000 shares authorized; 1,000,000
shares, issued and outstanding actual,
1,500,000 shares issued and outstanding
pro forma $4,901 $ 8,724
Capital surplus 4,901 8,724
Accumulated Deficit (1,157) (1,157)
Accumulated other comprehensive income (112) (112)
-------- ---------
Total shareholders' equity $8,533 $16,179
====== =======
Book value per share $8.53 $10.79
DILUTION
Dilution represents the difference between the amount per share paid by
purchasers of shares in this offering and the net tangible book value per share
of common stock immediately after the offering. The tangible book value of our
common stock was $8.5 million at June 30, 2000, or $8.53 per share. After
adjusting for the receipt of the net proceeds of the sale of 500,000 shares of
common stock in the offering, the pro forma book value would be $16.2 million,
or $10.79 per share. As the first table below shows, this represents an
immediate dilution of $5.21 per share to new investors, based on the difference
between pro forma book value and the offering price. The second table below
reflects the dilution resulting if only 250,000 of the offered shares are sold:
<TABLE>
<S> <C> <C>
Sale of 500,000 shares Sale of 250,000 shares
---------------------- ----------------------
Assumed price to public $16.00 $16.00
Book value per share before offering $8.53 $8.53
Increase per share attributable to new investors 2.26 1.27
----- -----
Pro forma tangible book value per share after offering 10.79 9.80
----- -----
Dilution to new investors $ 5.21 $ 6.20
====== ======
</TABLE>
BUSINESS
General
First Security Bancorp has conducted no business since its formation (and
has no expectation to conduct any business in the foreseeable future) apart
from its ownership of First Security Bank. First Security Bank, as presently
constituted, was organized in 1997. First Security Bank actively competes on the
local and regional levels with other commercial banks and financial institutions
for all types of deposits, loans and the financial and other services which it
offers. First Security Bank's general market area consists of Fayette County,
Kentucky and the surrounding counties. First Security Bank is subject to
competition not only from other banks and savings and loan associations located
in the First Security Bank service area, but from a number of financial service
entities that are competing for deposits and loans and providing financial
management services. These other entities include money market funds, finance
companies, investment banking firms, insurance companies, pension funds and
large retail organizations. Many of the banks and other financial institutions
with which First Security Bank competes have capital and resources substantially
in excess of First Security Bank's capital and resources. See "Competition"
below.
First Security Bank is one of 17 commercial banks and thrift
institutions with offices located in Fayette County, Kentucky, which is the
Bank's primary market area. As of June 30, 2000, the Bank had total assets of
$115 million and total deposits of $103 million.
First Security Bank engages in a wide range of commercial and personal
banking activities, including the usual 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; rental of
safe deposit boxes; and financial counseling for institutions and individuals.
First Security Bank's lending services include commercial, industrial, real
estate, installment, credit cards and participation in loans with other banks.
Premises and Business Hours
First Security Bank's main offices are located at 400 East Main Street
in Lexington, Kentucky. First Security Bank has one branch which is located at
2100 Southview Drive in Lexington, Kentucky and has made applications with the
Kentucky Department of Financial Institutions and the Federal Deposit Insurance
Corporation (which applications have been approved) to open a branch office at
3616 Walden Drive in Lexington. First Security Bank's current branch has both
drive-through and automatic teller facilities.
Both of First Security Bank's current offices are leased and the land for
the recently approved branch facility has been leased as well. First Security
Bank's main office lease is for a period of five years (beginning October 15,
1997), with First Security Bank holding the option to extend said lease term for
three additional terms of three years each. During the first two years of the
initial term of this lease, First Security Bank is obligated to pay annual
rental of $66,000, with such annual rental increasing to $69,000 for the other
three years of the initial term. The annual rental during the first two and the
third of the lease options will increase to $70,000 and $73,000, respectively.
First Security Bank's current branch office is leased for an initial
term of five years (beginning November 1, 1997), with First Security Bank having
options to extend said lease for three additional terms of five years each.
During the initial term of this lease, First Security Bank is obligated to make
annual rental payments of $46,000, and this rental obligation would increase in
any lease extension period based upon increases in the consumer price index.
The recently approved branch office will be on land leased for an initial
term of five years, with First Security Bank holding options to extend the lease
for five additional terms of five years each. Under this lease First Security
Bank will pay annual rent ranging from $55,000, $60,000 and $68,000 during the
first, second and third through fifth years of the lease, to $110,000 in the
last of the lease extension periods.
First Security Bank anticipates a cost of $715,000 to construct, equip
and furnish the new facility on the site for the recently approved branch.
First Security Bank offers convenient banking hours with the main office
lobby open from 8:00 a.m. to 5:30 p.m., Monday through Thursday, from 8:00 a.m.
to 6:00 p.m. on Friday, and 9:00 a.m. to 12:00 p.m. on Saturday. The current
branch office lobby is open from 8:30 a.m. to 5:30 p.m., Monday through
Thursday, 8:30 a.m. to 6:00 p.m. on Friday and 9:00 a.m. to 12:00 p.m. on
Saturday. The branch office drive-through window is open from 8:30 a.m. to 5:30
p.m., Monday through Friday and 9:00 a.m. to 12:00 p.m on Saturday.
First Security Bank has entered into an agreement with National City
Bank of Kentucky to purchase a building at 318-320 East Main Street, Lexington,
Kentucky, for $3.5 million. We intend for this site to serve as the main office
of First Security Bank and we have until November 13, 2000 to conduct due
diligence regarding this building (i.e.survey, title examination, environmental
audit, etc.) and until December 13, 2000 to close the purchase. Under this
agreement National City Bank retains the right to rent the third floor of this
building at no cost through March 31, 2001 and the other two floors of the
building are currently occupied and leased by GTE under a lease expiring March
31, 2001. We anticipate a cost of approximately $350,000 to equip this site for
banking activities.
Business Strategy
First Security Bank emphasizes experienced local management with a
strong commitment to the communities located within its primary market area. The
Lexington-Fayette County area is one which is growing and which has been
significantly affected by the general consolidation occurring within the banking
industry. We believe that many individuals and particularly small- to
medium-sized industrial and commercial businesses are not being adequately
served by existing financial institutions. We also believe that our officers and
directors are active in the community and that the community and business
leaders are anxious to patronize and support a locally managed bank owned by a
company with a broad base of local ownership. First Security Bank is committed
to providing outstanding customer service and banking products to a wide variety
of customers (including individuals and small- to medium-sized businesses) and
competing aggressively for banking business through a systematic program of
directly calling on both customers and referral sources, such as attorneys,
accountants, mortgage brokers, insurance agents and other business people.
Business Overview
First Security Bank conducts a general banking business and serves as a
full-service community financial institution offering a variety of products and
services. These services include the receipt of deposits, making of loans,
issuance of checks, acceptance of drafts, consumer and commercial credit
operations and mortgage lending. First Security Bank's deposit products include
basic, specialty and low-cost checking accounts and competitive savings and
certificate of deposit accounts. First Security Bank's loan products include a
variety of retail, commercial, mortgage and consumer products.
Business Financial Services. First Security Bank offers products and
services consistent with the goal of attracting a wide variety of customers,
including small- to medium-sized business customers. First Security Bank
actively pursues business checking accounts by offering competitive rates,
telephone banking and other convenient services to its business customers. In
some cases, First Security Bank requires business customers to maintain minimum
balances. First Security Bank has also established relationships with one or
more correspondent banks and other independent financial institutions to provide
other services requested by customers, including cash management services and
loan participations where the requested loan amount exceeds the lending limits
imposed by law or by our policies.
Consumer Financial Services. The retail banking strategy of First Security
Bank is to offer basic banking products and services that are attractively
priced and easily understood by the customer. First Security Bank focuses on
making its products and services convenient and readily accessible to the
customer. In addition to banking during normal business hours, First Security
Bank's products and services are delivered via multiple channels, including
extended drive-through hours, ATMs, telephone, mail, and by personal
appointment. First Security Bank has one ATM at its Southview Drive branch
facility and has joined an ATM network which has ATMs at convenience stores
and/or service stations. We intend for First Security Bank to explore
establishing Internet-based services. First Security Bank also provides debit
and credit card services by contracting for such services and also offers night
depository, direct deposits, Series E Savings Bond redemptions, cashier's and
travelers checks and letters of credit.
First Security Bank offers a variety of deposit accounts, including
checking accounts, regular savings accounts, NOW accounts, money market
accounts, sweep accounts, fixed and variable rate IRA accounts, certificate of
deposit accounts and safety deposit boxes. Although First Security Bank offers a
range of consumer and commercial deposit accounts, it does not actively solicit
(though it does accept) certificates of deposit in principal amounts greater
than $100,000.
We have hired and will continue to hire experienced staff to provide
personalized service. This experienced staff has access to current software and
database systems selected to deliver high-quality products and provide
responsive service to clients. First Security Bank's agreement with a
third-party service provider makes available to customers convenient telephonic
access to their accounts and is intended to allow First Security Bank to remain
at the forefront of technology while reducing the personnel and equipment
required to deliver such products.
Lending Practices. First Security Bank makes loans to individuals and
businesses located within its market area. First Security Bank's loan portfolio
consists of commercial loans (30%), residential and commercial mortgage loans
(60%) and personal loans (10%). First Security Bank's legal lending limits under
applicable regulations (based on the legal lending limits of 30% and 20%,
respectively, of capital and surplus for secured and unsecured loans,
respectively) are currently approximately $2.9 million and $2.0 million,
respectively, for secured and unsecured loans and following completion of the
offering would be (after deduction of expenses and sales commissions)
approximately $5.2 million and $3.5 million if all shares being offered were
sold and all proceeds immediately contributed by us to First Security Bank.
Commercial loans are made primarily to small- and medium-sized
businesses. These loans are secured and unsecured and are made available for
general operating inventory and accounts receivable, as well as any other
purposes considered appropriate. First Security Bank will generally look to a
borrower's business operations as the principal source of repayment, but will
also receive, when appropriate, security interests in personal property and/or
personal guarantees. In addition, the majority of commercial loans that are not
mortgage loans are secured by a lien on equipment, inventory and/or other assets
of the commercial borrower.
Commercial lending (including commercial real estate lending) involves
more risk than residential real estate lending because loan balances are greater
and repayment is dependent upon the borrower's operations. Additional risks
in commercial lending include the following:
* local or national economic recession;
* disruption of a business management team through death, removal or
resignation;
* disputes with suppliers or governmental regulators; and * in the case
of commercial real estate lending, loss of major tenants,
environmental liabilities, and casualty risks. First Security Bank
attempts to minimize the risks associated with these transactions by generally
limiting its exposure to owner-operated properties of customers with an
established profitable history. In many cases, risk can be further reduced by
limiting the amount of credit to any one borrower to an amount less than First
Security Bank's legal lending limit and avoiding types of commercial real estate
financings considered risky.
First Security Bank originates residential mortgage loans with either
fixed or variable interest rates. First Security Bank's general policy is to
sell most fixed rate loans in the secondary market. This policy is subject to
review by management and may be revised as a result of changing market and
economic conditions and other factors. First Security Bank does not retain
servicing rights with respect to the secondary market residential mortgage loans
that it originates. First Security Bank also offers home equity loans which are
secured by prior liens on the subject residence. All of First Security Bank's
residential real estate loans are secured by a first lien on the real estate and
the majority of First Security Bank's personal loans are home equity loans
secured by a second lien on real estate.
First Security Bank makes personal loans and lines of credit available
to consumers for various purposes, such as the purchase of automobiles, boats
and other recreational vehicles, and the making of home improvements and
personal investments. All of such loans are retained by First Security Bank.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and usually involve more credit risk than mortgage
loans because of the type and nature of the collateral. Risks associated with
both consumer and residential mortgage lending include the following:
*financial instability resulting from the loss of a job;
*illness;
*bankruptcy;
*divorce;
*local or national economic recession; and
*decline in real estate values in central Kentucky market.
In many cases, repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of depreciation of the underlying collateral. First Security Bank underwrites
its loans carefully, with a strong emphasis on the amount of the down payment,
credit quality and history, employment stability and monthly income. These loans
are expected generally to be repaid on a monthly repayment schedule with the
payment amount tied to the borrower's periodic income. We believe that the
generally higher yields earned on consumer loans help compensate for the
increased credit risk associated with such loans and that consumer loans are
important to First Security Bank's efforts to serve the credit needs of its
customer base.
Although First Security Bank takes a progressive and competitive
approach to lending, it stresses high quality in its loans. First Security Bank
is subject to written loan policies that contain general lending guidelines and
are subject to periodic review and revision by the First Security Bank Board of
Directors Loan Policy Committee. These policies concern loan administration,
documentation, approval and reporting requirements for various types of loans.
First Security Bank seeks to make sound loans while recognizing that
lending money involves a degree of business risk. First Security Bank's loan
policies are designed to assist it in managing the business risk involved in
making loans. These policies provide a general framework for First Security
Bank's loan operations while recognizing that not all risk activities and
procedures can be anticipated. First Security Bank's loan policies instruct
lending personnel to use care and prudent decision-making and to seek the
guidance of the Chief Credit Officer or the President and Chief Executive
Officer of First Security Bank where appropriate.
The loan policies address loan portfolio diversification and prudent
underwriting standards, loan administration procedures, and documentation,
approval and reporting requirements in light of First Security Bank's basic
objectives of:
* granting loans on a sound and collectible basis;
* investing First Security Bank funds profitably for the benefit
of you and other shareholders and securely for the benefit of
depositors; and
* serving the credit needs of the Lexington-Fayette County market.
Such policies provide that:
* individual officers of First Security Bank have personal
lending authority within varied ranges;
* credits in excess of an officer's lending authority but not in
excess of $500,000 require the approval of First Security Bank's
executive officers; and
* credits in excess of $500,000 require the approval of the First
Security Bank Board of Directors Loan Policy Committee.
First Security Bank's loan policies provide general guidelines for
loan-to-value ratios that restrict the size of loans to a maximum percentage of
the value of the collateral securing the loans, which percentage varies by the
type of collateral, including the following loan-to-value ratios:
* raw land (65%);
* improved residential real estate lots (80%);
* commercial real estate (80%); and
* residences (90%).
First Security Bank makes use of credit risk insurance, principally for
residential real estate mortgages where the loan-to-value ratio exceeds 80%.
Regulatory and supervisory loan-to-value limits are established by the Federal
Deposit Insurance Corporation Improvement Act of 1991. First Security Bank's
internal loan-to-value limitations will follow these limits and will often be
more restrictive than those required by the regulators.
First Security Bank's loan policies generally include other underwriting
guidelines for loans secured by liens on real estate. These underwriting
standards are designed to determine the maximum loan amount that a borrower has
the capacity to repay based upon the type of collateral securing the loan and
the borrower's income. Typically the borrower would be expected to have annual
cash flow of 1.25 times required debt service. In addition, the loan policies
require that First Security Bank obtain a written appraisal by a state certified
appraiser for loans secured by real estate in excess of $250,000, subject to
limited exceptions. The appraiser must be selected by First Security Bank and
must be independent and licensed or state certified. First Security Bank may
elect to conduct an in-house real estate evaluation for loans not exceeding
$50,000. First Security Bank's loan policies also include maximum amortization
schedules and loan terms for each category of loans secured by liens on real
estate. Loans secured by commercial real estate are generally subject to a
maximum term of 5 years and a maximum amortization schedule of 25 years. Loans
secured by residential real estate with variable interest rates will have a
maximum term and amortization schedule of 30 years. Except for five-year fixed
rate residential mortgage loans, First Security Bank sells to the secondary
market all of its residential fixed-rate mortgage loans, thereby reducing its
interest rate risk and credit risk. Loans secured by vacant land are generally
subject to a maximum term of 3 years and a maximum amortization schedule of 10
years.
First Security Bank's loan policies also establish guidelines on the
aggregate amount of loans to any one borrower, providing as a guideline that no
loan shall be granted where the aggregate liability of the borrower to First
Security Bank will exceed $1.3 million. This internal lending limit is subject
to review and revision by the First Security Bank Board of Directors Loan Policy
Committee from time to time.
In addition, First Security Bank's loan policies provide guidelines
for:
* personal guarantees;
* environmental policy review;
* loans to employees, executive officers and directors;
* problem loan identification;
* maintenance of a loan loss reserve; and
* other matters relating to First Security Bank's lending practices
Investments. First Security Bank first strives to meet the credit needs of
its community through making loans. Loan demand takes preference on investable
funds up to an acceptable loan-to-deposit ratio, as periodically determined by
our board of directors. Loan and investment opportunities are fully explored,
and those offering the greatest return considering liquidity risk, and community
requirements, will be given priority. Our investment policy specifies that the
overall portfolio objective is to maximize the long term total rate of return
through active management of portfolio holdings, consistent with
asset/liability, liquidity, tax equivalent yield, maturity and pledging
guidelines. Permissible investments include debt instruments such as U.S.
government securities, government sponsored agencies, municipal bonds, banker's
acceptances, commercial paper, domestic certificates of deposit which are FDIC
insured, mortgage-backed securities and collateralized mortgage obligations, and
small business administration (SBA) pools. Participation in the federal funds
market with other depository institutions is permitted. Investment in equity
securities is very limited and only done in exceptional circumstances. All
investments are made in accordance with our investment policy guidelines
covering acceptable yields, maturities, investment selection and evaluation, and
unsuitable investment practices.
Real estate acquired by First Security Bank in satisfaction of or in
foreclosure upon loans may be held, subject to a determination by a majority of
its board of directors as to the advisability of retaining the property, for a
period not to exceed sixty months after the date of acquisition or such longer
period as the appropriate regulators may approve. First Security Bank will also
be permitted to invest an aggregate amount not in excess of 40% of its capital
in such real estate, including furniture and fixtures, as is necessary for the
convenient transaction of its business. First Security Bank has no present plan
to make any such investment though its board of directors may alter the
investment policy without shareholder approval.
<PAGE>
Financial Planning. We are exploring using a third party provider or
creating a partnership, joint venture or other relationship to offer financial
planning, investment services and insurance services through First Security
Bank. The objective of offering these products and services would be to generate
fee income and strengthen relationships with First Security Bank customers.
Trust Services. First Security Bank does not have trust powers, but
expects to explore establishing a relationship with a third-party provider for
administrative trust services.
Data Management and Other Services
Rather than expending the large sums required to conduct the data
management function directly, First Security Bank has entered into an agreement
with BSC, Inc. BSC provides, among other things, on-line facilities, daily
financial report preparation, loan and deposit data processing and customer
account statement preparation pursuant to an agreement with a remaining term of
fifteen months. The fees under the BSC contract are currently $4,000 per month
and in November will increase to $6,000 per month for the balance of the term.
We believe using BSC for these services is a more cost efficient
alternative than hiring the personnel and purchasing the equipment required to
perform such services in-house. In addition, First Security Bank has attempted
to develop strong correspondent banking relationships that enable it to purchase
other services such as check collection, purchase and sale of federal funds,
wire transfer services and customer credit services, including selling
participations in loans which would otherwise exceed First Security Bank's legal
lending limits.
Personnel and Benefits
The operations of First Security Bank are staffed with 29 employees,
including 4 part-time employees. The current staffing is categorized as follows:
Management
Chairman and Founder
President and Chief Executive Officer
Executive Vice-President
Executive Vice-President and Chief Credit Officer
First Vice-President and Controller
Executive Administrator and Human Resources Officer
Assistant Vice President and Internal Auditor
Retail Operations
Three Branch Managers
Ten Tellers/New Accounts Staff
Two Marketing/Business Development Representatives
Lending
Consumer/Installment/Mortgage Lender
Commercial Lender
Senior Loan Administrator
Four Loan Support Employees
Management considers employee relations to be good. None of First Security
Bank's employees are covered by a collective bargaining agreement.
Competition
The banking business in the Lexington-Fayette County market area is
highly competitive. Competition exists between state and national banks for
deposits, loans and other banking services. First Security Bank is required to
compete with numerous well-established financial institutions with vastly
greater financial and human resources than those available to it.
First Security Bank's market area has experienced substantial consolidation
in recent years within the banking industry. Many of the area's locally owned or
locally managed financial institutions have either been acquired by large
regional bank holding companies or have been consolidated into branches. This
consolidation has been accompanied by fee changes, branch closings, the
dissolution of local boards of directors, management and branch personnel
changes and, in our judgment, a decline in the level of personalized customer
service. With recent changes in interstate banking regulations, this type of
consolidation is expected to continue.
