SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
_X_ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2002
___ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________
Commission File Number 000-49781
FIRST SECURITY BANCORP, INC.
(Name of Small Business Issuer in Its Charter)
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Kentucky 61-1364206
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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318 East Main Street, Lexington, Kentucky 40507
(Address, of Principal Executive Offices) (Zip Code)
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Issuer's Telephone Number, Including Area Code: (859)367-3700
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. _X_
State issuer's revenues for its most recent fiscal year: $15,235,000
State the aggregate market value of the voting stock held by
non-affiliates of the registrant on March 26, 2003: $13,748,894
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at March 26, 2003
- --------------------------- -----------------------------
Common Stock, no par value 1,470,722
Transitional Small Disclosure Format: Yes ___ No X
FIRST SECURITY BANCORP, INC.
Table of Contents
Part I
Item Page
1. Description of Business
General.................................................................3
Selected Consolidated Financial Data....................................3
2. Description of Property...................................................14
3. Legal Proceedings.........................................................15
4. Submission of Matters to a Vote of Security Holders.......................15
Part II
5. Market for Common Equity and Related Stockholder Matters..................15
6. Management's Discussion and Analysis or Plan of Operation.................16
7. Financial Statements
Report of Independent Auditors.........................................35
Consolidated Financial Statements......................................36
Notes on Consolidated Financial Statements.............................42
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................56
Part III
9. Directors and Executive Officers of the Registrant........................56
10. Executive Compensation...................................................59
11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..............................................61
12. Certain Relationships and Related Transactions...........................63
Part IV
13. Exhibits, Lists and Reports on Form 8-K63................................63
14. Controls and Procedures..................................................65
15. Principal Accountant Fees and Services...................................65
Signatures...................................................................65
Exhibit Index................................................................68
Part I
Item 1. Description of Business
General
Substantially all of First Security Bancorp's business activities consist
of its ownership of First Security Bank of Lexington, Inc. 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 19 commercial banks and thrift institutions
with offices located in Fayette County, Kentucky, which is the Bank's primary
market area. As of December 31, 2002, the Bank had total assets of $231 million
and total deposits of $189 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.
First Security Bank offers convenient banking hours with the main office
lobby open from 9:00 a.m. to 5:00 p.m., Monday through Thursday, from 9:00 a.m.
to 6:00 p.m. on Friday, and drive through service from 8:00 a.m. to 6:00 p.m.
Monday through Friday, and 9:00 a.m. to 12:00 p.m. on Saturday. The branch
office lobbies are open from 9:00 a.m. to 4:00 p.m., Monday through Thursday,
9:00 a.m. to 6:00 p.m. on Friday and 9:00 a.m. to 12:00 p.m. on Saturday. Branch
office drive-through windows are open from 8:00 a.m. to 6:00 p.m., Monday
through Friday and 9:00 a.m. to 12:00 p.m. on Saturday.
Selected Consolidated Financial Data
The following table sets forth First Security Bancorp's selected historical
financial information for 2000, 2001 and 2002. This information should be read
in conjunction with the Consolidated Financial Statements and the related Notes
found in Item 7 herein. Factors affecting the comparability of certain indicated
periods are discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
Years Ended December 31,
(dollars in thousands, except per share data)
2002 2001 2000
Income Statement Data:
Interest income $13,136 $ 12,107 $ 9,568
Interest expense 6,950 7,539 5,722
Net interest income 6,186 4,568 3,846
Provision for loan losses 1,472 447 425
Securities Gains 660 311 --
Gain on sale of loans 511 -- --
Loss on disposal of premises
and equipment (1) (95) --
Other non-interest income 929 437 209
Non-interest expense 5,442 3,684 2,777
Income tax expense 322 68
Net income 1,049 1,022 853
Balance Sheet Data
Total assets $231,086 $202,270 $134,459
Total securities 43,046 32,309 13,240
Loans held for sale 3,390 --- --
Allowance for loan losses 2,459 1,538 1,221
Total deposits 188,955 168,744 115,543
Repurchase agreements and other
short-term borrowings 8,211 12,957 1,393
FHLB advances 14,517 2,336 1,049
Total shareholders' equity 18,464 16,827 15,612
Basic earnings per share .72 .70 .81
Diluted earnings per share .69 .69 .79
Book Value 12.68 11.55 11.03
Performance ratios:
Return on average assets .47% .62% .74%
Return on average equity 5.86 6.06 8.63
Net interest margin 2.95 2.91 3.48
Efficiency ratio 66 71 69
Asset quality ratios:
Non-performing assets to
total loans 3.75% .52% .--%
Net loan charge-offs to
average loans .35% .10 .02
Allowance for loan losses to
total loans 1.46 1.01 1.14
Capital ratios:
Average shareholders' equity to
average total assets 8.05% 10.15% 8.66%
Leverage ratio 7.90 8.80 12.04
Tier 1 risk-based capital ratio
9.80 10.17 13.46
Total risk-based capital ratio
11.00 11.08 14.52
Other key data:
End-of-period full-time equivalent
employees 57 40 30
Number of bank offices 4 4 3
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 and Internet
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 participation where the requested loan amount exceeds the lending limits
imposed by law or by First Security Bank 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, Internet, mail, and by
personal appointment. First Security Bank has four ATMs at its branch facilities
and is a member of an ATM network which has ATMs at convenience stores and/or
service stations. First Security Bank also provides debit and credit card
services by contracting for such services and also offers safety deposit boxes,
night depository, direct deposits, Series EE 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, IRA accounts and certificate of deposit accounts.
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.
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, residential and commercial mortgage loans and
personal loans. 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 $5.4 million and $3.6 million, respectively.
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:
o
local or national economic recession;
o
disruption of a business management team through death,
removal or resignation;
o
disputes with suppliers or governmental regulators; and in
o
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 financing considered risky.
First Security Bank originates residential mortgage loans with either
fixed or variable interest rates. First Security Bank's general policy is to
place 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, First Security Bank thereby
generally takes a junior lien position on the subject residence.
On June 3, 2002, First Security Bank purchased certain assets of First
Mortgage Company, Inc. in an effort to expand its penetration of the Central
Kentucky residential mortgage loan market. This acquisition has enhanced the
Bank's products and service offerings and benefited its customers. The mortgage
products and services, now offered through the Bank as First Security Mortgage
Company, will be a new source of noninterest income.
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:
o
financial instability resulting from the loss of a job;
o
illness;
o
bankruptcy;
o
divorce;
o
local or national economic recession; and
o
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 based on such criteria as 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. 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 address 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:
o
granting loans on a sound and collectible basis;
o
investing First Security Bank funds profitably for the
benefit of shareholders and securely for the benefit of
depositors; and
o
serving the credit needs of the Lexington-Fayette County
market.
Such policies provide that:
o individual officers of First Security Bank have personal
lending authority within varied ranges;
o
credits in excess of an officer's lending authority but not in
excess of $500,000 require the approval of First Security
Bank's Chief Executive Officer or the chief Credit Officer;
and
o
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:
o
raw land (65%);
o
improved residential real estate lots (80%);
o
commercial real estate (80%); and
o
residences (90%).
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. Loans made in
excess of established supervisory ratios are periodically reported to the Board
of Directors.
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 three or
five-year fixed rate residential mortgage loans, First Security Bank places in
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 $2.5 million on an unsecured basis or $4.0 million on
a secured basis. 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:
o
personal guarantees;
o
environmental policy review;
o
loans to employees, executive officers and directors;
o
problem loan identification;
o
maintenance of a loan loss reserve; and
o
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
the 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. First Security Bank's 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 investment policy guidelines governing
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. Investment in real estate,
including furniture and fixtures, is also permitted as it is necessary for the
convenient transaction of the bank's business. Real estate investments are
subject to regulatory limitations.
Financial Planning. First Security Bank has made arrangements to offer
financial planning, investment and insurance services through a subsidiary under
the name First Security Capital Management. First Security Capital Management
will offer these services with the support of Consulting Services Support
Corporation. 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
eleven months. The fees under the BSC contract are currently $10,000 per month.
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 and
maintain 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
participation 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 sixty-two (62)
employees, including eleven (11) part-time employees. The current staffing is
categorized as follows:
Management
Chairman, President and Chief
Executive Officer; Executive
Vice-President and Chief Credit
Officer; First Vice-President and
Chief Financial Officer*; Human
Resources Officer; Assistant
Vice-President and Assistant
Controller*; Vice-President and
Retail Sales Manager; Internal
Auditor; Executive Assistant
Retail Operations
Four Branch Managers;
Twenty-Five Tellers/New Accounts Staff;
One Marketing-Business Dev't
Representative; Information Systems Analyst;
Four Operations Officers-Accounting Clerks
Lending
Consumer/Installment/Mortgage Lender
Two Commercial Lenders
New Business Development Officer
Senior Loan Administrator
Six Loan Support Employees
Mortgage Banking
President; Two Loan Originators;
7 Loan Support Employees
*These two members of Management left during the first quarter 2003.
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 (as well
as federal savings 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 the judgment of many, a decline in the level of
personalized customer service. With recent changes in interstate banking
regulations, this type of consolidation is expected to continue.
Currently, there are 15 commercial banks operating 86 offices in
Fayette County as well as 4 federal savings banks operating five 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 commercial banks with offices in
Fayette County, and the deposits (in millions) attributable to such offices, as
of June 30, 2002:
June 30, 2002 Deposits Number of Offices
Institution
Bank of the Bluegrass and Trust Company $ 103 1
Bank One, Kentucky, N.A. 1,045 14
Central Bank & Trust Co. 650 12
Fifth Third Bank, Kentucky, Inc. 519 9
First Southern National Bank 26 1
National City Bank of Kentucky 366 13
Community Trust Bank, N.A. 49 4
PNC Bank of Kentucky 106 4
Republic Bank and Trust Co. 132 4
Vine Street Trust Co. 78 3
Whitaker Bank, N.A. 95 7
Traditional Bank of Kentucky, Inc. 84 2
Firstar Bank, N.A. 112 6
First Security Bank 190 4
Integra Bank, N.A. 11 2
$3,566 86
Market Area
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.
Lexington is the center of a seven-county metropolitan area that has
experienced rapid growth over the past 15 years. Based upon the most recent
information from the U.S. Bureau of Census, the population of Lexington and
surrounding Fayette County grew by 15.6% to 261,000 in the 1990's. The state
population grew by 9.79% to 4.0 million residents. Unemployment levels in the
Lexington Metropolitan Statistical Area (MSA) and Fayette County have remained
historically low. November 2002 unemployment rates were 3.2% for the Lexington
MSA and 2.9% for Fayette County, compared to 5.3% for the Commonwealth of
Kentucky. The U.S. Census Bureau places Fayette County mean household income at
$39,800 versus $33,700 for the Commonwealth of Kentucky.
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 counties
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 3.2%) 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 10,658
Toyota Motor Mfg. USA 7,900
Fayette Co. Public Schools 4,906
Lexmark International 4,000
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
Johnson Controls 1,500
The Trane Co. 1,500
OSRAM Sylvania 1,355
Dillards 1,350
Veterans Medical Center 1,300
Regulation and Supervision
As a bank holding company, First Security Bancorp is regulated under
the Bank Holding Company Act of 1956, as amended (the "Act"). The Act limits the
business of bank holding companies to banking, managing or controlling banks and
other subsidiaries authorized under the Act, performing certain servicing
activities for subsidiaries and engaging in such other activities as the Board
of Governors of the Federal Reserve System ("Federal Reserve Board") may
determine to be closely related to banking. First Security Bancorp is registered
with and is subject to regulation by the Federal Reserve Board. Among other
things, applicable statutes and regulations require First Security Bancorp to
file an annual report and such additional information as the Federal Reserve
Board may require pursuant to the Act and the regulations which implement the
Act. The Federal Reserve Board also conducts examinations of First Security
Bancorp.
The Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve Board to acquire more than 5 percent of the
voting stock or substantially all the assets of any bank or bank holding
company. First Security Bancorp currently has no formal agreement or commitments
for any such transaction. However, First Security Bancorp evaluates
opportunities to invest in or acquire other banks or bank holding companies as
they arise and may engage in these transactions in the future. The Act also
provides that, with certain exceptions, a bank holding company may not (i)
engage in any activities other than those of banking or managing or controlling
banks and other authorized subsidiaries, or (ii) own or control more than 5
percent of the voting shares of any company that is not a bank, including any
foreign company.
A bank holding company is permitted, however, to acquire 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. The Federal Reserve Board's regulations state specific
activities that are permissible under that exception. First Security Bancorp
does not currently have any agreements or commitments to engage in any
nonbanking activities apart from investment advisory services.
In approving acquisitions by bank holding companies of banks and
companies engaged in banking-related activities, the Federal Reserve Board
considers whether any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, that outweigh any
possible adverse effects such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices. The
Federal Reserve Board has cease-and-desist powers over parent holding companies
and nonbanking subsidiaries if their actions constitute a serious threat to the
safety, soundness, or stability of a subsidiary bank.
A bank holding company may also acquire shares of a company which
furnishes or performs services for a bank holding company and acquire shares of
the kinds and in the amounts eligible for investment by national banking
associations. In addition, the Federal Reserve Act restricts First Security
Bank's extension of credit to First Security Bancorp.
On November 12, 1999, Congress enacted the Gramm-Leach-Bliley Act
(previously known as the Financial Services Modernization Act of 1999). The
Gramm-Leach-Bliley Act permits bank holding companies to qualify as "financial
holding companies" that may engage in a broad range of financial activities,
including underwriting, dealing in and making a market in securities; insurance
underwriting and agency activities; and merchant banking. The Federal Reserve
Board is authorized to expand the list of permissible financial activities. The
Gramm-Leach-Bliley Act also authorizes banks to engage through financial
subsidiaries in nearly all of the activities permitted for financial holding
companies. First Security Bancorp has not elected the status of financial
holding company.
The Gramm-Leach-Bliley Act also imposes significant new financial
obligations and reporting requirements on banks as well as on other financial
institutions. Among other things, financial institutions are required to (a)
establish privacy policies and disclose them to customers both at the time of
establishing the customer relationship and on an annual basis, and (b) permit
customers to opt out of the financial institution's disclosure of customer
nonpublic personal information to third parties that are not affiliated with the
financial institution.
As a state chartered commercial bank, First Security Bank is subject to
examination, supervision and extensive regulation by the FDIC and the Kentucky
Department of Financial Institutions (the "DFI"). First Security Bank is a
member of and owns stock in the Federal Home Loan Bank ("FHLB") of Cincinnati.
The FHLB institution located in Cincinnati is one of the twelve regional banks
in the FHLB system. First Security Bank is also subject to regulation by the
Federal Reserve Board, which governs reserves to be maintained against deposits
and regulates certain other matters. The extensive system of banking laws and
regulations to which First Security Bancorp is subject is intended primarily for
the protection of their customers and depositors, and not First Security Bancorp
shareholders.
The FDIC and the DFI s regularly examine First Security Bank and
prepare a report for the consideration of the First Security Bank's Board of
Directors on any deficiencies that it may find in its operations. The
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters as the form
and content of First Security Bank's mortgage documents and communication of
loan and deposit rates to both existing and prospective customers.
The FDIC has extensive authority over the operations of all insured
commercial banks. As part of this authority, First Security Bank is required to
file periodic reports with the FDIC and the DFI and is subject to periodic
examinations by both agencies. In the course of these examinations, the
examiners may require First Security Bank to provide for higher general loan
loss reserves. Financial institutions in various regions of the United States
have been called upon by examiners to write down assets to their fair market
values and to establish increased levels of reserves, primarily as a result of
perceived weaknesses in real estate values and a more restrictive regulatory
climate.
The investment and lending authority of a state-chartered bank is
prescribed by federal laws and regulations, and such banks are prohibited from
engaging in any activities not permitted by such laws and regulations. These
laws and regulations generally are applicable to all state chartered banks.
Federal Regulations
Sections 22(h) and (g) of the Federal Reserve Act place restrictions on
loans to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a bank, and certain affiliated interests of either, may not
exceed, together with all other outstanding loans to such person and affiliated
interests, the institution's loans to one borrower limit (20% of First Security
Bank's unimpaired capital and surplus). Section 22(h) also requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit to all insiders cannot exceed the
institution's unimpaired capital and surplus. At December 31, 2002 First
Security Bank was in compliance with the above restrictions.
Safety and Soundness.
The Federal Deposit Insurance Act (" FDIA"), as amended by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle
Community Development and Regulatory Improvement Act of 1994, requires the
federal bank regulatory agencies to prescribe standards, by regulations or
guidelines, relating to the internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest-rate-risk
exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits and such other operational and managerial
standards as the agencies may deem appropriate. The federal bank regulatory
agencies adopted, effective August 9, 1995, a set of guidelines prescribing
safety and soundness standards pursuant to FDICIA, as amended. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines.
If an insured depository institution or its holding company fails to
meet any of the standards promulgated by regulation, then such institution or
company will be required to submit a plan within 30 days to the FDIC specifying
the steps it will take to correct the deficiency. In the event that an
institution or company fails to submit or fails in any material respect to
implement a compliance plan within the time allowed by the agency, Section 39 of
the FDIA provides that the FDIC must order the institution or company to correct
the deficiency and may (1) restrict asset growth; (2) require the institution or
company to increase its ratio of tangible equity to assets; (3) restrict the
rates of interest that the institution or company may pay; or (4) take any other
action that would better carry out the purpose of prompt corrective actions.
The FDIC generally is authorized to take enforcement action against a
financial institution that fails to meet its capital requirements; such action
may include restrictions on operations and banking activities, the imposition of
a capital directive, a cease and desist order, civil money penalties or harsher
measures such as the appointment of a receiver or conservator or a forced merger
into another institution. In addition, under current regulatory policy, an
institution that fails to meet its capital requirements is prohibited from
paying any dividends. Except under certain circumstances, further disclosure of
final enforcement action by the FDIC is required.
Under Section 38 of the FDIA, as amended by the FDICIA, each federal
banking agency was required to implement a system of prompt corrective action
for institutions which it regulates. The federal banking agencies, including the
FDIC, adopted substantially similar regulations to implement Section 38 of the
FDIA, effective as of December 19, 1992. Under the regulations, an institution
is deemed to be (i) "well-capitalized" if it has total risk-based capital of
10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier
1 leverage capital ratio of 5.0% or more and is not subject to any order or
final capital directive to meet and maintain a specific capital level for any
capital measure, (ii) "adequately-capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more
and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% ( 3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier II average capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were
in the next lower category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized). At
December 31, 2002, First Security Bancorp and First Security Bank were deemed
well-capitalized for purposes of the above regulations.
Federal Home Loan Bank System.
First Security Bank is a member of the FHLB of Cincinnati. The FHLB of
Cincinnati is one of the 12 regional FHLB's that, prior to the enactment of
FIRREA, were regulated by the Federal Home Loan Bank Board (FHLBB). FIRREA
separated the home financing credit function of the FHLB's from the regulatory
functions of the FHLB's regarding savings institutions and their insured
deposits by transferring oversight over the FHLB's from the FHLBB to a new
federal agency, the Federal Home Financing Board ("FHFB").
As a member of the FHLB Banking system, First Security Bank is required to
purchase and maintain stock in the FHLB in an amount equal to the greater of one
percent of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year, or 1/20 (or such
greater fraction as established by the FHLB) of outstanding FHLB advances. At
December 31, 2002, First Security Bank had $742,000 in FHLB stock which was in
compliance with this requirement. In past years, First Security Bank has
received dividends on its FHLB stock.
