First Security Group Announces Third Quarter Profits

CHATTANOOGA, Tenn.--(BUSINESS WIRE)--

First Security Group, Inc. FSGI (“First Security” or “FSG”) reported net income for the third quarter of 2014 of $927 thousand, or $0.01 per basic and diluted share, and $1.5 million for the nine months ended September 30, 2014, or $0.02 per basic and diluted share.

Financial Highlights

• Net income of $927 thousand for the third quarter, a $314 thousand, or 51%, improvement from the second quarter and a $2.4 million improvement from the third quarter of 2013.
• Loans increased by $83.6 million, or 14.3% (19.2% annualized) from December 31, 2013 to September 30, 2014. Additionally, FSG has transferred $86.3 million of loans into the held-for-sale category during 2014 for net loan production of $169.9 million, or 29.1% (39.0% annualized) of the 2013 year-end balance of $583.1 million.

• Average pure deposits increased by $38.3 million, or 8.4% (33.4% annualized) comparing the second and third quarters of 2014.

“Our goal for the near- and long-term is to enhance our profitability each and every quarter. We made additional progress building a balance sheet that will produce sustainable, predictable and consistently improving earnings,” said Michael Kramer, First Security's President and Chief Executive Officer. “In the current interest rate environment, we have placed a significant emphasis on growing our deposit base to support our loan growth and we are pleased with the progress achieved during the quarter.”

The below discussion of First Security's results of operations and financial condition is supplemented by the accompanying financial highlights.

Net Interest Income

For the third quarter of 2014, net interest income improved by $942 thousand, or 12.5%, to $8.5 million compared to $7.5 million for the second quarter of 2014. Interest income on loans, including fees, increased by $1.1 million while total interest income increased by $937 thousand due to the continued reduction in the investment security portfolio. Included in the increase in interest income on loans is approximately $650 thousand of discount accretion as a result of the resolution of various loans purchased at discounts. The net interest margin improved by 30 basis points in the third quarter of 2014 from 3.30% to 3.60% compared to the second quarter. Excluding the discount accretion, the net interest margin for the third quarter improved by 3 basis points to 3.33%.

Loans

Loans totaled $666.7 million as of September 30, 2014 compared to $659.5 million as of June 30, 2014. During the third quarter, approximately $52.7 million of loans were transferred into the held-for-sale category. Including the transfer into the held-for-sale category, net loan production totaled $59.9 million during the third quarter of 2014.

“During the third quarter, we achieved significant loan production from our primary markets of Chattanooga and Knoxville as well as our TriNet line of business,” said John Haddock, First Security's EVP and Chief Financial Officer. “We will continue to evaluate and sell a portion of our TriNet production to capitalize on market opportunities and manage certain lending concentrations. We expect to realize solid gains on loan sales during the fourth quarter from the $50 million held-for-sale at the end of the quarter.”

Deposits

First Security continued to improve its deposit mix to reduce the overall cost of deposits from 0.59% for the second quarter of 2014 to 0.55% for the third quarter of 2014. Average transaction deposits accounted for 56.8% of average total deposits during the third quarter, up from 54.1% for the second quarter of 2014, totaling $493.7 million as compared to $455.4 million. Average core deposits, defined as transaction accounts plus retail CDs, increased to 75.3% of average total deposits as compared to 74.0% for the second quarter. Brokered CDs declined by $14.7 million during the third quarter, while customer deposits placed and reciprocated through our Promontory© products increased by $11.6 million.

Non-Interest Income

Non-interest income totaled $2.8 million for the third quarter of 2014 compared to $3.0 million for the second quarter of 2014. FSG reported $254 thousand in net gains on sales of loans during the third quarter, or a decline of $196 thousand, as compared to $450 thousand in the second quarter of 2014. This represents the aggregate gains from First Security's SBA lending department as well as gains from certain commercial real estate loans that were classified as held-for-sale as of June 30, 2014. As of September 30, 2014, loans held-for-sale totaled $46.9 million, which are expected to be sold for gains during the fourth quarter. Mortgage banking income increased by $183 thousand to $462 thousand for the third quarter, assisted by a sale of long-term fixed rate mortgages previously held-for-investment.