There are 15 commercial banks operating a total of 83 offices in Fayette
County as well as two federal savings banks operating four offices, eleven
credit unions and several small loan companies. The following table (adapted
from information provided in the Federal Deposit Insurance Corporation Summary
of Deposits) sets forth information respecting the financial institutions with
offices in Fayette County, and the deposits (in millions) attributable to
such offices, as of June 30, 1999:
June 30, 1999 Number of
Institution Deposits Offices
(in millions)
Bank of the Bluegrass and Trust Company $69 1
Bank One, Kentucky, N.A. $1,100 15
Central Bank & Trust Co. $470 12
Fifth Third Bank, Kentucky, Inc. $248 8
First Southern National Bank $29 1
National City Bank of Kentucky $313 13
Community Trust Bank, N.A. $115 6
PNC Bank of Kentucky $113 4
Republic Bank and Trust Co. $124 4
Vine Street Trust Co. $165 3
Whitaker Bank, N.A. $71 6
Progressive Bank, N.A. $12 1
Traditional Bank of Kentucky, Inc. $31 2
Firstar Bank, N.A. $160 5
First Security Bank of Lexington $ 65 2
------- --
$3,085 83
Market Area 1
First Security Bank concentrates the majority of its marketing efforts in
the Lexington-Fayette County area. Fayette County is located in central
Kentucky, approximately 75 miles east of Louisville and approximately 85 miles
south of Cincinnati.
The Lexington banking market is comprised of seven central Kentucky counties.
Lexington-Fayette County Metropolitan Statistical Area
County County Population Largest City Population
------ ----------------- -----------------------
Fayette 243,785 Lexington 243,785
Bourbon 19,363 Paris 8,898
Clark 32,457 Winchester 15,937
Jessamine 37,300 Nicholasville 17,099
Madison 67,690 Richmond 27,644
Scott 32,249 Georgetown 14,365
Woodford 22,773 Versailles 8,233
--------- -----------
TOTAL MSA 455,617 335,961 1 The information contained in the
following discussion has been derived from generally available published and
unpublished sources including, but not limited to, 1999 information provided by
the Greater Lexington Chamber of Commerce and the Kentucky Deskbook of Economic
Statistics.
Lexington is the center of our seven-county metropolitan area that has
experienced rapid growth over the past 15 years. Based on estimates from the
U.S. Bureau of Census, the MSA's population stood at 455,617 on July 1, 1999.
This represented 12.2% growth from 1990 and 22.8% growth since 1980. Likewise,
over the last several years, Lexington has experienced considerable population
growth. From 1980 to 1990, Lexington grew at an annual rate of 0.99% and 10.38%
overall. As of July 1, 1999, Lexington had grown during the 1990's by 18,000
people.
Between 1990 and 1997, the per capita personal income for Lexington-Fayette
County residents and the Lexington MSA increased at a rate of 37.8% and 36.9%,
respectively. The average household income in the Lexington MSA grew by 45% from
1985 to 1995. According to the 1993 Statistical Abstract of the United States,
Kentucky ranked third in the nation in per capita income growth from 1990 to
1992.
Lexington is the financial, educational, retail, health care, service, and
cultural center of the Bluegrass region in central Kentucky and most of eastern
Kentucky. The healthy economy of Lexington and the surrounding area is due in
large part to its diversification of employment opportunities. The MSA's largest
employment sector, the services industry, accounts for only 28.5% of total
non-agricultural jobs. Most of the remaining employment is dispersed among
government, retail trade, manufacturing, and construction. Because of the
diverse opportunities, Lexington's unemployment rate (currently at 1.8%) is
typically lower than the rest of the nation. The University of Kentucky, Toyota,
and Lexmark International are among the area's largest employers. Other
employment opportunities include equine-related businesses, health care,
tobacco, retail and services. The following is a list of 15 of the larger
employers in the Lexington MSA:
Major Employers - Lexington MSA
Company Employees
--------------------------------------------
University of Kentucky 10,562
Toyota Motor Mfg. USA 7,900
Lexmark International 6,000
Fayette Co. Public Schools 4,906
University of Ky. Hospital 3,100
Lex-Fayette Urban Co. Gov't 2,597
Central Baptist Hospital 2,400
St. Joseph Hospital 2,000
Kentucky Utilities 1,780
Eastern Ky. University 1,750
Veterans Medical Center 1,500
Johnson Controls 1,500
The Trane Co. 1,489
OSRAM Sylvania 1,355
Dillards 1,350
MARKET FOR COMMON STOCK AND DIVIDENDS
Price Ranges of Common Stock
The common shares of First Security Bancorp are not traded on any listed
stock exchange. The shares are traded in the over-the-counter market under the
symbol "FSLK", on an order-match agency basis, whereby buyers and sellers of the
stock execute transactions on a no spread basis. No bid or asked prices are
quoted. Trading volume in common stock is considered light and the stock is
thinly traded. As of June 30, 2000, there were 1,000,000 shares of common stock
outstanding and held by approximately 380 shareholders of record.
The following represents the reported prices (as well as the total
trading volume) for which shares of First Security Bancorp common stock have
been exchanged since May 31, 2000 on a per share basis, and prior to such date
the prices for which shares of First Security Bank common stock were exchanged
since the formation of First Security Bank (on a per share basis with such
prices and trading volume numbers having been adjusted to reflect the two for
one exchange of First Security Bancorp common stock for First Security Bank
common stock when First Security Bancorp acquired First Security Bank):
Price Per Share No. of Shares
Traded During Period
High Low
1997 4th Quarter 10 10 800
1998 1st Quarter 11.50 10 11,000
2nd Quarter 12.50 10 7,600
3rd Quarter 13 11.875 7,600
4th Quarter 13.50 12.50 4,600
1999 1st Quarter 13 12.50 18,400
2nd Quarter 13.50 12 68,400
3rd Quarter 13.375 12.75 79,800
4th Quarter 13 10.50 4,200
2000 1st Quarter 14.50 13.25 34,200
2nd Quarter 15.50 14.25 9,300
3rd Quarter 16 16 400
These price quotations are derived from data furnished by the National
Association of Securities Dealers and, accordingly, we cannot guarantee the
accuracy or reliability of such price quotations. Some trades may occur which
are not reported by the NASD. Since there is no established public trading
market for our common stock, there can be no assurance that the price
information set forth above is representative of prices which could be obtained
from sales of our common stock in established open market transactions.
Dividends
Holders of our common stock are entitled to receive dividends as and when
declared by our board of directors. First Security Bancorp has not paid cash
dividends since it became the holding company for First Security Bank, and prior
to that time First Security Bank did not pay any cash dividends, each electing
to retain its limited earnings to support growth. We currently intend to
continue the policy of retaining earnings to support growth for the immediate
future. Future dividends will depend primarily upon First Security Bank's
earnings, financial condition and need for funds, as well as applicable
governmental policies and regulations. There can be no assurance that we will
have earnings at a level sufficient to support the payment of dividends, or that
we will in the future elect to pay dividends. As First Security Bank is the
primary source of funds for payment of dividends by First Security Bancorp, the
inability of First Security Bank to pay dividends would adversely affect the
ability of First Security Bancorp to pay dividends.
Federal and state statutes and regulations place limits on the amount
of dividends First Security Bank may pay without prior approval. Under Kentucky
law, dividends by Kentucky banks may be paid only from current or retained net
profits. Before any common stock dividend may be declared for any period, a bank
must increase its capital surplus by at least 10% of the net profits of the bank
for such period until the bank's capital surplus equals the amount of its stated
capital attributable to its common stock. Prior regulatory approval is required
to pay dividends which exceed First Security Bank's net profits for the current
year plus its retained net profits for the preceding two calendar years, less
required transfers to surplus. State and federal regulatory authorities also
have authority to prohibit a bank from paying dividends if they deem such
payment to be an unsafe or unsound practice.
The Federal Reserve Board has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that First Security Bancorp may pay in the future. In 1985, the Federal Reserve
Board issued a policy statement on the payment of cash dividends by bank holding
companies. In the statement, the Federal Reserve Board expressed its view that a
holding company experiencing earnings weaknesses should not pay cash dividends
exceeding its net income, or which could only be funded in ways that weakened
the holding company's financial health, such as by borrowing. See "Supervision
and Regulation - First Security Bancorp: Capital Adequacy" on page 83.
As a depository institution, the deposits of which are insured by the
Federal Deposit Insurance Corporation, First Security Bank may not pay dividends
or distribute any of its capital assets while it remains in default on any
assessment due the Federal Deposit Insurance Corporation. First Security Bank is
not currently in default under any of its obligations to the Federal Deposit
Insurance Corporation.
SHARE AND WARRANT OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN
BENEFICIAL OWNERS
Share Ownership
The following table sets forth certain information as of September 1, 2000
concerning the number and percentage of shares of our common stock beneficially
owned by our directors and executive officers, and by all of our directors and
executive officers as a group, as well as information regarding the other person
known by us to own in excess of 5% of our outstanding common stock. Also shown,
for illustrative purposes only, are the number and percentage of shares that
will be owned by such persons after the offering based upon their expressed
purchase intentions. Such expressed purchase intentions may not result in the
actual purchase of such number of shares, not only because such expressed
intentions are non-binding but also because in several instances such intentions
exceed the number of shares which may be purchased under the rights offering
(though our Board of Directors may permit such additional purchases after the
rights offering is concluded). Except as otherwise indicated, all shares are
owned directly, and the named person possesses sole voting and sole investment
power with respect to all such shares. Except as set forth below, we are not
aware of any other person or persons who beneficially own in excess of five
percent of the common stock. Further, we are not aware of any arrangement which
at a subsequent date may result in a change of control of First Security
Bancorp.
<TABLE>
<CAPTION>
Projected
Beneficial
Ownership
and
Amount and Nature of Eligible Percentage
Beneficial Ownership of Shares After
Common Stock as of Percent of Subject to Offering***
September 1, 2000 Class* Warrants** -----------
Name of Beneficial Owner
<S> <C> <C> <C> <C>
Julian E. Beard 10,200(1) 1.02 2,680 12,700 (.84%)
James R. Burkholder**** 6,000(1) .60 --- 6,000 (.40%)
R. Greg Kessinger 10,050(2) 1.01 --- 12,050 (.80%)
Len Aldridge 45,000(3) 4.50 --- 50,000(3.33%)
Dennis R. Anderson 10,000(1) 1.00 2,680 17,500(1.16%)
John D. Barlow 11,594(4) 1.16 2,680 14,594 (.97%)
Harold Glenn Campbell 52,000(5) 5.20 --- 52,000(3.46%)
William A. Combs, Jr. 20,000 2.00 2,680 30,000(2.00%)
A. F. Dawahare 20,000(6) 2.00 5,896 30,000(2.00%)
Dr. Kenneth L. Gerson 12,000 1.20 2,680 17,000(1.13%)
Tommy R. Hall 12,570 1.26 2,680 20,070(1.33%)
Erle L. Levy 10,000(7) 1.00 2,680 16,250(1.08%)
David R. McCulloch 10,000 1.00 2,680 20,000(1.33%)
Dr. Ira P. Mersack 20,000(8) 2.00 5,494 32,500(2.16%)
Ben A. New --- --- --- --- ---
Fon Rogers, II 21,000(9) 2.10 5,896 42,000(2.80%)
Robert J. Rosenstein 30,010(10) 3.00 8,844 35,010(2.33%)
Dr. Ronald J. Saykaly 40,000(11) 4.00 --- 60,000(4.00%)
John S. Shropshire 300(12) .03 --- 6,550 (.43%)
Richard S. Trontz 15,000 1.50 4,422 25,000(1.66%)
William T. Vennes 27,400 2.74 2,680 33,650(2.24%)
Kathy E. Walker 10,000 1.00 --- 22,500(1.50%)
D. Woodford Webb, Jr. 10,000 1.00 2,680 16,250(1.08%)
------- ---- ----- -------------
All Directors and Executive
Officers as a group 403,124 40.31% 57,352 571,624(38.11%)
Other 5% Shareholders:
Donald K. Poole 118,400(13) 11.84% 11,792 177,600(11.84%)
1999 Richmond Rd.
Lexington, KY 40502
</TABLE>
*Exclusive of shares of common stock that may be purchased pursuant to
warrants.
**Represents rights to purchase the number of shares of common stock
indicated at a price of $10.00 per share at any time during the sixth
full calendar year of First Security Bank's operations. These warrants
were issued to the individuals reflected in 1997 by virtue of such
persons' actions as initial investors in First Security Bank.
***Assumes the sale of 500,000 shares under the offering.****Mr.
Burkholder is on a leave of absence and has indicated his intention to
resign from his positions with First Security Bancorp and First
Security Bank effective September 30, 2000. Mr. Burkholder and the
sales agent have indicated that following his departure from First
Security Bancorp and First Security Bank Mr.Burkholder will be employed
by the sales agent on terms and conditions not yet settled, though the
sales agent and Mr.Burkholder have indicated that Mr.Burkholder will
receive no compensation in connection with the offering of shares.
1Shares are held in an individual retirement account for the benefit of
the named person. With respect to Mr. Burkholder,common stock reflected
does not include options for the purchase of 4,000 shares of common
stock which First Security Bancorp has agreed to extend to Mr.
Burkholder.
2Includes 10,000 shares held in an individual retirement account for
the benefit of Mr. Kessinger and 50 shares held by Mr.Kessinger's wife,
Lana C. Kessinger.
3Includes 10,000 shares held by Brookhaven Trust Properties of which
Mr. Aldridge is a co-trustee.
4Includes 1,094 shares held in an individual retirement account for the
benefit of Mr. Barlow.
5Shares are held by the Harold Glenn Campbell Trust.
6Shares are held by the S F Dawahare Estate Limited Partnership.
7Shares are jointly owned with Mr. Levy's wife, Sara Levy.
8Includes 10,000 shares held for the benefit of Dr. Mersack by National
City Bank as Custodian for Dermatology Associates of Kentucky, P.S.C.
Profit Sharing Plan.
9Includes 1,000 shares held by two trusts (500 shares in each trust)
for two of Mr. Rogers' children.
10Includes 10 shares held by Mr. Rosenstein as custodian for his son,
Ross J. Rosenstein.
11Shares are jointly owned with Dr. Saykaly's wife, Teresa G. Saykaly.
12Does not reflect options for the purchase of 20,000 shares of common
stock which First Security Bancorp has agreed to extend to
Mr.Shropshire.
13Includes 10,000 shares held by the Donald K. Poole Trust Under
Agreement Dated March 29, 1985.
Warrants
The following persons hold warrants for the
purchase of common stock, as indicated:
Eligible Shares
Name from Warrants
---- -------------
Julian E. Beard 2,680
Dennis R. Anderson 2,680
John D. Barlow 2,680
William A. Combs, Jr. 2,680
Joe E. Coons 2,680
William Patrick Davey, M.D. 2,680
A. F. Dawahare 5,896
Kenneth L. Gerson, M.D. 2,680
Tommy R. Hall 2,680
Timothy L. Haymaker 2,680
Erle L. Levy 2,680
Michael Lischin 2,680
David R. McCulloch 2,680
Ira P. Mersack, M.D. 5,494
Donald K. Poole 11,792
Fon Rogers, II 5,896
Robert J. Rosenstein 8,844
Warren W. Rosenthal 5,896
Howard A. Settle 2,680
Richard S. Trontz 4,422
William T. Vennes 2,680
D. Woodford Webb, Jr. 2,680
-----
TOTAL: 88,440
======
The warrants entitle the holders thereof to purchase during 2003 the
subject number of shares of common stock at a per share purchase price of
$10.00. The warrants were issued in 1997 to the aforesaid persons for their role
as initial investors who incurred risk in advancing monies for the organization
of First Security Bank.
EXECUTIVE COMPENSATION AND CERTAIN TRANSACTIONS
Executive Compensation
The following table sets forth certain information concerning total
compensation for services rendered in all capacities awarded or paid by First
Security Bank to the three most highly compensated executive officers of First
Security Bancorp and First Security Bank (apart from John S. Shropshire whose
compensation arrangement is described below) for the three (3) fiscal years
ended December 31, 1999:
Long-Term
Compensation
Annual Awards
Name and Fiscal Compensation Restricted All Other
Principal Position Year Salary Bonus Stock Awards Compensation2
------------------ ---- -------------- ------------ ------------
Julian E. Beard
Chairman of the Board of 1999 $100,000 --- --- 4,286
Directors and Founder, First 1998 100,000 --- --- 4,286
Security Bank 1997 75,000 --- --- ---
(President and CEO until
March 1, 2000)
James R. Burkholder1 1999 85,000 1,000 --- 3,188
Executive Vice-President, 1998 85,000 --- --- 3,188
First Security Bank 1997 63,750 --- --- ---
R. Greg Kessinger 1999 80,000 1,000 --- 2,400
Executive Vice-President and 1998 80,000 --- --- 2,400
Chief Credit Officer, First 1997 46,666 --- --- ---
Security Bank
1 Mr. Burkholder is on a leave of absence and has indicated his intention to
resign effective September 30, 2000. 2 Represents the amounts contributed by
First Security Bank to the named participants' accounts in the First Security
Bank 401(k) Profit Sharing Plan.
Employee Benefit Plans
First Security Bank provides all officers and full-time employees with
group life and medical and dental insurance coverage. First Security Bank also
has a defined contribution 401(k) retirement plan which covers employees that
meet certain age and length of service requirements. First Security Bank
currently contributes to the 401(k) plan through a fifty percent (50%) match of
employee contributions up to 7.5% of employee compensation.
Under First Security Bank's Stock Award Plan, approved by First Security
Bank stockholders earlier this year and assumed by First Security Bancorp when
it acquired First Security Bank, 100,000 shares of common stock are available
for issuance under options which may be granted between 2000 and 2010. Both
incentive stock options and non-qualified stock options may be issued under the
Stock Award Plan, as well as restricted stock awards and stock appreciation
rights. The purpose of the Stock Award Plan is to enable First Security Bancorp
to attract, retain and provide incentives for outstanding employees, directors
and advisory directors for First Security Bancorp and First Security Bank, and
to reward excellent performance by the employees and to further the growth,
development and financial success of First Security Bancorp. Our board of
directors administers the Stock Award Plan. As of September 1, 2000, there were
no options to purchase shares of common stock outstanding under the Stock Award
Plan.
Shropshire Employment Agreement
John S. Shropshire was appointed as President and Chief Executive
Officer of First Security Bank effective March 1, 2000, replacing Julian E.
Beard who announced his retirement from active service with First Security Bank
effective February 28, 2001. First Security Bank has an agreement with Mr.
Shropshire to provide him the following benefits:
* Annual base salary of $125,000;
* Annual cash incentive bonus tied to the growth in First Security
Bank's assets and net income;
* Options for the purchase of up to 20,000 shares of common stock
granted at the rate of 4,000 shares per year for a five year
period. Such options are to be exercised within seven years of
being awarded and the option price for such shares will be the
market price of common stock at the time of the award;
* Health, dental and disability insurance, and 401(k) and vacation
benefits, in accordance with First Security Bank's plans
generally available to First Security Bank employees;
* Term life insurance with a death benefit of $200,000;
* Use of a corporate Country Club membership to be
owned by First Security Bank; and
* Severance pay of $156,250 upon a change in control of First
Security Bank or $62,500 in the event of termination of
employment other than for cause.
Certain Transactions With Management
First Security Bank has had, and expects to have in the future, banking
transactions in the ordinary course of business with some of its directors,
officers, and employees and their associates. All of such transactions have been
on the same terms, including interest rates, maturities and collateral
requirements as those prevailing at the time for comparable transactions with
non-affiliated persons and did not involve more than the normal risk of
collectibility or present other unfavorable features.
MANAGEMENT
Directors and Executive Officers
The following tabulation lists the names and certain information about
our directors and executive officers as of September 1, 2000. The directors and
executive officers of First Security Bancorp are currently executive officers
and directors of First Security Bank.
Business
Experience
During Past Term
Name, Age and Position(s) Five Years Began
Len Aldridge Vice-President, Limited 2000
Age - 63 Partners of Lexington, Inc.
Director (real estate management
company)
Dennis R. Anderson Owner, Dennis Anderson Real 2000
Age - 48 Estate, Inc. (real estate
Director development and investment
company)
John D. Barlow President, Barlow Homes, Inc. 2000
Age - 41 (home builder)
Director
Julian E. Beard Chairman of the Board of 2000
Age - 62 Directors and Founder of
Chairman of the Board of Directors First Security Bank since
March 1, 2000; President and Chief
Executive Officer of First Security Bank
from 1997 to March 1, 2000; Previously
President, BSC, Inc. (community bank data
processing and operations management
company) from 1990 to February 1997
James R. Burkholder1 Executive Vice-President of 2000
Age - 51 First Security Bank since
Vice-President 1997; Previously partner,
First Commonwealth Capital
Management, Inc. from 1993
to April 1997
Harold Glenn Campbell President and Chief Executive 2000
Age - 49 Officer, Farmers State Bank,
Director Booneville, Kentucky
William A. Combs, Jr. Officer and Director, 2000
Age - 60 Ellerslie Corp. and Dana
Director Motor Company of Cincinnati
A. F. Dawahare President and Chief Executive 2000
Age - 68 Officer, Dawahare's, Inc.