Certain provisions of FIRREA require all 12 FHLB's to provide financial
assistance for the resolution of troubled savings institutions and to contribute
to affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low-and moderate-income housing
projects. These contributions could cause rates on the FHLB advances to increase
and could affect adversely the level of FHLB dividends paid and the value of
FHLB stock in the future.
Each FHLB serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. At December 31, 2002, First Security Bank had $14.5
million in advances from the FHLB.
Accounting.
An FDIC policy statement applicable to all banks clarifies and
re-emphasizes that the investment activities of a bank must be in compliance
with approved and documented investment policies and strategies, and must be
accounted for in accordance with accounting principles generally accepted in the
United States of America. Under the policy statement, management must support
its classification of and accounting for loans and securities (i.e., whether
held to maturity, available for sale or available for trading) with appropriate
documentation. First Security Bank is in compliance with these amended rules.
Insurance of Accounts.
First Security Bank's deposits are insured up to $100,000 per insured
member (as defined by law and regulation). Deposits of First Security Bank are
insured by the Bank Insurance Fund ("BIF"). This insurance is backed by the full
faith and credit of the United States Government. The BIF is administered and
managed by the FDIC. As insurer, the FDIC is authorized to conduct examinations
of and to require reporting by BIF insured institutions. It also may prohibit
any insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to either fund. The FDIC also has
the authority to initiate enforcement actions against financial institutions.
The annual assessment for deposit insurance is based on a risk-related premium
system. Each insured institution is assigned to one of three capital groups:
well capitalized, adequately capitalized or under capitalized. Within each
capital group, institutions are assigned to one of three subgroups (A, B, or C)
on the basis of supervisory evaluations by the institution's primary federal
supervisor and if applicable, state supervisor. Assignment to one of the three
capital groups, coupled with assignment to one of three supervisory subgroups,
will determine which of the nine risk classifications is appropriate for an
institution. Institutions are assessed insurance rates based on their assigned
risk classifications. The well capitalized, subgroup "A" category institutions
are assessed the lowest insurance rate, while institutions assigned to the under
capitalized subgroup "C" category are assessed the highest insurance rate. As of
December 31, 2002 First Security Bank was assigned to the well-capitalized,
subgroup "A" category and paid an annual insurance rate of 1.7 cents per $100 of
deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
order or any condition imposed by an agreement with the FDIC. The FDIC also may
suspend deposit insurance temporarily for any financial institution during the
hearing process for the permanent termination of insurance, if First Security
Bank has no tangible capital. If insurance of accounts is terminated, the
insured accounts at the institution at the time of the termination, less
subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC.
The FDIC has passed regulations, under the FDIA, that generally
prohibit payments to directors, officers and employees contingent upon
termination of their affiliation with an FDIC-insured institution or its holding
company (i.e., "golden parachute payments") if the payment is received after or
in contemplation of, among other things, insolvency, a determination that the
institution or holding company is in "troubled condition", or the assignment of
a composite examination rating of "4" or "5" for the institution. Certain types
of employee benefit plans are not subject to the prohibition. The regulations,
which are not currently applicable to First Security Bancorp, would also
generally prohibit certain indemnification payments regarding any administrative
proceeding instituted against a person that results in a final order pursuant to
which the person is assessed civil money penalties or subjected to other
enforcement action. The Company has no such agreements with any directors or
employees.
The Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
and non-personal time deposits. Cash on hand or on deposit with the Federal
Reserve Bank of $2.1 million and $1.2 million was required to meet regulatory
reserve and clearing requirements at year-end 2002 and 2001. These balances do
not earn interest.
Banks are authorized to borrow from the Federal Reserve Bank "discount
window," but Federal Reserve Board regulations require banks to exhaust other
reasonable alternative sources of funds, including FHLB advances, before
borrowing from the Federal Reserve Bank.
Federal Taxation.
For federal income tax purposes, First Security Bancorp and its
subsidiaries file a consolidated federal income tax return on a calendar year
basis. Consolidated returns have the effect of eliminating intercompany
distributions, including dividends, from the computation of consolidated taxable
income for the taxable year in which the distributions occur.
The Company and its subsidiaries are subject to the rules of federal
income taxation generally applicable to corporations under the Internal Revenue
Code of 1986, as amended (the "Code").
First Security Bancorp is subject to the corporate alternative minimum
tax which is imposed to the extent it exceeds First Security Bancorp's regular
income tax for the year. The alternative minimum tax will be imposed at the rate
of 20 percent of a specially computed tax base. Included in this base will be a
number of preference items, including the following: (i) 100 percent of the
excess of a financial institution's bad debt deduction over the amount that
would have been allowable on the basis of actual experience; (ii) interest on
certain tax-exempt bonds issued after August 7, 1986; and (iii) for years
beginning in 1988 and 1989 an amount equal to one-half of the amount by which a
institution's "book income" (as specially defined) exceeds its taxable income
with certain adjustments, including the addition of preference items (for
taxable years commencing after 1989 this adjustment item is replaced with a new
preference item relating to "adjusted current earnings" as specially computed).
In addition, for purposes of the new alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses is
limited to 90 percent of alternative minimum taxable income.
First Security Bancorp has not been audited by the Internal Revenue Service.
Item 2. Description of Property
In September, 2001, First Security moved its downtown offices to
318-320 East Main Street. The new main office facility was purchased in December
2000 at an initial cost of $3.5 million, and an additional investment of $1.2
million was incurred for capital improvements. The new location offers
drive-through service and an ATM, not found in the former main office facility.
The building features innovative interior design and technological advancements.
First Security Bank has three branch offices located at 2100 Southview
Drive, 3616 Walden Drive, and 3750 Palomar Centre Drive, all in Lexington. The
Southview Drive and Palomar Centre Drive facilities have been leased, as is the
land for the other two branch locations.
First Security Bank's Southview Drive branch office was leased for an
initial term of five years (beginning November 1, 1997). In November 2002 First
Security Bank exercised an option to extend said lease an additional five years.
First Security Bank has the option to extend said lease for two additional terms
of five years each. During the initial term of this lease, First Security Bank
was obligated to make annual rental payments of $46,000. Beginning in November
2002 the annual rental payments increased to $51,000. This rental obligation
would increase in any lease extension period based upon increases in the
consumer price index.
The Walden Drive branch office is located 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 $109,515 in the
last of the lease extension periods.
The Palomar Centre Drive office is leased for an initial term of twenty
years, with First Security Bank holding an option to extend the lease for one
additional term of twenty years. Under this lease First Security will pay annual
rents of $67,200 during the initial twenty one month period, with bi-annual
adjustments of $2,400 until the end of the lease.
Item 3. Legal Proceedings
In the opinion of management, there is no proceeding pending or, to the
knowledge of management, threatened, in which an adverse decision could result
in a material adverse change in the consolidated financial condition or results
of operations of First Security Bancorp. To the knowledge of management, no
proceedings have been or are contemplated by or against any governmental
authority in connection with First Security Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2002.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The common shares of First Security Bancorp trade on the Over-the-counter
Bulleton Board quotation service under under the symbol "FSLK". Trading volume
in common stock is considered light and the stock is thinly traded. As of
December 31, 2002, there were 1,456,250 shares of common stock outstanding and
beneficially held by approximately 530 shareholders.
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 during the past two years:
Per Share No of Shares Traded
During Period
High Low
2001 1st Quarter 17.00 14.00 14,300
2nd Quarter 16.50 14.25 1900
3rd Quarter 17.00 15.00 8,100
4th Quarter 16.00 15.00 9,100
2002 1st Quarter 16.25 16.00 6,700
2nd Quarter 23.00 16.00 2,900
3rd Quarter 23.00 20.25 12,300
4th Quarter 23.00 20.55 46,100
These price quotations are derived from data furnished by the National
Association of Securities Dealers and, accordingly, the accuracy or reliability
of such price quotations cannot be guaranteed. Some trades may occur which are
not reported by the NASD. Since there is no established public trading market
for First Security Bancorp, inc. stock, there can be no assurance that the price
information set forth above is representative of prices which could be obtained
from sales of First Security Bancorp common stock in established open market
transactions.
Item 6. Management's Discussion and Analysis or Plan of Operation
Management's Discussion and Analysis OF FINANCIAL
CONDITION or Plan of Operation
This discussion includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, that involve inherent
risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing in
geographic and business areas in which First Security Bancorp operates,
prevailing interest rates, changes in government regulations and policies
affecting financial service companies, credit quality and credit risk
management, changes in the banking industry including the effects of
consolidation resulting from possible mergers of financial institutions,
acquisitions and integration of acquired businesses. First Security Bancorp
undertakes no obligation to release revisions to these forward-looking
statements or reflect events or circumstances after the date of this report.
The data presented in the following pages should be read in conjunction
with the audited Consolidated Financial Statements on pages 34 to 62 of this
Annual Report on Form 10-K.
Overview
The mission of First Security Bank is to firmly establish itself in
Lexington, Kentucky as a full-service bank providing traditional products and
services typically offered by commercial banks. The Lexington banking market is
highly competitive with 19 commercial banks and thrift institutions currently
serving the market. Most of the banks in Lexington are part of larger bank
holding companies headquartered outside of the Lexington/Fayette County market
and Kentucky. Promoting local management has proven effective for First Security
Bank in attracting customers, fostering loyalty and establishing and maintaining
strong asset quality.
Results of Operations
The operating results of First Security Bancorp 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. Net income is also
affected by the amount of the provision for loan loss and other income and
operating expenses.
Net income for 2002 increased to $1,049,000 as compared to $1,022,000
for the year ended 2001. Return on Average Equity was 5.86% for 2002 versus
6.06% for 2001. Return on Average Assets was .47% versus .62% for the same
periods, respectively. Earning assets increased from $188.1 million as of
December 31, 2001 to $216.2 million as of December 31, 2002. Funding the earning
asset growth were deposit increases of $20.2 million, from $168.7 million as of
December 31, 2001 to $188.9 million as of December 31, 2002, and increases in
advances from the FHLB of $12.2 million from $2.3 million to $14.5 million, for
the same period, respectively. First Security Bancorp's provisions for federal
income taxes increased $254,000, from $68,000 in 2001 to $322,000 in 2002.
In December, 2000 First Security Bank purchased a former banking
facility at 318-320 East Main Street in downtown Lexington for $3.5 million to
replace its main office. First Security Bank moved its downtown offices to the
new facility in September, 2001. The new location features drive-through
windows, an ATM and innovative interior design features. A total of $1.2 million
was invested on the new facility in addition to its purchase price. A fourth
location was also opened during the fourth quarter of 2001. A building was
purchased and was opened for this purpose at a total cost of $906,000. The land
for this facility will be leased for $5,600 per month. Growth in net income and
book value per share will be negatively impacted until the growth in earnings
resulting from these new locations covers the additional costs. First Security
Bancorp believes however, that the potential longer term benefits, including
prospects for new loan and deposit growth, outweigh the potential near term
costs.
On June 3, 2002, First Security Bank purchased certain assets of First
Mortgage Company, Inc. in an effort to expand its penetration of the Central
Kentucky residential mortgage loan market. The operations were assumed by First
Security Bank and are promoted and conducted as a division of First Security
Bank under the name "First Security Mortgage Company", the purpose of which is
to originate mortgage loans for sale into the secondary market. The acquisition
agreement included a purchase price of up to $476,000, $69,000 of which was paid
at closing. The remainder of the purchase price is payable contingent upon the
division's earnings over the next four years. The acquisition also included a
four-year employment agreement with First Security Mortgage's shareholder and
president at a salary level similar to that of other executives of First
Security Bank. This acquisition has enhanced First Security Bank's products and
service offerings and benefited its customers. The acquisition is a new source
of non-interest income for First Security Bank.
Net Interest Income
First Security Bancorp's principal source of revenue is net interest
income. Net interest income is the difference between interest income on
interest-earning assets, such as loans and securities, and the interest expense
on liabilities used to fund those assets, such as interest-bearing deposits and
borrowings. Net interest income is impacted by both changes in the amount and
composition of interest-earning assets and interest-bearing liabilities as well
as market interest rates.
The change in net interest income is typically measured by changes in
net interest spread and net interest margin. Net interest spread is the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities. Net interest margin is determined by
dividing net interest income by interest-earning assets.
Net interest income increased from $4.6 million in 2001 to $6.2 million
in 2002. The net interest spread increased from 2.30% to 2.55%, and the net
interest margin increased from 2.91% to 2.95%, from 2001 to 2002. The increase
in net interest income primarily was a result of a decline in the cost of
funding deposits and to a lesser extent, increases in the volume of
interest-earning assets more than in the volume of interest-bearing liabilities.
The increase in net interest margin was caused by the repricing of rate
sensitive liabilities (precipitated by the decline in the general level of
interest rates) at a faster rate than rate sensitive assets which had already
repriced. In order to improve net interest margin, First Security Bank deployed
available funding by investing in mortgage-backed securities and federally
tax-exempt bonds. In addition, First Security Bank adjusted its loan pricing
strategies and implemented features such as interest rate floors.
The following table provides detailed information about average
balances, interest income/expense, and rates by major balance sheet category:
AVERAGE BALANCE SHEETS AND RATES
Years ended December 31
(dollars in thousands)
2002 2001 2000
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest-earning assets:
Securities (1) $ 46,506 $ 2,002 4.30 % $ 21,950 $ 1,256 5.72 % $ 6,918 $ 432 6.24 %
Loans (2)
Commercial 45,692 2,692 5.89 35,058 2,751 7.85 29,532 2,752 9.32
Real estate commercial 79,121 5,802 7.33 66,543 5,440 8.18 45,429 3,964 8.73
Real estate residential (3) 22,286 1,630 7.31 15,846 1,465 9.25 9,938 907 9.13
Consumer 14,415 978 6.78 11,743 962 8.19 9,694 939 9.69
TOTAL $161,514 $ 11,102 6.87 $129,190 $10,618 8.22 $ 94,593 $ 8,562 9.05
Federal funds sold 1,748 32 1.83 5,598 233 4.16 8,946 574 6.42
Total interest-earning
assets 209,768 13,136 6.26 156,738 12,107 7.72 110,457 9,568 8.66
Allowance for loan losses (1,678) (1,401) (1,014)
Noninterest-earning assets:
Premises and equipment 7,905 6,151 1,304
Cash and due from banks 4,301 3,129 2,512
Interest receivable and
other assets 2,109 1,352 847
Total Assets $222,405 $165,969 $114,106
2002 2001 2000
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits
Interest-bearing demand
deposits $ 20,926 $ 282 1.35 % $ 15,107 $ 409 2.71 % $ 16,217 $ 721 4.45 %
Savings deposits 21,455 412 1.92 14,805 528 3.57 9,754 507 5.20
Time deposits 125,897 5,718 4.54 101,141 6,313 6.24 69,650 4,407 6.33
Total interest-bearing
deposits 168,278 6,412 3.81 131,053 7,250 5.53 95,621 5,635 5.89
Short-term borrowings 9,180 138 1.50 6,860 209 3.05 1,190 78 6.55
FHLB advances 10,060 400 3.98 1,182 80 6.77 134 9 6.71
Total interest-bearing
liabilities 187,518 6,950 3.71 139,095 7,539 5.42 96,945 5,722 5.90
Noninterest-bearing liabilities:
Noninterest-bearing
demand deposits 15,930 8,997 6,615
Interest payable and other
liabilities 1,053 1,026 661
Stockholders' equity 17,904 16,851 9,885
Total Liabilities and
Stockholders' Equity $222,405 $165,969 $114,106
Net interest income and
interest rate spread $ 6,186 2.55 % $ 4,568 2.30 % $ 3,846 2.76 %
Net interest rate margin 2.95 % 2.91 % 3.48 %
(1) State and municipal securities are not shown on a tax-equivalent basis.
(2) Non-accrual loans (if any) are included in average loan balances and loan
fees received are included in interest income.
Loan fees were $816,000, $615,000 and $428,000 in 2002, 2001 and 2000,
respectively.
(3) Includes loans held for sale.
The following table depicts the dollar effect of volume and rate changes on
First Security Bancorp from December 31, 2001 to December 31, 2002. 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
Increase (Decrease) Due to
(in thousands)
2002
2002 Compared to 2001 2001 Compared to 2000
December 31, Volume Rate Total Volume Rate Total
Interest income
Securities $ 1,120 $ (374) $ 746 $ 863 $ (39) $ 824
Loans (1) 2,394 (1,910) 484 2,901 (845) 2,056
Federal funds sold (111) (90) (201) (176) (165) (341)
Total interest income 3,403 (2,374) 1,029 3,588 (1,049) 2,539
Interest expense
Interest-bearing demand deposits 123 (250) (127) (46) (266) (312)
Savings deposits 183 (299) (116) 211 (190) 21
Time deposits 1,346 (1,941) (595) 1,966 (60) 1,906
Short-term borrowings 56 (127) (71) 193 (62) 131
FHLB advances 366 (46) 320 71 --- 71
Total interest expense 2,074 (2,663) (589) 2,395 (578) 1,817
Net interest income $ 1,329 $ 289 $ 1,618 $ 1,193 $ (471) $ 722
(1) Includes loans held for sale
Non-interest Income and Expense
Non-interest income increased $1.4 million from $653,000 in 2001 to $2.1
million in 2002. Components of non-interest income include service charges and
fees on deposit accounts, securities gains, gains and losses on the sale of
loans and other fees. The primary increases in non-interest income were the
result of service charges and fees on deposit accounts, gains on the sales of
securities and gains on the sale of loans. Service charges and fees on deposits
increased $504,000 from $284,000 for the year ending 2001 to $788,000 for the
year ending December 31, 2002. The increase in fees resulted from the
introduction of a new checking product and growth in time deposit accounts.
Gains on the sale of securities were $660,000 for the year ended December 31,
2002, up from $311,000 in 2001. Securities gains were taken on investments sold,
with the proceeds subsequently reinvested. Securities gains were incurred as a
result of the repositioning of the investment portfolio effected in order to
reduce interest rate risk and for tax planning. Gains of this nature are
infrequent and irregular in amount, and are not anticipated to regularly
increase earnings in significant amounts going forward. Gains on the sale of
loans were $511,000 for the year ended December 31, 2002. This is a new source
of revenue for First Security Bank, resulting from the acquisition and continued
operations of First Mortgage Company, Inc. Management anticipates that this
revenue source will grow going forward, fluctuating with cycles experienced in
the secondary mortgage market caused by changes in interest rates.
Total non-interest expense increased $1.7 million from $3.7 million in 2001
to $5.4 million in 2002. The primary causes of the increase in non-interest
expense were increases in salaries and benefits and occupancy and equipment
costs.
Salaries and benefits were $1.9 million in 2001, increasing $800,000 to
$2.7 million in 2002. The number of full-time equivalent employees increased
from 40 at December 31, 2001 to 57 at December 31, 2002. Staffing levels
increased as a result of the continued expansion of customer services of First
Security Bank and the acquisition of First Mortgage Company, Inc.
Occupancy and equipment expenses (net of rental income of $52,000 in 2002
and $105,000 in 2001) increased $391,000 to $953,000 in 2002 from $562,000 in
2001. The increase resulted primarily from operating costs associated with First
Security Bank's fourth branch office (opened in the fourth quarter of 2001), the
new main office facility and costs associated with the acquisitions and
operations of First Mortgage Company, Inc.