Non-Interest Expense

Non-interest expense increased by $121 thousand to $10.2 million for the third quarter of 2014 as compared to the second quarter of 2014. Total non-performing asset costs, including write-downs, net gains or losses and associated expenses, increased by $135 thousand during the third quarter of 2014. As of September 30, 2014, full-time equivalent employees remained steady at 264 as compared June 30, 2014 and declined from the 313 as of September 30, 2013. Salary expense declined slightly to $5.2 million in the third quarter as compared to the second quarter.

Asset Quality

First Security recorded provision expense of $11 thousand to adjust the allowance for loan losses to FSG's current estimate of $8.6 million as of September 30, 2014. Net charge-offs during the third quarter totaled $664 thousand, of which approximately $500 thousand was a release of a previously recorded specific reserve within the allowance. The ratio of the allowance to total loans declined from 1.43% as of June 30, 2014 to 1.29% as of September 30, 2014. Total non-performing assets (“NPAs”) declined by $1.8 million to improve the NPA to total assets ratio from 1.35% to 1.16% comparing June 30, 2014 to September 30, 2014.

Capital

Stockholders' equity as of September 30, 2014 totaled $88.0 million, a $1.4 million increase from June 30, 2014. As of September 30, 2014, book value per share increased to $1.32 per share compared to $1.30 per share as of June 30, 2014 and $1.26 per share as of December 31, 2013.

“The banking teams that joined FSG this past spring are producing great results in new loan and deposit relationships,” said CEO Kramer. “We believe that our East Tennessee and North Georgia markets will enable us to build a strong community bank that will provide our shareholders with solid returns.” Kramer concluded, “While we are pleased with our progress and proud of our improvement, we are still a long way from satisfied with the level of our earnings.”

About First Security Group, Inc.

First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee, with $1.0 billion in assets. Founded in 1999, First Security's community bank subsidiary, FSGBank, N.A. has 26 full-service banking offices along the interstate corridors of eastern and middle Tennessee and northern Georgia. FSGBank provides retail and commercial banking services, trust and investment management, mortgage banking, financial planning, and internet banking (www.FSGBank.com).

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with generally accepted accounting principles in the United States of America (GAAP). First Security's management uses these “non-GAAP” measures in its analysis of First Security's performance. Non-GAAP measures typically adjust GAAP performance measures to exclude the effects of charges, expenses and gains related to the consummation of mergers and acquisitions, and costs related to the integration of merged entities. These non- GAAP measures may also exclude other significant gains, losses or expenses that are unusual in nature and not expected to recur. Since these items and their impact on First Security's performance are difficult to predict, management believes presentations of financial measures excluding the impact of these items provide useful supplemental information that is important for a proper understanding of the operating results of First Security's core business. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Forward-Looking Statements

This news release contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1993) that are based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from the results expressed in forward-looking statements. Factors that might cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in the national and local economy; and other factors, including risk factors, referred to from time to time in filings made by First Security with the Securities and Exchange Commission. First Security undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.

Public companies, from time to time, become aware of rumors concerning their business. Investors are cautioned that in this age of instant communication and internet access, it may be important to avoid relying on rumors and unsubstantiated information. First Security complies with Federal and State law applicable to disclosure of information. Investors may be at significant risk in relying on unsubstantiated information from other sources.