Director (retail clothier)
Dr. Kenneth L. Gerson Allergist 2000
Age - 69 (Gerson & Greisner M.D.)
Director
Tommy R. Hall President and Owner, Hall's 2000
Age - 62 Enterprises, Inc.
Director
R. Greg Kessinger Executive Vice-President and 2000
Age - 51 Chief Credit Officer of First
Director; Secretary/Treasurer Security Bank since 1997;
Previously President and
Chief Executive Officer of
Whitaker Bank, N.A. from 1994
Erle L. Levy Owner, Kentucky Lighting and 2000
Age - 66 Supply, Inc.
Director
David R. McCulloch Director of Sales, Schaefer 2000
Age - 36 Systems International
Director (industrial packaging company)
Ben New Vice-President of First 2000
Age - 41 Security Bank since 1997;
Controller Previously Controller of
Whitaker Bank Corporation
Dr. Ira P. Mersack Dermatologist (Dermatology 2000
Age - 60 Associates of Kentucky, P.S.C.)
Director
Fon Rogers, II Manager, Mary-Lon 2000
Age - 50 Investments, LLC, an
Director investment limited liability
company, and Rogers Run, LLC (manages
mineral holdings in Kentucky); Trustee of
four trusts containing mineral properties
in Kentucky, Virginia and West Virginia
Robert J. Rosenstein President, Shoppers Village 2000
Age - 45 Liquors, Inc. (d/b/a The
Director Liquor Barn); Commercial real
estate developer
Dr. Ronald J. Saykaly Rheumatologist (Ronald J. 2000
Age - 58 Saykaly, M.D., P.S.C.)
Director
John S. Shropshire Community Trust Bancorp, Inc. 2000
Age - 51 [President, Chief Executive
Director; President and Officer and Director,
Chief Executive Officer Flemingsburg, Kentucky
affiliate (1995-1997);
Executive Vice-President and
Senior Lending Officer,
Pikeville, Kentucky
(1997-1998); President and
Chief Executive Officer
Central Kentucky Region
(1998-2000)]
Richard S. Trontz Owner, Hopewell Farm and 2000
Age - 46 Bluegrass Bloodstock Agency
Director (bloodstock services and
equine insurance)
William T. Vennes Retired Vice-President and 2000
Age - 59 General Manager of the
Director Imaging Solutions Division,
Lexmark International, Inc.
Kathy E. Walker Owner, Elm Street Resources, 2000
Age - 41 Inc. (coal sales agency)
Director
D. Woodford Webb, Jr. Attorney (Webb, Hoskins, 2000
Age - 32 Glover & Thompson, P.S.C.)
Director
-------
1 Mr. Burkholder has expressed his intention to resign his officer positions
with First Security Bancorp and First Security Bank effective September 30,
2000. Mr. Burkholder and the sales agent have indicated that following his
departure from First Security Bancorp and First Security Bank Mr. Burkholder
will be employed by the sales agent on terms and conditions not yet settled,
though the sales agent and Mr.Burkholder have indicated that Mr.Burkholder will
receive no compensation in connection with the offering of shares.
Pursuant to the First Security Bancorp articles of incorporation, our
directors are classified into three classes serving varying terms. Messrs.
Campbell, Combs, Gerson, Hall, Trontz and Vennes are serving one year terms
expiring at the 2001 annual meeting of shareholders; Ms. Walker and Messrs.
Beard, Aldridge, Dawahare, Rogers, Rosenstein and Saykaly are serving two year
terms expiring at the 2002 annual meeting of shareholders; and Messrs.
Kessinger, Anderson, Barlow, Levy, McCulloch, Mersak, Shropshire and Webb are
serving three year terms expiring at the 2003 annual meeting of shareholders.
In addition to the persons listed in the table above, Michael Lischin,
Donald K. Poole, Irving Rosenstein, Warren W. Rosenthal and Dr. Siba P. Saha
serve as advisory directors of the Bank.
Directors of First Security Bank and First Security Bancorp currently
receive no fees for their services in such capacity.
Standing Committees
First Security Bancorp has no standing committees of the board of
directors. It currently anticipates appointing in the near future an executive
committee and an audit committee, which committees would perform functions for
First Security Bancorp similar to the functions performed by such committees of
the First Security Bank board of directors.
There are six standing committees of the board of directors of First
Security Bank: the Asset/Liability Management Committee, the Director Loan
Policy Committee, the Investment Committee, the Audit Committee, the Community
Reinvestment Act Committee and the Executive Committee.
The Asset/Liability Management Committee consists of directors Beard,
Anderson, Kessinger, Saykaly and Shropshire. In addition, First Security Bank
Vice-Presidents Greg Doyle and Ben New serve on this committee. The
Asset/Liability Management Committee establishes and monitors adherence to First
Security Bank's asset/liability policies and monitors First Security Bank's
interest rate sensitivity and liquidity.
The Director Loan Policy Committee consists of directors Beard,
Kessinger, Barlow, Hall, Levy, Rosenstein, Shropshire, Trontz, Vennes and Webb.
The Director Loan Policy Committee establishes First Security Bank's lending
policies, monitors adherence to First Security Bank's lending policies and
regulatory lending requirements, reviews and participates in the loan approval
process respecting loans in excess of $500,000 and monitors the quality of First
Security Bank's loan portfolio, including a review of First Security Bank's
allowance for loan and lease losses.
The Investment Committee consists of directors Beard, Aldridge, Combs,
Dawahare, Levy, Rogers, Saykaly and Shropshire. The Investment Committee
establishes the Bank's investment policies, monitors adherence to First Security
Bank's investment policies and regulatory investment requirements and reviews
First Security Bank's investment portfolio.
The Audit Committee consists of directors Anderson, Dawahare, Gerson and
McCulloch. The Audit Committee nominates an independent accounting firm to
conduct an annual audit of First Security Bank, reviews First Security Bank's
audited financial statements and monitors and supervises First Security Bank's
internal audit control. The Audit Committee reports the result of the annual
audit in writing to the board of directors, such report stating whether First
Security Bank is in a sound condition and whether adequate internal controls and
procedures are being maintained.
The Community Reinvestment Act Committee consists of directors Beard,
Kessinger, McCulloch, Saykaly, Shropshire, Walker and Webb. In addition, First
Security Bank Vice-President Ben New serves as secretary to this committee. The
Community Reinvestment Act Committee monitors First Security Bank's adherence to
the Community Reinvestment Act of 1978.
The Executive Committee consists of directors Beard, Kessinger,
Aldridge, Campbell, Combs, Rogers, Rosenstein , Shropshire and Vennes. The
Executive Committee previews all matters that are brought to First Security
Bank's board of directors and has the power to direct the business of the Bank
except for such actions as are required by law to be effected by the entire
board of directors.
Meetings of the Board of Directors
The board of directors of First Security Bancorp has held three
meetings apart from its organization meeting since it was incorporated on
February 11, 2000. In 1999, there were 13 meetings held by the First Security
Bank board of directors. With respect to board of directors committees, such
committees held the following number of meetings in 1999: Asset/Liability
Management Committee, 5 meetings; Director Loan Policy Committee, 21 meetings;
Investment Committee, 6 meetings; Audit Committee, 3 meetings; Community
Reinvestment Act Committee, 4 meetings; and Executive Committee, 13 meetings.
Pending Legal Proceedings
There are no material pending legal proceedings in which First Security
Bank or First Security Bancorp is involved, including proceedings in which any
director, officer or affiliate of First Security Bank or First Security Bancorp,
any owner of record or beneficially of more than five percent (5%) of common
stock, or any associate of a director, officer or five percent (5%) security
holder is a party adverse to First Security Bank or First Security Bancorp or
has a material interest adverse to First Security Bank or First Security
Bancorp.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion and analysis is presented to illustrate and
describe an overview of the business, and the results of operations and
financial condition, of First Security Bancorp. It identifies trends and
significant changes that occurred during the reported periods and should be
reviewed in conjunction with the audited financial statements of First Security
Bancorp beginning on page F-1 in this prospectus.
Overview of Operations
Our mission is to firmly establish ourself in Lexington, Kentucky as a
community owned and operated full-service bank providing traditional products
and services typically offered by commercial banks. The Lexington banking market
is highly competitive with 17 commercial banks and thrift institutions
currently serving the market. We believe that our ability to compete is enhanced
by our posture as a locally managed institution with a base of local
shareholders and board of directors. 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 and ownership has proven
effective for us in attracting customers, fostering loyalty and establishing and
maintaining strong asset quality. We have and intend to continue emphasizing our
Lexington roots, and we have a philosophy of giving our customers prompt and
responsive personal service.
Following completion of a $10 million initial capital offering ($9.8
million net of commissions on the sale of stock), First Security Bank commenced
operations as a newly chartered commercial bank on November 17, 1997 at 400 East
Main Street, Lexington, Kentucky. Since inception, our balance sheet has
steadily grown to $115.0 million in total assets at June 30, 2000 which was
sufficient to produce positive consolidated earnings on a monthly basis starting
with August, 1999. As a result of becoming profitable, our accumulated deficit
had declined to $1.5 million at June 30, 2000 which not only includes our net
loss since inception, but $133,000 of pre-opening expenses reimbursed to the
organizers upon commencement. To further enhance our growth and customer
service, we are in process of opening a third branch in Lexington and anticipate
it to be ready for operations in the second half of 2000.
First Security Bancorp became the holding company of First Security Bank on
May 31, 2000. Accounted for as an internal reorganization, each of First
Security Bank's outstanding shares of common stock was exchanged for two shares
of First Security Bancorp stock. The transaction was approved by the Federal
Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky
Department of Financial Institutions. This structure will permit us to offer a
broader range of financial products and services than would otherwise be
available.
Results of Operations
Our operating results substantially depend on net interest income, which is
the difference between interest income on interest-earning assets, primarily
loans and investment securities, and interest expense on interest-bearing
liabilities, primarily deposits. Our net income or loss is also affected by the
amount of the provision for loan loss and other income and operating expenses.
Net Interest Income.
Net interest income is determined by an institution's interest rate spread
(i.e. the difference between the yields earned on its interest-earning assets
and the rates paid on its interest-bearing liabilities) and the amount of
interest-earning assets financed by noninterest- bearing liabilities or
stockholders' equity. Net interest income is primarily affected by volume and
rate of average interest-earning assets and interest-bearing liabilities. The
following table sets forth, for the six months ending June 30, 2000 and 1999,
and for the years ended December 31, 1999 and 1998, information regarding the
total dollar amount of interest income from interest-earning assets and the
resultant average yields earned; the total dollar amount of interest expense on
interest-bearing liabilities and the resultant average rate; net interest
income; interest rate spread; and net yield on interest-earning assets (also
referred to herein as net interest margin):
<PAGE>
<TABLE>
AVERAGE BALANCE SHEETS AND RATES
Six Months ended June 30, 2000 Six Months ended June 30, 1999
(in thousands)
<CAPTION>
Average Average Average Average
ASSETS Balance (1) Interest Rate Balance (1) Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Securities, net $ 4,122 $ 121 5.87% $ 3,161 $ 83 5.25%
Loans (2)
Commercial 29,160 1,336 9.16 16,991 703 8.27
Real estate commercial 42,344 1,783 8.42 18,530 765 8.26
Real estate residential 8,871 390 8.79 4,608 214 9.29
Consumer 8,862 411 9.28 4,722 185 7.84
------ ----- ------ -----
Total 89,237 3,920 8.79 44,851 1,867 8.33
Federal funds sold 7,655 233 6.09 10,078 237 4.70
------ ----- ------- -----
Total interest-earning assets $ 101,014 $ 4,274 8.46% $ 58,090 $ 2,187 7.53%
Allowance for loan losses (915) (447)
Noninterest-earning assets
Premises and equipment 756 821
Cash and due from banks 2,348 1,504
Interest receivable and other
assets 703 373
-------- ------
Total Assets $ 103,906 $ 60,341
======== ======
</TABLE>
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Six Months ended June 30, 2000 Six Months ended June 30, 1999
(in thousands)
Interest-bearing liabilities
<S> <C> <C> <C> <C> <C> <C>
Deposits
Interest-bearing
demand deposits $ 17,382 $ 388 4.46% $13,961 $ 297 4.25%
Savings deposits 7,978 195 4.89 2,770 51 3.68
Time deposits 62,778 1,886 6.01 31,906 867 5.43
------ ----- ------ -----
Total interest-bearing deposits 88,138 2,469 5.60 48,637 1,215 5.00
Repurchase agreements and 986 26 5.27 5 --- ---
short-term borrowings ______ _____ _______ _____
Total interest-bearing
liabilities $ 89,124 $ 2,495 5.60% $48,642 $1,215 5.00%
Noninterest-bearing
liabilities
Noninterest-bearing demand
deposits 5,846 3,263
Interest payable and other
liabilities 541 280
Stockholders' equity 8,395 8,156
------- ------
Total Liabilities and
Stockholders' Equity $103,906 $60,341
======= ======
Interest margin recap
Net interest income and
interest rate spread $1,779 2.86% $ 972 2.53%
Net interest margin 3.52% 3.35%
</TABLE>
(1) Average balances are computed using daily balances.
(2) Non-accrual loans (if any) are included in average loan balances and loan
fees received are included in interest income. Loan fees were $197,000 for
June 30, 2000 and $106,000 for June 30, 1999.
<PAGE>
AVERAGE BALANCE SHEETS AND RATES
<TABLE>
Year ended December 31, 1999 Year ended December 31, 1998
<CAPTION> (in thousands)
Average Average Average Average
ASSETS Balance (1) Interest Rate Balance (1) Interest Rate
Interest-earning assets
<S> <C> <C> <C> <C> <C> <C>
Securities, net $ 3,813 $206 5.40% $ 1,520 $ 84 5.53%
Loans (2)
Commercial 20,526 1,734 8.45 5,369 470 8.75
Real estate commercial 23,921 2,036 8.51 5,540 515 9.30
Real estate residential 5,744 470 8.18 2,255 182 8.07
Consumer 5,943 494 8.31 1,765 150 8.50
----- --- ------ ---
Total 56,134 4,734 8.43 14,929 1,317 8.82
Federal funds sold 9,040 447 4.94 13,307 717 5.39
----- --- ------ ---
Total interest-earning assets $68,987 $5,387 7.81% $29,756 $2,118 7.12%
Allowance for loan losses (579) (104)
Noninterest-earning assets
Premises and equipment 805 734
Cash and due from banks 1,789 718
Interest receivable and other
assets 480 296
------ ---
Total Assets $71,482 $31,400
====== ======
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Year ended December 31, 1999 Year ended December 31, 1998
(in thousands)
Interest-bearing liabilities
Deposits
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing
Demand deposits $15,160 $ 661 4.36% $7,604 $ 351 4.62%
Savings deposits 3,476 136 3.91 1,333 4 3.68
Time deposits 40,220 2,198 5.46 11,977 693 5.79
------ ----- ------ -----
Total interest-bearing deposits 58,856 2,995 5.09 20,914 1,093 5.23
Repurchase Agreements
and short-term borrowings
309 15 4.85 -- -- --
Total interest-bearing
liabilities $59,165 $3,010 5.09% $20,914 $1,093 5.23%
Noninterest-bearing
liabilities
Noninterest-bearing demand
deposits 3,837 1,420
Interest payable and other
liabilities 351 143
Stockholders' equity 8,129 8,923
----- -----
Total Liabilities and
Stockholders' Equity $71,482 $31,400
======= =======
Interest margin recap
Net interest income and
interest rate spread $2,377 2.72% $1,025 1.89%
Net interest margin 3.45% 3.44%
</TABLE>
(1) Average balances are computed using daily balances.
(2) Non-accrual loans (if any) are included in average loan balances and loan
fees received are included in interest income. Loan fees were $246,000 for
1999 and $101,000 for 1998.
June 30, 2000 compared to June 30, 1999.
Net income for the six months ended June 30, 2000 was $335,000 which
compares favorably with a net loss of $160,000 for the same period in the prior
year. The growth in earnings is the result of the increase in net interest
income of 62% or $606,000 to $1.8 million. The provision for loan losses
declined slightly from $221,000 to $201,000. 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.
See "Allowance for Loan Losses and Asset Quality," below. The increase in net
interest income and decrease in provision for loan losses, more than offset the
increase in net interest expense of $367,000. Collectively, the increase in net
income results from having achieved a sufficient size for profitability in the
last few months of 1999. Our total interest income increased from $2.2 million
in 1999 to $4.3 million in 2000. The increase in interest income during 2000 was
primarily a result of the increase in average loans. Our total interest expense
increased from $1.2 million in 1999 to $2.5 million in 2000. The increase in
interest expense was due to an increase in interest-bearing liabilities.
Comparing the same periods of 1999 and 2000, our spread increased from 2.53% to
2.86% while our margin increased from 3.35% to 3.52%. The increase in spread and
margin involves changes to earning assets volumes, mix, and rates of interest
earned. The average rate earned on earning assets increased from 7.53% in 1999,
to 8.46% in 2000, which represents a 93 basis point increase. The rate paid on
deposits increased from 5.00% in 1999 to 5.60% in 2000, or 60 basis ponts. Also,
the shift of assets into higher yielding loans from federal funds sold
positively impacted both spread and margin. While both the spread and margin
increased, they remained lower than other financial institutions of similar size
because of our aggressive pricing strategies which are needed to grow to a size
necessary to achieve profitability. Our spread and margin were also negatively
impacted by the slower growth in inexpensive funding sources such as
noninterest-bearing deposits and stockholders' equity, which is common for newly
formed banks. We expect to continue our aggressive growth policies for the
foreseeable future.
December 31, 1999 compared to December 31, 1998
It is not uncommon for newly organized banks, like First Security Bank, to
incur net losses during the first two to three years of operation. During 1998,
First Security Bank's first full year of operation, we incurred a net loss of
$1.3 million. Of this amount, $153,000 was a non-recurring charge for a change
in accounting principle related to organizational costs. For the period ending
December 31, 1999, our second full year of operation, we achieved net income of
$22,000.
<PAGE>
Our total interest income increased from $2.2 million in 1998 to $5.4
million in 1999. The increase in interest income during 1999 was primarily a
result of the increase in outstanding loans. Our total interest expense
increased from $1.1 million in 1998 to $3.0 million in 1999. The increase in
interest expense was due to an increase in interest-bearing liabilities.
Comparing the same periods, our spread increased from 1.89% to 2.72% while our
margin increased slightly from 3.44% to 3.45%. The increase in spread is the
result of both the growth in loans which earn at higher rates than other
interest-earning assets and an overall decrease in the average rate paid on
interest-bearing deposits. The margin remained relatively constant primarily due
to the growth in loans being funded by time deposits which carry higher average
rates than other interest-bearing liabilities.
The provision for loan losses increased from $329,000 in 1998 to $487,000
in 1999. The increase in the provision resulted primarily from the increase in
net loans of $32.9 million in 1998 to $43.8 million in 1999. See "Allowance for
Loan Losses and Asset Quality" below.
The following table depicts the dollar effect of volume and rate changes
from June 30, 1999 to June 30, 2000 and December 31, 1998 to December 31, 1999.
Changes not specifically attributable to volume or rate were allocated
proportionately between rate and volume using absolute values of each for a
basis for the allocation:
VOLUME/RATE ANALYSIS
Change from June 30, 1999 to June 30,
2000 Due to
Volume Rate Total
(in thousands)
Interest income
Securities $ 27 $ 11 $ 38
Loans 1,944 109 2,053
Federal funds sold (65) 61 (4)
---- --- -----
Total interest income 1,906 181 2,087
Interest expense
Interest-bearing demand deposits 76 15 91
Savings deposits 123 21 144
Time deposits 919 100 1,019
Repurchase agreements and
short-term borrowings 26 -- 26
----- --- -----
Total interest expense 1,144 136 1,280
Net interest income $ 762 $ 45 $ 807
====== ===== =====
VOLUME/RATE ANALYSIS
Change from December 31, 1998 to
December 31, 1999 Due to
Volume Rate Total
(in thousands)
Interest income
Securities $ 124 $ (2) $ 122
Loans 3,477 (60) 3,417
Federal funds sold (215) (55) (270)
----- ---- -----
Total interest income 3,386 (117) 3,269
Interest expense
Interest-bearing demand deposits 330 (20) 310
Savings deposits 84 3 87
Time deposits 1,546 (41) 1,505
Repurchase agreements and
short-term borrowings 15 -- 15
----- --- ----
Total interest expense 1,975 (58) 1,917
------ --- -----
Net interest income $ 1,410 $ (58) $ 1,352
====== ===== ======
June 30, 2000 compared to June 30, 1999
Other profitability ratios often used to evaluate a bank's earnings
performance are return on average assets and return on average equity. Return on
average assets and return on average equity in 1999 were (.53%) and (3.92%),
respectively, as compared to 2000 return on average assets and return on average
equity of .64% and 7.98%, respectively. We attribute the significant
improvements in return on average assets and return on average equity to a net
increase in volume, and to a lesser extent, a net increase in rates and
controlled growth in non-interest expenses.