Advertising expense increased by $5,000 from $162,000 in 2001 to $167,000
in 2002. Additional advertising expense was incurred in connection with the
opening of the fourth branch office and the acquisition and operations of First
Mortgage Company, Inc. Data processing expenses increased $18,000 from $197,000
in 2001 to $215,000 in 2002. The increased data processing expenses resulted
primarily from increases in deposit and loan volume, and the introduction of new
products and services. Professional fees increased $66,000 from $151,000 in 2001
to $217,000 in 2002. The primary reason for the increase were professional fees
incurred in connection with the acquisition of First Mortgage Company, Inc.
In the third quarter of 2001, First Security Bancorp began recording
federal income tax expense, which for the year ended December 31, 2002 was
$322,000. Income tax expense was not previously recorded due to both historical
losses and concern about First Security Bancorp's ability to utilize certain
deferred tax assets. Going forward, income tax expense will continue to be
recorded at approximately 34% of taxable pre-tax income. See Note 9 to the
Consolidated Financial Statements found under Item 7 herein.
Financial Condition
Total assets increased 14.2% from $202.3 million at December 31, 2001 to
$231.1 million at December 31, 2002. The increase is primarily a result of a
9.3% increase in net loans from $150.9 million to $165.0 million and a 33%
increase in securities available for sale from $32.3 million to $43.0 million.
The growth in assets was funded by a 12.0% growth in deposits from $168.7
million at December 31, 2001 to $189.0 million at December 31, 2002.
Additionally, the asset growth was funded through an increase in advances from
the FHLB, which increased from $2.3 million at December 31, 2001 to $14.5
million at December 31, 2002.
Loans
Net loans increased $14.1 million or 9.3% from December 31, 2001 to
December 31, 2002. The majority of the increase in 2002 was in commercial loans,
commercial real estate loans and construction loans. As of December 31, 2002 and
2001, approximately 79% of First Security Bank's loan portfolio was in loans to
commercial businesses and commercial real estate borrowers.
First Security Bank anticipates attracting new commercial and commercial
real estate borrowers, but desires increased penetration in the consumer loan
market and believes that planned additional locations will build new consumer
relationships. Loans within the consumer sector of the portfolio increased $1.3
million from $33.3 million in 2001 to $34.6 million in 2002, or 3.9%. The loan
portfolio is primarily to customers within the Fayette County area.
Approximately 96% of First Security Bank's loans mature or reprice within
five years or less. Residential (1-4 family) real estate loans held in the First
Security Bank portfolio typically amortize up to thirty years, but mature or
reprice in five years or less. The acquisition of First Mortgage Company, Inc.
has provided a new venue for mortgage products, and has enhanced the Bank's
presence in the Lexington market. See Note 1 to the Consolidated Financial
Statements under Item 7 herein.
In an effort to maintain the quality of the loan portfolio, First Security
Bank seeks to minimize higher risk types of lending. To the extent risks are
identified, additional precautions are taken in order to reduce 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 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.
While there is no assurance that First Security Bank will not suffer losses
on its commercial loans or its commercial real estate loans, First Security Bank
has attempted to reduce the risks associated with these loans by lending to
owner-occupied projects where the borrower has demonstrated that its business
will generate sufficient cash flow to repay the loan. As a result, First
Security Bank primarily enters into agreements with individuals who are familiar
to its personnel, are residents of its primary market area, and are believed to
be creditworthy.
First Security Bank's Board of Directors and senior management have also
placed emphasis on loan review and underwriting procedures. 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 First
Security Bank's loan program which have contributed to the loan portfolio's
performance to date. Nonetheless, First Security Bank maintains a cautious
outlook in attempting to anticipate the potential effects of uncertain economic
conditions (both locally and nationally).
LOANS
December 31,
(in thousands 2002 2001 2000
Commercial $ 48,159 $ 41,309 $ 31,257
Real Estate - Commercial 84,689 77,838 53,058
Real Estate - Residential 17,871 19,749 11,663
Consumer 16,739 13,526 11,120
Total $ 167,458 $152,422 $107,098
SELECTED LOAN DISTRIBUTION
As of December 31, 2002
(in thousands)
One Year
One Year Through Five Over Five
Total or Less Years Years
Fixed rate maturities $101,764 $24,210 $68,859 $ 8,695
Variable rate
repricing frequency 65,694 64,448 1,246 --
Total $167,458 88,658 70,105 $ 8,695
Allowance for Loan Losses and Asset Quality
During 2002, the allowance for loan loss increased $921,000 from $1.5
million in 2001 to $2.5 million in 2002. The increase in the allowance was a
result of the increase in the provision for loan losses, which increased $1.0
million from $447,000 in 2001 to $1.5 million in 2002. The increase in the
provision for loan losses resulted principally from an increase in the level of
nonperforming loans and a related increase in net charge-offs, a development
tied in part to a growth in the level of outstanding loans, and to a decline in
the national and local economy. The net charge-offs for the year ended December
31, 2002 were $551,000 compared to $130,000 for the year ended December 31,
2001. The level of charge-offs was significantly impacted by a charge-off
involving two borrowers in the amounts of $335,000 and $100,000.
The allowance for loan losses is regularly evaluated by management and
reported quarterly to the Board of Directors, who maintain the allowance for
loan losses at a level believed to be sufficient for probable losses in the
portfolio at a point in time. Management's allowance for loan 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.
During the second half of 2002 and in an effort to improve its collection
process and loan review, First Security Bank hired a new Chief Credit Officer, a
Credit Manager and an independent consultant to perform reviews of loans. As a
result of this increased attention and increased effort to analyze credit risk
and collateral, a few loans have received a downgrade on their risk ratings.
These downgrades have led to additional loan losses being accrued. Management
believes this process has been effective and that no further provisions for loan
losses related to these loans are necessary based on information currently
available.
To evaluate the loan portfolio, management has also established loan
grading procedures. These procedures establish a grade for each loan upon
origination which is periodically reassessed throughout the term of the loan.
Grading categories include prime, good, satisfactory, fair, watch, substandard,
doubtful, and loss. Specific 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, loans fully secured by certificates of
deposit with First Security Bank and accounts receivable financing with
established reserve accounts. 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.
The allocation of the allowance for loan losses is derived from the sum of
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 consumer 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.
Management believes the allowance for loan losses at December 31, 2002 was
adequate. Although First Security Bank believes it uses the best information
available to make allowance provisions, future adjustments which could be
material may be necessary if the assumptions used to determine the allowance
differ from future loan portfolio performance. The table below illustrates how
the allowance for loan losses has been allocated to the types of loans in the
portfolio:
MANAGEMENT'S ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2002 2001 2000
(dollars in thousands) Percent of Percent of Percent of
Loans to Loans to Loans to
Allowance Total Loans Allowance Total Loans Allowance Total Loans
Commercial $ 1,509 28.7 % $ 639 27.1 % $ 514 29.2 %
Real Estate -
Commercial 576 50.6 561 51.1 364 49.5
Real Estate -
Residential 125 10.7 138 13.0 85 10.9
Consumer 249 10.0 200 8.8 258 10.4
Total $ 2,459 100.0 % $ 1,538 100.0 % $ 1,221 100.0 %
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. First Security
Bank's policy is to charge-off a loan when, in the opinion of management, the
loan is deemed uncollectible, although concerted efforts are made to maximize
recovery.
The following table sets forth loan charge-offs and recoveries:
SUMMARY OF LOAN LOSS EXPERIENCE
Years ended December 31, 2002 2001 2000
(dollars in thousands)
Balance at beginning of period $ 1,538 $ 1,221 $ 819
Charge-offs
Commercial (472) (77) (23)
Real Estate --- (32) ---
Consumer (89) (21) ---
Total (561) (130) (23)
Recoveries
Commercial --- --- ---
Real Estate 7 --- ---
Consumer 3 --- ---
Total 10 --- ---
Net Charge-offs (551) (130) (23)
Provisions for loan losses 1,472 447 425
Balance at end of period $ 2,459 $ 1,538 $ 1,221
Loans at end of period $ 167,458 $ 152,422 $ 107,098
Average Loans (1) $ 159,625 $ 129,190 $ 94,593
Ratios:
Allowance for loan losses
to total loans 1.46% 1.01% 1.14%
Net loan charge-offs to average
loans for the period 0.35% 0.10% 0.02%
(1) Excluding loans held for sale
The level of non-performing loans is an important element in assessing
asset quality and the relevant risk in First Security Bank's credit portfolio.
Non-performing loans include non-accrual loans, loans delinquent 90 days or
more, and restructured loans. Loans are classified as non-accrual when
management believes that collection of interest is doubtful, but for which
principal is considered collectible. A loan is defined as impaired when full
payment under the loan terms is not expected. Impaired loans also include
troubled debt restructuring. 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.
First Security Bank's 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 of December 31, 2002, nonperforming assets totaled $6.3 million as
compared to $793,000 as of December 31, 2001. Nonperforming assets as a
percentage of total loans was 3.75% at December 31, 2002 as compared to 0.52% at
December 31, 2001. The increase was due to an overall decline in the economy,
the seasoning of the loan portfolio (prior to 2002, First Security Bank's
nonperforming assets were minimal due in large part to the portfolio at the time
consisting of more newly originated loans than in 2002 - First Security Bank
commenced operation in November 1997), and commercial loans to a financially
troubled franchise restaurant operator. These loans totaled approximately $2.9
million and are considered to be a troubled debt restructuring. The loans were
restructured effective December 31, 2002 and First Security Bank gained
additional security in the form of cash, liens on business assets and certain
franchise rights and mortgages. Also included in non-performing assets ,
although becoming current in the first quarter of 2003, is an unrelated
non-accrual commercial real estate loan in the amount of $518,000. Should this
loan remain current, it will be removed from non-accrual status. Management
continues to emphasize evaluation of loan portfolio risks and will pursue all
available means of collection.
NON-PERFORMING ASSETS
December 31, 2002 2001 2000
(dollars in thousands)
Restructured loans $ 2,882 $ --- $ ---
Loans on non-accrual status 1,867 470 ---
Loans past due 90 days or more 1,218 319 2
Total non-performing loans 5,967 789 2
Other real estate owned and
repossessed assets 307 4 ---
Total non-performing assets $ 6,274 $ 793 $ 2
Non-performing
loans to total loans 3.56% 0.52% ---%
Non-performing
assets to total loans 3.75% 0.52% ---%
Off Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments to extend credit are arrangements 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 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:
Greater than Greater than
Less than one year to 3 3 years to 5 More than 5
Total one year years years years
(dollars in thousands)
Commitments to make
loans $ 22,270 $22,270 - - -
Unused lines of credit 19,189 5,873 243 1,828 11,275
Standby letters of credit 1,103 1,103 - - -
Investment Securities
Through all the reported periods, First Security Bank's investment
portfolio consisted primarily of mortgage backed securities and state and
municipal bonds. Securities increased from $32.3 million as of December 31,
2001, to $43.0 million as of December 31, 2002. The increases in investment
securities were to redeploy excess liquidity into investment securities in order
to attain higher yields, the majority of which are not subject to federal income
tax. The weighted average tax equivalent yield of the portfolio decreased from
5.70% at December 31, 2001 to 4.12% at December 31, 2002. The weighted average
maturity of First Security Bank's investment portfolio, which takes into
consideration anticipated calls and prepayments, decreased from 7.1 years at
December 31, 2001 to 3.9 years at December 31, 2002. Securities purchased during
2002 were at lower yields due to the decline in the overall interest rates.
INVESTMENT PORTFOLIO
December 31, 2002 2001 2000
(in thousands)
Investment securities available for sale
U.S. Treasury and U.S. Government
Agencies $ 1,017 $ 503 $10,945
Mortgage-backed 27,778 18,873 2,295
State and Municipal 14,251 12,933 ---
Total available for sale securities $43,046 $32,309 $13,240
Contractual Maturity
As of December 31, 2002
(dollars in thousands)
Amortized Tax Equivalent
Cost Fair Value Yield
Investment securities available for sale
U.S. Treasury and U.S. Government
Agencies
Over one year through five years $ 1,009 $ 1,017 3.09 %
Total 1,009 1,017 3.09
Mortgage-backed
Over one year through five years 332 337 3.06
Over five years through ten years 2,041 2,052 4.03
Over 10 years 25,209 25,389 3.42
------ ------
Total 27,582 27,778 3.46
State and Municipal
Over one year through five years 1,748 2,055 4.08
Over five years through ten years 5,788 5,835 5.20
Over 10 years 6,538 6,361 6.08
------ ------
Total 14,072 14,251 5.48
====== ======
Total available for sale securities $42,663 $43,046 4.12 %
====== ======
Unrealized losses and unrealized gains on available for sale securities are
a result of changes in the general level of interest rates since the securities
were purchased, and are accordingly due to market risk rather than credit risk.
Through the reported periods, all of the securities comprising the investment
portfolio were 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 net of tax. 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 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.
As of December 31, 2001, the unrealized loss in the fair value of First
Security Bank's securities portfolio was $495,000. As of December 31, 2002, the
portfolio fair value reflected an unrealized gain of $385,000. The change in the
fair value of the portfolio was impacted by changes in the general level of
interest rates as discussed above, and changes in the composition of the
portfolio resulting from sales and purchase activity.
Deposits and Other Borrowings
First Security Bank's deposit base provides the major funding source for
earning assets. The following table illustrates that First Security Bank has
experienced deposit growth across all categories. First Security Bank operates
in a highly competitive market for deposits. As is often the case with newly
chartered banks, in order to attract depositors, First Security Bank has at
times paid above market rates on a portion of transaction deposit accounts,
savings deposits and time deposits.
DEPOSITS
December 31, 2002 2001 2000
(in thousands)
Interest-bearing demand deposits $ 17,601 $ 18,886 $ 15,028
Savings deposits 22,889 17,113 12,784
Time deposits 77,732 75,672 57,707
Time deposits $100,000 and over 50,255 44,498 21,750
Total interest-bearing deposits 168,477 156,169 107,269
Total noninterest-bearing deposits 20,478 12,575 8,274
Total $ 188,955 $ 168,744 $ 115,543
MATURITIES OF TIME DEPOSITS $100,000 AND OVER
December 31, 2002
(in thousands)
0 - 3 months $ 10,412
3 - 12 months 22,507
1 - 3 years 13,991
3 years and over 3,345
Total $ 50,255
Liquidity
Liquidity management is the process by which management attempts to insure
that adequate liquid funds are available to meet financial commitments on a
timely basis. These commitments include withdrawals by depositors, funding
credit obligations to borrowers, servicing long-term obligations, paying
operating expenses, funding capital expenditures and maintaining reserve
requirements. Liquidity is monitored closely by the Asset/Liability Management
Committee of the First Security Bank Board of Directors, which monitors interest
rates and liquidity risk while implementing appropriate funding and balance
sheet strategies.
First Security Bank has established a limited number of alternative or
secondary sources to provide additional liquidity and funding sources when
needed to support lending activity or other liquidity needs. These alternative
funding sources currently include unsecured federal funds lines of credit from
five correspondent banks aggregating approximately $27 million; a secured
repurchase agreement line of credit from a correspondent bank based upon the
market value of pledged securities; and a secured repurchase agreement
arrangement with an agency of the Commonwealth of Kentucky. Additionally, First
Security Bank is a member of the FHLB of Cincinnati which allows First Security
Bank to borrow based on the level of qualifying residential loans which serve as
collateral for this type of borrowing. At December 31, 2002, First Security Bank
could borrow an additional $1.5 million based on available collateral.
First Security Bank had total borrowings of $22.7 million and $15.3 million
as of December 31, 2002 and 2001, respectively. Borrowings at December 31, 2002
were in the form of customer repurchase agreements in the amount of $8.2 million
and FHLB advances in the amount of $14.5 million. The need for future borrowing
arrangements above current levels will be evaluated by Management with
consideration given to the growth prospects of the loan portfolio, liquidity
needs, costs of deposits, market conditions and other factors. Short-term
liquidity needs for periods of up to one year may be met through federal funds
lines of credit borrowings and short-term FHLB advances. The FHLB additionally
offers advance programs of varying maturities for terms beyond one year.
Capital
First Security Bancorp issued stock warrants to each of the initial
investors in First Security Bank who subscribed to $100,000 or more of common
stock prior to July 4, 1997. The warrants entitle the holder to purchase
additional shares of First Security Bancorp stock at the price of $10 per share
at any time during 2003. If all 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 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. Management has no reason to think any of the
warrants won't be exercised in 2003. As of March 12, 2003, warrants representing
14,472 shares have been exercised. See Note 11 to the Consolidated Financial
Statements under Item 7 herein.
During 2000, a stock option plan was formed in which certain employees are
eligible to receive incentive stock options and other options and awards.
Options granted are exercisable on such terms and conditions as the First
Security Bancorp Board of Directors may determine, but if unexercised, expire
after ten years. If all the options become exercised, First Security Bancorp's
capital will be increased by $1.8 million. See Note 10 to the Consolidated
Financial Statements under Item 7 herein.
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. Total capital increased $1.7 million from $16.8 million
at year-end 2001 (8.30% of total assets) to $18.5 million at year-end 2002
(8.00% of total assets). This increase was attributable to an increase in the
accumulated other comprehensive income and net income during 2002.
First Security Bancorp and First Security Bank exceed the regulatory
requirements for all three capital ratios. First Security Bancorp intends to
maintain a capital position that meets or exceeds the "well capitalized"
requirements as defined by these regulations. In addition to capital
regulations, state banking regulations limit First Security Bank's ability to
pay dividends without prior approval. Under these regulations, First Security
Bank may pay dividends in any calendar year only to the extent of current year's
net profits plus the retained net profits of the preceding two years and not in
excess of the balance of retained earnings then on hand. First Security Bancorp
also has regulatory limits on dividends, but less restrictive. First Security
Bancorp does not anticipate paying dividends to shareholders for at least the
next several years as any earnings generated will need to be retained to support
future growth opportunities. See Note 12 to the Consolidated Financial
Statements under Item 7 herein.
Item 7. Financial Statements
FIRST SECURITY BANCORP, INC.
Lexington, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
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. as of December 31, 2002 and 2001 and the related consolidated
statements of 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 auditing standards generally accepted
in the United States of America. 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. as of December 31, 2002 and 2001 and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Crowe, Chizek, and Company LLP
Crowe, Chizek and Company LLP
Lexington, Kentucky
January 24, 2003
FIRST SECURITY BANCORP, INC.
See accompanying notes.