First Security Group, Inc. and Subsidiary Consolidated Financial Highlights (unaudited)
			3rd Quarter					2nd Quarter					1st Quarter					4th Quarter					3rd Quarter						Year-to-Date
			2014					2014					2014					2013					2013						September 30, 2014					September 30, 2013
			(in thousands, except per share amounts and full-time equivalent employees)
Earnings:
Net interest income			$	8,487				$	7,545				$	6,925				$	6,478				$	6,165					$	22,957				$	16,893
Credit for loan and lease losses			$	11				$	(270	)			$	(972	)			$	(955	)			$	(1,632	)				$	(1,231	)			$	(1,780	)
Non-interest income1			$	2,805				$	3,030				$	2,635				$	2,188				$	2,292					$	8,470				$	6,497
Non-interest expense1			$	10,222				$	10,101				$	10,445				$	10,150				$	11,197					$	30,768				$	37,614
Income tax provision (benefit)			$	132				$	131				$	132				$	119				$	322					$	395				$	358
Dividends and accretion on preferred stock			$	—				$	—				$	—				$	—				$	—					$	—				$	1,381
Effect of exchange on preferred stock to common stock			$	—				$	—				$	—				$	—				$	—					$	—				$	26,179
Net income available (loss allocated) to common stockholders			$	927				$	613				$	(45	)			$	(648	)			$	(1,430	)				$	1,495				$	11,996
Per Share Data:
Net income available (loss allocated) to common stockholders, basic			$	0.01				$	0.01				$	0.00				$	(0.01	)			$	(0.02	)				$	0.02				$	0.30
Net income available (loss allocated) to common stockholders, diluted			$	0.01				$	0.01				$	0.00				$	(0.01	)			$	(0.02	)				$	0.02				$	0.30
Book value per common share			$	1.32				$	1.30				$	1.27				$	1.26				$	1.25					$	1.32				$	1.25
Performance Ratios:
Return on average assets			0.36		%			0.24		%			(0.02		)%			(0.26		)%			(0.56		)%				0.20		%			1.52		%
Return on average common equity			4.23		%			2.86		%			(0.21		)%			(3.08		)%			(7.21		)%				2.32		%			29.77		%
Efficiency ratio			90.52		%			95.52		%			109.26		%			117.12		%			132.4		%				97.90		%			160.81		%
Non-interest income to net interest income and non-interest income			24.84		%			28.65		%			27.56		%			25.25		%			27.1		%				26.95		%			27.78		%
Capital:
Total equity to total assets			8.56		%			8.55		%			8.63		%			8.56		%			8.24		%				8.56		%			8.24		%
Liquidity, Yields and Rates:
Interest-bearing cash - average balance			$	8,436				$	8,997				$	13,653				$	34,075				$	68,964					$	10,343				$	137,291
Investment securities - average balance			230,297					247,459					272,563					330,094					329,385						249,952					291,698
Loans - average balance			702,271					673,175					604,298					550,749					529,406						660,274					544,136
Average Earning Assets			$	941,004				$	929,631				$	890,514				$	914,918				$	927,755					$	920,569				$	973,125
Pure deposits2 - average balance			$	493,707				$	455,407				$	446,820				$	452,495				$	454,379					$	465,483				$	428,826
Core deposits3 - average balance			654,893					622,636					624,365					640,177					653,044						634,076					646,062
Customer deposits4 - average balance			783,996					757,704					773,336					801,827					829,926						771,717					842,066
Brokered deposits - average balance			85,369					84,021					70,204					84,143					90,323						79,920					125,299
Total deposits - average balance			$	869,365				$	841,725				$	843,540				$	885,970				$	920,249					$	851,637				$	967,365
Total loans to total deposits			75.85		%			76.01		%			71.85		%			68.02		%			58.76		%				75.85		%			58.76		%
Yield on earning assets			4.14		%			3.86		%			3.85		%			3.53		%			3.57		%				3.96		%			3.32		%
Rate on customer deposits (including impact of non-interest bearing DDAs)			0.37		%			0.37		%			0.41		%			0.48		%			0.56		%				0.38		%			0.63		%
Cost of deposits			0.55		%			0.59		%			0.65		%			0.74		%			0.84		%				0.60		%			0.94		%
Rate on interest-bearing funding			0.66		%			0.68		%			0.78		%			0.73		%			1.01		%				0.70		%			1.09		%
Net interest margin, taxable equivalent			3.60		%			3.30		%			3.21		%			2.89		%			2.71		%				3.38		%			2.38		%
Non-Interest Income:
Service Charges on Deposits			$	778				$	769				$	741				$	800				$	798					$	2,288				$	2,298
POS Fees			436					439					401					420					401						1,276					1,171
BOLI			234					235					351					239					238						820					723
Mortgage Banking Income			462					279					180					208					420						921					927
Trust			233					235					200					188					193						668					527
Other			398					376					369					165					242						1,143					697
Net Gains on Sales of Loans			254					450					22					—					—						726					—
Net Gains on AFS sales			10					247					371					168					—						628					154
Total Non-Interest Income			$	2,805				$	3,030				$	2,635				$	2,188				$	2,292					$	8,470				$	6,497
Non-Interest Expense:
Salaries and Benefits			$	5,153				$	5,225				$	5,274				$	5,503				$	5,807					$	15,652				$	17,081
Occupancy			814					776					820					799					891						2,410					2,502
Furniture and Fixtures			565					520					557					544					656						1,642					1,799