Our average total assets during 1999 as shown in the table above were $60.3
million. At December 31, 1999, total assets were $94.5 million. Total average
assets during 2000 grew to $103.9 million, while total assets at June 30, 2000
were $115 million. Average loans increased 98.9% from $44.9 million in 1999 to
$89.2 million in 2000. Total loans outstanding increased from $78.2 million at
December 31, 1999 to $95.7 million at June 30, 2000. Total average deposits
increased from $51.9 million in 1999 to $94 million in 2000. Total deposits at
June 30, 2000 were $102.7 million, up from $83.4 million at December 31, 1999,
an increase of 23.2%. Our equity to total asset ratio at December 31, 1999 and
June 30, 2000 was 8.70% and 7.42%, respectively. This decrease in the equity to
asset ratio (which ratio was still within bank regulatory capital guidelines)is
a result of the continued strong growth in assets during 2000.
December 31, 1999 compared to December 31, 1998.
Return on average assets and return on average equity for the year ended
1998 were (4.01%) and (14.13%), respectively, as compared to year ended 1999
return on average assets and return on average equity of .03% and .27%,
respectively. We do not believe, however, that these performance ratios are
particularly meaningful during a bank's first two years of operation due to the
substantial amount of up-front costs necessary for a commercial bank to grow
assets, deposits and the resultant net interest spread to levels sufficient to
generate net earnings.
Our average total assets during 1998 as shown in the table above were $31.4
million. At December 31, 1998, total assets were $47.1 million. Total average
assets during 1999 grew to $71.5 million, while total assets at December 31,
1999 were $94.5 million. Average loans increased 276% from $14.9 million in 1998
to $56.1 million in 1999. Total loans outstanding increased from $34.4 million
at December 31, 1998 to $78.2 million at December 31, 1999. Total average
deposits increased from $22.3 million in 1998 to $62.7 million in 1999. Total
deposits at December 31, 1999 were $83.4 million, up from $38.6 million at
December 31,1998, an increase of 116% over December 31, 1998. Our equity to
total asset ratio at December 31, 1998 and 1999 was 17.6% and 8.7%,
respectively. This decrease in the equity to asset ratio (which ratio was still
within bank regulatory capital guidelines) is a result of the substantial growth
in assets during 1999.
Other factors impacting results of operations.
In addition to total loans outstanding, we had unfunded loan commitments
outstanding to borrowers as of June 30, 2000 of $23.4 million and December 31,
1999 of $17.3 million including unfunded home equity lines of credit, which, if
drawn upon, would reduce our liquidity. To meet short term funding requirements,
we borrowed federal funds from a correspondent bank once for a three day period
during 1999. There have been no federal funds borrowings during 2000. We may
need to draw upon existing borrowing arrangements in the future to fund loan
growth and maintain an adequate level of liquidity if we do not continue to
attract deposit volume within our market sufficient to meet future loan demand.
This could result in an increased cost of interest-bearing liabilities that
could have the effect of decreasing net interest income and net interest margin.
In addition, should our core deposit growth not continue to meet loan demand,
resorting to other alternative funding sources could limit our growth in assets
and earnings since these alternative funding sources are limited. See "Financial
Condition: Deposits and Other Borrowings", below.
We will open a third branch office in Lexington, Kentucky during the second
half of 2000 and we anticipate a cost of $715,000 to construct, equip and
furnish this branch office. In addition, a contract has been signed for the
purchase of a facility in downtown Lexington at a cost of $3.5 million and we
anticipate a cost of $350,000 to equip this site for banking activities. The
immediate impact of establishing these locations will result in an increase in
noninterest-earning assets, and could initially result in a decrease in net
interest income. Our net capital position and book value per share could also be
negatively impacted if our earnings are not sufficient to cover the start-up
costs associated with building and staffing the new locations. We believe,
however, that the potential longer term benefits, including the prospects for
new loan and deposit growth associated with opening these locations, outweigh
these potential shorter term negative impacts.
<PAGE>
Noninterest Income and Expense.
Our noninterest income is comprised primarily of service charges on deposit
accounts. Total service charges increased from $31,000 to $59,000, for the six
month periods ended June 30, 1999 and 2000, respectively. For the year ended
December 31, 1998 and 1999 service charges income increased from $36,000 to
$102,000. Service charges increased during the reported periods primarily as a
result of the increase in the number of deposit accounts. We anticipate service
charges income will continue to increase as we continue to grow and diversify
our deposit portfolio.
The largest components of noninterest expense are salaries and benefits
that increased by $84,000, or 15.5%, in the six month period ending June 30,
2000 compared to the same period in the prior year. For the year ended December
31, 1999, salaries and benefits increased $36,000 or 3.5% compared to the same
period in 1998. The increase in salary expense has resulted from several
staffing additions designed to accomodate current and future growth in volumes.
Comparing the six month period ending June 30, 2000 to the same period in the
prior year, noninterest expenses other than salaries and benefits increased from
$421,000 to $704,000, a $283,000 increase or 67.2%. Of the increase,
approximately $141,000 in expense resulted from the formation of First Security
Bancorp. Comparing years ended 1998 and 1999 all other noninterest expense
increased from $785,000 to $909,000, exclusive of the cumulative effect of a
change in the accounting principle discussed below. Two of the more commonly
used ratios to analyze a bank's noninterest expense performance are (i) assets
per employee, and (ii) efficiency ratio. The assets per employee ratio is
computed by dividing total end of period assets by the number of full-time
equivalent employees at the end of the period. The efficiency ratio expresses
non-interest expenses as a percentage of net interest income plus other fee
income. At June 30, 2000, our assets per employee ratio was $4.9 million versus
$4.3 million at December 31, 1999 and $2.2 million at December 31, 1998.
Comparing the six months ending June 30, 1999 and 2000 our efficiency ratio
improved from 94.0% to 71.2%. The efficiency ratio for year ended December 31,
1999 was 80% up from 173% for the same period in 1998. The improvements were a
result of the growth in earning assets during the reported periods. In
conjuction with the approval and formation of First Security Bancorp approval
was also granted by the Federal Reserve Board and the Kentucky Department of
Financial Institutions for First Security Bank to make a dividend payment to
First Security Bancorp of $189,000. Approximately $141,000 of this amount was
used to reimburse First Security Bank for various formation expenses. The
remainder of the dividend payment was placed into a First Security Bancorp
checking account to be used for operating needs.
We have not recorded income tax since inception as taxable earnings through
June 30, 2000 have not exceeded the previously generated net operating losses.
As of June 30, 2000, we had a remaining net operating loss for tax purposes of
$376,000, which can be carried forward to offset future taxable income. (See
Note 9 to our financial statements beginning on page F-1). Due to the
uncertainty concerning our near-term ability to utilize this asset, a valuation
allowance in the same amount has been established. The valuation allowance will
be reduced as the net operating loss carry forward is utilized, and will be
reversed entirely at such time that our historical and projected earnings become
sufficient to support a conclusion that we will be able to fully realize this
asset.
We adopted Statement of Position 98-5 in 1998 that resulted in a change in
accounting principle which increased our 1998 net loss by $153,000. See Note 14
to our financial statements beginning on page F-1.
Financial Condition
Investment Securities.
Through all the reported periods, our investment portfolio consisted
primarily of U.S. Government agency securities. The amortized cost of investment
securities decreased from $5.0 million as of December 31, 1998, to $4.4 million
as of December 31, 1999, or $595,000. An additional decrease of $576,000
occurred between December 31, 1999, and June 30, 2000. The decreases in
investment securities were the result of funding loan growth which over time
will have a favorable impact on earnings as loans typically earn higher yields
than investment securities. The weighted average maturity of our investment
portfolio was 4.5 years at June 30, 2000 and 2.7 years at December 31, 1999.
<PAGE>
The following tables reflect the amortized costs, fair value and
weighted average yield of our investment securities portfolio as of June 30,
2000 and December 31, 1999 and 1998:
INVESTMENT PORTFOLIO
As of June 30, 2000
Weighted
Investment securities Amortized Fair Average
available for sale Cost Value Yield
(in thousands)
U.S. Treasury and
U.S. Government Agencies
Within one year $ 250 $ 248 5.05%
Over one year through five years 2,498 2,422 5.73
------ ------
Total $ 2,748 $ 2,670 5.67%
Mortgage-backed securities:
Over five years through ten years 1,082 1,048 6.86
Equity securities 20 20
----- -----
Total available for sale
investment securities $ 3,850 $ 3,738 5.97%
===== =====
<TABLE>
INVESTMENT PORTFOLIO
As of December 31, 1999 As of December 31, 1998
<CAPTION>
Weighted Weighted
Investment securities Amortized Fair Average Amortized Fair Average
available for sale Cost Value Yield Cost Value Yield
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
U.S. Government Agencies
Within one year $1,501 $1,497 5.01% $2,497 $2,497 4.88%
Over one year through five years 2,250 2,185 5.34 2,005 2,000 5.31
----- ----- ----- -----
Total $3,751 $3,683 5.21% $4,502 $4,497 4.57%
Mortgage-backed securities:
Over five years through ten years 655 629 6.17 499 497 6.00
Equity securities 20 20 20 20
--- --- --- ---
Total available for sale
investment securities $4,426 $4,331 5.33% $5,021 $5,014 5.14%
===== ===== ===== =====
</TABLE>
The general rise in interest rates resulted in unrealized losses of
$112,000 and $95,000 in the fair value of our securities portfolio as of June
30, 2000 and December 31, 1999, respectively. The unrealized loss is a result of
changes in interest rates since these securities were purchased and is
accordingly due to market risk rather than credit risk. If interest rates
continue to increase as they have since mid-1999, the fair value of our existing
investment portfolio will continue to decrease, resulting in an increase in the
portfolio's unrealized loss. Through the reported periods, all of the securities
comprising our investment portfolio are classified as "available for sale",
which requires these securities to be carried at fair value. Unrealized gains
and losses are included as a separate component of equity. Gains or losses on
securities are realized in the income statement only when securities are sold or
called, or when the unrealized loss is other than temporary. Investment
transactions resulting in an actual loss of principal could occur if our
liquidity needs dictate the sale, at a loss, of one or more of the securities,
or if other alternatives for funding new loans are either unavailable, or more
costly.
<PAGE>
Loans.
Net loans increased $43.3 million or 127% from December 31, 1998 to
December 31, 1999 and $17.3 million, or 22.4%, from December 31, 1999 to June
30, 2000. The majority of the increase in 1999 was in commercial loans and
commercial real estate loans as compared to residential loans and commercial
real estate loans in 2000. We have a significant amount of our loans extended to
commercial and commercial real estate borrowers. At June 30, 2000 and December
31, 1999, approximately 79% and 80% 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.
Substantially all of our loans at June 30, 2000 mature or reprice within
five years or less. We hold residential (1 - 4 family) real estate loans in our
portfolio, the majority of which amortize up to thirty years, but that mature or
reprice in five years or less. At December 31, 1998 and 1999 and June 30, 2000,
residential loans in our portfolio were $3.8 million, $7.5 million and $10.2
million, respectively. In order to accommodate customers that prefer longer term
fixed rate mortgage loans, we have established a relationship with a local
mortgage company which underwrites and sells these long term fixed rate loans
into the secondary market. Income received from this relationship is included as
other income.
We seek to maintain a high quality of assets through conservative
underwriting and sound lending practices. Our commercial real estate portfolio
is comprised primarily of loans to owner-occupied commercial businesses. We have
experienced low delinquency and defaults in our commercial and commercial real
estate portfolio since opening in 1997. In addition, we have had no real estate
owned by means of foreclosure during the same period.
While there is no assurance that we will not suffer losses on our
commercial loans or our commercial real estate loans, we have attempted to
reduce the risks associated therewith by extending said credits to
owner-occupied projects where the borrower has demonstrated to us that its
business will generate sufficient cash flow to repay the loan. We primarily
enter into agreements with individuals who are familiar to our personnel, are
residents of our primary market area and are believed by our management to be
creditworthy.
In an effort to maintain the quality of the loan portfolio, we seek to
minimize higher risk types of lending. To the extent risks are identified,
additional precautions are taken in order to reduce our risk of loss. Commercial
loans entail certain additional risks because repayment of such loans is usually
dependent upon the successful operation of the commercial enterprise, which in
turn is subject to adverse conditions in the economy. Commercial loans are
generally riskier than residential real estate loans because they are typically
underwritten on the basis of the ability to repay from the cash flow of a
business rather than on the ability of the borrower or any guarantor to repay.
Furthermore, the collateral underlying commercial loans may be subject to
greater fluctuations in market value over time than residential real estate, and
may fluctuate in value based on the success of the business.
Our board of directors and senior management have placed emphasis on loan
review and underwriting procedures. Our management has established an
independent risk rating and review process with the objective of quickly
identifying, evaluating and initiating necessary corrective action for
commercial and commercial real estate loans. The goal of the risk rating process
is to develop a "watch list" of substandard and non-performing loans as early as
possible. These components of risk management are integral elements of our loan
program which have contributed to the loan portfolio performance to date.
Nonetheless, we maintain a cautious outlook in attempting to anticipate the
potential effects of uncertain economic conditions (both locally and
nationally).
<PAGE>
The following tables reflect outstanding balances by loan type at June
30,2000 and December 31,1999 and 1998,as well as the maturity distribution of
our loans for the period ended June 30, 2000:
LOANS
June 30, December 31, December 31,
2000 1999 1998
(in thousands)
Commercial $29,336 $26,596 $12,469
Real Estate - Commercial 46,668 35,855 14,125
Real Estate - Residential 10,166 7,450 3,831
Consumer 9,508 8,296 3,978
------ ------ ------
Total $95,678 $78,197 $34,403
====== ====== ======
SELECTED LOAN DISTRIBUTION
As of June 30, 2000
Over One
Total One Year or Through Five Over Five
Less Years Years
(in thousands)
Fixed rate maturities $60,605 $9,516 $47,395 $3,694
Variable rate repricing frequency 35,073 29,616 5,457 --
------ ------ ------ -----
Total $95,678 $39,132 $52,852 $3,694
====== ====== ====== =====
Allowance for Loan Losses and Asset Quality.
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.
The allocation of the allowance for loan losses is derived from the sum of
the specific and general reserve estimates by loan type as discussed above.
Comparing the loan portfolio categories to the resultant allowance for loan loss
estimates, commercial loans (other than real estate) and installment loans are
disproportionate to loan categories secured by real estate. This results from
higher loss factors assigned to these categories which were based on the peer
data and the various factors also discussed above.
We believe the allowance for loan losses at June 30, 2000 and December 31,
1999 was adequate. The relationship between the allowance for loan losses and
loans did not change significantly 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. The table below illustrates how we allocated our
allowance for loan losses to the types of loans in our portfolio:
<TABLE>
MANAGEMENT'S ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
June 30, 2000 December 31, 1999 December 31, 1998
<CAPTION>
Allocated % of Loans Allocated % of Loans Allocated % of Loans
Allowance to Total Loans Allowance to Total Loans Allowance to Total Loans
(dollars in thousands) (dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $424 30.7% $348 34.0% $142 36.2%
Real Estate - Commercial 329 48.8 270 45.9 110 41.1
Real Estate - Residential 86 10.6 71 9.5 26 11.1
Consumer 158 9.9 130 10.6 57 11.6
--- --- --- ----- --- -----
Total $997 100.0% $819 100.0% $335 100.0%
=== ===== === ===== ==== =====
</TABLE>
The recorded values of loans actually removed from the balance sheet are
referred to as charge-offs and, after netting out recoveries on previously
charged-off assets, are referred to as net loan charge-offs. Our policy is to
charge off a loan when, in our opinion, the loan is deemed uncollectible,
although concerted efforts are made to maximize recovery.
The following table sets forth our loan charge-offs and recoveries for the
six months ended June 30, 2000 and 1999 and for the years ended December 31,
1999 and 1998:
SUMMARY OF LOAN LOSS EXPERIENCE
Six Months Ended Years Ended
June 30, June 30, December 31, December 31,
2000 1999 1999 1998
(dollars in thousands)
Balance at beginning of period $819 $335 $335 $15
Charge-offs
Commercial (14) -- -- --
Real Estate -- -- -- --
Installment (Consumer) (9) (2) (3) (9)
---- --- --- ---
Total (23) (2) (3) (9)
Recoveries
Commercial -- -- -- --
Real Estate -- -- -- --
Installment (Consumer) -- -- 1 --
---- ---- ---- ----
Total -- -- 1 --
---- ---- ---- ----
Net charge-offs (23) (2) (2) (9)
Provision for loan losses 201 221 486 329
---- ---- ---- ----
Balance at end of period $997 $554 $819 $335
==== ==== ==== ====
Loans at end of period $95,678 $51,234 $78,197 $34,402
Average loans $89,237 $44,851 $56,134 $14,929
Ratios:
Allowance for loan losses to
total loans 1.04% 1.08% 1.05% 0.97%
Net loan charge-offs to average
loans for the period 0.03% 0.00% 0.00% 0.06%
The level of non-performing loans is an important element in assessing
asset quality and the relevant risk in our credit portfolio. Non-performing
loans include non-accrual loans and loans delinquent 90 days or more. Loans are
classified as non-accrual when we believe that collection of interest is
doubtful, but for which principal is considered collectable. A loan is defined
as impaired when full payment under the loan terms is not expected. 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. Our policy is to charge off all or a portion of
an impaired loan upon a determination that it is probable the full amount will
not be collected. As the table above illustrates, we have experienced a
relatively small number (and dollar amount) of charge-offs during our operation.
We expect charge-offs to increase in future periods as the loan portfolio
matures, and as loans to consumers and small businesses increase. In addition,
adverse changes in the economy could negatively affect our commercial and
commercial real estate loans.
<PAGE>
The table below sets forth our non-performing assets as of June 30, 2000
and December 31, 1999 and 1998:
NON-PERFORMING ASSETS
June 30, December 31, December 31,
2000 1999 1998
(dollars in thousands)
Loans on non-accrual status -- -- $6
Loans past due 90 days or more -- -- --
------ ------ ------
Total non-performing loans -- -- 6
Other real estate owned -- -- --
------ ------ ------
Total non-performing assets -- -- $6
Percentage of non-performing loans
to total loans -- -- .02%
Percentage of non-performing
assets to total loans -- -- .02%
Deposits and Other Borrowings.
Our 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 June 30,
2000, and December 31, 1999 and 1998:
DEPOSITS
June 30, December 31, December 31,
2000 1999 1998
(in thousands)
Interest-bearing demand deposits $18,209 $17,488 $12,192
Savings deposits 6,731 6,598 3,718
Time deposits 51,554 39,772 14,710
Time deposits $100,000 and over 19,245 14,397 5,247
------ ------ ------
Total interest-bearing deposits 95,739 78,255 35,867
Total noninterest-bearing deposits 6,941 5,157 2,746
-------- ------- -------
Total $102,680 $83,412 $38,613
========= ========= =======
MATURITIES OF TIME DEPOSITS $100,000 AND OVER
June 30, 2000
(in thousands)
0-3 months $1,141
3-6 months 7,819
6-12 months 2,313
12 months and over 7,972
-------
Total $19,245
=======
Liquidity.
Liquidity management is the process by which we 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 our board of
directors, which monitors interest rates and liquidity risk while implementing
appropriate funding and balance sheet strategies.
We have 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 two correspondent banks
aggregating approximately $5.5 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, First Security
Bank became a member of the Federal Home Loan Bank of Cincinnati in 1999.
Although First Security Bank has not, as yet, borrowed from the Federal Home
Loan Bank, First Security Bank has the ability to borrow approximately $7.1
million based on the level of residential loans in First Security Bank's
portfolio as of June 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 June
30, 2000 totaled approximately $3.2 million. Of this amount, $2.6 million was in
the form of customer repurchase agreements. Repurchase agreements provide our
customers with cash management services. The remainder of the borrowings
consisted of $600,000 evidenced by an unsecured note made by First Security
Bancorp. This borrowing in turn was used for a capital contribution to First
Security Bank to maintain a required Tier I capital to total assets ratio of 8%
as required by banking regulators. This debt will be retired with the proceeds
of this offering. 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.