CONSOLIDATED BALANCE SHEETS
December 31
2002 2001
(in thousands)
ASSETS
Cash and due from banks $ 4,744 $ 4,521
Federal funds sold 4,069 4,397
Total cash and cash equivalents 8,813 8,918
Securities available for sale 43,046 32,309
Loans held for sale 3,390 -
Loans 167,458 152,422
Less allowance for loan losses (2,459) (1,538)
Net loans 164,999 150,884
Federal Home Loan Bank stock 742 539
Premises and equipment, net 7,932 7,656
Accrued interest receivable 1,176 1,133
Other assets 988 831
$ 231,086 $ 202,270
LIABILITIES AND SHAREHOLDE`RS' EQUITY
Liabilities
Deposits
Noninterest bearing $ 20,478 $ 12,575
Time deposits, $100,000 and over 50,255 44,498
Other interest bearing 118,222 111,671
Total deposits 188,955 168,744
Repurchase agreements and short-term
borrowings 8,211 12,957
Federal Home Loan Bank advances 14,517 2,336
Accrued interest payable 578 832
Other liabilities 361 574
Total liabilities 212,622 185,443
Shareholders' equity
Common stock, no par value: 5,000,000 shares
authorized; 1,456,250 shares issued and outstanding 8,385 8,385
Paid-in capital 8,385 8,385
Retained earnings 1,432 383
Accumulated other comprehensive income (loss) 262 (326)
Total shareholders' equity 18,464 16,827
$ 231,086 $ 202,270
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
(In Thousands, Except Per Share Data)
2002 2001
Interest income
Loans, including fees $ 11,102 $ 10,618
Securities
Taxable 1,333 932
Non-taxable 669 324
Federal funds sold 32 233
13,136 12,107
Interest expense
Deposits 6,412 7,250
Other 538 289
6,950 7,539
Net interest income 6,186 4,568
Provision for loan losses 1,472 447
Net interest income after provision for loan losses 4,714 4,121
Noninterest income
Service charges and fees on deposits 788 284
Gain on sale of securities 660 311
Gain on sale of loans 511 -
Loss on disposal of premises and equipment (1) (95)
Other 141 153
2,099 653
Noninterest expense
Salaries and employee benefits 2,711 1,885
Occupancy and equipment 953 562
Data processing 215 197
Advertising 167 162
Professional fees 217 151
Taxes other than payroll, property and income 187 143
Other 992 584
5,442 3,684
Income before income taxes 1,371 1,090
Provision for income taxes 322 68
Net income $ 1,049 $ 1,022
2002 2001
Weighted average shares common stock outstanding:
Basic 1,456 1,456
Diluted 1,511 1,489
Earnings per share:
Basic $ .72 $ .70
Diluted .69 .69
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002 and 2001
(In Thousands)
Accumulated
Retained Other Total
Common Stock Paid-In Earnings Comprehensive Shareholders'
Shares Amount Capital (Deficit) Income (Loss) Equity
Balance, January 1, 2001 1,415 $ 8,071 $ 8,071 $ (639) $ 109 $ 15,612
Net income - - - 1,022 - 1,022
Change in unrealized gain
(loss) on securities available
for sale, net of reclassification
and tax effects - - - - (435)
(435)
Total comprehensive income 587
Issuance of common stock, net 41 314 314 - - 628
Balance, December 31, 2001 1,456 8,385 8,385 383 (326)
16,827
Net income - - - 1,049 - 1,049
Change in unrealized gain
(loss) on securities available
for sale, net of reclassification
and tax effects - - - - 588 588
Total comprehensive income 1,637
Balance, December 31, 2002 1,456 $ 8,385 $ 8,385 $ 1,432 $ 262 $ 18,464
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In Thousands)
2002 2001
Cash flows from operating activities
Net income $ 1,049 $ 1,022
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 463 262
Amortization and accretion on available
for sale securities, net 467 (3)
Provision for loan losses 1,472 447
Federal Home Loan Bank stock dividends (29) (21)
Gain on sale of securities (660) (311)
Originations of loans held for sale (36,165) -
Proceeds from sale of loans 33,286 -
Gain on sale of mortgage loans (511) -
Loss on disposal of premises and equipment 1 95
Change in assets and liabilities:
Accrued interest receivable (43) (71)
Other assets 148 (663)
Accrued interest payable (254) 208
Other liabilities (516) 504
Net cash from operating activities (1,292) 1,469
Cash flows from investing activities
Activity in available for sale securities:
Maturities and principal repayments 11,778 7,451
Sales 46,225 19,836
Purchases (67,668) (46,645)
Net change in loans (15,890) (45,454)
Purchase of Federal Home Loan Bank stock (174) (294)
Purchases of premises and equipment, net (661) (2,423)
Cash paid in acquisition (69) -
Net cash from investing activities (26,459) (67,529)
Cash flows from financing activities
Net change in deposits 20,211 53,201
Net change in repurchase agreements and
short-term borrowings (4,746) 11,564
Proceeds from Federal Home Loan Bank advances 13,232 9,620
Repayments of Federal Home Loan Bank advances (1,051) (8,333)
Proceeds from issuance of common stock, net - 628
Net cash from financing activities 27,646 66,680
2002 2001
Net change in cash and cash equivalents $ (105) $ 620
Cash and cash equivalents at beginning of period 8,918 8,298
Cash and cash equivalents at end of period $ 8,813 $ 8,918
Supplemental cash flow information:
Interest paid $ 7,204 $ 7,331
Income tax paid 80 9
Supplemental non-cash disclosures:
Transfers from loans to foreclosed and repossessed assets 303 4
FIRST SECURITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements of First Security Bancorp, Inc. and its wholly owned subsidiary First
Security Bank of Lexington (the "Bank"), together referred to as "the Company".
Intercompany transactions and balances are eliminated in consolidation.
The Bank is a Kentucky corporation operating as a commercial bank under a state
bank charter and commenced business on November 17, 1997. 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. Other financial instruments which potentially
represent concentrations of credit risk include deposit accounts in other
financial institutions and federal funds sold.
On June 3, 2002, the Bank acquired the assets of First Mortgage Company, Inc.,
in Lexington, Kentucky. The operations were assumed by the Bank and are promoted
and conducted as a division under the name "First Security Mortgage Company",
the purpose of which is to originate mortgage loans for sale into the secondary
market. The acquisition agreement included a purchase price of up to $476,000,
$69,000 of which was paid at closing for fixed assets. The remainder of the
purchase price is payable contingent upon the division's earnings over the next
four years. In conjunction with the purchase and in addition to the fixed
assets, the Bank recorded $67,000 in intangibles for a non-compete agreement
which is being amortized over its three-year life. The remaining $340,000
contingent purchase price, if earned, will be recorded as goodwill.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 include the allowance for
loan losses and fair values of financial instruments.
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.
Gains and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market value.
To deliver closed loans to the secondary market and to control its interest rate
risk prior to sale, the Company enters "best-efforts" forward sales derivative
contracts. The aggregate market value of mortgage loans held for sale considers
the price of the sales contracts.
On July 1, 2002, the Company became subject to new accounting guidance for
certain commitments to originate loans. The new guidance requires loan
commitments related to the origination of mortgage loans held for sale to be
accounted for as derivative instruments. The Company's commitments are for fixed
rate mortgage loans, generally lasting 60 to 90 days and are at market rates
when initiated. Considered derivatives, the Company had commitments to originate
$887,000 in loans at December 31, 2002 which it intends to sell after the loans
are closed. The impact of adopting this guidance was not material and
substantially all of the gain on sale generated from mortgage banking activities
continues to be recorded when closed loans are delivered into the sales
contracts.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of an allowance for loan losses.
Interest income is reported on the simple interest method. Interest income on
mortgage and commercial loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well secured and in process of collection.
Consumer loans are typically charged-off no later than 180 days past due. In all
cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful. Interest received on
such loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable, incurred credit losses, 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. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
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: Land is carried at cost. Premises and equipment are
reported net of accumulated depreciation. Depreciation expense is computed using
principally the straight-line method over the shorter of the asset's useful life
or lease term with useful lives ranging from 3 to 40 years. 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.
Foreclosed and Repossessed Assets: Assets acquired through or instead of loan
foreclosure or repossession are initially recorded at fair value when acquired,
establishing a new cost basis. If fair value declines, a valuation allowance is
recorded through expense. Costs after acquisition are expensed. Foreclosed and
repossessed assets totaled $307,000 and $4,000 at year-end 2002 and 2001 and are
included in other assets.
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.
Benefit Plans: Profit sharing and 401(k) plan expense is the amount contributed
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.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2002 2001
Net income as reported $ 1,049 $ 1,022
Deduct: Stock-based compensation expense
determined under fair value based method (292) (75)
Pro forma net income $ 757 $ 947
Basic earnings per share as reported $ .72 $ .70
Pro forma basic earnings per share .52 .65
Diluted earnings per share as reported $ .69 $ .69
Pro forma diluted earnings per share .51 .64
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2002 2001
Risk-free interest rate 3.96% 5.16%
Expected option life 7.2 years 7.0 years
Expected stock price volatility 42% 34%
Dividend yield - -
Estimated value per share $9.91 $7.44
Earnings Per Common Share: Basic earnings per common share are net income
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under warrants and stock options.
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.
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 Note 12.
Off-Balance Sheet Financial Instruments: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
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.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $2.1 million and $1.2 million was required to meet regulatory reserve and
clearing requirements at year-end 2002 and 2001. These balances do not earn
interest.
New Accounting Pronouncements: A new accounting standard requires all business
combinations to be recorded using the purchase method of accounting for any
transaction initiated after June 30, 2001. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of the acquired
company must be recorded at fair value at date of acquisition, and the excess of
cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets must be separated from goodwill. Identifiable
intangible assets with finite useful lives will be amortized under the new
standard, whereas goodwill, both amounts previously recorded and future amounts
purchased, will cease being amortized starting in 2002. Annual impairment
testing will be required for goodwill with impairment being recorded if the
carrying amount of goodwill exceeds its implied fair value. Adoption of this
standard on January 1, 2002 did not have a material effect on the Company's
financial statements since no goodwill has been recorded in conjunction with its
sole business combination discussed above.
On July 1, 2002, the Company became subject to new accounting guidance for
certain commitments to originate loans as described in "Mortgage Banking
Activities".
Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in
2003, they will not have a material impact on the Company's financial condition
or results of operations.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Operating Segments: Internal financial information is primarily reported and
aggregated in two lines of business, banking and mortgage banking. While
management monitors the revenue streams of the various products and services,
the identifiable segments are not material and operations are managed and
financial performance is evaluated on a Company-wide basis. Accordingly, all of
the financial service operations are considered by management to be aggregated
in one reportable operating segment.
NOTE 2 - SECURITIES
Year-end securities available for sale are as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
(in thousands)
December 31, 2002
U.S. Government agency $ 1,017 $ 8 $ -
State and municipal 14,251 241 (62)
Mortgage-backed 27,778 200 (2)
Total $ 43,046 $ 449 $ (64)
December 31, 2001
U.S. Government agency $ 503 $ 3 $ -
State and municipal 12,933 1 (449)
Mortgage-backed 18,873 98 (148)
Total $ 32,309 $ 102 $ (597)
Contractual maturities of securities at year-end 2002 were as follows.
Securities not due at a single maturity date are shown separately.
Fair
Value
(in thousands)
Due in one year or less $ -
Due from one to five years 3,072
Due from five to ten years 5,835
Due after ten years 6,361
Mortgage-backed 27,778
Total $ 43,046
Proceeds from sales of securities available for sale during 2002 were $46.2
million. Gross realized gains of $677,000 and gross realized losses of $17,000
were recognized on those sales.
Securities pledged at year-end 2002 and 2001 had carrying amounts of $4.8 and
$13.0 million, and were pledged to secure customer repurchase agreements.
NOTE 3 - LOANS
Loans at year-end were as follows:
2002 2001
(in thousands)
Commercial $ 48,159 $ 41,309
Mortgage loans on real estate:
Commercial 64,025 62,330
Residential 17,871 19,749
Construction 20,664 15,508
Home equity 10,180 7,981
Consumer 5,674 4,696
Credit card 885 849
$ 167,458 $ 152,422
Substantially all residential mortgage loans are pledged to the Federal Home
Loan Bank as collateral for advances as additionally discussed in Note 7.
Changes in the allowance for loan losses were as follows:
2002 2001
(in thousands)
Beginning balance $ 1,538 $ 1,221
Loans charged-off (561) (130)
Recoveries 10 -
Provision for loan losses 1,472 447
Ending balance $ 2,459 $ 1,538
Impaired loans were as follows:
2002 2001
(in thousands)
Year-end loans with no allocated allowance
for loan losses $ - $ -
Year-end loans with allocated allowance
for loan losses 4,059 -
Total $ 4,059 $ -
Amount of the allowance for loan losses allocated $ 1,070 $ -
Average of impaired loans during the year 1,708 31
Interest income recognized during impairment - -
Cash-basis interest income recognized - -
Impaired loans include $2.9 million with a troubled borrower which was
restructured during 2002.
Nonperforming loans were as follows:
2002 2001
(in thousands)
Loans past due 90 days still on accrual $ 1,218 $ 319
Nonaccrual loans 1,867 470
Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
Loans to executive officers, directors, and their affiliates in 2002 were as
follows (in thousands):
Beginning balance $ 5,895
New loans 2,853
Repayments (1,811)
Ending balance $ 6,937
NOTE 4 - PREMISES AND EQUIPMENT
Premises and equipment at year-end were as follows:
2002 2001
(in thousands)
Land $ 1,250 $ 1,250
Buildings 4,956 4,728
Leasehold improvements 305 298
Furniture and equipment 2,461 1,967
Total cost 8,972 8,243
Accumulated depreciation (1,040) (587)
Premises and equipment, net $ 7,932 $ 7,656
The Company leases its three branch locations with various renewal options.
Lease expense for the years ended December 31, 2002 and 2001 was $206,000 and
$187,000.
Future operating lease commitments as of December 31, 2002 (in thousands):
2003 $ 202
2004 192
2005 140
2006 125
2007 127
Total $ 786
NOTE 5 - DEPOSITS
The scheduled maturities of time deposits as of December 31, 2002 were as
follows (in thousands):
2003 $ 81,774
2004 32,831
2005 5,176
2006 2,213
2007 5,846
Thereafter 147
Total $ 127,987
Related party deposits totaled $3.0 and $3.9 million at December 31, 2002
and 2001.
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:
2002 2001
(in thousands)
Average balance during the year $ 6,832 $ 6,474
Average interest rate during the year 1.34% 2.98%
Maximum month-end balance during the year $ 14,088 $ 13,647
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows:
2002 2001
(in thousands)
Monthly maturities through December 2016, $12,517 $2,336
at fixed rates ranging from 2.84% to 6.71%
2002 2001
(in thousands)
Principal due at maturity in May 2004,
at fixed rate of 3.73% 2,000 -
Total $ 14,517 $ 2,336
Advances are secured by the Federal Home Loan Bank stock and substantially all
residential mortgage loans under a blanket lien arrangement.
Principal payments over the next five years are as follows (in thousands):
2003 $ 2,188
2004 4,272
2005 2,901
2006 503
2007 1,350
Thereafter 3,303
NOTE 8 - BENEFIT PLANS
The Bank has a 401(k) benefit plan which allows employee contributions up to 15%
of their compensation. The Bank matches 100% of the first 4% of compensation
contributed. Expense for the years ended December 31, 2002 and 2001 was $60,000
and $35,000.
NOTE 9 - INCOME TAXES
The components of the provision (benefit) for income taxes consists of:
2002 2001
(in thousands)
Current $ 544 $ 363
Deferred (222) (77)
Change in valuation allowance - (218)
$ 322 $ 68
NOTE 9 - INCOME TAXES (Continued)
An analysis of the differences between the statutory U.S. federal income tax
rate and the effective tax rate is as follows:
2002 2001
(in thousands)
U.S. federal income tax rate $ 466 34.0% $ 370 34.0%
Changes from the statutory rate
Change in valuation allowance - 0.0% (218) (20.1)
Tax exempt interest income (194) (14.1) (89) (8.2)
Other 50 3.6 5 .5
Total $ 322 23.5% $ 68 6.2%
The Company's deferred tax assets and liabilities are shown below.
2002 2001
(in thousands)
Deferred tax assets
Allowance for loan losses $ 761 $ 503
Organizational costs 1 25
Unrealized security losses - 168
Other 42 -
Total assets 804 696
Deferred tax liabilities
FHLB stock dividends $ (23) $ -
Depreciation (150) (94)
Cash to accrual (69) (103)
Unrealized security gains (122) -
Other (42) (33)
Total liabilities (406) (230)
Net deferred tax asset $ 398 $ 466
NOTE 10 - STOCK OPTIONS
The Company maintains a stock option plan whereby certain employees of the
Company are eligible to receive incentive stock options. The Plan is accounted
for in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. Under
the Plan, a maximum of 100,000 shares of the Company's common stock may be
issued through the exercise of these options. At year-end 2002, 5,200 of the
options granted were outside of the Plan. The option price is the fair market
value of the Company's share at the date of the grant. The options are
exercisable in five to ten years from the date of grant and vest either
immediately or over a five-year period.
A summary of the activity in the plan is as follows:
2002 2001
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 51,200 $ 14.83 46,200 $ 14.70
Granted 54,000 19.71 5,000 16.00
Outstanding at end of year 105,200 $ 17.33 51,200 14.83
Options exercisable at year-end 66,380 $ 17.76 25,440 $ 15.24
Options outstanding at year-end 2002 were as follows:
----------------Outstanding----------------- --------Exercisable--------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
$13.75-$15.50 46,200 52.3 months $ 14.70 26,880 $ 14.90
$16.00-$22.00 59,000 65.5 months 19.35 39,500 19.71
Outstanding at year end 105,200 59.7 months $ 17.33 66,380 $ 17.76
NOTE 11 - STOCK WARRANTS
The Company issued stock warrants to certain organizers of the Bank. The
warrants, issued in 1997, 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 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 12 - SHAREHOLDERS' EQUITY AND REGULATORY MATTERS
Common Stock - On September 29, 2000, the Company initiated the sale of 456,250
shares of common stock at $16 per share through a public offering. Through
December 31, 2000, the Company sold 414,778 shares which, net of direct costs of
issuance, increased shareholders' equity $6.3 million. The remaining 41,472
shares in the offering were sold in January 2001 which, net of direct costs of
issuance, increased shareholder's equity an additional $628,000.
Regulatory Capital Requirement - 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 Company and Bank were
categorized as well capitalized for the periods presented as noted in the tables
that follow.
NOTE 12 - SHAREHOLDERS' EQUITY AND REGULATORY MATTERS (Continued)
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)
2002
Total Risk Based Capital to
Risk Weighted Assets
Consolidated $ 20,311 11.0% $14,784 8% $ 18,480 10%
Bank only 20,296 11.0 14,784 8 18,480 10
Tier I Capital to Risk
Weighted Assets
Consolidated $ 18,202 9.8% $ 7,392 4% $ 11,088 6%
Bank only 17,986 9.7 7,392 4 11,088 6
Tier I Leverage Capital to
Average Assets
Consolidated $ 18,202 7.9% $ 9,261 4% $ 11,577 5%
Bank only 17,986 7.8 9,257 4 11,571 5
2001
Total Risk Based Capital to
Risk Weighted Assets
Consolidated $ 18,691 11.1% $13,497 8% $ 16,872 10%
Bank only 18,484 11.0 13,497 8 16,872 10
Tier I Capital to Risk
Weighted Assets
Consolidated $ 17,153 10.2% $ 6,749 4% $ 10,123 6%
Bank only 16,946 10.0 6,749 4 10,123 6
Tier I Leverage Capital to
Average Assets
Consolidated $ 17,153 8.8% $ 7,826 4% $ 9,783 5%
Bank only 16,946 8.7 7,797 4 9,746 5
Banking regulations also limit the amount of dividends that may be paid by the
Bank 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 exceed the retained earnings
then on hand. Without prior approval, the Bank had $1,451,000 in retained
earnings available for dividends to the Company at December 31, 2002.