Professional Fees			658					690					599					417					533						1,947					1,840
FDIC insurance assessments			336					336					311					150					150						983					2,150
Write-downs on OREO and repossessions			289					76					309					375					374						674					1,997
Losses (Gains) on OREO, repossessions and fixed assets, net			(113		)			(15		)			10					57					(116		)				(118		)			(417		)
Non-performing asset expenses, net			204					184					221					450					488						609					3,506
Data processing			577					506					588					517					628						1,671					1,697
Communications			129					147					150					172					141						426					411
Debit card fees			244					232					258					181					207						734					625
Intangible asset amortization			49					49					48					57					67						146					213
Printing and supplies			144					150					207					121					213						501					528
Advertising			140					135					134					65					89						409					246
Insurance			295					303					325					251					523						923					1,873
Other			738					787					634					491					546						2,159					1,562
Total Non-Interest Expense			$	10,222				$	10,101				$	10,445				$	10,150				$	11,197					$	30,768				$	37,613
Asset Quality:
Net charge-offs (recoveries)			$	664				$	(470	)			$	228				$	(754	)			$	(32	)				$	422				$	1,320
Net loan charge-offs (recoveries) to average loans, annualized			0.19		%			(0.14		)%			0.15		%			(0.55		)%			(0.02		)%				0.09		%			0.32		%
Non-accrual loans			$	4,000				$	4,891				$	6,027				$	7,203				$	6,803					$	4,000				$	6,803
Other real estate owned and repossessed assets, net			$	5,960				$	7,725				$	7,075				$	8,213				$	8,678					$	5,960				$	8,678
Loans 90 days past due			$	1,951				$	1,083				$	854				$	928				$	509					$	1,951				$	509
Non-performing assets (NPA)			$	11,911				$	13,699				$	13,956				$	16,344				$	15,990					$	11,911				$	15,990
NPA to total assets			1.16		%			1.35		%			1.42		%			1.67		%			1.58		%				1.16		%			1.58		%
Non-performing loans (NPL)			$	5,951				$	5,974				$	6,881				$	8,131				$	7,312					$	5,951				$	7,312
NPL to total loans			0.89		%			0.91		%			1.14		%			1.39		%			1.37		%				0.89		%			1.37		%
Allowance for loan and lease losses to total loans			1.29		%			1.43		%			1.52		%			1.80		%			2.00		%				1.29		%			2.00		%
Allowance for loan and lease losses to NPL			144.51		%			157.35		%			133.70		%			129.14		%			146.33		%				144.51		%			146.33		%
Period End Balances:
Loans, excluding HFS			$	666,728				$	659,539				$	604,859				$	583,097				$	534,627					$	666,728				$	534,627
Allowance for loan and lease losses			$	8,600				$	9,400				$	9,200				$	10,500				$	10,700					$	8,600				$	10,700
Intangible assets			$	184				$	233				$	282				$	330				$	388					$	184				$	388
Assets			$	1,027,882				$	1,012,685				$	980,505				$	977,574				$	1,011,855					$	1,027,882				$	1,011,855
Total deposits			$	879,029				$	867,709				$	841,832				$	857,268				$	909,848					$	879,029				$	909,848
Common stockholders' equity			$	87,963				$	86,566				$	84,654				$	83,649				$	83,388					$	87,963				$	83,388
Total stockholders' equity			$	87,963				$	86,566				$	84,654				$	83,649				$	83,388					$	87,963				$	83,388
Common stock market capitalization			$	132,315				$	144,594				$	138,601				$	153,187				$	138,534					$	132,315				$	138,534
Full-time equivalent employees			264					264					275					285					313						264					313
Common shares outstanding			66,826					66,633					66,635					66,603					66,603						66,826					66,603
Average Balances:
Loans, including HFS			$	702,271				$	673,175				$	604,298				$	550,749				$	529,406					$	660,274				$	544,136
Intangible assets			$	217				$	265				$	313				$	363				$	405					$	264				$	501
Earning assets			$	941,004				$	929,631				$	890,514				$	914,918				$	927,755					$	920,569				$	973,125
Assets			$	1,017,631				$	1,006,143				$	967,624				$	993,447				$	1,016,919					$	997,316				$	1,055,611
Deposits			$	869,365				$	841,725				$	843,540				$	885,970				$	920,249					$	851,637				$	967,365
Common stockholders' equity			$	87,656				$	85,613				$	84,340				$	84,125				$	79,382					$	85,882				$	53,720
Total stockholders' equity			$	87,656				$	85,613				$	84,340				$	84,125				$	79,382					$	85,882				$	65,659
Common shares outstanding, basic - wtd			65,869					65,731					65,726					66,603					62,600						65,776					40,020
Common shares outstanding, diluted - wtd			65,874					65,737					65,726					66,603					62,600						65,779					40,020
1 Certain amounts were reclassified between non-interest income and non-interest expense to conform with the current presentation.
2 Pure deposits are all transaction-based accounts, including non-interest bearing DDAs, interest bearing DDAs, money market accounts and savings accounts.
3 Core deposits are Pure deposits plus customer certificates of deposits less than $100,000.
4 Customer deposits are total deposits less brokered deposits.