Bank regulatory authorities have established five levels of capital
adequacy based on corresponding capital ratios. The highest of these is well
capitalized which requires a Tier I risk-based capital ratio (Tier I capital to
risk-weighted assets) of at least 6.0%, a total risk-based capital ratio (total
capital to risk-weighted assets) of at least 10.0% and a Tier I leverage ratio
(Tier I capital to average assets) of at least 5.0%. In connection with the
initial approval of its charter, First Security Bank was required to maintain a
Tier I leverage ratio of at least 8.0% during the first three years of
operation. Outside of this specific agreement, First Security Bank would only
need to maintain 5% Tier I Capital to Total Assets to be classified as well
capitalized. As of June 30, 2000, First Security Bank's Tier I risk-based
capital ratio was 9.34%, its total risk-based capital ratio was 10.35%, and its
Tier I leverage capital ratio was 8.35%. As of December 31, 1999, First Security
Bank's Tier-1 risk-based capital ratio was 10.47%, its total risk-based capital
ratio was 11.50%, and its Tier 1 leverage capital ratio was 9.39%. As of June
30, 2000 and December 31, 1999, First Security Bank met the "well capitalized"
requirements for all three ratios. On a consolidated basis at June 30, 2000,
First Security Bancorp was categorized as well capitalized with the exception of
our total risk based capital ratio which was categorized as adequate.
Capital Planning.
By order of the Federal Deposit Insurance Corporation Insurance dated
October 14, 1997, the charter for First Security Bank was approved subject to
the following capital stock 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
"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 $20 million or 21.6% from December 31,
1999 to June 30, 2000. The growth in deposits has provided the necessary volume
to fund new loans. Loan demand has remained consistently good over the past 6
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 First Security 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 thru 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. The
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 on an unsecured basis. This stock offering will allow us to retire the
$600,000 in debt and to support the continued growth in total assets of First
Security Bank. Additionally, the requirement to maintain 8% in Tier I capital to
total assets will expire in November 2000 after which First Security Bank then
is only required to maintain 5% to be classified as well capitalized.
DESCRIPTION OF CAPITAL STOCK
The following is a summary of our common stock and the rights of our
shareholders. The following summary is not intended to be complete and is
qualified in its entirety by reference to the Kentucky Revised Statutes as well
as our articles of incorporation and bylaws.
Anti-Takeover Provisions Generally
Our articles of incorporation and bylaws contain certain provisions
designed to assist our board of directors in playing a role if any group or
person attempts to acquire control of us so that our board of directors can
further protect our interests and our shareholders under the circumstances.
These provisions may help our board of directors determine that a sale of
control is in the best interests of our shareholders, or enhance our board of
directors' ability to maximize the value to be received by our shareholders upon
a sale of control.
Although management believes that these provisions are beneficial to
our shareholders, they also may tend to discourage some takeover bids. As a
result, our shareholders may be deprived of opportunities to sell some or all of
their shares at prices that represent a premium over prevailing market prices.
On the other hand, defeating undesirable acquisition offers can be a very
expensive and time-consuming process. To the extent that these provisions
discourage undesirable proposals, we may be able to avoid those expenditures of
time and money.
These provisions also may discourage open market purchases by a company
that may desire to acquire us. Those purchases may increase the market price of
common stock temporarily, and enable shareholders to sell their shares at a
price higher than that price they might otherwise obtain. In addition, these
provisions may decrease the market price of common stock by making the stock
less attractive to persons who invest in securities in anticipation of price
increases from potential acquisition attempts. The provisions also may make it
more difficult and time consuming for a potential acquirer to obtain control
through replacing our board of directors and management. Furthermore, the
provisions may make it more difficult for shareholders to replace our board of
directors or management, even if a majority of the shareholders believe that
replacing our board of directors or management is in the best interests of First
Security Bancorp. Because of these factors, these provisions may tend to
perpetuate the incumbent board of directors and management. For more information
about these provisions, see the subsections "Amendment of Articles of
Incorporation and Bylaws," "Classified Board of Directors and Cumulative
Voting," "Director Removal," "Limitations on Director Liability,"
"Indemnification," and "Business Combinations", below.
Authorized Capital Stock
First Security Bancorp is authorized to issue 5,000,000 shares of
common stock, 1,000,000 of which are currently issued and outstanding. Our board
of directors may authorize the issuance of additional shares of common stock
without further action by our shareholders, unless applicable laws or
regulations or a stock exchange on which our capital stock is listed requires
shareholder action.
The authority to issue additional shares of common stock provides us
with the flexibility necessary to meet future needs without the delay resulting
from seeking shareholder approval. The authorized but unissued shares of common
stock may be issued from time to time for any corporate purpose, including stock
splits, stock dividends, employee benefit and compensation plans (including
awards under the Stock Award Plan), acquisitions and public or private sales for
cash as a means of raising capital. The shares could be used to dilute the stock
ownership of persons seeking to obtain control of First Security Bancorp. The
sale of a substantial number of shares of voting stock to persons who have an
understanding with us concerning the voting of such shares, or the distribution
or declaration of a dividend of shares of voting stock (or the right to receive
voting stock) to our shareholders, may have the effect of discouraging or
increasing the cost of unsolicited attempts to acquire control of First Security
Bancorp.
Preemptive Rights
The Kentucky Business Corporation Act provides that, unless a Kentucky
corporation's articles of incorporation expressly provide for preemptive rights,
shareholders of a Kentucky corporation do not have a preemptive right to acquire
proportional amounts of the corporation's unissued shares upon a decision of the
board of directors to issue shares. Our Articles of Incorporation do not provide
our shareholders preemptive rights.
Amendment of Articles of Incorporation and Bylaws
First Security Bancorp may amend its articles of incorporation in any
manner permitted by Kentucky law. The Kentucky Business Corporation Act provides
that a corporation's charter may be amended by a majority of votes entitled to
be cast on an amendment, subject to any condition the board of directors may
place on its submission of the amendment to the shareholders. Our articles of
incorporation require a vote of 80% or more of the shares of capital stock
entitled to vote in an election of directors to amend the articles of the
articles of incorporation governing directors and to remove a director from
office without cause. An 80% vote is also required to amend, alter, or repeal
the articles of incorporation governing business combinations.
Our board of directors may adopt, amend or repeal our bylaws by a
majority vote of the entire board of directors. The bylaws may also be amended
or repealed by action of our shareholders.
Our articles of incorporation provide that our board of directors must
exercise all powers unless otherwise provided by law. The board of directors may
designate an executive committee and may authorize that committee to exercise
all of the authority of the board of directors.
Classified Board of Directors and Cumulative Voting
Our articles of incorporation provide that our board of directors is to
be divided into three classes, with each class to be as nearly equal in number
as possible. The directors in each class serve three-year terms of office. The
effect of having a classified board of directors is that only approximately
one-third of the members of our board of directors are elected each year. As a
result, two annual meetings are required for shareholders to change a majority
of the members of our board of directors.
The purpose of dividing the board of directors into classes is to
facilitate continuity and stability of leadership by insuring that experienced
personnel familiar with us will be represented on the board of directors at all
times, and to permit management to plan for the future for a reasonable amount
of time. However, by potentially delaying the time within which an acquirer
could obtain working control of our board of directors, such provisions may
discourage some potential mergers, tender offers or takeover attempts.
Pursuant to our articles of incorporation, each holder of common stock is
entitled to one vote for each share of common stock held in the election of
directors, and is entitled to cumulative voting rights in the election of
directors. With cumulative voting, a shareholder has the right to cast a number
of votes equal to the total number of such holder's shares multiplied by the
number of directors to be elected. A shareholder has the right to distribute all
of his or her votes in any manner among any number of candidates or to
accumulate such shares in favor of one candidate.
Director Removal
Our articles of incorporation provides that a director may be removed
without cause by the shareholders only if the shareholders holding at least
eighty percent (80%) of the voting power entitled to vote generally in the
election of directors vote for such removal. The purpose of this provision is to
prevent a majority shareholder from circumventing the classified board system by
removing directors and filling the vacancies with new individuals selected by
that shareholder. This provision may have the effect of impeding efforts to gain
control of the board of directors by anyone who obtains a controlling interest
in our common stock.
Limitations on Director Liability
Section 271B.8-330 of the Kentucky Business Corporation Act provides
that a director shall not be liable for any action, or failure to take action if
he discharges his duties:
* in good faith;
* with the care of an ordinarily prudent person in a
like position under similar circumstances; and
* in a manner the director reasonably believes to be
in the best interests of the corporation.
In discharging his duties, a director may rely on the information,
opinions, reports or statements, including financial statements, prepared or
presented by officers or employees of the corporation whom the director
reasonably believes to be reliable. The director may also rely on such
information prepared or presented by legal counsel, public accountants or other
persons as to matters that the director reasonably believes are in the person's
competence.
Our articles of incorporation limit the liability of our directors to
the greatest extent permitted by law and provide that no director shall be
personally liable to First Security Bancorp or its shareholders for monetary
damages for a breach of his or her duties as a director, except for liability
* for any transaction in which the director's personal financial
interest is in conflict with the financial interest of the
entity in question or its shareholders;
* for acts or omissions not in good faith or which involve
intentional misconduct or are known to the director to be a
violation of law;
* for voting for or assenting to any distributions made in
violation of Section 271B.8-330 of the Kentucky Revised
Statutes; or
* for any transaction from which the director derives an
improper personal benefit.
Indemnification
Under the Kentucky Business Corporation Act, a corporation may
indemnify any director against liability if the director:
* conducted himself or herself in good faith;
* reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that his or her
conduct was in the best interests of the corporation;
* reasonably believed, in all other civil cases, that his or her
conduct was at least not opposed to the corporation's best
interests; and
* in the case of any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful.
Unless limited by its articles of incorporation, a Kentucky corporation
must indemnify, against reasonable expenses incurred by him or her, a director
who was wholly successful, on the merits or otherwise, in defending any
proceeding to which he or she was a party because he or she is or was a director
of the corporation. Expenses incurred by a director in defending a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding if three conditions are met:
* the director must furnish the corporation a written
affirmation of the director's good faith belief that he or she
has met the standard of conduct as set forth above;
* the director must furnish the corporation a written
undertaking by or on behalf of the director to repay such
amount if it is ultimately determined that he or she is not
entitled to be indemnified by the corporation against such
expenses; and
* a determination must be made that the facts then known to
those making the determination would not preclude
indemnification.
A director may apply for court-ordered indemnification under certain
circumstances. Unless a corporation's articles of incorporation provide
otherwise,
* an officer of a corporation is entitled to mandatory
indemnification and is entitled to apply for court-ordered
indemnification to the same extent as a director;
* the corporation may indemnify and advance expenses to an
officer, employee or agent of the corporation to the same
extent as to a director; and
* a corporation may also indemnify and advance expenses to an
officer, employee or agent who is not a director to the
extent, consistent with public policy, that may be provided by
its articles of incorporation, bylaws, general or specific
action of its board of directors or contract.
Our articles of incorporation and bylaws provide for the
indemnification of our directors and officers to the fullest extent permitted by
Kentucky law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling First
Security Bancorp under the provisions described above, we have been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
Special Meetings of Shareholders
Special meetings of our shareholders may be called for any purpose or
purposes whatsoever at any time by five (5) or more shareholders owning, in the
aggregate, not less than 25% of the shares entitled to vote at such meeting.
Actions by Shareholders Without a Meeting
Our bylaws provide that any action required or permitted to be taken by
our shareholders at a duly called meeting of shareholders may be effected by the
unanimous written consent of the shareholders entitled to vote on such action.
Shareholder Nominations and Proposals
Our articles of incorporation and bylaws are silent as to whether a
shareholder may nominate members of the board of directors or submit proposals
to be presented at an annual meeting of shareholders.
Business Combinations
Holders of 80% or more of our common stock must approve a merger,
consolidation, a sale or lease of 10% of the assets of First Security Bancorp or
sale of First Security Bancorp common stock if the other party to the
transaction (including affiliates of such person) is a beneficial owner of 15%
or more of the outstanding shares of our common stock. An 80% vote is not
required for any merger or consolidation of First Security Bancorp with or into
any corporation or entity if a majority of the outstanding shares of voting
capital stock is owned by First Security Bancorp or if such transaction is
approved by a majority of "continuing directors" (as defined in our articles of
incorporation).
The requirement of a supermajority vote of shareholders to approve certain
business transactions may discourage a change in control by allowing a minority
of our shareholders to prevent a transaction favored by the majority of the
shareholders. Also, in some circumstances, the board of directors could cause an
80% vote to be required to approve a transaction and thereby enable management
to retain control over our affairs. The primary purpose of the supermajority
vote requirement is to encourage negotiations by groups or corporations
interested in acquiring control of First Security Bancorp and to reduce the
danger of a forced merger or sale of assets.
As a Kentucky corporation, First Security Bancorp is or could be
subject to certain restrictions on business combinations under Kentucky law,
including, but not limited to, combinations with interested shareholders.
Limitations on Ability to Vote Stock
Our articles of incorporation and bylaws contain no provisions
restricting a shareholder's ability to vote shares of his or her voting stock.
Dissenters' Rights of Appraisal
Under the Kentucky Business Corporation Act, a shareholder is generally
entitled to dissent from a corporate action and obtain payment of the fair value
of his shares in certain events. These events generally include:
* mergers, share exchanges and sales of substantially all of the
corporation's assets other than in the usual and regular
course of business, if the shareholder is entitled to vote on
the transaction;
* certain types of amendments of the corporation's articles of
incorporation that materially and adversely affect a
shareholder's rights; or
* other corporate actions taken pursuant to a shareholder vote,
to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provide for dissenters'
rights. Our articles of incorporation and bylaws do not
provide for any such additional dissenters' rights.
Shareholders' Rights to Examine Books and Records
The Kentucky Business Corporation Act provides that a shareholder of a
Kentucky corporation may inspect and copy books and records of the corporation
during regular business hours, if he or she gives the corporation written notice
of his or her demand at least five business days before the date of the
inspection. In order to inspect certain records, written demand must also be
made in good faith and for a proper purpose and must describe with reasonable
particularity the purpose of the request and the records the shareholder desires
to inspect.
Dividends
Our ability to pay dividends on common stock is dependent upon
dividends from First Security Bank and is governed by Kentucky corporate law.
Under Kentucky corporate law, dividends may be paid so long as the corporation
would be able to pay its debts as they become due in the ordinary course of
business and the corporation's total assets would not be less than the sum of
its total liabilities plus the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution to shareholders whose preferential rights
are superior to those receiving the distribution.
First Security Bank's Board of Directors may declare dividends on
shares of First Security Bank common stock out of funds legally available
therefor. The payment of dividends on First Security Bank common stock is
subject to certain limitations imposed by law. Under Kentucky law, dividends by
Kentucky banks may be paid only from current or retained net profits. Before any
dividend may be declared for any period, other than with respect to preferred
stock, if any, a bank must increase its capital surplus by at least 10% of the
net profits of the bank for such period until the bank's capital surplus equals
the amount of its stated capital attributable to its common stock. Moreover, the
Commissioner of the Kentucky Department of Financial Institutions must approve
the declaration of dividends if the total dividend to be declared by a bank for
any calendar year would exceed the bank's total net profits for such year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus or a fund for the retirement of preferred stock,
if any, or debt.
Purchase of Own Stock
Under Kentucky law, a corporation such as First Security Bancorp may
purchase, take, receive or otherwise acquire its own shares so long as such
action will not
* render the corporation unable to pay its debts as they become due
in the normal course of business; or
* render the corporation's total assets less than the sum of its
total liabilities plus amounts needed (if the corporation were to
be dissolved at such time) to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are
superior to those whose shares are being purchased. However, in
some circumstances a bank holding company may not purchase or
redeem its own shares without prior notice to and approval of the
Federal Reserve Board.
Stock Transfer Agent
The stock transfer agent for First Security Bancorp stock is the Registrar
and Transfer Company.
SHARES ELIGIBLE FOR FUTURE SALE
All shares sold in this offering will be freely tradable without
restriction or registration under the Securities Act of 1933, except for any
shares purchased by an "affiliate" of First Security Bancorp, which will be
subject to the resale limitations set forth in Securities and Exchange
Commission Rule 144.
All of our directors are considered "affiliates" within the meaning of
Rule 144 and will, therefore, be subject to the applicable resale limitations
with respect to the shares purchased in this offering. In general, the number of
shares that can be sold by each director in brokers' transactions, (as that term
is used in Rule 144) within any three month period may not exceed the greater of
one percent (1%) of the outstanding shares as shown by the most recent report or
statement published by the company, or the average weekly reported volume of
trading in the shares on all national securities exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the sale.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following is a brief summary of statutes and rules
and regulations that affect First Security Bancorp and First Security Bank. This
summary is qualified in its entirety by reference to the particular statutes and
regulatory provisions referred to below and is not intended to be an exhaustive
description of the statutes or regulations that are (or will be) applicable to
the business of First Security Bancorp or First Security Bank. Supervision,
regulation and examination of First Security Bancorp and First Security Bank by
the regulatory agencies are intended primarily for the protection of depositors
rather than our shareholders.
First Security Bancorp
General. First Security Bancorp's activities are subject to the
supervision of Kentucky and federal law. With respect to Kentucky law, Kentucky
Revised Statutes Section 287.900 provides that any individual (which is defined
to mean a natural person, partnership, association, business trust, voting trust
or similar organization, but not a corporation) or bank holding company having
its principal place of business in Kentucky may acquire control of one or more
banks or bank holding companies wherever located within the Commonwealth of
Kentucky, subject to two general restrictions:
* neither an individual, which on the effective date of the legislation
controlled a bank or bank holding company, nor a bank holding company
can acquire control of any bank located in Kentucky, if the bank was
chartered after July 13, 1984 but has been in existence for fewer than
five years on the date of its acquisition (except for one bank holding
company formations); and
* no individual or bank holding company may acquire control of any bank
or bank holding company if, upon the acquisition, the individual or
bank holding company would control banks located in Kentucky holding
more than fifteen percent(15%)of the total deposits of all federally-
insured depository institutions in Kentucky.
In addition to Kentucky Revised Statutes Section 287.900, Kentucky
Revised Statutes Section 287.905 also contains provisions requiring any bank
holding company to seek and obtain the approval of the Commissioner of the
Kentucky Department of Financial Institutions before acquiring control of any
bank chartered in Kentucky or any bank holding company controlling a bank which
is chartered in the Commonwealth of Kentucky. Control is defined the same as in
the Bank Holding Company Act of 1956, as amended, which generally means the
power to vote 25% or more of any class of voting securities, the power to elect
a majority of the board of directors or the power to directly or indirectly
exercise a controlling influence over the management or policies of a bank or
bank holding company.
The Commissioner of the Kentucky Department of Financial Institutions
must approve an application by a bank holding company to acquire a bank or bank
holding company unless he finds:
* the terms of the acquisition are not in accordance with the laws of
Kentucky;
* the financial condition or the competence, experience and integrity
of the acquiring company or its principals are such as will
jeopardize the financial stability of the acquired entity;
* the public convenience and advantage will not be served by the
acquisition; or
* a federal regulatory authority whose approval is required has
disapproved the transaction because it would result in a monopoly or
substantially lesser competition.
Bank holding companies are required to obtain the prior approval of the
Federal Reserve Board before they may:
* acquire direct or indirect ownership or control of more than 5% of
the voting shares of any bank;
* acquire all or substantially all of the assets of any bank; or
* merge or consolidate with any other bank holding company.
The Federal Reserve Board generally may not approve any transaction
that would result in a monopoly or that would further a combination or
conspiracy to monopolize banking in the United States. Nor can the Federal
Reserve Board approve a transaction that could substantially lessen competition
in any section of the country, that would tend to create a monopoly in any
section of the country, or that would be in restraint of trade. But the Federal
Reserve Board may approve any such transaction if it determines that the public
interest in meeting the convenience and needs of the community served clearly
outweighs the anticompetitive effects of the proposed transaction. The Federal
Reserve Board is also required to consider the financial and managerial
resources and future prospects of the bank holding companies and banks
concerned, as well as the convenience and needs of the community to be served.
Consideration of financial resources generally focuses on capital adequacy,
which is discussed below. Consideration of convenience and needs include the
parities' performance under the Community Reinvestment Act of 1977.
Restrictions on Activities. In addition to the effect of Kentucky law,
we are also restricted in our activities by federal law. Under the Bank Holding
Company Act, a bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of any voting shares of any
company which is not a bank, or engaging in any activity other than managing and
controlling banks.
Among the activities which are permissible for bank holding
companies are:
* acquiring and holding shares of any company engaged solely in the
business of the holding and operating of properties used wholly or
substantially by a subsidiary bank,conducting a safe deposit business
or furnishing services to or performing services for a subsidiary
bank;
* acquiring and holding up to five percent (5%) of the outstanding
voting shares of any company;
* acquiring and holding up to five percent(5%)of the outstanding voting
shares of an investment company that is solely engaged in investing
in securities and that does not own or control more than five percent
(5%)of the outstanding shares of any class of voting securities of
any company; and
* acquiring and holding shares of any company, the activities of which
the Federal Reserve Board has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto.