NOTE 13 ' 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 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:
2002 2001
Fixed Variable Fixed Variable
(in thousands)
Commitments to make loans $ 3,931 $ 18,339 $ 4,109 $ 8,557
Unused lines of credit 2,858 16,331 2,544 18,402
Letters of credit 427 676 723 51
Commitments to make loans are at market rates and generally made for periods of
6 months or less. The fixed rate loan commitments at December 31, 2002 had
interest rates ranging from 4.25% to 9.63% and maturities up to five years.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
2002 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands)
Financial assets
Cash and cash equivalents $ 8,813 $ 8,813 $ 8,918 $ 8,918
Securities available for sale 43,046 43,046 32,309 32,309
Loans held for sale 3,390 3,441 - -
Loans, net 164,999 170,200 150,884 151,737
Federal Home Loan Bank stock 742 742 539 539
Accrued interest receivable 1,176 1,176 1,133 1,133
Financial liabilities
Deposits $ 188,955 $ 190,885 $ 168,744 $ 171,173
Repurchase agreements and
short-term borrowings 8,211 8,211 12,957 12,957
Federal Home Loan Bank advances 14,517 14,875 2,336 2,236
Accrued interest payable 578 578 832 832
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, 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 of credit
risk. Fair values for impaired loans are estimated using discounted cash flow
analysis or underlying collateral values. 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 15 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
FIRST SECURITY BANCORP, INC.
BALANCE SHEET
December 31
(in thousands)
2002 2001
ASSETS
Cash and due from banks $ 124 $ 98
Investment in subsidiary 18,248 16,620
Other assets 104 117
$ 18,476 $ 16,835
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Other liabilities $ 12 $ 8
Shareholders' Equity
Common stock 8,385 8,385
Paid-in capital 8,385 8,385
Retained earnings 1,432 383
Accumulated other comprehensive income (loss) 262 (326)
Total shareholders' equity 18,464 16,827
$ 18,476 $ 16,835
STATEMENT OF INCOME
Years Ended December 31
(in thousands)
2002 2001
Income
Interest income $ - $ 4
Dividend from subsidiary 100 -
100 4
Expenses
Salaries and employee benefits 36 45
Professional fees 44 35
Other 11 24
91 104
Income (loss) before income tax and undistributed
subsidiary income 9 (100)
Income tax benefit - 108
Income (loss) before undistributed earnings
of subsidiary 9 8
Equity in undistributed earnings of subsidiary 1,040 1,014
Net income $ 1,049 $ 1,022
FIRST SECURITY BANCORP, INC.
STATEMENT OF CASH FLOWS
Years Ended December 31
(in thousands)
2002 2001
Cash flows from operating activities
Net income $ 1,049 $ 1,022
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed earnings of subsidiary (1,040) (1,014)
Change in other assets 13 (109)
Change in other liabilities 4 (92)
Net cash from operating activities 26 (193)
Cash flows from investing activities
Investment in subsidiary - (1,699)
Cash flows from financing activities
Proceeds from issuance of common stock, net - 628
Net change in cash and cash equivalents 26 (1,264)
Cash and cash equivalents at beginning of period 98 1,362
Cash and cash equivalents at end of period $ 124 $ 98
NOTE 16 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2002 2001
(in thousands,
except per share data)
Basic
Net income $ 1,049 $ 1,022
Weighted average common shares 1,456 1,456
Basic earnings per common share $ .72 $ .70
Diluted
Net income $ 1,049 $ 1,022
Weighted average common shares outstanding
for basic earnings per common share 1,456 1,456
Add dilutive effects of assumed exercises:
Stock warrants 43 31
Stock options 12 2
Average shares and dilutive potential
common shares 1,511 1,489
Diluted earnings per common share $ .69 $ .69
The diluted earnings per share computation for 2002 and 2001 excludes 43,750 and
27,200 stock options because they were anti-dilutive.
NOTE 17 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2002 2001
(in thousands)
Unrealized holding gains and losses on
available-for-sale securities $ 1,539 $ (293)
Less reclassification adjustments for gains
and losses later recognized as income (660) (311)
Net unrealized gains and losses 879 (604)
Tax effect 291 169
Other comprehensive income (loss) $ 588 $ (435)
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information concerning changes in and disagreements with accountants is
incorporate" herein by reference to information under the heading "Appointment
of Auditors" in First Security Bancorp's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 20, 2003.
PART III
Item 9. Directors and Executive Officers of the Registrant
Information concerning Directors and executive officers of the First
Security Bancorp and reporting under Section 16 of the Securities Exchange Act
of 1934 is incorporated herein by reference to information under the headings
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in First Security Bancorp's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 20, 2003.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference to the information under the headings "Executive Compensation and
Certain Transactions", "Compensation of Directors", and "Employee Benefit Plans"
in First Security Bancorp's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 20, 2003.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information concerning security ownership of certain owners and management
is incorporated herein by reference to the information under the heading "Share
Ownership of Directors, Executive Officers and certain Beneficial Owners" in
First Security Bancorp's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 2003.
Item 12. Certain Relationships and Related Transactions
Information concerning relationships and transactions is incorporated
herein by reference to the information under the heading "Certain Transactions
with Management" in First Security Bancorp's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 20, 2003.
Item 13. Exhibits, Lists and Reports on Form 8-K
(a)Exhibits
The following exhibits are filed herein:
3.1 Articles of Incorporation of First Security Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form SB-2 [No. 333-43444]).
3.2 Articles of Amendment to Articles of Incorporation of First Security
Bancorp, Inc. (incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form SB-2 [No. 333-43444]).
3.3 Bylaws of First Security Bancorp, Inc. (incorporated by reference
to Exhibit 3.3 of the Company's Registration Statement on Form SB-2
[No. 333-43444]).
4.1 Articles of Incorporation of First Security Bancorp, Inc.
(included in Exhibit 3.1) (incorporated by reference to Exhibit 4.1 of
the Company's Registration Statement on Form SB-2 [No. 333-43444]).
4.2 Articles of Amendment of Articles of Incorporation of First Security
Bancorp, Inc. (included in Exhibit 3.2) (incorporated by reference to
Exhibit 4.2 of the Company's Registration Statement on Form SB-2
[No. 333-43444]).
10.1 Employment Agreement between First Security Bancorp, Inc. and
John S. Shropshire (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form SB-2 [No. 333-43444]).
10.2 Contract for Electronic Data Processing Services between BSC, Inc.
and First Security Bank of Lexington, Inc. (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement on Form SB-2
[No.333-43444]).
10.3 Outsource Contract between BSC, Inc. and First Security Bank of
Lexington, Inc. (incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form SB-2 [No. 333-43444]).
10.4 Business/Manager License Agreement between Private Business, Inc.
and First Security Bank of Lexington, Inc. (incorporated by reference
to Exhibit 10.4 of the Company's Registration Statement on
Form SB-2 [No.333-43444]).
10.5 Agreement for Administration of Credit Card Program between Crittson
Financial, LLC and First Security Bank of Lexington, Inc.
(incorporated by reference to Exhibit 10.5 of the Company's Registration
Statement on Form SB-2 [No. 333-43444]).
10.6 Lease 400 East Main Street between Isaac and Teresa C. Lawrence and
First Security Bank of Lexington, Inc.(incorporated by reference to
Exhibit 10.6of the Company's Registration Statement on Form SB-2
[No. 333-43444]).
10.7 Lease between THOMCO, Inc. and First Security Bank of Lexington, Inc.
(incorporated by reference to Exhibit 10.7 of the Company's Registration
Statement on Form SB-2 [No. 333-43444]).
10.8 Grounds lease between Cherrywood Development, LLC and First Security
Bank of Lexington, Inc. (incorporated by reference to Exhibit 10.8 of
the Company's Registration Statement on Form SB-2 [No. 333-43444]).
10.9 First Security Bank of Lexington, Inc. Stock Award Plan
(Amended and Restated as of March 18, 2003).
10.10 Consulting Services Support Corporation Affiliation Agreement.
11 Statement re: Computation of Per share earnings (included in Note 16 to
the Company's Consolidated Financial Statement included in this report).
21 Subsidiaries of First Security Bancorp, Inc.
22 Consent of Crowe, Chizek and Company LLP
99.1 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. The Company filed on October 16, 2002 a report
on Form 8-K dated October 16, 2002 reporting the Company's press
release announcing its earnings for the third quarter of 2002.
Item 14. Controls and Procedures
Company management, including the Chief Executive Officer (currently
serving as both the principal executive officer and principal financial
officer), have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer concluded that the disclosure controls
and procedures are effective in ensuring that all material information required
to be filed in this annual report has been made known to him in a timely
fashion. Notwithstanding such conclusion, it should be noted that the employment
of the Company's Chief Financial Officer and the Company's Assistant Controller
was terminated on March 2, 2003. While there have been no significant changes in
internal controls subsequent to the date the Chief Executive Officer completed
his evaluation of such controls, the fact that the Company currently has no
Chief Financial Officer or Assistant Controller could (depending on the length
of time such positions remain vacant) affect (perhaps significantly) the
effectiveness of the Company's internal controls.
Item 15. Principal Accountant Fees and Services
Information concerning principal accountant fees and services is
incorporated herein by reference to the information under the headings "Audit
Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees" in First Security
Bancorp's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on May 20, 2003.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 31, 2003 By:/s/ John S. Shropshire
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer:
Date: March 31, 2003
/s/ John S. Shropshire
President, Chief Executive Officer
and Director
Directors:
/s/ Len Aldridge March 31, 2003
Len Aldridge
/s/ Dennis R. Anderson March 31, 2003
Dennis R. Anderson
/s/ John D. Barlow March 31, 2003
John D. Barlow
/s/ Julian E. Beard March 31, 2003
Julian E. Beard
/s/ Harold Glenn Campbell March 31, 2003
Harold Glenn Campbell
/s/ William C. Combs, Jr. March 31, 2003
William A. Combs, Jr.
/s/ A.F. Dawahare March 31, 2003
A. F. Dawahare
March 31, 2003
Dr. Kenneth L. Gerson
March 31, 2003
Tommy R. Hall
/s/ Erle L. Levy March 31, 2003
Erle L. Levy
March 31, 2003
David R. McCulloch
/s/ Dr. Ira P. Mersack March 31, 2003
Dr. Ira P. Mersack
March 31, 2003
Robert J. Rosenstein
/s/ Nick O. Rowe March 31, 2003
Nick O. Rowe
March 31, 2003
Dr. Ronald J. Saykaly
/s/ Richard S. Trontz March 31, 2003
Richard S. Trontz
/s/ William T. Vennes March 31, 2003
William T. Vennes
/s/ Kathy E. Walker March 31, 2003
Kathy E. Walker
March 31, 2003
D. Woodford Webb, Jr.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, John S. Shropshire, certify that:
1. I have reviewed this annual report on Form 10-K of First Security
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others
within those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ John S. Shropshire
John S. Shropshire
President, Chief Executive Officer and Principal Financial Officer
EXHIBIT INDEX
The following exhibits are filed herein:
3.1 Articles of Incorporation of First Security Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form SB-2 [No. 333-43444]).
3.2 Articles of Amendment to Articles of Incorporation of First
Security Bancorp, Inc. (incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form SB-2 [No. 333-43444]).
3.3 Bylaws of First Security Bancorp, Inc. (incorporated by
reference to Exhibit 3.3 of the Company's Registration Statement
on Form SB-2 [No. 333-43444]).
4.1 Articles of Incorporation of First Security Bancorp, Inc.
(included in Exhibit 3.1) (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form SB-2 [No. 333-43444]).
4.2 Articles of Amendment of Articles of Incorporation of First Security
Bancorp, Inc., (included in Exhibit 3.2) (incorporated by reference
to Exhibit 4.2 of the Company's Registration Statement on Form SB-2
[No. 333-43444]).
10.1 Employment Agreement between First Security Bancorp, Inc. and
John S. Shropshire (incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form SB-2 [No. 333-43444]).
10.2 Contract for Electronic Data Processing Services between BSC, Inc
and First Security Bank of Lexington, Inc. (incorporated by reference
to Exhibit 10.2 of the Company's Registration Statement on Form SB-2
[No. 333-43444]).
10.3 Outsource Contract between BSC, Inc. and First Security Bank of
Lexington, Inc. (incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form SB-2 [No. 333-43444]).
10.4 Business/Manager (R) License Agreement between Private Business, Inc
and First Security Bank of Lexington, Inc. (incorporated by reference
to Exhibit 10.4 of the Company's Registration Statement on
Form SB-2 [No.333-43444]).
10.5 Agreement for Administration of Credit Card Program between Crittson
Financial, LLC and First Security Bank of Lexington, Inc.
(incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form SB-2 [No. 333-43444]).
10.6 Lease 400 East Main Street between Isaac and Teresa C. Lawrence and
First Security Bank of Lexington, Inc.(incorporated by reference to
Exhibit 10.6 of the Company's Registration Statement on Form SB-2
[No. 333-43444]).
10.7 Lease between THOMCO, Inc. and First Security Bank of Lexington, Inc.
(incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form SB-2 [No. 333-43444]).
10.8 Grounds lease between Cherrywood Development, LLC and First Security
Bank of Lexington, Inc. (incorporated by reference to Exhibit 10.8 of
the Company's Registration Statement on Form SB-2 [No. 333-43444]).
10.9 First Security Bank of Lexington, Inc. Stock Award Plan (Amended and
Restated as of March 18, 2003)
10.10 Consulting Services Support Corporation Affiliation Agreement.
11 Statement re Computation of Per share Earnings (included in Note 16 to
the Company's Consolidated Financial Statement included in this report).
21 Subsidiaries of First Security Bancorp, Inc.
22 Consent of Crowe, Chizek and Company LLP
99.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section1350, as Adopted to
Section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 10.9
FIRST SECURITY BANCORP, INC.
STOCK AWARD PLAN
(AMENDED AND RESTATED AS OF MARCH 18, 2003)
1. Purpose. The purpose of the First Security Bancorp, Inc. Stock Award
Plan (the "Plan") is to secure for First Security Bancorp, Inc. and its
successors and assigns (the "Company") and its stockholders the benefits of the
additional incentive, inherent in the ownership of the Company's common stock,
no par value per share (the "Common Stock"), by selected employees, directors
and advisory directors of the Company and its subsidiaries who are important to
the success and growth of the business of the Company and its subsidiaries and
to help the Company and its subsidiaries secure and retain the services of such
persons. Compensation awarded under the Plan in appropriate instances is
intended to qualify for tax deductibility pursuant to the requirements of
Section 162(m) of the Internal Revenue Code of 1986, as amended from time to
time or any successor statute or statutes (the "Code"), to the extent deemed
appropriate by the Board (as defined in Paragraph 2. 1 hereof).
Pursuant to the Plan, selected employees, directors and advisory directors
of the Company will be offered the opportunity to acquire Common Stock through
the grant of options, stock appreciation rights in tandem with such options and
awards of restricted stock. Any options, rights or awards granted hereunder are
a matter of separate inducement and are not in lieu of any salary or other
compensation for the services of any advisory director, director or employee.
Options granted under the Plan will be either "incentive stock options,"
intended to qualify as such under the provisions of Section 422 of the Code, or
"nonqualified stock options." For purposes of the Plan, the terms "parent" and
"subsidiary" shall mean "parent corporation" and "subsidiary corporation,"
respectively, as such terms are defined in Sections 424(e) and (f) of the Code.
2. Committee.
2.1 Administration. The Plan shall be administered by the board of
directors of the Company or by a committee appointed by the board of directors
from among its members (collectively, the "Board"). Any such committee appointed
shall be comprised, unless otherwise determined by the board of directors,
solely of not less than two members who shall be (i) "Non-Employee Directors"
within the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii)
"disinterested directors." For purposes of the Plan, a person shall be deemed to
be a "disinterested person" if, at the time of reference, such person is not,
and has not been at any time during the preceding one-year period, eligible to
participate in the Plan or any other plan of the Company or any of its
affiliates entitling participants therein to acquire stock, stock options or
stock appreciation rights of the Company or any of its affiliates.
Notwithstanding any of the foregoing, the board of directors may designate one
or more persons, who at the time of such designation are not disinterested
persons, to serve on any such committee effective upon the date such person or
persons qualify as disinterested persons. Any vacancy on any such committee,
whether due to action of the board of directors or due to any other cause, may
be filled, and shall be filled if required to maintain any such committee of at
least two disinterested persons, by resolution adopted by the board of
directors.
2.2 Procedures. The Board shall adopt such rules and regulations as it
shall deem appropriate concerning the administration of the Plan. A majority of
the whole Board shall constitute a quorum, and the acts of a majority of the
members of the Board present at a meeting at which a quorum is present, or acts
approved in writing by all of the members of the Board, shall be the acts of the
Board.
2.3 Interpretation. The Board shall have full power and authority to
interpret the provisions of the Plan and any agreement evidencing options or
restricted stock awards granted under the Plan, and to determine any and all
questions arising under the Plan, and its decisions shall be final and binding
on all participants in the Plan. The Board shall have exclusive authority to
select the individuals to be granted awards under the Plan, to determine the
type, size and terms of all such awards, to modify the terms of any awards so
granted and to make any other determinations which it deems necessary or
desirable for the administration of the Plan.
2.4 Liability. No member of the Board and no employee of the Company shall
be liable for any act or failure to act hereunder, except in circumstances
involving his or her bad faith, gross negligence or willful misconduct, or for
any act or failure to act hereunder by any other member or employee or by any
agent to whom duties in connection with the administration of this Plan have
been delegated. The Company shall indemnify members of the Board and any agent
of the Board who is an employee of the Company, a subsidiary or an affiliate
against any and all liabilities or expenses to which they may be subjected by
reason of any act or failure to act with respect to their duties on behalf of
the Plan, except in circumstances involving such person's bad faith, gross
negligence or willful misconduct.
The Board may delegate to one or more of its members, or to one or more
agents, such administrative duties as it may deem advisable, and the Board, or
any person to whom it has delegated duties as aforesaid, may employ one or more
persons to render advice with respect to any responsibility the Board or such
person may have under the Plan. The Board may employ such legal or other
counsel, consultants and agents as it may deem desirable for the administration
of the Plan and may rely upon any opinion or computation received from any such
counsel, consultant or agent. Expenses incurred by the Board in the engagement
of such counsel, consultant or agent shall be paid by the Company, or the
subsidiary or affiliate whose employees have benefited from the Plan, as
determined by the Board.
3. Shares Subject to Grants.
3.1 Number of Shares. Subject to the provisions of Paragraph 19 hereof
(relating to adjustments upon mergers, reorganizations or like changes in
capitalization), the number of shares of Common Stock subject at any one time to
options or awards of restricted stock or deferred stock units granted under the
Plan, plus the number of shares of Common Stock theretofore issued or delivered
pursuant to the exercise of options granted, and awards of restricted stock and
deferred stock units made, under the Plan, shall not exceed 200,000 shares;
provided, that no more than one-fifth of such shares may be awarded as
restricted stock awards. If and to the extent that options granted under the
Plan terminate, expire or are canceled without having been exercised, or
restricted stock or deferred stock units are forfeited, new options, restricted
stock or deferred stock units may be granted under the Plan with respect to the
shares of Common Stock covered by such terminated, expired or canceled options
or forfeited shares of restricted stock or deferred stock units; provided, that
the granting and terms of such new options, restricted stock awards and deferred
stock units shall in all respects comply with the provisions of the Plan.