First Security Group, Inc. and Subsidiary Consolidated Financial Highlights Non-GAAP Reconciliation Table (unaudited)
			3rd Quarter				2nd Quarter				1st Quarter				4th Quarter				3rd Quarter					Year-to-Date
			2014				2014				2014				2013				2013					September 30, 2014				September 30, 2013
			(in thousands, except per share data)
Total stockholders' equity			$	87,963			$	86,566			$	84,654			$	83,649			$	83,388				$	87,963			$	83,388
Effect of preferred stock			—				—				—				—				—					—				—
Common stockholders' equity			$	87,963			$	86,566			$	84,654			$	83,649			$	83,388				$	87,963			$	83,388
Average total stockholders' equity			$	87,657			$	85,613			$	84,340			$	84,125			$	79,382				$	85,882			$	65,659
Effect of average preferred stock			—				—				—				—				—					—				(11,939		)
Average common stockholders' equity			$	87,657			$	85,613			$	84,340			$	84,125			$	79,382				$	85,882			$	53,720

First Security Group, Inc. and Subsidiary Consolidated Balance Sheets
	September 30, 2014				December 31, 2013				September 30, 2013
(in thousands)	(unaudited)								(unaudited)
ASSETS
Cash and Due from Banks	$	11,519			$	10,742			$	10,357
Interest Bearing Deposits in Banks	7,344				10,126				59,943
Cash and Cash Equivalents	18,863				20,868				70,300
Securities Available-for-Sale	98,677				172,830				207,009
Securities Held-to-Maturity, at amortized cost (fair value - $131,549 at September 30, 2014, $132,104 at December 31, 2013 and $130,170 at September 30, 2013)	129,313				132,568				129,164
Loans Held-for-Sale	46,904				220				1,661
Loans	666,728				583,097				534,627
Less: Allowance for Loan and Lease Losses	8,600				10,500				10,700
Net Loans	658,128				572,597				523,927
Premises and Equipment, net	27,862				27,888				28,810
Bank Owned Life Insurance	29,020				28,346				28,155
Other Real Estate Owned	5,952				8,201				8,662
Other Assets	13,163				14,056				14,167
TOTAL ASSETS	$	1,027,882			$	977,574			$	1,011,855
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest Bearing Demand	$	155,177			$	144,365			$	147,865
Interest Bearing Demand	104,404				95,559				92,108
Savings and Money Market Accounts	252,218				206,125				215,293
Certificates of Deposit less than $100 thousand	157,629				182,408				195,129
Certificates of Deposit of $100 thousand or more	125,606				153,750				170,466
Brokered Deposits	83,995				75,062				88,987
Total Deposits	879,029				857,269				909,848
Federal Funds Purchased and Securities Sold under Agreements to Repurchase	12,878				12,520				12,657
Other Borrowings	43,485				20,000				—
Other Liabilities	4,527				4,137				5,962
Total Liabilities	939,919				893,926				928,467
SHAREHOLDERS' EQUITY
Common Stock – $.01 par value – 150,000,000 shares authorized; 66,826,254 shares issued as of September 30, 2014, 66,602,601 shares issued as of December 31, 2013, and 66,602,601 shares issued as of September 30, 2013	766				764				764
Paid-In Surplus	197,326				196,536				196,059
Accumulated Deficit	(102,547		)		(104,042		)		(103,395		)
Accumulated Other Comprehensive Loss	(7,582		)		(9,610		)		(10,040		)
Total Shareholders' Equity	87,963				83,648				83,388
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,027,882			$	977,574			$	1,011,855