In determining whether a particular activity is permissible, the
Federal Reserve Board must consider whether the performance of such an activity
reasonably can be expected to produce benefits to the public that outweigh
possible adverse effects. Possible benefits that the Federal Reserve Board
considers include greater convenience, increased competition or gains in
efficiency. Possible adverse effects include undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Among the activities which the Federal Reserve Board has determined
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto and which may be engaged in by a bank holding company or
a subsidiary thereof in accordance with the rules and regulations of the Federal
Reserve Board are:
* making, acquiring and servicing loans and other extensions of credit;
* operating an industrial bank, Morris Plan bank or industrial loan
company;
* performing functions or activities that may be performed by a trust
company;
* acting as an investment or financial advisor;
* leasing personal or real property if the lease is to serve as the
functional equivalent of an extension of credit to the lessee and
meets other criteria;
* making investments in corporations or projects designed primarily to
promote community welfare;
* providing data processing and data transmission services if the data
to be processed or furnished are financial, banking or economic in
nature;
* acting as a principal, agent or broker for insurance that is directly
related to an extension of credit by the holding company or a bank
subsidiary of the holding company, or engaging in any insurance agency
activity in a place where the holding company (or a subsidiary) has a
lending office and that has a population not exceeding 5,000;
* owning, controlling or operating a savings association;
* providing courier services for financial instruments exchanged among
banks and financial institutions;
* providing management consulting advice to banks and other depository
institutions not affiliated with the holding company;
* issuing and selling money orders and similar consumer-type payment
instruments having a face value of not more than $1,000;
* performing appraisals of real estate and personal property;
* acting as intermediary for the financing of commercial or industrial
income-producing real estate;
* providing securities brokerage services, if the services are
restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing or investment advice or research services;
* underwriting and dealing in government obligations and money market
instruments;
* providing general information and statistical forecasting with respect
to foreign exchange markets and transnational services with respect
thereto;
* acting as futures commissions merchant for nonaffiliated persons;
* providing investment advice on financial futures and options on
futures;
* providing consumer financial counseling;
* providing tax planning and preparation services;
* providing check guaranty services;
* operating a collection agency; and
* operating a credit bureau.
The Federal Reserve Board has determined that the following nonbanking
activities (among others) are not so closely related to banking or managing or
controlling banks as to be a proper incident thereto:
* insurance premium funding or the combined sale of mutual funds and
insurance;
* underwriting life insurance, except in low-population areas, that is
not sold in connection with a credit transaction by a bank holding
company system;
* real estate brokerage;
* land development;
* real estate syndication;
* management consulting;
* property management; and
* operation of a travel agency.
The Gramm-Leach-Bliley Act of 1999 has expanded the permissible
activities of a bank holding company. The Gramm Act allows qualifying bank
holding companies to elect to be treated as "financial holding companies." A
bank holding company qualifies to be a financial holding company if its
depository institution subsidiaries are well-managed, well capitalized and
received at least a "satisfactory" Community Reinvestment Act rating as of the
most recent examination. A financial holding company may engage in activities
and acquire companies engaged in activities that are "financial" in nature or
"incidental" or "complementary" to such financial activities including:
* acting as a principal, agent or broker in selling various forms of
insurance;
* providing financial investment and economic advisory services,
including advising investment companies;
* underwriting, dealing or making a market in securities, without any
revenue limitation;
* investing in shares or other ownership interests in any entity in
course of a bona fide underwriting, merchant banking or investment
banking business, provided that such investments are not made by a
depository institution or its subsidiary; and
* investing, through an insurance subsidiary in the ordinary course of
its business in accordance with relevant state law, in any entity, but
subject to conditions analogous to those for merchant banking
investments.
The Federal Reserve Board and the Treasury Department have the
authority to expand the list of permissible activities for a financial holding
company. Any bank holding company which cannot or chooses not to become a
financial holding company will remain subject to the previous rules of the Bank
Holding Company Act.
Bank holding companies are not limited under section 4(c)(8) of the
Bank Holding Company Act to activities previously approved by the Federal
Reserve Board. If a bank holding company is of the opinion that other activities
in the circumstances surrounding a particular case are closely related to
banking or managing or controlling banks, the holding company may apply for
Federal Reserve Board approval to engage in the activity or acquire an interest
in a company that is engaged in the activity.
There are no territorial limitations on permissible non-banking
activities of bank holding companies. Despite prior approval, the Federal
Reserve Board has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company may result from such activity.
We may seek to engage, or to acquire an interest in a company that
engages, in nonbanking activities so closely related to banking or managing or
controlling banks as to be a proper incident thereto. No negotiations for the
acquisition of any entities have been carried on by us, nor are any such
negotiations specifically contemplated, nor are any plans currently under
consideration under which we would engage in any nonbanking activities. There
can be no assurance that any such entity will be acquired by us or that we will
engage in any nonbanking activities in the future.
Capital Adequacy. First Security Bancorp and First Security Bank are
required to comply with the capital adequacy standards established by the
Federal Reserve Board and the Federal Deposit Insurance Corporation,
respectively. There are two basic measures for capital adequacy for bank holding
companies and the depository institutions that they own: a risk-based measure
and a leverage measure. All applicable capital standards must be satisfied for a
bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among
depository institutions and bank holding companies, to account for
off-balance-sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance-sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted
assets (including some off-balance sheet items, such as standby letters of
credit) is 8.0%. At least half of total capital must be comprised of tier 1
capital, which is common equity, undivided profits, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock and a limited amount of cumulative perpetual preferred stock, less
goodwill and other permissible intangible assets. The remainder may consist of
tier 2 capital which is subordinated debt, other preferred stock, and a limited
amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of tier 1 capital to average assets, less goodwill and
permissible other intangible assets, of 3.0% for bank holding companies that
meet specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a leverage ratio
of at least 3.0%, plus an additional cushion of 100 to 200 basis points. The
guidelines also provide that bank holding companies that experience internal
growth to make acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. The Federal Reserve Board will consider a
"tangible tier 1 capital leverage ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The federal bank regulators continue to indicate their desire to raise
the capital requirements that apply to banks beyond their current levels. The
Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office
of the Comptroller of the Currency have proposed an amendment to the risk-based
capital standards that would calculate the change in a bank's net economic value
attributable to increases and decreases in market interest rates and would
require banks with excessive interest rate risk exposure to hold additional
amounts of capital against such exposures.
Reporting Obligations. A bank holding company is required to file with
the Federal Reserve Board annual reports and other information regarding its
business operations and the business operations of its subsidiaries. It is also
subject to examination by the Federal Reserve Board and is required to obtain
Federal Reserve Board approval prior to acquiring, directly or indirectly,
ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting stock of such bank unless it already owns a majority of
the shares of voting stock of such bank.
Support of Subsidiary Institutions. Under Federal Reserve Board policy
we are expected to act as a source of financial strength for, and to commit
resources to support, First Security Bank. This support may be required at times
when, absent such Federal Reserve Board policy, we may not be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
its banking subsidiaries are subordinate in right of payment to deposits and to
other indebtedness of such banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act, a depository institution
insured by the Federal Deposit Insurance Corporation can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the Federal Deposit
Insurance Corporation after August 9, 1989, in connection with
* the default of a commonly controlled Federal Deposit Insurance
Corporation-insured depository institution or
* any assistance provided by the Federal Deposit Insurance Corporation
to any commonly controlled Federal Deposit Insurance
Corporation-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or
receiver, and "in danger of default"is defined generally as the existence of
conditions indicating that a default is likely to occur in the absence of
regulatory assistance. The Federal Deposit Insurance Corporation's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company, but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institution. First Security Bank is
subject to these cross- guarantee provisions. As a result, any loss suffered by
the Federal Deposit Insurance Corporation in respect of First Security Bank
would likely result in assertion of the cross-guarantee provisions, the
assessment of such estimated losses against the depository institution's banking
or thrift affiliates and a potential loss of our respective investment in any
other subsidiary depository institution.
First Security Bank
General. As a bank organized under Kentucky law, First Security Bank is
subject to the regulation and supervision of the Kentucky Department of
Financial Institutions. As an insured bank under the Federal Deposit Insurance
Act, First Security Bank is also subject to regulation and examination by the
Federal Deposit Insurance Corporation. Although First Security Bank is not a
member of the Federal Reserve System, it is nevertheless be subject to
provisions of the Federal Reserve Act and regulations promulgated thereunder.
The Federal Deposit Insurance Corporation and the Kentucky Department
of Financial Institutions regularly examine the operations of First Security
Bank. State banks also are subject to regulation requiring the maintenance of
prescribed minimum capital levels, and First Security Bank is required to file
annual reports and such additional information as the Kentucky Department of
Financial Institutions and Federal Deposit Insurance Corporation regulations
require. First Security Bank is also subject to restrictions on loan limits,
interest rates, "insider" loans to officers, directors and principal
shareholders, restrictions on tie-in arrangements and transactions with
affiliates, as well as many other matters. Strict compliance at all times with
state and federal banking laws is required. Supervision, regulation and
examination of First Security Bank by bank regulatory agencies is intended for
the protection of First Security Bank's depositors, not its shareholders.
Federal and state regulators have authority to impose sanctions on First
Security Bank and its directors and officers if First Security Bank engages in
unsafe or unsound practices, or otherwise fails to comply with regulatory
standards.
The following summaries of statutes, regulations and policies affecting
banks do not purport to be complete, and the statutes and regulations described
should be referred to by all prospective investors.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 introduced a process enabling nationwide interstate
banking through bank subsidiaries and interstate banking mergers. Effective
September 29, 1995, the Riegle-Neal Act allowed adequately capitalized and
well-managed bank holding companies to acquire control of a bank in any state
subject to concentration limits. The Riegle-Neal Act also generally provides
that, after June 1, 1997, national and state-chartered banks may branch
interstate through acquisitions of banks in other states. By adopting
legislation prior to that date, a state has the ability either to "opt in" and
accelerate the date after which interstate branching is permissible, or "opt
out" and prohibit interstate branching altogether.
Kentucky enacted "opt-in" legislation that permits banks from other
states to establish branches in Kentucky by acquisition of a Kentucky bank after
June 1, 1997. Restrictions currently imposed upon Kentucky banks will continue
to apply under the legislation, including prohibiting bank holding companies
from chartering a new bank in Kentucky or acquiring a bank in Kentucky which has
been in existence for less than five years, and prohibiting acquisitions which
have the result of concentrating control of more than fifteen percent (15%) of
the federally insured deposits in Kentucky.
It is expected that the Riegle-Neal Act will increase competition in
the banking industry as it will allow out of state banks to branch into Kentucky
through acquisitions of banks in Kentucky.
State Regulation. Kentucky law places numerous restrictions and
requirements on the banking operations of state-chartered banks. State-chartered
banks must report to the Kentucky Department of Financial Institutions
periodically upon request, and at least annually, regarding the financial
condition and operations of the bank.
Kentucky Revised Statutes Section 287.100(2) limits a bank's investment
in real estate and provides that a bank may only hold title to real estate
necessary or appropriate for the transaction of legitimate business and the cost
of such real estate, including furniture and fixtures, generally may not exceed
forty percent (40%) of the total paid-in capital, unimpaired surplus and
undivided profits of the bank without approval of the Kentucky Department of
Financial Institutions. A state-chartered bank may invest in real estate other
than that related to its legitimate business within its generally accepted
banking market provided such investment does not exceed ten percent (10%) of the
bank's actual paid-in capital and surplus at the time the investment is made.
Exceptions to the foregoing rules apply in the case of real estate conveyed to a
bank in satisfaction of a debt previously contracted.
With respect to expansion, First Security Bank until recently could
establish branches only within the geographical limits of Fayette County,
Kentucky, and at locations which are subject to approval by the Kentucky
Department of Financial Institutions. However, recent legislation has been
interpreted by the Kentucky Department of Financial Institutions to permit
certain well-capitalized and well-managed Kentucky banks to establish a branch
office anywhere in Kentucky and an administrative regulation to such effect
has been issued by the Kentucky Department. First Security Bank is also
subject to the banking and usury laws of Kentucky restricting the amount of
interest it may charge in making loans or other extensions of credit.
Kentucky law also currently imposes a time restriction on the
acquisition of recently chartered banks in Kentucky. Except for mergers or
consolidations of banks whose principal place of business is in the same county,
Kentucky Revised Statutes Section 287.900 provides that a bank or bank holding
company may not be acquired unless it has been in existence for at least five
years at the time of the acquisition.
Dividend Restrictions. Federal and state statutes and regulations
restrict the payment of dividends by state-chartered banks. Under Kentucky law,
dividends by Kentucky banks may be paid only from current or retained net
profits. Before any dividend may be declared for any period (other than with
respect to preferred stock, if any), a bank must increase its capital surplus by
at least ten percent (10%) of the net profits of the bank for such period until
the bank's capital surplus equals the amount of its stated capital attributable
to its common stock. Moreover, the Commissioner of the Kentucky Department of
Financial Institutions must approve the declaration of dividends if the total
dividend to be declared by a bank for any calendar year would exceed the bank's
total net profits for such year combined with its retained net profits for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of preferred stock, if any, or debt.
The Kentucky Business Corporation Act provides additional restrictions
on distributions by a Kentucky corporation, including First Security Bancorp and
First Security Bank.
The Federal Deposit Insurance Corporation may also restrict First
Security Bank's payment of dividends. If the Federal Deposit Insurance
Corporation determines that a depository institution under its jurisdiction is
engaged in or is about to engage in an unsafe or unsound practice, the Federal
Deposit Insurance Corporation may require, after notice and hearing, that the
institution cease and desist from such practice. Depending on the financial
condition of the depository institution, an unsafe or unsound practice could
include the payment of dividends. Moreover, regulations of the Federal Deposit
Insurance Corporation requiring First Security Bank to maintain certain capital
levels will also affect First Security Bank's ability to pay dividends.
Prompt Corrective Action for Capital Deficiencies. First Security Bank
is subject to risk-based and leverage capital requirements similar to those
imposed upon us as described above under "Capital Adequacy." The failure of
First Security Bank to meet its capital guidelines would subject it to a variety
of enforcement remedies and other restrictions on its business. The Federal
Deposit Insurance Corporation Improvement Act of 1991 establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, which became effective in December 1992, the
federal banking regulators are required to establish five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized). With respect to institutions
in the three undercapitalized categories, the regulators must take prescribed
supervisory actions and are authorized to take other discretionary actions.
Generally, subject to a narrow exception, the Improvement Act requires the
banking regulator to appoint a receiver or conservator for an institution that
is critically undercapitalized. The federal banking agencies have specified by
regulation the relevant capital level for each category.
An institution is deemed to be well capitalized if it
* has a total capital ratio of 10% or greater;
* has a tier 1 capital ratio of 6.0% or greater;
* has a leverage ratio of 5.0% or greater; and
* is not subject to any written agreement, order, capital directive, or
prompt corrective action directive issued by its federal banking agency.
An institution is considered to be adequately capitalized if it has
* a total capital ratio of 8.0% or greater;
* a tier 1 capital ratio of 4.0% or greater; and
* a leverage ratio of 4.0% or greater.
An institution is considered to be undercapitalized if it has
* a total capital ratio of less than 8.0%;
* a tier 1 capital ratio of less than 4.0%; or
* a leverage ratio of less than 4.0%.
An institution is considered to be significantly undercapitalized if it has
* a total capital ratio of less than 6.0%;
* a tier 1 capital ratio of less than 3.0%; or
* a leverage ratio of less than 3.0%.
An institution that has a tangible equity capital to assets ratio equal
to or less than 2.0% is deemed to be critically undercapitalized. For purposes
of the regulation, the term "tangible equity" includes core capital elements
counted as tier 1 capital for purposes of the risk-based capital standards, plus
the amount of outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets with exceptions. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under the Improvement Act, a bank holding company must guarantee that a
subsidiary depository institution meet its capital restoration plan, subject to
limitations. The obligations of a controlling bank holding company under the
Improvement Act to fund a capital restoration plan is limited to the lesser of
5.0% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. An undercapitalized institution is also
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches or engaging in any new line of business,
except in accordance with an accepted capital restoration plan or with the
approval of the Federal Deposit Insurance Corporation. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of the Improvement Act.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions:
* sell enough shares, including voting shares, to become
adequately capitalized;
* merge with, or be sold to, another institution or holding company, but
only if grounds exist for appointing a conservator or receiver;
* restrict transactions with banking affiliates as if the "sister bank"
exception to the requirements of Section 23A of the Federal Reserve
Act did not exist;
* otherwise restrict transactions with bank or non-bank
affiliates;
* restrict interest rates that the institution pays on deposits
to "prevailing rates" in the institution's "region";
* restrict asset growth or reduce total assets;
* alter, reduce, or terminate activities;
* hold a new election of directors;
* dismiss any director or senior executive officer who held office for
more than 180 days immediately before the institution became
undercapitalized, provided that in requiring dismissal of a director
or senior officer, the agency must comply with prescribed procedural
requirements, including the opportunity for an appeal in which the
director or officer will have the burden of proving his or her value
to the institution;
* employ "qualified" senior executive officers;
* cease accepting deposits from correspondent depository
institutions;
* divest nondepository affiliates which pose a danger to the
institution; or
* be divested by a parent holding company.
In addition, without the prior approval of the appropriate federal
banking agency, a significantly undercapitalized institution may not pay any
bonus to any senior executive officer or increase the rate of compensation for
such an officer.
Deposit Insurance. First Security Bank's deposits are insured by the
Federal Deposit Insurance Corporation up to the statutory limit of $100,000 per
depositor through the Bank Insurance Fund. Under current law, the insurance
assessment paid by Bank Insurance Fund-insured institutions is set by the
Federal Deposit Insurance Corporation and is designed to achieve a target
reserve ratio of 1.25 percent of estimated insured deposits, or such higher
ratio as the Federal Deposit Insurance Corporation may determine in accordance
with law. The Federal Deposit Insurance Corporation is also authorized to impose
one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the Federal Deposit Insurance Corporation from
the Treasury Department. Bank Insurance Fund annual assessment rates currently
range from 0 to 27 basis points. The actual assessment rate paid by individual
institutions is determined by the risk category rating of the institution as
determined by the Federal Deposit Insurance Corporation.
On September 30, 1996, Congress enacted the Deposit Insurance Funds Act
of 1996. The Funds Act authorized the Financing Corporation to levy assessments
on Bank Insurance Fund-assessable deposits and stipulates that the rate must
equal one-fifth of the Financing Corporation assessment rate that is applied to
deposits assessable by the Savings Association Insurance Fund. Based on June 30,
1996, deposit date, Financing Corporation assessments imposed on Bank Insurance
Fund-insured deposits in annual amounts are presently estimated at 1.26 basis
points.
Effects of Governmental Policies and Economic Conditions. First
Security Bank's earnings are affected by the difference between the interest
earned by First Security Bank on its loans and investments and the interest paid
by First Security Bank on its deposits or other borrowings. The yields on its
assets and the rates paid on its liabilities are sensitive to changes in
prevailing market rates of interest. Thus, the earnings and growth of First
Security Bank are influenced by general economic conditions, fiscal policies of
the Federal government, and the policies of regulatory agencies, particularly
the Federal Reserve Board, which establishes national monetary policy, all of
which are beyond First Security Bank's control. The nature and impact of any
future changes in fiscal or monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. For example, the Depository Institutions Deregulation
and Monetary Control Act of 1980 provided for the phasing out of restrictions on
deposit interest rate ceilings, the authorization of new accounts and related
services and the expansion of the lending authority of savings and loan
associations. The Depository Institutions Deregulation Act, has altered the
competitive relationship that previously existed among financial institutions,
and has resulted in a substantial reduction in the historical distinction
between the services offered by banks, savings and loan associations and other
financial institutions.
Monetary Policy. Commercial banks, including First Security Bank, are
affected by the credit policy of various regulatory authorities, including the
Federal Reserve Board. An important function of the Federal Reserve Board is to
regulate the national supply of bank credit. Among the instruments of monetary
policy used by the Federal Reserve Board to implement these objectives are open
market operations in U.S. government securities, changes in reserve requirements
on bank deposits, changes in the discount rate on bank borrowings and
limitations on interest rates that banks may pay on time and savings deposits.
The Federal Reserve Board uses these means in varying combinations to influence
overall growth of bank loans, investments and deposits, and also to affect
interest rates charged on loans, received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including
the Federal Reserve Board, also affect the banking industry. Through changes in
the reserve requirements against bank deposits, open market operations in U.S.
government securities and changes in the discount rate on bank borrowings, the
Federal Reserve Board influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of First Security Bank.