3.2 Character of Shares. Shares of Common Stock delivered under the Plan
may be authorized and unissued Common Stock, issued Common Stock held in the
Company's treasury, or both.
3.3 Reservation of Shares. There shall be reserved at all times for sale or
award under the Plan a number of shares of Common Stock (authorized and unissued
Common Stock, issued Common Stock held in the Company's treasury, or both) equal
to the maximum number of shares set forth in Paragraph 3.1 hereof.
4. Eligibility. Options and awards of restricted stock may be granted under
the Plan to any employee, director or advisory director of the Company or any of
its subsidiaries, or to any prospective employee, director or advisory director
of the Company or any of its subsidiaries, conditioned upon, and effective not
earlier than, such person's becoming an employee or director. Notwithstanding
the foregoing:
(a) Only non-qualified stock options may be granted to non-employee
directors or advisory directors of the Company;
(b) No incentive stock options may be granted under the Plan to any person
who owns, directly or indirectly (within the meaning of Sections 422(b)(6) and
424(d) of the Code), at the time the incentive stock option is granted, stock
possessing more than 10% of the total combined voting power of all classes of
stock of the employee's employer corporation or of its parent, if any, or any of
its subsidiaries, unless the option price is at least 110% of the fair market
value of the shares subject to the option, determined on the date of the grant,
and the option by its terms is not exercisable after the expiration of five
years from the date such option is granted; and
(c) In each calendar year during any part of which the Plan is in effect,
no Participant (as defined below) may be granted options relating in the
aggregate to more than 10,000 shares of Common Stock, subject to adjustment as
provided in Paragraph 19 hereof.
An individual receiving any option, restricted stock award or deferred
stock units under the Plan is hereinafter referred to as a "Participant." Any
reference herein to the employment of a Participant by the Company shall include
(i) his or her employment by the Company or any of its subsidiaries, and (ii)
with respect to a Participant who was not an employee of the Company or any of
its subsidiaries at the time of grant of his or her option or award, his or her
period of service in the capacity for which the option or award was granted. For
all purposes of this Plan, the time at which an option or award is granted shall
be deemed to be the effective date of such grant. The Plan does not create a
right in any person to participate in the Plan, nor does it create a right in
any person to have any options or rights granted to him or her.
5. Grant of Options. The Board shall determine, within the limitations of
the Plan, the persons to whom options are to be granted, the number of shares
that may be purchased under each option and the option price, and shall
designate options at the time of grant as either "incentive stock options" or
"nonqualified stock options"; provided, that the aggregate fair market value
(determined as of the time the option is granted) of the Common Stock with
respect to which incentive stock options become exercisable for the first time
by any Participant (as defined in Paragraph 4 hereof) in any calendar year
(under all stock option plans of the employee's employer corporation and its
parent, if any, and its subsidiaries) shall not exceed $100,000 (the provisions
of Section 422(d) of the Code are intended to govern). In determining the
persons to whom options shall be granted and the number of shares to be covered
by each option, the Board shall take into consideration the person's present and
potential contribution to the success of the Company and its subsidiaries and
such other factors as the Board may deem proper and relevant. Each option
granted under the Plan shall be evidenced by a written agreement between the
Company and the Participant containing such terms and conditions and in such
form, not inconsistent with the provisions of the Plan or, with respect to
incentive stock options, Section 422 of the Code, as the Board shall provide.
6. Option Price. Subject to Paragraph 19 hereof, the option price of each
share of Common Stock purchasable under any incentive stock option granted under
the Plan shall be not less than the fair market value of such share of Common
Stock at the time the option is granted, and the option price of each share of
Common Stock purchasable under any non-qualified stock option granted under the
Plan shall not be less than 50% of the fair market value of such share of Common
Stock at the time the option is granted. The option price of an option issued in
a transaction described in Section 424(a) of the Code shall be an amount which
conforms to the requirements of that Section and the regulations thereunder.
For purposes of this Plan, the "fair market value" of the Common Stock on
any date means (i) if the Common Stock is listed on a national securities
exchange or quotation system, the closing sales price on such exchange or
quotation system on such date or, in the absence of reported sales on such date,
the closing sales price on the immediately preceding date on which sales were
reported, (ii) if the Common Stock is not listed on a national securities
exchange or quotation system, the mean between the bid and offered prices as
quoted by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") for such date or (iii) if the Common Stock is
neither listed on a national securities exchange or quotation system nor quoted
by NASDAQ, the fair value as determined by such other method as the Board
determines in good faith to be reasonable.
7. Stock Appreciation Rights. In the discretion of the Board, a stock
appreciation right may be granted (a) alone, (b) simultaneously with the grant
of an option (either incentive or non-qualified) and in conjunction therewith or
in the alternative thereto or (c) subsequent to the grant of a non-qualified
option and in conjunction therewith or in the alternative thereto.
The exercise price of a right granted alone shall be determined by the
Board but shall not be less than one hundred percent (100%) of the fair market
value of one share of Common Stock on the date of grant of such right. A right
granted simultaneously with or subsequent to the grant of an option and in
conjunction therewith or in the alternative thereto shall have the same exercise
prices as the related option, shall be transferable only upon the same terms and
conditions as the related option, and shall be exercisable only to the same
extent as the related option; provided, however, that a right, by its terms,
shall be exercisable only when the fair market value of the shares subject to
the right and related option exceeds the exercise price thereof.
Upon exercise of a right granted simultaneously with or subsequent to an
option and in the alternative thereto, the number of shares for which the
related option shall be exercisable shall be reduced by the number of shares for
which the right shall have been exercised. The number of shares for which a
right shall be exercisable shall be reduced upon any exercise of a related
option by the number of shares for which such option shall have been exercised.
Any right shall be exercisable upon such additional terms and conditions as
may from time to time be prescribed by the Board.
A right shall entitle the holder upon exercise thereof to receive from the
Company, upon a written request filed with the Secretary of the Company at its
principal offices, a number of shares (with or without restrictions as to
substantial risk of forfeiture and transferability, as determined by the Board
in its sole discretion), an amount of cash, or any combination of shares and
cash, as specified in the request (but subject to the approval of the Board, in
its sole discretion, at any time up to and including the time of payment, as to
the making of any cash payment), having an aggregate fair market value equal to
the product of (a) the excess of the fair market value, on the day of such
request, of one share over the exercise price per share specified in such right
or its related option, multiplied by (b) the number of shares for which such
right shall be exercised; provided, however, that the Board, in its discretion,
may impose a maximum limitation on the amount of cash, the fair market value of
shares, or a combination thereof, which may be received by a holder upon
exercise of a right.
Any election by a holder of a right to receive cash in full or partial
settlement of such right, and any exercise of such right for cash, may be made
only by a request filed with the Corporate Secretary of the Company during the
period beginning on the third business day following the date of the release for
publication by the Company of quarterly or annual summary statements of earnings
and ending on the twelfth business day following such date. Within thirty (30)
days after the receipt by the Company of a request to receive cash in full or
partial settlement of a right or to exercise such right for cash, the Company
shall, in its sole discretion, either consent to or disapprove, in whole or in
part, such request.
If the Board disapproves in whole or in part any election by a holder to
receive cash in full or partial settlement of a right or to exercise such right
for cash, such disapproval shall not affect such holder's right to exercise such
right at a later date, to the extent that such right shall be otherwise
exercisable, or to elect the form of payment at a later date, provided that an
election to receive cash upon such later exercise shall be subject to the
approval of the Board. Additionally, such disapproval shall not affect such
holder's right to exercise any related option or options granted to such holder
under the Plan.
A holder of a right shall not be entitled to request or receive cash in
full or partial payment of such right during the first six (6) months of its
term, provided however, that such prohibition shall not apply if the holder of
such right is not subject to the reporting requirements of Section 16(a) of the
Exchange Act.
For all purposes of this Paragraph 7, the fair market value of shares shall
be determined in accordance with the principles set forth in Paragraph 6 hereof.
8. Exercisability and Duration of Options.
8.1 Determination of Board; Acceleration. Each option granted under the
Plan shall be exercisable at such time or times, or upon the occurrence of such
event or events, and in such amounts, as the Board shall specify in the
agreement evidencing the option. Subsequent to the grant of an option which is
not immediately exercisable in full, the Board, at any time before complete
termination of such option, may accelerate the time or times at which such
option may be exercised in whole or in part.
8.2 Automatic Termination. The unexercised portion of any option granted
under the Plan shall automatically and without notice terminate and become null
and void at the time of the earliest to occur of the following:
(a) The expiration of ten years from the date on which such option was
granted;
(b) The expiration of three months from the date of termination of the
Participant's employment by the Company or service as a director or advisory
director with the Company unless a longer period is provided by the Board (other
than a termination described in subparagraph (c) or (d) below); provided that if
the Participant shall die during such three-month period, the time of
termination of the unexercised portion of any such option shall be determined
under the provisions of subparagraph (c) below;
(c) The expiration of six months following the issuance of letters
testamentary or letters of administration to the executor or administrator of a
deceased Participant, if the Participant's death occurs either during his
employment by the Company or service as a director or advisory director or
during the three-month period following the date of termination of such
employment or service as a director or advisory director (other than a
termination described in subparagraph (d) below), but in no event later than one
year after the Participant's death;
(d) The termination of the Participant's employment by the Company if such
termination constitutes or is attributable to a breach by the Participant of an
employment or consulting agreement with the Company or any of its subsidiaries,
or if the Participant is discharged from employment or service as a director or
advisory director or his or her services are terminated for cause or if the
Participant voluntarily terminates his or her employment or service as a
director or advisory director; or
(e) The expiration of such period of time or the occurrence of such event
as the Board in its discretion may provide upon the granting thereof.
The Board or the board of directors shall have the right to determine what
constitutes cause for discharge or termination of services, whether the
Participant has been discharged or his or her services terminated for cause and
the date of such discharge or termination of services, and such determination of
the Board or the board of directors shall be final and conclusive.
9. Exercise of Options. Options granted under the Plan shall be exercised
by the Participant (or by his or her executors or administrators, as provided in
Paragraph 10 hereof) as to all or part of the shares covered thereby, by the
giving of written notice of exercise to the Company, specifying the number of
shares to be purchased accompanied by payment of the full purchase price for the
shares being purchased. Payment of such purchase price shall be made (a) by
check payable to the Company, (b) with the consent of the Board, by delivery of
shares of Common Stock already owned by the Participant for at least six months
(which may include shares received as the result of a prior exercise of an
option) having a fair market value (determined as of the date such option is
exercised) equal to all or part of the aggregate purchase price, (c) with the
consent of the Board and at the election of the Participant, by withholding from
those shares that would otherwise be obtained upon exercise of the option a
number of shares having a fair market value equal to the option exercise price,
(d) in accordance with a "cashless exercise" program established by the Board in
its sole discretion under which if so instructed by the Participant, shares may
be issued directly to the Participant's broker or dealer upon receipt of the
purchase price in cash from the broker or dealer, (e) by any combination of (a),
(b), (c) or (d) above or (f) by other means that the Board deems appropriate.
Such notice of exercise, accompanied by such payment, shall be delivered to the
Company at its principal business office or such other office as the Board may
from time to time direct, and shall be in such form, containing such further
provisions consistent with the provisions of the Plan, as the Board may from
time to time prescribe. The date of exercise shall be the date of the Company's
receipt of such notice. The Company shall effect the transfer of the shares so
purchased to the Participant (or such other person exercising the option
pursuant to Paragraph 10 hereof) as soon as practicable. No Participant or other
person exercising an option shall have any of the rights of a stockholder of the
Company with respect to shares subject to an option granted under the Plan until
due exercise and full payment has been made as provided above. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to the date of such due exercise and full payment. In no event may any
option granted hereunder be exercised for a fraction of a share.
10. Non-Transferability of Options and Stock Appreciation Rights. Except as
provided herein, no option granted under the Plan or any right evidenced thereby
shall be transferable by the Participant other than by will or by the laws of
descent and distribution, and an option may be exercised, during the lifetime of
a Participant, only by such Participant. Notwithstanding the preceding sentence:
(a) in the event of a Participant's death during his or her employment by the
Company or his or her service as a director or advisory director of the Company,
its parent, if any, or any of its subsidiaries, or during the three-month period
following the date of termination of such employment, his or her options shall
thereafter be exercisable, during the period specified in Paragraph 8.2(c)
hereof, by his or her executors or administrators; and (b) the Participant, with
the approval of the Board, may transfer his or her options (other than incentive
stock options) for no consideration to or for the benefit of the Participant's
spouse, parents, children (including stepchildren or adoptive children),
grandchildren or siblings, or to a trust for the benefit of any of such persons.
11. Restricted Stock. Participants may be granted awards of restricted
stock under the Plan, subject to the applicable provisions of the Plan,
including the following terms and conditions, and to such other terms and
conditions not inconsistent therewith, as the Board shall determine:
(a) Awards of restricted stock may be in addition to or in lieu of option
grants;
(b) During a period set by, and/or until the attainment of particular
performance goals based upon criteria established by the Board at the time of
each award of restricted stock (the "restriction period"), the Participant shall
not be permitted to sell, transfer, pledge or otherwise encumber the shares of
restricted stock; except that such shares may be used, if the Board permits, to
pay the option price of any option granted under the Plan; provided that an
equal number of shares delivered to the Participant upon exercise of the option
shall carry the same restrictions as the shares of restricted stock so used;
(c) If so provided by the Board, the applicable restriction period shall
expire, and shares of restricted stock shall become free of all restrictions if
(i) the Participant dies, (ii) the Participant's employment or service
terminates by reason of permanent disability, as determined by the Board, (iii)
the Participant retires or (iv) a "Change in Control" of the Company occurs (as
defined in Paragraph 16 hereof). The Board may require medical evidence of
permanent disability, including medical examinations by physicians selected by
it. If the Board determines that any such recipient is not permanently disabled
the restricted stock held by such recipient shall be forfeited and revert to the
Company;
(d) Unless and to the extent otherwise provided in accordance with
Paragraph 11(c) hereof, shares of restricted stock shall be forfeited and revert
to the Company upon the Participant's termination of employment or service
during the restriction period, except to the extent the Board, in its sole
discretion, finds that such forfeiture is not in the best interests of the
Company and, therefore, waives all or part of the application of this provision
to the restricted stock held by such Participant;
(e) Stock certificates for restricted stock shall be registered in the name
of the Participant but shall be appropriately legended and returned to the
Company by the Participant, together with a stock power, endorsed in blank by
the Participant. The Participant shall be entitled to vote shares of restricted
stock and shall be entitled to all dividends paid thereon, except that dividends
paid in Common Stock or other property shall be subject to the same restrictions
as apply to the restricted stock with respect to which they are paid; and
(f) Restricted stock shall become free of the foregoing restrictions upon
expiration of the applicable restriction period and the Company shall then
deliver certificates evidencing such Common Stock to the recipient.
12. Deferred Stock Units. Participants may be granted units representing
the right to receive shares of Common Stock at the end of a specified deferral
period ("deferred stock units"), subject to applicable provisions of the Plan,
including the following terms and conditions, and to such other terms and
conditions not inconsistent therewith, as the Board shall determine:
(a) Deferred stock units shall be exercisable for shares of Common Stock
after the period and upon the terms set by the Board. If so provided by the
Board, the applicable deferral period shall expire when (i) the Participant
dies, (ii) the Participant's employment or service terminates by reason of
permanent disability, as determined by the Board, (iii) the Participant retires
or (iv) a "Change in Control" of the Company occurs (as defined in Paragraph 16
hereof). The Board may require medical evidence of permanent disability,
including medical examinations by physicians selected by it. If the Board
determines that any such recipient is not permanently disabled, the deferred
stock units held by such recipient shall be forfeited and revert to the Company;
(b) Unless and to the extent otherwise provided in accordance with
Paragraph 12(a), deferred stock units shall be forfeited and revert to the
Company upon the Participant's termination of employment or service during the
deferral period, except to the extent the Board, in its sole discretion, finds
that such forfeiture is not in the best interest of the Company and, therefore,
waives all or part of the application of this provision to the deferred stock
units held by such Participant; and
(c) Unless otherwise determined by the Board at the date of grant,
dividends on the specified number of shares of Common Stock covered by the
deferred stock units will be paid at the dividend payment date in cash, or the
payment of such dividends shall be deferred and/or the amount or value thereof
automatically reinvested in additional deferred stock units, as the Board shall
determine or permit the Participant to elect. Unless otherwise determined by the
Board, shares of Common Stock distributed in connection with a stock split or
stock dividend, and other property distributed as a dividend, shall be subject
to restrictions, risk of forfeiture and/or deferral to the same extent as the
deferred stock units with respect to which such Common Stock or other property
has been distributed.
13. Reload Options. At the time an option (the "original option") is
granted, the Board may also authorize the grant of a "reload option," which
shall be subject to the following terms:
(a) The number of shares of Common Stock subject to the reload option shall
be the number of shares, if any, used by the Participant to pay the purchase
price upon exercise of the original option, plus the number of shares, if any,
delivered by the Participant to satisfy the tax withholding requirement relating
to such exercise;
(b) The reload option shall be a nonqualified stock option;
(c) The grant of the reload option shall be effective upon the date of
exercise of the original option, and the term of the reload option shall be the
period, if any, remaining from that date to the date upon which the original
option would have expired;
(d) The grant of the reload option shall not be effective if, on the date
of exercise of the original option, the Participant is not employed by the
Company; and
(e) Except as specified in (a) through (d) above, the terms of the reload
option shall be as prescribed in the preceding Paragraphs of this Plan.
14. Withholding Tax.
(a) Whenever under the Plan shares of stock are to be delivered upon
exercise of a nonqualified stock option or deferred stock unit, the Company
shall be entitled to require as a condition of delivery that the Participant
remit or, in appropriate cases, agree to remit when due an amount sufficient to
satisfy all federal, state and local withholding tax requirements relating
thereto. At the option of the Company, such amount may be remitted by check
payable to the Company, in shares of Common Stock (which may include shares
received as the result of a prior exercise of an option or deferred stock unit),
by the Company's withholding of shares of Common Stock issuable upon the
exercise of any option or stock appreciation right or pursuant to any award of
restricted stock or deferred stock unit pursuant to the Plan, or any combination
thereof. Whenever an amount shall become payable to a Participant in connection
with the exercise of a stock appreciation right, the Company shall be entitled
to withhold therefrom an amount sufficient to satisfy all federal, state and
local withholding tax requirements relating to such amount.
(b) Recipients of restricted stock, pursuant to Paragraph 11 hereof, shall
be required to remit to the Company an amount sufficient to satisfy all
applicable tax withholding requirements upon expiration of restriction periods
or upon such earlier date(s)) as may be elected pursuant to Section 83 of the
Code, unless other arrangements satisfactory to the Company have been made for
the withholding of applicable taxes. At the option of the Company, the amount
referred to in the preceding sentence may be remitted by check payable to the
Company, in shares of Common Stock (which may include shares of Common Stock
received as the result of a prior exercise of an option), by the Company's
withholding of shares of Common Stock issuable upon the exercise of any option
or stock appreciation right or pursuant to any award of restricted stock or
deferred stock unit pursuant to the Plan, or any combination thereof.