First Security Group, Inc. and Subsidiary Consolidated Statements of Operations (unaudited)
			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except per share data)			2014						2013						2014						2013
INTEREST INCOME
Loans, including fees			$	8,805					$	6,461					$	23,493					$	19,537
Investment Securities – taxable			887						1,321						2,883						3,143
Investment Securities – non-taxable			86						312						524						749
Other			2						77						52						338
Total Interest Income			9,780						8,171						26,952						23,767
INTEREST EXPENSE
Interest Bearing Demand Deposits			42						62						137						213
Savings Deposits and Money Market Accounts			193						188						467						628
Certificates of Deposit of less than $100 thousand			253						466						824						1,551
Certificates of Deposit of $100 thousand or more			246						475						793						1,558
Brokered Deposits			484						795						1,576						2,873
Other			75						20						198						51
Total Interest Expense			1,293						2,006						3,995						6,874
NET INTEREST INCOME			8,487						6,165						22,957						16,893
Provision (Credit) for Loan and Lease Losses			11						(1,632		)				(1,231		)				(1,780		)
NET INTEREST INCOME AFTER CREDIT FOR LOAN AND LEASE LOSSES			8,476						7,797						24,188						18,673
NONINTEREST INCOME
Service Charges on Deposit Accounts			778						798						2,288						2,298
Mortgage Banking Income			462						420						921						927
Gain on Sales of Securities Available-for-Sale			10						—						628						154
Gain on Sales of Loans			254						—						726						—
Other			1,301						1,074						3,907						3,118
Total Noninterest Income			2,805						2,292						8,470						6,497
NONINTEREST EXPENSES
Salaries and Employee Benefits			5,153						5,807						15,652						17,081
Expense on Premises and Fixed Assets, net of rental income			1,379						1,547						4,052						4,301
Other			3,690						3,843						11,064						16,232
Total Noninterest Expenses			10,222						11,197						30,768						37,614
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)			1,059						(1,108		)				1,890						(12,444		)
Income Tax Provision			132						322						395						358
NET INCOME (LOSS)			927						(1,430		)				1,495						(12,802		)
Preferred Stock Dividends			—						—						—						(929		)
Accretion on Preferred Stock Discount			—						—						—						(452		)
Effect of Exchange of Preferred Stock to Common Stock			—						—						—						26,179
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS			$	927					$	(1,430	)				$	1,495					$	11,996
NET INCOME PER SHARE:
Net Income (Loss) Per Share – Basic			$	0.01					$	(0.02	)				$	0.02					$	0.30
Net Income (Loss) Per Share – Diluted			$	0.01					$	(0.02	)				$	0.02					$	0.30
Dividends Declared Per Common Share			$	—					$	—					$	—					$	—