EXPERTS
The financial statements of First Security Bancorp as of December 31, 1999
and 1998 and for the years then ended included in this prospectus, have been
audited by Crowe, Chizek and Company LLP, independent auditors, as set forth in
their report appearing elsewhere herein, and are included in reliance upon such
report given upon authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of common stock offered under this
prospectus are being passed upon by Stoll, Keenon & Park, LLP, Lexington,
Kentucky.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the shares
of common stock offered under this prospectus. The registration statement
contains additional information about us and our common stock. The Securities
and Exchange Commission allows us to omit certain information included in the
registration statement from this prospectus. The registration statement may be
inspected and copied at the Public Reference Section at the Securities and
Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains an Internet site that contains
reports, proxy and information statements, and other information about issuers
that file electronically with the Securities and Exchange Commission. The
address of that site is http://www.sec.gov. In addition, you can read and copy
this information at the regional offices of the Securities and Exchange
Commission at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
--------
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS............................................. F -2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 and 1998.............................................. F -3
Consolidated Statements of Income and Comprehensive Income for the six months
ended June 30, 2000 and 1999 (unaudited) and for
the years ended December 31, 1999 and 1998........... .................. F -4
Consolidated Statements of Shareholders' Equity for the six months ended June
30, 2000 (unaudited) and for the years ended December
31, 1999 and 1998....................................................... F -5
Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and
1999 (unaudited) and for the years ended December
31, 1999 and 1998....................................................... F -6
Notes to Consolidated Financial Statements................................. F -7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Security Bancorp, Inc.
Lexington, Kentucky
We have audited the accompanying consolidated balance sheets of First Security
Bancorp, Inc. and its wholly owned subsidiary, First Security Bank of Lexington,
as of December 31, 1999 and 1998 and the related consolidated statements of
income and comprehensive income, changes in shareholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Security
Bancorp, Inc. and its wholly owned subsidiary, First Security Bank of Lexington,
as of December 31, 1999 and 1998 and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 14, First Security Bank of Lexington changed its method of
accounting for certain start-up costs in 1998.
Crowe, Chizek and Company LLP
Lexington, Kentucky
January 27, 2000
<PAGE>
FIRST SECURITY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2000 (Unaudited) and
December 31, 1999 and 1998
(Dollars in Thousands)
June 30 December 31
2000 1999 1998
---- ---- ----
(unaudited)
ASSETS
Cash and due from banks $ 3,006 $ 2,219 $ 1,175
Federal funds sold 11,688 9,053 5,742
-------- ------- -------
Total cash and cash equivalents 14,694 11,272 6,917
Securities available for sale 3,738 4,331 5,014
Loans 95,678 78,197 34,403
Less allowance for loan losses (997) (819) (335)
-------- -------- --------
Net loans 94,681 77,378 34,068
Federal Home Loan Bank stock 216 117 -
Premises and equipment, net 793 758 830
Accrued interest receivable 714 528 225
Other assets 130 131 81
-------- ------- ---------
$114,966 $94,515 $47,135
======== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 6,941 $ 5,157 $ 2,746
Time deposits, $100,000 and over 19,245 14,397 5,247
Other interest bearing 76,494 63,858 30,620
-------- --------- ---------
Total deposits 102,680 83,412 38,613
Repurchase agreements and short-term
borrowings 3,158 2,382 -
Accrued interest payable 516 387 159
Other liabilities 79 119 82
-------- -------- ---------
Total liabilities 106,433 86,300 38,854
Shareholders' equity
Common stock, no par value: 5,000,000 shares
authorized; 1,000,000 shares issued and
outstanding 4,901 4,901 4,901
Paid-in capital 4,901 4,901 4,901
Accumulated deficit (1,157) (1,492) (1,514)
Accumulated other comprehensive income (loss) (112) (95) (7)
--------- --------- ---------
Total shareholders' equity 8,533 8,215 8,281
--------- --------- ---------
$ 114,966 $94,515 $ 47,135
======= ======== ========
See accompanying notes.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Six Months
Ended June 30, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
(In Thousands, Except Per Share Data)
<CAPTION>
June 30 December 31
2000 1999 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees $ 3,920 $ 1,867 $ 4,734 $ 1,317
Securities - taxable 115 82 202 84
Federal funds sold 233 237 447 717
Other 6 1 4 -
-------- --------- --------- --------
4,274 2,187 5,387 2,118
Interest expense
Deposits 2,469 1,215 2,995 1,093
Other 26 - 15 -
-------- --------- --------- ---------
2,495 1,215 3,010 1,093
Net interest income 1,779 972 2,377 1,025
Provision for loan losses 201 221 487 329
-------- --------- --------- ---------
Net interest income after provision for loan loss 1,578 751 1,890 696
Noninterest income
Service charges and fees on deposits 59 31 102 36
Other 27 20 37 5
-------- --------- --------- ---------
86 51 139 41
Noninterest expense
Salaries and employee benefits 625 541 1,098 1,060
Occupancy 114 101 211 185
Equipment 50 55 106 101
Advertising 57 32 68 99
Professional fees 139 30 72 71
Bank franchise tax 37 35 62 73
Other 307 168 390 256
-------- --------- --------- ---------
1,329 962 2,007 1,845
-------- --------- --------- ---------
Income (loss) before cumulative effect
of a change in accounting principle 335 (160) 22 (1,108)
Cumulative effect of a change in accounting principle - - - (153)
------- --------- --------- ---------
Net income (loss) $ 335 $ (160) $ 22 $ (1,261)
======== ========= ========= =========
Other comprehensive income (loss) (17) (59) (88) (7)
-------- --------- --------- ---------
Comprehensive income (loss) $ 318 $ (219) $ (66) $ (1,268)
======== ========= ========= =========
Weighted average shares common stock outstanding:
Basic 1,000 1,000 1,000 1,000
Diluted 1,026 1,019 1,019 1,000
Earnings (loss) per share:
Basic $ .34 $ (.16) $ .02 $ (1.26)
Diluted .33 (.16) .02 (1.26)
See Accompanying Notes
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Six Months
Ended June 30, 2000 (Unaudited) and
Years Ended December 31, 1999 and 1998
(In Thousands)
<CAPTION> Accumulated
Other Total
Stock Capital Deficit Income (Loss) Equity
----- ------- ------- ------------ ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 4,901 $ 4,901 $ (253) $ - $ 9,549
Net loss - - (1,261) - (1,261)
Change in unrealized gain
(loss) on securities available
for sale - - - (7) (7)
---------- ---------- ------------- ---------- ----------
Balance, December 31, 1998 4,901 4,901 (1,514) (7) 8,281
Net income - - 22 - 22
Change in unrealized gain
(loss) on securities available
for sale - - - (88) (88)
---------- ---------- ------------- ---------- ----------
Balance, December 31, 1999 4,901 4,901 (1,492) (95) 8,215
Net income - - 335 - 335
Changes in unrealized gain
(loss) on securities available
for sale - - - (17) (17)
---------- ---------- ------------- ---------- -----------
Balance, June 30, 2000 $ 4,901 $ 4,901 $ (1,157) $ (112) $ 8,533
========== ========== ============= ========== ==============
See Accompanying Notes
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
June 30, 2000 and 1999 (Unaudited)
and Years Ended December 31, 1999 and 1998
(In Thousands)
<CAPTION>
June 30 December 31
2000 1999 1999 1998
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 335 $ (160) $ 22 $ (1,261)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation 62 57 116 96
Change in accounting principle - - - 153
Amortization and accretion on available
for sale securities, net 2 4 3 2
Provision for loan losses 201 221 487 329
Federal Home Loan Bank stock dividends (6) (1) (4) -
Change in assets and liabilities:
Accrued interest receivable (186) (186) (303) (221)
Other assets 1 (16) (50) (34)
Accrued interest payable 129 121 229 150
Other liabilities (40) (17) 36 63
-------- -------- --------- ---------
Net cash from operating activities 498 23 536 (723)
Cash flows from investing activities
Net change in loans (17,504) (17,385) (43,797) (32,896)
Activity in available for sale securities:
Prepayments 54 27 93 8
Maturities 1,500 2,500 2,500 1,750
Calls - - - 1,500
Purchases (980) (2,002) (2,002) (6,535)
Purchases of building and equipment, net (97) (42) (43) (461)
Purchase of Federal Home Loan Bank stock (93) (57) (113) -
-------- --------- --------- ---------
Net cash from investing activities (17,120) (16,959) (43,362) (36,634)
Cash flows from financing activities
Net change in deposits 19,268 26,690 44,799 34,454
Net change in repurchase agreements and
short-term borrowings 776 - 2,382 -
-------- --------- --------- ---------
Net cash from financing activities 20,044 26,690 47,181 34,454
-------- --------- --------- ---------
Net change in cash and cash equivalents 3,422 9,754 4,355 (2,903)
Cash and cash equivalents at beginning of period 11,272 6,917 6,917 9,820
-------- --------- --------- ---------
Cash and cash equivalents at end of period $ 14,694 $ 16,671 $ 11,272 $ 6,917
======== ========= ========= =========
Supplemental cash flow information:
Interest paid $ 2,366 $ 1,161 $ 2,781 $ 943
See Accompanying Notes
</TABLE>
<PAGE>
FIRST SECURITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the
Six Months Ended June 30, 2000 (Unaudited)
and Years Ended December 31, 1999 and 1998
NOTE 1 - 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 (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the banking industry. The significant policies are described
below.
First Security Bancorp, Inc. was formed in February 11, 2000 and on May 31, 2000
became a bank holding company through its acquisition of all of the outstanding
shares of First Security Bank of Lexington. 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.
Nature of Operations: 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.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. Estimates that are more susceptible
to change in the near term include the allowance for loan losses and fair values
of securities.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due from
banks and federal funds sold. Net cash flows are reported for customer loan and
deposit transactions, and repurchase agreements and short-term borrowings.
Securities: Securities are classified as available for sale. Available for sale
securities are those which might be sold before maturity, and are reported at
fair value, with unrealized gains or losses reported in other comprehensive
income. Gains and losses on sales are determined based on the amortized cost of
the specific security sold. Other securities such as Federal Home Loan Bank
stock are carried at cost. Interest income includes amortization of premiums and
accretion of discounts.
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs. Interest income on real estate, commercial, and consumer
loans is accrued over the term of the loans based on the principal outstanding.
Interest income is not reported when full loan repayment is in doubt. Payments
on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loss experience, general economic conditions, information about
specific borrower situations, and other factors. While management may
periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan losses that occur.
Loans are considered impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at the
fair value of the collateral if the loan is collateral dependent. A portion of
the allowance for loan losses is allocated to impaired loans. Loans are
evaluated for impairment when payments are delayed or expected to be delayed or
when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Premises and Equipment: Premises and equipment are reported net of accumulated
depreciation. Depreciation expense is computed using principally straight line
method over the shorter of the asset's useful life or lease term. Maintenance
and repairs are expensed and major improvements are capitalized. These assets
are reviewed for impairment when events indicate the carrying amount may not be
recoverable.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are for the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under warrants.
Lease Commitments: Expense is recognized as payments are made on operating
leases. Leasing arrangements are for five years and -------- contain renewal
options.
Dividend Restriction: The Bank is subject to banking regulations which require
the maintenance of certain capital levels and which limit the amount of
dividends which can be paid. For details concerning regulatory capital
requirements, see Notes 12 and 13.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity.
Benefit Plans: Profit sharing and 401(k) plan expense is the amount contributed
as determined by a formula.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material impact on the financial statements.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not covered by
federal deposit insurance.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. 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, but the effect will depend on derivative holdings when
this standard applies.
Reclassifications: Certain items in the prior period financial statements were
reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
<TABLE>
Year-end securities are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
Available for Sale
June 30, 2000
U.S. Treasury securities $ 250 $ - $ (2) $ 248
U.S. Government agency securities 2,498 - (76) 2,422
Mortgage-backed 1,082 - (34) 1,048
--------- --------- --------- ---------
Total debt securities 3,830 - (112) 3,718
Equity securities 20 - - 20
--------- --------- --------- ---------
Total $ 3,850 $ - $ (112) $ 3,738
========= ========= ========= =========
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
========= ========= ========= =========
December 31, 1998
U. S. Treasury securities $ 999 $ - $ - $ 999
U. S. Government agency securities 3,503 - (5) 3,498
Mortgage-backed 499 - (2) 497
--------- --------- --------- ---------
Total debt securities 5,001 - (7) 4,994
Equity securities 20 - 20
--------- --------- --------- ---------
Total $ 5,021 $ - $ (7) $ 5,014
========= ========= ========= =========
</TABLE>
Contractual maturities of debt securities at year-end 1999 were as follows.
Securities not due at a single maturity date, mortgage-backed and equity
securities, are shown separately.
Amortized Fair
Cost Value
(in thousands)
Due in one year or less $ 1,501 $ 1,497
Due from one to five years 2,250 2,185
Mortgage-backed 655 629
Equity securities 20 20
----------- -----------
Total $ 4,426 $ 4,331
=========== ===========
Securities pledged at June 30, 2000 and year-end 1999 and 1998 had carrying
amounts of $3,718,000, $3,564,000 and $0, and were pledged to secure customer
repurchase agreements. There were no securities sales during the first six
months of 2000 or during 1999 or 1998.
NOTE 3 - LOANS
Loans were as follows:
June 30 December 31
2000 1999 1998
---- ---- ----
(in thousands)
Commercial $ 29,336 $ 26,596 $ 12,469
Mortgage loans on real estate:
Commercial 46,668 35,855 14,125
Residential 10,166 7,450 3,831
Consumer 9,508 8,296 3,978
----------- ----------- -----------
$ 95,678 $ 78,197 $ 34,403
=========== =========== ===========
<TABLE>
NOTE 3 - LOANS
Changes in the allowance for loan losses were as follows:
<CAPTION>
Six Months Ended Years Ended
June 30 December 31
2000 1999 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Beginning balance $ 819 $ 335 $ 335 $ 15
Loans charged off (23) (2) (3) (9)
Recoveries - - 1 -
Provision for loan losses 201 221 486 329
----------- ----------- ----------- -----------
Ending balance $ 997 $ 554 $ 819 $ 335
=========== =========== =========== ===========
</TABLE>
With the exception of $6,000 in non-accrual loans at December 31, 1998, there
were no impaired or non-performing loans during any of the periods presented.
Loans to executive officers, directors, and their affiliates in 1999 were as
follows (in thousands):
Beginning balance $ 1,715
New loans 3,485
Repayments (565)
-----------
Ending balance $ 4,635
===========
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
June 30 December 31
2000 1999 1998
---- ---- ----
(in thousands)
Buildings $ 87 $ - $ -
Leasehold improvements 515 514 491
Furniture and equipment 473 464 443
----------- ---------- -----------
Total cost 1,075 978 934
Accumulated depreciation (282) (220) (104)
----------- ---------- -----------
Premises and equipment, net $ 793 $ 758 $ 830
=========== ========== ===========
The Company is currently leasing its main banking facility, opened in 1997,
under a non-cancelable five year operating lease which includes three three-year
renewal options. The Company is also leasing a facility for their branch
operation which opened in 1998. This lease is a non-cancelable five year
operating lease which includes three five-year renewal options. The Company also
leases certain equipment under non-cancelable operating leases with various
terms and expiration dates. Rental expense for the six months ended June 30,
2000 was $62,000 and for the years ended December 31, 1999 and 1998 was $119,000
and $112,000.
Future operating lease commitments as of December 31, 1999 (in thousands):
2000 $ 122
2001 117
2002 86
2003 1
2004 1
-----------
Total $ 327
===========
NOTE 5 - DEPOSITS
The scheduled maturities of time deposits as of December 31, 1999 were as
follows (in thousands):
2000 $ 38,371
2001 12,161
2002 1,018
2003 1,231
2004 1,388
Thereafter -
-----------
Total $ 54,169
===========
Related party deposits totaled $3,272,000 at June 30, 2000 and $4,044,000 and
$2,695,000 at December 31, 1999 and 1998.
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to
ninety days from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows:
June 30 December 31
2000 1999 1998
---- ---- ----
(in thousands)
Average balance during the year $ 983 $ 309 $ -
Average interest rate during the year 5.09% 4.91% -
Maximum month-end balance during the year $ 2,558 $2,382 $ -
NOTE 7 - OTHER BORROWED FUNDS (UNAUDITED)
On June 30, 2000, the Company borrowed $600,000 from Bank One, Kentucky, NA. The
note bears interest at the prime rate and matures on December 30, 2000. The
balance is included with repurchase agreements and short-term borrowings in the
consolidated financial statements at June 30, 2000.
NOTE 8 - STOCK WARRANTS
The Company has issued stock warrants to each of its initial investors who
subscribed to $100,000 or more of the Company's common stock prior to July 4,
1997, the value of which is included in common stock and paid-in capital. The
warrants entitle the holder to purchase additional shares of the Company's
common stock at the offering price of $10 per share at any time during 2003. If
all the warrants are fully exercised, the Company will issue a total of 88,440
shares of common stock, and the Company's capital will be increased by
$884,400. The amount of dilution to the book value, earnings per share, and
market value of the common stock that will occur upon exercise of the warrants
will depend on a variety of factors, including the number of warrants exercised,
the amount of the Company's capital at the time the warrants are exercised, the
number of shares of common stock then outstanding, net earnings of the Company
(if any), and the then market value of the Company's common stock. The warrants
have no voting rights and may be transferred without the underlying shares of
common stock, but are not transferable until the exercise period commences. The
warrants will expire if not exercised by December 31, 2003.
NOTE 9 - INCOME TAXES
The components of the provision (benefit) for income taxes consists of:
Six Months Ended Years Ended
June 30, 2000 December 31
2000 1999 1999 1998
---- ---- ---- ----
(in thousands)
Current $ - $ - $ - $ -
Benefit of net operating loss
carryforward (173) - - -
Deferred 59 (4) (8) 428
Change in valuation allowance 114 4 8 (428)
------- ------- ------- -------
$ - $ - $ - $ -
======= ======= ======= =======
The Company's deferred tax assets and liabilities are shown below. A valuation
allowance has been established due to uncertainty over the utilization of the
deferred tax assets.
June 30 December 31
2000 1999 1998
---- ---- ----
(in thousands)
Deferred tax assets
Net operating loss carryforward $ 128 $ 301 $ 404
Allowance for loan losses 297 229 63
Organizational costs 108 74 99
Other - 3 1
----------- ---------- -----------
Total assets 533 607 567
Deferred tax liabilities
Depreciation (55) (50) (31)
Cash to accrual (82) (49) (21)
Other (3) (1) -
---------- --------- ----------
Total liabilities (140) (100) (52)
---------- ---------- ----------
393 507 515
Valuation allowance (393) (507) (515)
---------- ---------- ----------
Net deferred tax asset $ - $ - $ -
=========== =========== ===========
The Bank had a tax net operating loss of $885,000 at December 31, 1999 ($376,000
at June 30, 2000) which can be carried forward to offset future taxable income
through the year 2019.
An analysis of the differences between the statutory U. S. federal income tax
rate and the effective tax rate is as follows:
<TABLE>
Six Months Ended Years Ended
June 30, 2000 December 31
2000 1999 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. federal income
tax rate $ 114 34.0% $ (54) 34.0% $ 7 34.0% $ (429) 34.0%
Changes from the
statutory rate
Change in
valuation
allowance (114) (34.0) 54 (34.0) (8) (36.5) 428 (34.0)
Other - - - - 1 2.5 1 -
-------- -------- ------ ------- ------ -------- -------- --------
$ - - % $ - - % $ - - % $ - - %
======== ======== ======= ====== ====== ======== ======== ========
</TABLE>
NOTE 10 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
<TABLE>
Six Months Ended Years Ended
June 30 December 31
2000 1999 1999 1998
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic
Net income $ $ 335 $ (160) $ 22 $ (1,261)
====== ======== ====== ========
Weighted average common shares 1,000 1,000 1,000 1,000
Basic earnings per common share $ .34 $ (.16) $ .02 $ (1.26)
======= ======== ====== =======
Diluted
Net income $ $ 335 $ (160) $ 22 $(1,261)
Weighted average common shares outstanding
for basic earnings per common share 1,000 1,000 1,000 1,000
Add: Dilutive effects of assumed exercises
of stock warrants 26 19 19 -
--------- --------- --------- ---------
Average shares and dilutive potential
common shares 1,026 1,019 1,019 1,000
Diluted earnings per common share $ .33 $ (.16) $ .02 $ (1.26)
========= ========= ========= =========
</TABLE>
Stock warrants for 88,440 shares of common stock were not considered exercised
for 1998 diluted earnings per share because they were anti-dilutive.
NOTE 11 - COMMITMENTS AND OFF-BALANCE-SHEET RISK
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, and standby
letters of credit. These involve, to varying degrees, credit and interest-rate
risk in excess of the amount reported in the financial statements. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount for commitments to extend credit, standby letters of credit,
and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. Collateral or
other security is normally not required to support financial instruments with
credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party. The contractual amount of financial instruments with
off-balance-sheet risk at year end was as follows (in thousands):
<TABLE>
June 30 December 31
2000 1999 1998
---- ---- ----
Fixed Variable Fixed Variable Fixed Variable
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Commitments to
make loans $ 8,646 $ 6,846 $ 1,222 $ 10,088 $ - $ 9,660
Unused lines of
credit - 7,556 - 5,959 - 3,853
Letters of credit 361 - 690 - 25 -
</TABLE>
Commitments to make loans are at market rates and generally made for periods of
60 days or less. The fixed rate loan commitments at December 31, 1999 had
interest rates ranging from 7.67% to 8.95% and maturities up to seven years.