15. Restrictions on Delivery and Sale of Shares. Each option and restricted
stock award and deferred stock unit granted under the Plan is subject to the
condition that if at any time the Board, in its discretion, shall determine that
the listing, registration or qualification of the shares covered by such option
or award upon any securities exchange or under any state or federal law is
necessary or desirable as a condition of or in connection with the granting of
such option or award or the purchase or delivery of shares thereunder, the
delivery of any or all shares pursuant to exercise of the option or upon
expiration of the restriction or deferral period may be withheld unless and
until such listing, registration or qualification shall have been effected. The
Board may require, as a condition of exercise of any option, or grant of a
restricted stock award or deferred stock unit, that the Participant represent,
in writing, that the shares received are being acquired for investment and not
with a view to distribution and agree that the shares will not be disposed of
except pursuant to an effective registration statement, unless the Company shall
have received an opinion of counsel satisfactory to the Company that such
disposition is exempt from such requirement under the Securities Act of 1933.
The Board may require that the sale or other disposition of any shares acquired
upon exercise of an option hereunder or upon expiration of a restriction or
deferral period shall be subject to a right of first refusal in favor of the
Company, which right shall permit the Company to repurchase such shares from the
Participant or his or her representative prior to their sale or other
disposition at their then current fair market value in accordance with such
terms and conditions as shall be specified in the agreement evidencing the grant
of the option, restricted stock award or deferred stock unit. The Company may
endorse on certificates representing shares issued upon the exercise of an
option or expiration of a restriction or deferral period, such legends referring
to the foregoing representations or restrictions or any other applicable
restrictions on resale as the Company, in its discretion, shall deem
appropriate.
16. Change in Control.
(a) In the event of a Change in Control of the Company, as defined below,
the Board may, in its sole discretion, provide that any of the following
applicable actions be taken as a result, or in anticipation, of any such event
to assure fair and equitable treatment of Participants:
(i) accelerate the exercisability of any outstanding options, or the
expiration of restriction periods of restricted stock or the expiration of
deferral periods of deferred stock units awarded pursuant to this Plan;
(ii) offer to purchase any outstanding options or shares of restricted
stock or deferred stock units made pursuant to this Plan from the holder for its
equivalent cash value, as determined by the Board, as of the date of the Change
in Control; or
(iii)make adjustments or modifications to outstanding options, restricted
stock or deferred stock units as the Board deems appropriate to maintain and
protect the rights and interests of the Participants following such Change in
Control.
Any such action approved by the Board shall be conclusive and binding on the
Company, its subsidiaries and all Participants.
(b) In no event, however, may (i) any option be exercised prior to the
expiration of six (6) months from the date of grant (unless otherwise provided
in the agreement evidencing the option), or (ii) any option be exercised after
ten (10) years from the date it was granted.
(c) To the extent not otherwise defined in this Plan, the following terms
used in this Paragraph 16 shall have the following meanings:
"Affiliate" means any other corporation or other entity which controls, is
controlled, directly or indirectly, by, or under common control with, the
Company and which the Board designates as an "Affiliate" for purposes of the
Plan.
"Associate" of a Person means (a) any corporation or organization of which such
Person is an officer or partner or is, directly or indirectly, the Beneficial
Owner of 10% or more of any class of equity securities, (b) any trust or other
estate in which such Person has a substantial beneficial interest or as to which
such Person serves as trustee or in a similar fiduciary capacity and (c) any
relative or spouse of such Person, or any relative of such spouse, who has the
same home as such Person or who is a director or officer of such Person or any
of its parents or subsidiaries.
"Beneficial Owner" has the meaning ascribed thereto in Rule 13d-3 under the
Exchange Act, except that, in any case, a Person shall be deemed the Beneficial
Owner of any securities owned, directly or indirectly, by the Affiliates and
Associates of such Person.
"Change in Control" means (a) a majority of the board of directors ceases to
consist of Continuing Directors; (b) any Person becomes the Beneficial Owner of
25% or more of the outstanding voting power of the Company unless such
acquisition is approved by a majority of the Continuing Directors; (c) the
stockholders of the Company approve an agreement to merge or consolidate into
any other entity, unless such merger or consolidation is approved by a majority
of the Continuing Directors; or (d) the stockholders of the Company approve an
agreement to dispose of all or substantially all of the assets of the Company,
unless such disposition is approved by a majority of the Continuing Directors.
"Continuing Director" means any member of the board of directors who is a member
on the effective date of the Plan as set forth in Paragraph 21 hereof or who is
elected to the board of directors after such date upon the recommendation or
with the approval of a majority of the Continuing Directors at the time of such
recommendation or approval.
"Person" means an individual, a corporation, a partnership, an association, a
joint stock company, a trust, any unincorporated organization or a government or
a political subdivision thereof or any other entity
17. Right to Terminate Employment. Nothing in the Plan or in any option
granted under the Plan shall confer upon any Participant the right to continue
as an employee of the Company or affect the right of the Company or any of its
subsidiaries to terminate the Participant's employment at any time, subject,
however, to the provisions of any agreement of employment between the
Participant and the Company, its parent, if any, or any of its subsidiaries.
18. Transfer or Leave of Absence. For purposes of this Plan, neither (i) a
transfer of an employee from the Company to a subsidiary or other affiliate of
the Company, or vice versa, or from one subsidiary or affiliate of the Company
to another, nor (ii) a duly authorized leave of absence, shall be deemed a
termination of employment.
19. Adjustment Provisions: Effect of Certain Transactions. If there shall
be any change in the Common Stock of the Company, through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, reverse stock
split, split up, spin-off, combination of shares, exchange of shares, dividend
in kind or other like change in capital structure or distribution to
shareholders of the Company (other than normal cash dividends), in order to
prevent dilution or enlargement of participants' rights under the Plan, the
Board (or the counterpart Board of any entity assuming the obligations of the
Plan) shall adjust, in an equitable manner, the number and kind of shares that
may be issued under the Plan, the number and kind of shares subject to
outstanding options and rights, the consideration to be received upon exercise
of options or in respect of rights, the exercise price applicable to outstanding
options and rights, and/or the fair market value of the shares and other value
determinations applicable to outstanding options and rights. Appropriate
adjustments may also be made by the Board (or the counterpart Board of any
entity assuming the obligations of the Plan) in the terms of any options and
rights under the Plan to reflect such changes or distributions and to modify any
other terms of outstanding options and rights on an equitable basis. In
addition, the Board (or the counterpart Board of any entity assuming the
obligations of the Plan) is authorized to make adjustments to the terms and
conditions of, and the criteria included in, options and rights in recognition
of unusual or nonrecurring events affecting the Company or the financial
statements of the Company, or in response to changes in applicable laws,
regulations or accounting principles.
20. Expiration and Termination of the Plan.
20.1 General. Options and awards of restricted stock and deferred stock
units may be granted under the Plan at any time and from time to time on or
prior to the tenth anniversary of the effective date of the Plan as set forth in
Paragraph 21 hereof (the "Expiration Date"), on which date the Plan will expire
except as to options then outstanding and stock subject to restriction or
deferral periods under the Plan. Such outstanding options shall remain in effect
until they have been exercised, terminated or have expired; such restricted
stock shall remain subject to restriction until expiration of the restriction
period in accordance with Paragraph 11 hereof and such deferred stock units
shall remain subject to deferral until expiration of the deferral period in
accordance with Paragraph 12. The Plan may be terminated, modified or amended by
the board of directors at any time on or prior to the Expiration Date, except
with respect to any options then outstanding under the Plan; provided, however,
that the approval of the Company's stockholders will be required for any
amendment which (i) changes the class of employees eligible for grants, as
specified in Paragraph 4, (ii) increases the maximum number of shares subject to
grants, as specified in Paragraph 3 hereof (unless made pursuant to the
provisions of Paragraph 19 hereof) or (iii) materially increases the benefits
accruing to participants under the Plan, within the meaning of Rule 16b-3
promulgated under the Exchange Act.
20.2 Modifications. No modification, extension, renewal or other change in
any option or award of restricted stock or deferred stock unit granted under the
Plan shall be made after grant, unless the same is consistent with the
provisions of the Plan and does not disqualify an incentive stock option under
the provisions of Section 422 of the Code.
21. Effective Date of Plan. The Plan (as amended and restated) shall become
effective on March 21, 2000, the date of its adoption by the board of directors,
subject, however, to the approval of the Plan by the Company's stockholders
within 12 months of such adoption.
EXHIBIT 10.10
2001, Consulting Services Support Corporation
CONSULTING SERVICES SUPPORT CORPORATION
AFFILIATION AGREEMENT
The undersigned bank ("Bank"), separate consulting services firm
("Consulting Services Entity") and individuals ("Program Participants")
(collectively and, as applicable individually, referred to herein as
"Affiliates"), by signing this Affiliation Agreement, agree to affiliate with
Consulting Services Support Corporation, and its subsidiaries, (Consulting
Services Support Corporation and its subsidiaries are herein collectively
referred to as "CSSC"), which collectively accept such affiliation upon their
execution of this Agreement, subject to the following terms and conditions. CSSC
provides training, a financial services business development Program, consulting
service support, and other service and assistance to banks, such as Affiliates
(hereinafter referred to as "Consulting Services Support ProgramSM" or "Program)
(as such terms are regulatorily defined), all subject the provisions set forth
below.
The parties below, intending to be legally bound, hereby represent,
warrant, and agree as follows:
1. The Consulting Services Support ProgramSM.
1.1 Payment of Affiliation Fee and Access to the Consulting Services
Support ProgramSM. Upon payment of the Affiliation Fee set forth on Schedule A
to this Agreement, and after Program Participants obtain the licenses and
registrations required to participate in CSSC's Consulting Services Support
ProgramSM, Affiliates will actively participate in CSSC's Program, through which
CSSC will provide Affiliates with access to the financial services described
above; training and support in the areas of financial services business
development and consulting services support; protocols and procedures to enable
the Affiliates to ethically provide financial services in compliance with
federal and state laws and regulations, and the rules of regulatory entities
with jurisdiction over the providers of the services contemplated herein ("other
regulatory entities"); and the materials, systems, procedures, methodologies,
and forms used in the Program. Affiliates understand and agree this Agreement
does not confer on Affiliates any right of geographical or any other form of
exclusivity with respect to the Program.
1.2 Licensing and Registration of Program Participants. CSSC will assist
Program Participants in obtaining the required licenses and registrations set
forth in Schedule B ("Licenses & Registrations"). If any Program Participant
does not already hold the required Licenses & Registrations, CSSC will provide
Program Participant with one set of study materials, along with admittance to a
license preparation classroom course (if available in the local area, and if
desired) for such Program Participant. CSSC will schedule and pay for the
examination(s) and state required for Program Participants to obtain the
Licenses & Registrations. If a Program Participant must retake any examination,
or if any examination or course needs to be rescheduled, then the Program
Participant shall be responsible for any additional rescheduling fees or other
expenses required to obtain the Licenses & Registrations.
1.3 Holding of Licenses and Registrations. Affiliates agree to place and
maintain their Licenses and Registrations, in compliance with all state and
federal laws and regulations and the rules of other regulatory entities, with
such entities as CSSC shall, from time to time, designate with Mutual Service
Corporation ("MSC"), a registered broker/dealer through which brokerage services
are currently provided to Program Participants. Each individual Program
Participant agrees to execute and comply with the provisions of an MSC
Registered Representative Agreement in such form as CSSC has negotiated with
MSC. The cost of annual renewal of state securities, investment advisory, and
insurance registrations, if any, shall be the responsibility of each registered
Program Participant.
The SEC requires that all licensed individuals' accounts be monitored by
the broker-dealer's Compliance Department for insider trading activities and
other potential compliance violations. As a result, all licensed Participants
and their immediate family members (i.e., spouse and minor children) who
maintain a securities account with another broker-dealer must either (i)
transfer their accounts to CSSC's designated broker-dealer (currently Mutual
Service Corporation), or (ii) direct the other broker-dealer to send duplicate
copies of the statements for such accounts to the MSC Compliance Department.
When directed to do so by CSSC, Affiliates agree to take all necessary steps
(including the termination of Registered Representative Agreements with MSC) to
have their Licenses and Registrations, as well as such underlying accounts as
may be affected thereby, transferred to such registered broker/dealer, general
insurance agent/agency, and/or registered investment advisor as CSSC shall
designate. CSSC shall have the right to modify this Agreement to add such new
broker/dealer or other entity as a party hereto.
1.4 Minimum Computer, Software, and Technical Requirements. As a condition
of participating in CSSC's Program, Affiliates agree to obtain and maintain at
their own cost and expense hardware and software needed to meet technical
requirements, as set forth in Schedule C, as said Schedule may from time to time
be amended.
1.5 Providing Solutions to Affiliate's Clients' Needs. Affiliates shall
accurately and completely obtain and transmit to CSSC such client and other
information as CSSC may require in order to accomplish an analysis of the
specific financial or other service needs corresponding to the particular
service needs which CSSC assists Affiliates in meeting for their clients. After
completing its analysis, CSSC will provide Affiliates with the results for
review and presentation to Affiliates' clients. CSSC will also provide
applications, new account forms, prospectuses and/or other documents required
for the implementation of such resulting conclusions and/or suggested
alternatives as Affiliates shall have approved (subject to CSSC's Compliance
Department's review and approval). If Affiliate requests support and assistance
from CSSC in presenting and explaining its analysis and/or resulting conclusions
or alternatives to Affiliates' client, then CSSC will provide the necessary
support by means including conference telephone calls and/or videoconferencing.
Affiliates shall bear such teleconferencing and videoconferencing costs (e.g.,
the costs of Affiliates' acquisition and use of such equipment, including
Affiliates' ISDN or other transmission line usage charges incurred in on-line
conferences with CSSC, but not including the costs of CSSC's equipment or its
access charges.)
1.6 Compensation of Affiliate. If Affiliate successfully "Implements" all
or any portion of a financial services solution on behalf of a client, the
client executes all required documents, and takes all other actions necessary
(e.g., pays the required insurance premiums, pays for securities purchased,
etc.) to implement the particular financial services solutions), then CSSC will
cause to be paid to the appropriately licensed Program Participants the share of
the commissions or other compensation generated by him or her, all as set forth
in Schedule D. No commissions or other compensation will be due until the funds
to which Affiliates' revenue shares apply are actually received by CSSC or its
subsidiaries. If an Affiliate's client fails to pay an invoice for a service
rendered by an Affiliate through CSSC's Program, then CSSC may, at its option,
deduct its share of such unpaid amount (i.e., the amount of the unpaid invoice
multiplied by CSSC's revenue share set forth on the current Schedule D) from any
amounts due the Affiliate hereunder, or charged to any credit card which
Affiliate has previously authorized CSSC to charge. Any unpaid balance shall
accrue interest at the lesser of (a) 18% per annum; or (b) the maximum rate
permissible by the laws of the state in which Consulting Services Entity is
located.
2. Training, Continuing Education, Compliance, and Liability Insurance.
2.1 Training and Continuing Education. As a condition of participation in
CSSC's Program, Program Participants shall participate in such programs of
training and continuing education, as CSSC shall prescribe. CSSC will inform
Program Participants from time to time of the specific requirements of its
training and continuing education programs but, at a minimum, Program
Participants will be required to attend initial training at CSSC's offices and
at least one CSSC Affiliate Meeting/Compliance Conference per year. CSSC will
provide Program Participants with continuing education modules, which the
Program Participants must complete and return to CSSC, within the time period
prescribed by CSSC. Program Participants shall be responsible for transportation
to CSSC's offices for the aforementioned training program and compliance
conference, and for lodging and meals during the training program and compliance
conference.
2.2 Compliance.
2.2.1 Compliance Manual. Program Participants agree to read and be familiar
with he contents of MSC's Compliance Manual, as it may be amended from time to
time, or any other compliance manual that CSSC may adopt and/or substitute
therefor. In addition, Affiliates agree to comply with the terms, conditions,
and procedures set forth therein, and agree that a material or continuing
failure to do so may result in the termination of this Agreement by CSSC for
cause in accordance with Section 3.2 below.
2.2.2 Full Bank Participation. Affiliates agree that any employee of the
Bank or the Consulting Services Entity who holds any of the required Licenses
and Registrations, whether obtained through CSSC's Program or otherwise, shall
participate in CSSC's Program through the Consulting Services Entity, and shall
either execute this Agreement or a supplemental signature page to this
Agreement.
2.2.3 Recording of Telephone Conversations. Affiliates acknowledge,
consent, and agree that telephone conversations between CSSC and Affiliates, or
with Affiliates' clients, may be recorded by CSSC or its representatives.
2.2.4 Required Consulting Services Entity Materials. In order to be able to
render financial services through their Consulting Services Entity, and prior to
rendering any such services, Affiliate agrees to utilize separate stationary,
business cards, and fax cover sheets. This can either be done through
Affiliates' own marketing/graphic vendors or through CSSC's staff, according to
fees set forth in Schedule F.
2.3 Liability Insurance. Affiliates shall pay to Trading Support, Inc., or
to such other entity as CSSC shall designate, the sum of per Program Participant
per year, payable by the 1st of December, to cover the costs of their Errors &
Omissions Insurance Coverage. This amount may be adjusted by CSSC from time to
time upon not less than 30 days prior notice to Affiliates. At CSSC's option,
this expense may be deducted from any amounts due to Affiliates hereunder, or
charged to any credit card which Affiliates have previously authorized CSSC to
charge. Any unpaid balance shall accrue interest at the lesser of (a) 18% per
annum; or (b) the maximum rate permissible by the laws of the state in which
Consulting Services Entity is located.
2.4 Other Fees and Expenses. Affiliates agree to pay the following fees, as
set forth in Schedule F, in order to hold and maintain the following licenses
and bond so that they may render financial services:
NASD Filing Fee
State Branch Registration & Renewal Fee
NASD Fidelity Bond Fee
OSJ Satellite Branch Fee
Miscellaneous Fees
This amount may be adjusted by CSSC from time to time upon not less than 30
days prior notice to Affiliates. At CSSC's option, this expense may be deducted
from any amounts due to Affiliates hereunder, or charged to any credit card
which Affiliates have previously authorized CSSC to charge. Any unpaid balance
shall accrue interest at the lesser of (a) 18% per annum; or (b) the maximum
rate permissible by the laws of the state in which Consulting Services Entity is
located.
3. Term and Termination.
3.1 Term. The initial term of this Agreement is five years, subject to
earlier termination, as set forth herein. This Agreement will be automatically
renewed for additional five-year periods, unless a party gives written notice of
intention not to renew this Agreement to the others at least 90 days prior to
the expiration of its then current term.
3.2 Termination. Affiliate or CSSC may terminate this Agreement for no
cause, upon ninety (90) days prior written notice to the terminated party. The
notice period provided for above shall not apply in the event of a termination
for cause, in which event the notice and cure periods shall be as set forth in
Schedule G. If one party gives another notice of an intention to terminate this
agreement for cause, then the party to which such notice is directed shall have
the times set forth in Schedule G to cure the matter.
Upon termination of this Agreement by one or more Affiliate(s), if such
terminating Affiliate(s) desire assistance from CSSC in the transferring of
their clients' securities and investment advisory accounts, such Affiliates
shall pay CSSC an Account Transfer Assistance Fee, to be determined by CSSC, in
order to help defray CSSC's administrative and other costs associated with
rendering such assistance. This fee shall be paid on the effective date of the
termination. At CSSC's option, this expense may be deducted from any amounts due
to Affiliates hereunder, or charged to any credit card which Affiliates have
previously authorized CSSC to charge. Any unpaid balance shall accrue interest
at the lesser of (a) 18% per annum; or (b) the maximum rate permissible by the
laws of the state in which Consulting Services Entity is located.