NOTE 12 - LIMITATION ON BANK DIVIDENDS
Banking regulations limit the amount of dividends that may be paid without prior
approval. Under these regulations, the amount of dividends that may be paid in
any calendar year is limited to the current year's net profits, as defined,
combined with the retained net profits of the preceding two years. Also, no
dividends can be paid that would equal or exceed the retained earnings then on
hand. Without prior approval, there were no retained earnings available for
dividends during any of the periods presented.
Having received approval from the regulators, the Bank dividend $189,000 the
Company to fund its current expenses.
NOTE 13 - REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements administered
by federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, under capitalized, significantly
undercapitalized, and critically under capitalized, although these terms are not
used to represent overall financial condition. The Bank was categorized as well
capitalized at June 30, 2000 and at year-end 1999 and 1998 as noted in the
tables below. On a consolidated basis (shown for June 30, 2000 only), the
Company was categorized as well capitalized with the exception of total risk
based capital to risk weighted assets in which they are categorized as adequate.
<TABLE>
<CAPTION>
Minimum Amounts
to be Well
Minimum Required Capitalized
for Capital Under Prompt
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000
Total Risk Based Capital
(to Risk Weighted Assets)
Consolidated $ 9,642 9.8% $7,877 8% $ 9,847 10%
Bank only 10,194 10.4 7,877 8 9,847 10
Tier I Capital
(to Risk Weighted Assets)
Consolidated 8,645 8.8 3,939 4 5,908 6
Bank only 9,197 9.3 3,939 4 5,908 6
Tier I Leverage Capital
(to Average Assets)
Consolidated 8,645 7.8 4,408 4 5,510 5
Bank only 9,197 8.4 4,408 4 5,510 5
</TABLE>
<TABLE>
<CAPTION>
Minimum Amounts
to be Well
Minimum Required Capitalized
for Capital Under Prompt
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total Capital to Risk Weighted Assets $ 9,129 11.5% $6,348 8% $ 7,935 10%
Tier 1 Capital to Risk Weighted Assets 8,310 10.5 3,174 4 4,761 6
Tier 1 Capital to Average Assets 8,310 9.4 3,541 4 4,426 5
December 31, 1998
Total Capital to Risk Weighted Assets $ 8,623 23.3% $2,934 8% $ 3,692 10%
Tier 1 Capital to Risk Weighted Assets 8,288 22.4 1,477 4 2,213 6
Tier 1 Capital to Average Assets 8,288 19.4 1,236 4 1,570 5
</TABLE>
In addition to the above capital requirements, in connection with the initial
approval of its charter, the Bank is required to maintain Tier I capital to
total assets of at least 8% during its first three years of operation. The
Bank's Tier I capital to total assets at June 30, 2000 and December 31, 1999
were 8.0% and 8.8%.
NOTE 14 - CHANGE IN ACCOUNTING PRINCIPLE
Statement of Position 98-5 was passed in 1998 and is effective for financial
statements beginning after December 15, 1998. This pronouncement states that
certain start-up costs that could previously be capitalized must be expensed as
incurred, instead of being capitalized. Start-up costs are defined to include
organization costs, which the Bank had capitalized. The pronouncement also
states that all start-up costs previously capitalized must be expensed on
January 1, 1999. However, early adoption of this pronouncement was permitted in
1998. The Bank's management elected to early adopt the provisions of the
pronouncement and expensed all previously capitalized organizational costs in
1998. The amount of those costs was $153,000.
NOTE 15 - BENEFIT PLAN
A 401(k) benefit plan was established in 1998 which allows employee
contributions up to 15% of their compensation. The Bank matches 50% of the first
7.5% of the compensation contributed. Expense for the six months ended June 30,
2000 was $16,000 and for the years ended 1999 and 1998 was $27,000 and $24,000.
NOTE 16 - OTHER COMPREHENSIVE INCOME
<TABLE>
Other comprehensive income components and related taxes were as follows:
June 30 December 31
2000 1999 1998
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Unrealized holding gains and losses on
available-for-sale securities $ (17) $ (88) $ (7)
Less reclassification adjustments for gains
and losses later recognized as income - - -
----------- ----------- -----------
Net unrealized gains and losses (17) (88) (7)
Tax effect - - -
----------- ----------- -----------
Other comprehensive income (loss) $ (17) $ (88) $ (7)
=========== =========== ===========
</TABLE>
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of finacial instruments were as
follows at year-end.
1999 1998
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
(in thousands)
Financial assets
Cash and cash equivalents $11,272 $11,272 $6,917 $6,917
Securities available for sale 4,331 4,331 5,014 5,014
Loans, net 77,378 77,337 34,068 34,107
Financial liabilities
Deposits 83,412 82,810 38,613 38,089
Repurchase agreements
and short-term borrowings 2,382 2,382 - -
The methods and assumptions used to estimate fair value are described as
follows.
Carrying amount is the estimated fair value for cash and cash equivalents,
accrued interest receivable and payable (not material), demand deposits, and
variable rate loans or deposits that reprice frequently and fully. Security fair
values are based on market prices or dealer quotes, and if no such information
is available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair values for impaired loans are estimated using discounted cash flow
analysis or underlying collateral values. Fair value of loans held for sale is
based on market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items is based on the current
fees or cost that would be charged to enter into or terminate such arrangements
and is not material.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
As also discussed in Note 1, the Company was formed on May 31, 2000 and acquired
all the outstanding shares of the Bank. The financial statements presented below
are since inception.
FIRST SECURITY BANCORP, INC.
BALANCE SHEET
June 30, 2000
(in thousands)
ASSETS
Cash $ 48
Investment in subsidiary 9,085
-----------
$ 9,133
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Short-term borrowing $ 600
Shareholders' Equity
Common stock 4,901
Paid-in capital 4,901
Accumulated deficit (1,157)
Accumulated other comprehensive income (loss) (112)
-----------
Total shareholders' equity 8,533
-----------
$ 9,133
===========
FIRST SECURITY BANCORP, INC.
STATEMENT OF INCOME
May 31, 2000 (inception) to June 30, 2000
(in thousands)
Income
Dividend from subsidiary $ 189
Operating expenses
Professional fees 123
Other 18
-----------
141
Net income before undistributed earnings
of subsidiary 48
Distributions in excess of earnings of subsidiary (108)
----------
Net loss $ (60)
===========
FIRST SECURITY BANCORP, INC.
STATEMENT OF CASH FLOWS
May 31, 2000 (inception) to June 30, 2000
(in thousands)
Cash flows from operating activities
Net loss $ (60)
Adjustments to reconcile net (loss)
to net cash from operating activities
Distribution in excess of earnings of subsidiary 108
-----------
Net cash from operating activities 48
Cash flows from investing activities
Additional investment in subsidiary (600)
Cash flows from financing activities
Proceeds from issuance of short-term borrowing 600
-----------
Net change in cash and cash equivalents 48
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at end of period $ 48
===========
NOTE 19 - SUBSEQUENT EVENTS (UNAUDITED)
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 grants of 20,000 options (at market) to purchase Company
stock and severance of 125% of salary upon a change in control.
Additionally, on July 27, 2000, the Company granted 4,000 options (at
market) to purchase stock to an executive officer.
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.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification of corporate directors and officers is governed by
Sections 271B.8-500 through 271B.8-580 of the Kentucky Revised Statutes (the
"Act"). Under the Act, a person may be indemnified by a corporation against
judgments, fines, amounts paid in settlement and reasonable expenses (included
attorneys' fees) actually and necessarily incurred by him in connection with any
threatened or pending suit or proceeding or any appeal thereof (other than an
action by or in the right of the corporation), whether civil or criminal, by
reason of the fact that he is or was a director or officer of the corporation or
is or was serving at the request of the corporation as a director or officer,
employee or agent of another corporation of any type or kind, domestic or
foreign, if such director or officer acted in good faith for a purpose which he
reasonably believed to be in the best interest of the corporation and, in
criminal actions or proceedings only, in addition, had no reasonable cause to
believe that his conduct was unlawful. A Kentucky corporation may indemnify a
director or officer thereof in a suit by or in the right of the corporation
against amounts paid in settlement and reasonable expenses, including attorneys'
fees, actually and necessarily incurred as a result of such suit if such
director or officer acted in good faith for a purpose which he reasonably
believed to be in the best interests of the corporation.
Article VIII entitled INDEMNIFICATION, of the registrant's Bylaws
provides as follows:
ARTICLE VIII
Indemnification
8.1 Definitions. As used in this Article VIII:
-----------
a) "Proceeding" means any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, and
whether formal or informal;
(b) "Party" includes a person who was, is or is threatened to be made a named
defendant or respondent in a Proceeding;
(c) "Expenses" include attorneys' fees;
(d) "Officer" means any person serving as Chairman of the Board of Directors,
President, Vice-President, Treasurer, Secretary or any other officer of the
Corporation; and
(e) "Director" means an individual who is or was a director of the Corporation
or an individual who, while a director of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, limited liability company, registered limited liability
partnership, joint venture, association, trust, employee benefit plan or
other entity. A Director shall be considered serving an employee benefit
plan at the request of the Corporation if his duties to the Corporation
also impose duties on, or otherwise involve services by, him to the plan or
to participants in or beneficiaries of the plan. "Director" includes,
unless the context requires otherwise, the estate or personal
representative of a director.
8.2 Indemnification by Corporation.
(a) The Corporation shall indemnify any Officer or Director who is made a Party
to any Proceeding by reason of the fact that such person is or was an
Officer or Director if:
(1) Such Officer or Director conducted himself in good faith; and
(2) Such Officer or Director reasonably believed:
(i) In the case of conduct in his official capacity with the Corporation, that
his conduct was in the best interests of the Corporation; and
(ii) In all other cases, that his conduct was at least not opposed to the best
interests of the Corporation; and
(3) In the case of any criminal Proceeding, he had no reasonable cause to
believe his conduct was unlawful.
(b) A Director's conduct with respect to an employee benefit plan for a purpose
he reasonably believes to be in the interest of the participants in and
beneficiaries of the plan shall be conduct that satisfies the requirement
of Section 8.2 (a)(2)(ii) of these Bylaws.
(c) Indemnification shall be made against judgments, penalties, fines,
settlements and reasonable Expenses, including legal Expenses, actually
incurred by such Officer or Director in connection with the Proceeding,
except (1) if the Proceeding was by or in the right of the Corporation,
indemnification shall be made only against such reasonable Expenses and
shall not be made in respect of any Proceeding in which the Officer or
Director shall have been adjudged to be liable to the Corporation, and (2)
if the Proceeding charged improper personal benefit to the Officer or
Director and the Officer or Director was adjudged liable on the basis that
improper personal benefit was improperly received by him, indemnification
shall not be made. The termination of any Proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not, by itself, be determinative that the Officer or Director did not
meet the requisite standard of conduct set forth in this Section 8.2.
(d) (1) Reasonable Expenses incurred by an Officer or Director as a Party to a
Proceeding with respect to which indemnity is to be provided under this
Section 8.2 shall be paid or reimbursed by the Corporation in advance of
the final disposition of such Proceeding provided:
(i) The Corporation receives (I) a written affirmation by the Officer or
Director of his good faith belief that he has met the requisite standard of
conduct set forth in this Section 8.2, and (II) the Corporation receives a
written undertaking by or on behalf of the Officer or Director to repay
such amount if it shall ultimately be determined that he has not met such
standard of conduct; and
(ii) The Corporation's Board of Directors (or other appropriate decision maker
for the Corporation) determines that the facts then known to the Board of
Directors (or decision maker) would not preclude indemnification under
Kentucky law.
(2) The undertaking required herein shall be an unlimited general obligation of
the Officer or Director but shall not require any security and shall be
accepted without reference to the financial ability of the Officer or
Director to make repayment.
(3) Determinations and authorizations of payments under this Section 8.2(d)
shall be made in the manner specified in Section 8.2(e) of these Bylaws.
(e) (1) The Corporation shall not indemnify an Officer or Director under this
Section 8.2 unless authorized in the specific case after a determination
has been made that indemnification of the Officer or Director is
permissible in the circumstances because he has met the standard of conduct
set forth in this Section 8.2.
(2) Such determination shall be made:
(i) By the Corporation's Board of Directors by majority vote of a quorum
consisting of directors not at the time Parties to the Proceeding;
(ii) If a quorum cannot be obtained under Section 8.2(e)(2)(i) of these Bylaws,
by majority vote of a committee duly designated by the Corporation's Board
of Directors (in which designation directors who are Parties may
participate), consisting solely of two (2) or more directors not at the
time Parties to the Proceeding; or
(iii) By special legal counsel:
(I) Selected by the Corporation's Board of Directors or its committee in the
manner prescribed in Sections 8.2(e)(2)(i) and (ii) of these Bylaws; or
(II) If a quorum of the Board of Directors cannot be obtained under Section
8.2(e)(2)(i) of these Bylaws and a committee cannot be designated under
Section 8.2(e)(2)(ii) of these Bylaws, selected by a majority vote of the
full Board of Directors (in which selection directors who are Parties may
participate); or
(iv) By the shareholders, provided that shares owned by or voted under the
control of Directors who are at the time Parties to the Proceeding shall
not be voted on the determination.
(3) Authorization of indemnification and evaluation as to reasonableness of
Expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as
to reasonableness of Expenses shall be made by those entitled under Section
8.2(e)(2)(iii) of these Bylaws to select counsel.
8.3 Further Indemnification. Notwithstanding any limitation imposed by Section
8.2 of these Bylaws or elsewhere and in addition to the indemnification set
forth in Section 8.2 of these Bylaws, the Corporation, to the full extent
permitted by law, may agree by contract or otherwise to indemnify any
Officer or Director and hold him harmless against any judgments, penalties,
fines, settlements and reasonable Expenses actually incurred or reasonably
anticipated in connection with any Proceeding in which any Officer or
Director is a Party, provided the Officer or Director was made a Party to
such Proceeding by reason of the fact that he is or was an Officer or
Director of the Corporation or by reason of any inaction, nondisclosure,
action or statement made, taken or omitted by or on behalf of the Officer
or Director with respect to the Corporation or by or on behalf of the
Officer or Director in his capacity as an Officer or Director.
8.4 Insurance. The Corporation may, in the discretion of the Board of
Directors, purchase and maintain or cause to be purchased and maintained
insurance on behalf of all Officers and Directors against any liability
asserted against them or incurred by them in their capacity or arising out
of their status as an Officer or Director, to the extent such insurance is
reasonably available. Such insurance shall provide such coverage for the
Officers and Directors as the Board of Directors may deem appropriate.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses in connection with
the issuance and distribution of the securities being registered. Except for the
registration fee, all of the amounts shown are estimates.
--------------------------------------- ------------------------------------
Registration Fee $ 4,224.00
Blue Sky Fees and Expenses 21,515.00
NASD Filing Fee 2,600.00
Accounting Fees 20,000.00
Legal Fees 50,000.00
Printing 5,000.00
Miscellaneous Expenses 5,000.00
-----------
TOTAL $108,339.00
------------------------------------------ ---------------------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
No securities have been sold by the registrant within the past
three years without registering the securities under the Securities Act of 1933.
ITEM 27. EXHIBITS
The following exhibits are filed herein:
1* Sales Agency Agreement between First Security Bancorp,
Inc. and Winebrenner Capital Partners, LLC
3.1* Articles of Incorporation of First Security Bancorp, Inc.
3.2* Articles of Amendment to Articles of Incorporation of First
Security Bancorp, Inc
3.3* Bylaws of First Security Bancorp, Inc.
4.1* Articles of Incorporation of First Security Bancorp, Inc.
(included in Exhibit 3.1)
4.2* Articles of Amendment of Articles of Incorporation of First
Security Bancorp, Inc., (included in Exhibit 3.2)
5* Opinion of Stoll, Keenon & Park, LLP as to the validity of the
shares of First Security Bancorp, Inc. Common Stock being
registered
10.1* Employment Agreement between First Security Bancorp, Inc. and
John S. Shropshire
10.2* Contract for Electronic Data Processing Services between BSC, Inc.
and First Security Bank of Lexington, Inc.
10.3* Outsource Contract between BSC, Inc. and First Security Bank of
Lexington, Inc.
10.4* Business/Manager(R)License Agreement between Private Business, Inc.
and First Security Bank of Lexington, Inc.
10.5* Agreement for Administration of Credit Card Program between
Crittson Financial, LLC and First Security Bank of Lexington, Inc.
10.6* Lease 400 East Main Street between Isaac and Teresa C. Lawrence
and First Security Bank of Lexington, Inc.
10.7* Lease between THOMCO, Inc.and First Security Bank of Lexington,Inc.
10.8* Ground lease between Cherrywood Development, LLC and First
Security Bank of Lexington, Inc.
10.9* First Security Bank of Lexington, Inc. Stock Award Plan
10.10* Escrow Agreement between First Security Bancorp, Inc. and
Peoples Bank & Trust Company, Inc.
10.11* Subscription Agreement Offer
10.12* Real Estate Purchase Agreement Between National City Bank of
Kentucky and First Security Bank of Lexington
11* Statement re Computation of Per Share Earnings (included in Note 10
to the First Security Bancorp, Inc. Financial Statements
included in the within prospectus)
21* Subsidiaries of First Security Bancorp, Inc.
23.1 Consent of Crowe, Chizek and Company LLP
23.2* Consent of Stoll, Keenon & Park, LLP (included in Exhibit 5)
24* Power of attorney from officers and directors of First Security
Bancorp, Inc. (contained on the signature page at page II-8 hereof)
27* Financial Data Schedule for the six months ended June 30, 2000
----------------------------
* Previously filed
ITEM 28 UNDERTAKINGS
The undersigned small business issuer hereby undertakes as follows:
(1) The small business issuer will:
(a) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in information in the registration statement.
Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar
value of securities offered would not exceed that which
was registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(b) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
(c) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
(2) The small business issuer will supplement the prospectus, after the end
of the subscription period, to include the results of the subscription offer,
the transactions by the underwriters during the subscription period, and the
amount of unsubscribed securities that the underwriters will purchase and the
terms of any later reoffering. If the underwriters make any public offering of
the securities on terms different from those on the cover page of the
prospectus, the small business issuer will file a post-effective amendment to
state the terms of such offering.
(3) That for the purposes of determining any liability under the Securities
Act of 1933 (the "Act"), it will treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the small business issuer
pursuant to Rule 424 (b) (1) or (4) or 497 (h) under the Act as part of this
registration statement as of the time the Commission declared it effective.
(4) That for the purposes of determining any liability under the Act,
it will treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
(5) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provision, or otherwise, the small business issuer has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amendment to
registration statement to be signed on its behalf by the undersigned, in the
city of Lexington, Commonwealth of Kentucky, on September 27, 2000.
FIRST SECURITY BANCORP,INC.
/s/John S. Shropshire
By:_____________________________
John S. Shropshire
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Julian E. Beard Chairman of the Board of Directors September 27, 2000
Julian E. Beard
/s/John S. Shropshire Director; President
John S. Shropshire (Principal Executive Officer) September 27, 2000
Vice-President
------------------------ ---------
James R. Burkholder
/s/R. Greg Kessinger* Secretary/Treasurer; Director September 27, 2000
R. Greg Kessinger
/s/Len Aldridge* Director September 27, 2000
Len Aldridge
Director
------------------------ ---------
Dennis Anderson
Director
------------------------ ---------
John D. Barlow
/s/Harold Glenn Campbell* Director September 27, 2000
Harold Glenn Campbell
/s/William A. Combs, Jr.* Director September 27, 2000
William A. Combs, Jr.
/s/A.F. Dawahare* Director September 27, 2000
A. F. Dawahare
------------------------ Director ---------
Dr. Kenneth L. Gerson
/s/Tommy R. Hall* Director September 27, 2000
Tommy R. Hall
/s/Erle L. Levy* Director September 27, 2000
Erle L. Levy
-------------------- Director --------
David R. McCulloch
------------------ Director --------
Dr. Ira P. Mersack
/s/Fon Rogers, II* Director September 27, 2000
Fon Rogers, II
------------------ Director --------
/s/Dr.Ronald J. Saykaly* Director September 27, 2000
Dr, Ronald J. Saykaly
------------------ Director --------
Richard S. Trontz
------------------ Director --------
William T. Vennes
------------------ Director --------
Kathy E. Walker
/s/ D.Woodford Webb, Jr.* Director September 27, 2000
D.Woodford Webb, Jr.
/s/Ben New* Controller (Principal Financial and September 27, 2000
Ben New Accounting Officer)
*By:/s/John S. Shropshire
John S. Shropshire, Attorney-in-Fact
</TABLE>