Nothing in this Section shall be construed to mean or imply that a
terminating Affiliate may make any use of any of CSSC's training or other
materials following termination of the Agreement, all of which (and any copies
or other reproductions of the same) Affiliate agrees to return to CSSC promptly
upon termination of the Agreement, by either party and with or without cause.
Confidentiality, Copyrights, Confidential and Proprietary Information, and
Non-competition.
4.1 Confidentiality.
4.1.1 Affiliates' Duty of Confidentiality. Affiliates understand and agree
that CSSC owns, uses, and develops valuable proprietary and confidential
information for use in connection with its Consulting Services Support
ProgramSM. This proprietary and confidential information includes, but is not
limited to, the following documents and information, which may exist in printed,
magnetic, digital, or other forms (hereinafter "Confidential Information"): all
descriptions of procedures, systems, concepts, methodologies, and know-how used
in the organization, operation, or management of the Program; all internal
forms, training and other materials; all compliance, procedural, operating, and
other manuals, booklets, bulletins, memoranda, and similar documents, pertaining
to the Program; all affiliate, or prospective affiliate, names, addresses,
telephone numbers and related information disclosed in writing or orally by CSSC
or their representatives from time to time; all marketing strategies and
marketing materials pertaining to the organization, operation, or promotion of
the Program; all computer software programs that are not commercially available
to the public that are used in connection with the Program; and all other
documents, systems, procedures, forms, data, or information as may be disclosed
to Affiliates from time to time by CSSC in connection with the Program.
Affiliates shall not disclose or use, except: (i) as is necessary in connection
with their participation in the Program; (ii) as may be necessary in order to
enforce Affiliates' rights hereunder in a Court proceeding, as long as such
confidential information is protected from outside disclosure or use; and (iii)
as may be required by Court order, subject to CSSC's right to secure a
protective order or other order ensuring that such use is protected from outside
disclosure or use, the Confidential Information in any way, either during the
term of this Agreement or following the expiration or termination of this
Agreement (with or without cause). Upon the expiration or termination of this
Agreement (with or without cause), Affiliates shall immediately return all
Confidential Information and Proprietary Information (defined below), and any
and all copies, duplicates, and/or extracts of the same, to CSSC, and CSSC shall
be entitled to withhold any and all amounts due to Affiliates until such
Information is returned to CSSC.
4.1.2 CSSC's Duty of Confidentiality. During and after the term of
thisAgreement, CSSC shall maintain the confidentiality of Affiliates' clients,
only using the information that it obtains regarding such clients to further the
intent and purposes of this Agreement and/or assist in the providing of the
financial services needed by Affiliates' clients. After termination of this
Agreement, CSSC agrees not to directly or indirectly solicit Affiliates'
clients, and shall only provide routine servicing and account maintenance for
Affiliates' clients and such additional services as Affiliates' clients may
request and/or reasonably need. This paragraph does not prohibit general
advertising by CSSC not specifically targeted to Affiliates' clients.
4.2 Copyrights and Proprietary Information. Affiliates agree that any
Confidential Information and forms, agreements, contracts, procedures, publicly
used with clients, prospective clients, or other persons in connection with the
Program; promotional, marketing, or advertising materials that may be publicly
distributed in connection with the Program; and such other documents or
information created or developed by CSSC or by Affiliates, or to which
Affiliates contribute while affiliated with CSSC, are valuable assets that
belong to CSSC ("Proprietary Information"). Affiliates acknowledge that CSSC
claims a copyright with respect to all such Proprietary Information, whether or
not it may contain a copyright symbol. At no time will Affiliates acquire any
ownership interest in the Proprietary Information, nor may Affiliates attempt to
place a copyright symbol on any such Proprietary Information.
4.3 Non-Competition. Affiliates shall, at all times, retain the right to
perform and continue to perform the types and levels of services provided by
Affiliates prior to the execution of this Agreement, provided that such
activities can be offered under existing federal, state, and other regulatory
exemptions from the licensing and registration requirements set forth in
Schedule B. Outside of the scope of the foregoing reservation of rights,
Affiliates shall not, either directly or indirectly, during the term of this
Agreement, without the prior written consent of CSSC, engage in any business
activities within the scope of CSSC's service capabilities with, through, or in
relationship with any person(s) and/or entity(ies) other than CSSC. It
isunderstood that this prohibition includes, but is not limited to: o the
placing, securing, or sale of any stocks, bonds, mutual funds, securities,
annuities, insurance, or any other type of financial services or products, to
clients, or other entities and/or individuals; or o assisting other firms,
entities or individuals to render, provide, or sell such products and financial
services, in any manner involving Affiliates' receipt of compensation from the
firms, entities or individuals providing such products or services (whether on a
commission, referral fee, fee for service, or other basis). During the term of
this Agreement, and for a period of three (3) years following its termination,
Affiliates shall not, either directly or indirectly, engage in any employment or
business activities that compete, directly or indirectly, with CSSC. This
prohibition is intended to prevent Affiliates from in any way participating in
or assisting in the marketing to other accounting firms, law firms, banks,
advisory professionals (of all types), financial planners, and others of support
services, programs or methodologies similar to those offered by CSSC. This
includes, but is not limited to, assisting such firms, professionals and/or
entities in rendering financial services or other consulting services to the
clients of such firms, professionals and/or entities through the provision of
any knowledge, information, services or support of any nature other than: to the
making of uncompensated referrals of clients of Affiliates during the term of
this Agreement (after the termination of this Agreement, there shall be no such
restriction on the making of compensated referrals of clients), or to the
provision of normal accounting services to them. This provision is not intended
to prevent the rendering of financial services by Affiliates to Bank's clients,
through any relationship with any other financial services entity(ies), after
the termination of this Agreement.
4.4 Other Contracts and Relationships. Affiliates understand and agree that
CSSC has contracts and/or business affiliations and relationships with other
companies, entities, and individuals (collectively referred to as "Other
Affiliates"), both inside and outside of the accounting industry. Affiliates
agree not to solicit such Other Affiliates.
5. Arbitration. It is understood that the following AGREEMENT TO ARBITRATE
does not constitute a waiver of the right to seek a judicial forum to the extent
that such a waiver would be void under applicable law.
5.1IT IS AGREED THAT ANY CONTROVERSY BETWEEN THE PARTIES ARISING OUT OF
THIS AGREEMENT SHALL BE SUBMITTED TO ARBITRATION CONDUCTED BEFORE THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC., AND IN ACCORDANCE WITH ITS RULES. THE
ARBITRATION PROCEEDING IS COMMENCED ONLY BY SERVICE UPON THE OTHER PARTY OF A
WRITTEN DEMAND FOR ARBITRATION OR A WRITTEN NOTICE OF INTENTION TO ARBITRATE. IT
IS THE INTENT OF THE PARTIES THAT THIS ARBITRATION AGREEMENT SHALL APPLY TO
CSSC, AND ANY AFFILIATE OR EMPLOYEE OF THE CONSULTING SERVICES ENTITY.
NOTWITHSTANDING THE FOREGOING, THE PARTIES HERETO AGREE THAT CSSC MAY APPLY TO A
JUDICIAL COURT TO SEEK THE INJUNCTIVE AND OTHER RELIEF SET FORTH IN SECTION 6.5
OF THIS AGREEMENT.
5.2 ARBITRATION IS FINAL AND BINDING ON THE PARTIES. THE PARTIES ARE
WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO A JURY
TRIAL. PRE-ARBITRATION DISCOVERY GENERALLY IS MORE LIMITED THAN, AND DIFFERENT
FROM, COURT PROCEEDINGS. THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE
FACTUAL FINDINGS OR LEGAL REASONING, AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED. THE PANEL OF
ARBITRATORS TYPICALLY WILL INCLUDE A MINORITY OF ARBITRATORS WHO WERE OR ARE
AFFILIATED WITH THE SECURITIES INDUSTRY.
5.3 NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST
ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION; OR WHO IS A
MEMBER OF A PUTATIVE CLASS ACTION WHO HAS NOT OPTED OUT OF THE CLASS WITH
RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (i) THE
CLASS CERTIFICATION IS DENIED; (ii) THE CLASS ACTION IS DECERTIFIED; OR (iii)
THE PERSON IS EXCLUDED FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE
AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS
AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
5.4 Any arbitration pursuant to this Agreement shall be in accordance with,
and governed by, the rules and regulations of the National Association of
Securities Dealers, Inc. The award of the arbitrators, or of the majority of
them, will be final and binding upon the parties, and judgment upon the award
rendered may be entered in any federal or state court having jurisdiction. Any
arbitration shall be commenced by delivery to the other party of a written
demand for arbitration setting forth in detail the claim or controversy to be
arbitrated.
5.5 The arbitrators shall be entitled to order specific performance of the
obligations imposed by this Agreement.
6. Miscellaneous.
6.1 Relationship Between Affiliates and CSSC. CSSC must, through those
persons and entities designated by it, supervise Affiliates pursuant to federal,
state, and regulatory entity laws, rules and regulations, including the National
Association of Securities Dealers, Inc. ("NASD") Membership, Registration and
Conduct Rules, and Affiliates must comply with all applicable statutes and
regulations pertaining to the conduct covered hereby (as well as the rules and
procedures from time to time adopted by CSSC respecting its methods of doing
business). Nevertheless, Affiliates shall at all times be independent
contractors with respect to CSSC and otherwise control the details of
Affiliates' work. "Supervision," as required by the NASD's Conduct Rules and
certain other securities regulations, relates only to the propriety or
impropriety of making offers, sales and purchases of securities, and is not used
to connote, or be deemed to mean, the exercise of any degree of control by CSSC
which would cause Affiliates to be anything other than independent contractors
in their relations with CSSC.
Affiliates will not at any time be a franchisee or be treated as employees
of CSSC for any purposes, and Affiliates will take any and all necessary and
appropriate steps to ensure that no person or entity misperceives Affiliates'
relationship with CSSC. Affiliates shall bear all expenses for conducting
Affiliates' business under this Agreement.
In the event any state and/or federal agency and/or court determines that
Affiliate is not an independent contractor, CSSC shall be entitled to be
reimbursed by Affiliates for any costs, taxes and/or expenses related to such
determination and CSSC shall be entitled to set the same off against any amounts
due to Affiliates hereunder.
CSSC shall be responsible for all service obligations on any insurance
policies or related insurance products, and all agent rights, including
commissions are deemed assigned to CSSC. In the event that an Affiliate
terminates this Agreement, then CSSC shall assign the Commission Assignment
Rights and Principal Servicing Agent rights to said Affiliate after the first
year commissions have been paid in full. Affiliates grant an irrevocable power
of attorney to, and hereby appoint as their lawful attorney-in-fact, CSSC or its
designee, for the purpose of executing, on their behalf, any assignment of
commission or similar forms, and any appointment forms. The parties understand,
acknowledge, and agree that the aforementioned power of attorney is irrevocable
and coupled with an interest.
6.2 Audits. Affiliates agree that CSSC shall have the right, at any time
during the term of this Agreement, and for a period of one year beyond the
effective time of any duty or obligation of Affiliates to CSSC thereafter, to
require Affiliates to undergo an audit of Affiliates' books and records by an
independent auditor selected by CSSC, as CSSC may deem necessary, to verify that
Affiliates have not engaged in transactions in violation of Sections 2.2.2 and
4.3, or violations of other provisions of this Agreement and any Schedule. CSSC
will pay the costs of such audit unless the results of the audit confirm that
Affiliates have violated this Agreement, in which case Affiliates agree to pay
the costs of the audit (which CSSC may deduct from any sums due and owing to
Affiliates, or charge to any credit card which Affiliates have previously
authorized CSSC to charge). The audit provision described herein is in addition
to such audits as may be required by the United States Securities and Exchange
Commission, the National Association of Securities Dealers, Inc., and other
self-regulatory organizations and governmental authorities which may have
jurisdiction over portions of CSSC's Program.
6.3 Indemnification. The provisions of this Section shall survive the
termination of this Agreement.
6.3.1 By Affiliates. Affiliates shall indemnify CSSC and its officers,
directors, employees, and agents against, and hold them harmless from, all
losses, liabilities, damages, expenses, investigative costs, or other costs
(including, without limitation, reasonable attorneys' and paralegals' fees and
other litigation expenses), incurred by any of them arising out of, or in
connection with, any violation by Affiliates and/or their employees or staff of
any statute, regulatory rule, or regulation, or the policies, procedures, or
instructions set forth in the compliance manuals provided to Affiliates by CSSC
(as said manuals may be amended and/or substituted from time to time). CSSC
shall be entitled to this indemnification whether or not any action or
proceeding is prosecuted to a final judgment or award or is settled, and
regardless of whether or not such claim also involves a failure to supervise
claim against CSSC.
6.3.2 By CSSC. CSSC shall indemnify Affiliates and Affiliates' officers,
directors, employees, and agents against, and hold them harmless from, all
losses, liabilities, damages, expenses, investigative costs, or other costs
(including, without limitation, reasonable attorneys' and paralegals' fees and
other litigation expenses), incurred by any of them arising out of, or in
connection with, any violation by CSSC and/or its employees or staff of any
statute, regulatory rule, or regulation, excluding a failure to supervise claim
against CSSC as a result of an underlying or associated action against
Affiliates. Affiliates shall be entitled to this indemnification whether or not
any action or proceeding is prosecuted to a final judgment or award or is
settled.
6.3.3 Right of Offset. The parties shall be entitled, upon reasonable
notice to the other and without any further action, to offset any amount that
may become due and owing under this Agreement against any consideration or
compensation that may become due or owing to the other. In the event the other
party shall contest the prospective offset by submitting the issue to
Arbitration, pursuant to Section 5, above, no such offset shall be made unless
and until the offset shall be sanctioned by a ruling in that proceeding.
6.4 Choice of Law. This Agreement was made and accepted in, and shall be
construed in accordance with the laws of (without regard to conflicts of laws
principles), the state of Michigan.
6.5 Specific Performance/Enforcement. Affiliates agree that any breach of
the provisions of Sections 2.2.2, 4.1, 4.2, 4.3, and other provisions of this
Agreement and any Schedule (from time to time amended) dealing with
confidentiality, non-competition, regulatory compliance and fair and honest
dealings by Affiliates (which, together with the provisions for indemnification
and collection of amounts due CSSC, will survive any termination or expiration
of this Agreement and remain binding on Affiliates), would cause CSSC
irreparable damage, and that, in addition to any other remedies available to
CSSC, and notwithstanding the Agreement to Arbitrate set forth in Section 5
herein, CSSC shall be entitled to a restraining or injunctive order from a court
of competent jurisdiction restraining or preventing Affiliates' anticipated or
actual breach of these Sections.
In the event that CSSC obtains such a restraining order or injunctive order
restraining or preventing Affiliates anticipated or actual breach of the above
described provisions of the Agreement, but not as a precondition to such, CSSC
shall also be entitled to an award of the direct and consequential damages that
it has sustained as a result of said breach or anticipated breach, but in any
event in an amount not less than the income obtained by Affiliates, or those
acting in concert with Affiliates, in using said Confidential Information. In
addition, if it is determined that Affiliates have violated the terms of Section
4.3, then Affiliates shall pay to CSSC damages in an amount equal to the amount
of revenue generated by Affiliates in violation of Section 4.3 multiplied by the
percentage revenue share for CSSC set forth on Schedule D.
The prevailing party shall be entitled to an award of its attorneys' fees
and other costs and expenses associated with any action to enforce the
provisions of this Agreement or the collection of any amounts due hereunder.
6.6 General. No modification or amendment of this Agreement shall be valid,
and no term, provision, or right granted pursuant to this Agreement shall be
deemed waived, and no breach of this Agreement shall be excused, unless
documented in a writing signed by the parties. Any consent by any party to, or
waiver of, a breach by the other party, whether expressed or implied, shall not
constitute consent to, waiver of, or excuse of, any different or subsequent
breach. The invalidity of any provision in this Agreement shall not affect the
validity of any other provision. If any one or more of the provisions contained
in this Agreement shall be held to be excessively broad as to time, duration,
geographical scope, activity, or subject, it shall be construed, by limiting or
reducing it, so as to be enforceable to the fullest extent permitted by
applicable law. Headings in this Agreement are provided solely for convenience,
and shall be of no effect in construing this Agreement. Notices, when required
by this Agreement, shall be deemed given when sent to the parties at their
respective addresses set forth on the signature page, by certified mail, return
receipt requested, or by overnight delivery service.
IN WITNESS WHEREOF, the Parties hereto, intending to be fully bound by the
terms hereof and all Schedules hereto, have hereby individually executed this
Agreement (in the case of Individual Program Participants) and by duly
authorized officers, members and/or partners (in the case of other entities),
all effective on the 29 day of January,2002.
BANK:
First Security Bank of Lexington /s/ John S. Shropshire
___________________________________ By:
(Please print or type Bank name)
Its: President & CEO
Date: 1-29-02
Address:318 East Main Street
Lexington, KY 40507
CONSULTING SERVICES ENTITY:
First Security Capital Management, Inc.
_________________________________ By: /s/ John S. Shropshire
(Please print or type name of Consulting
Services Entity) Its: President
Date: 1-29-02
Address: 318 East Main Street
Lexington, KY 40507
PROGRAM PARTICIPANTS:
Each individual associated with the Consulting Services Entity who becomes
affiliated with CSSC must execute this Agreement below, or later execute an
Addition of signature page adding the individual as a bound party to this
Agreement.
Individual's Name (printed or typed) Individual's Signature Date
John S. Shropshire /s/John S. Shropshire 1-29-02
Address: 656 Tally Road, Lexington, KY 40502
Wayne Stefanovich /s/Wayne Stefanovich 1-29-02
Address: 1353 Corona Drive, Lexington, KY 40514
D.Keith Preston /s/D.Keith Preston 1-29-02
Address: 1348 Tanforan Drive, Lexington, KY 40517
Paul Victor Rowe /s/Paul Victor Rowe 1-29-02
Address:1368 Deer Lake Circle, Lexington, KY 40515
R.Greg Kessinger /s/R.Greg Kessinger 1-29-02
Address: 2063 Old Nassau Road, Lexington, KY 40504
Exhibit 21
Subsidiaries
Subsidiaries of First Security Bancorp, Inc.
First Security Bank of Lexington, Inc.
Exhibit 22
Consent of Independent Public Accountants
We hereby consent to the incorporation by reference in the Form S-8 Registration
Statement No. 333-98625 of First Security Bancorp, Inc. of our report dated
January 24, 2003 on the consolidated financial statements of First Security
Bancorp, Inc. as of and for the years December 31, 2002 and 2001 as included in
the registrant's annual report on From 10-KSB.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Lexington, Kentucky
March 28, 2003
Exhibit 99.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Form 10-K of First Security Bancorp,
Inc. for the year ended December 31, 2002, I, John S. Shropshire, Chief
Executive Officer and Principal Financial Officer of First Security Bancorp,
Inc. hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) Such Form 10-K for the year ended December 31, 2002 fully complies with
the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in such Form 10-K for the year ended December
31, 2002 fairly presents, in all material respects, the financial condition and
results of operation of First Security Bancorp, Inc.
By:/s/ John S. Shropshire
John S. Shropshire
President, Chief Executive Officer and
Principal Financial Officer
Date: March 31, 2003