First Security Group, Inc. (NASDAQ: FSGI) (“First Security” or “FSG”) today reported a net loss available to common shareholders for the first quarter of 2014 of $45 thousand, as compared to a loss of $648 thousand in the fourth quarter of 2013 and a $7.9 million loss in the first quarter of 2013. Loans, including held-for-sale, increased by $57.0 million, or 9.8%, since December 31, 2013 and $96.4 million, or 17.7%, since March 31, 2013.

“The improvement in our revenue is reflective of the loan growth realized in the last two quarters,” said Michael Kramer, First Security’s President and Chief Executive Officer. “We achieved pre-tax income during the first quarter of 2014 with a negative provision to the allowance. Our goal is to continue our momentum to achieve core profitability.”

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 first quarter of 2014, net interest income improved by $447 thousand, or 6.9%, to $6.9 million compared to $6.5 million for the linked fourth quarter of 2013. Interest income on loans, including fees, increased by $454 thousand while total interest income increased by $180 thousand due to reduction in the investment security portfolio. During the last two quarters, First Security sold approximately $71.3 million of lower yielding investment securities to redeploy into loans. Total interest expense improved by $267 thousand through improvement in the cost of deposits as well as reductions in total deposits. For the first quarter of 2014, the net interest margin improved by 32 basis points to 3.21% compared to 2.89% in the fourth quarter of 2013.

Loans

Loans, excluding held-for-sale, totaled $604.9 million as of March 31, 2014, a $21.8 million increase, or 3.7%, from the December 31, 2013 total of $583.1 million. As of March 31, 2014, First Security reclassified approximately $33.6 million of loans into held-for-sale. These loans are expected to be sold at a gain during the second quarter of 2014. For loans held-for-investment, the main categories of loan growth during the first quarter of 2014 included: owner-occupied real estate by $8.9 million, or 7.8%; commercial loans by $8.6 million, or 15.5%; and consumer loans by $3.0 million, or 14.2%.

“The loan growth in the owner-occupied real estate and commercial categories reflects our progress towards becoming the community bank of choice for small businesses in East Tennessee,” said John Haddock, First Security’s EVP and Chief Financial Officer. “With the Consent Order lifted, we are focused on achieving the enhanced revenue opportunities of a well-capitalized bank, including expanding our dedicated SBA lending department as well as our mortgage department.”

Deposits

During the first quarter, First Security continued to improve its deposit mix to reduce the overall cost of deposits from 0.74% for the fourth quarter of 2013 to 0.65% for the first quarter of 2014. Average pure deposits, defined as transaction accounts, for the first quarter of 2014 accounted for 53.0% of average total deposits as compared to 51.1% for the fourth quarter of 2013. Average core deposits, defined as transaction accounts plus retail CDs, accounted for 74.0% of average total deposits as compared to 72.3% for the fourth quarter.

Non-Interest Income

Non-interest income totaled $2.6 million for the first quarter of 2014 compared to $2.2 million for the fourth quarter of 2013. First Security recorded investment security gains of $371 thousand in the first quarter compared to $168 thousand in the fourth quarter. Excluding the investment security gains, non-interest income improved by $244 thousand. Income from bank-owned life insurance increased by $114 thousand, primarily due to a non-recurring interest bonus on certain policies. Service charges on deposits, point-of-sale fees, and mortgage banking fees all declined, primarily due to seasonality.

Non-Interest Expense

Non-interest expense increased by $295 thousand to $10.4 million for the first quarter of 2014 as compared to the fourth quarter of 2013. As of March 31, 2014, full-time equivalent employees declined to 275 as compared to 285 as of December 31, 2013 and 325 as of March 31, 2013. Total salary and benefit expense declined by $229 thousand in the first quarter of 2014 as compared to the fourth quarter of 2013. These savings were fully offset by higher operating expenses, including professional fees increasing by $182 thousand.

Asset Quality

First Security recorded a $972 thousand negative provision to adjust the allowance for loan losses to First Security’s current estimate of $9.2 million as of March 31, 2014. The ratio of the allowance to total loans declined from 1.80% as of December 31, 2013 to 1.52% as of March 31, 2014. Total non-performing assets (“NPAs”) declined by $2.4 million, or 14.6%, to $14.0 million as of March 31, 2014 compared to December 31, 2013. NPAs to total assets as of March 31, 2014 improved to 1.42% compared to 1.67% as of December 31, 2013.

Capital

Stockholders’ equity as of March 31, 2014 totaled $84.7 million, a $1.0 million increase from December 31, 2013. As of March 31, 2014, book value per share increased to $1.27 per share compared to $1.26 per share as of year-end. With the termination of the Consent Order between the Office of the Comptroller of the Currency and FSGBank, FSGBank met all regulatory minimum capital ratios to be classified as “well-capitalized” at March 31, 2014.

“Four goals were identified when this management team began the turnaround process at FSG: improving asset quality to peer group or better levels, recapitalizing First Security and FSGBank, removing the regulatory enforcement order, and achieving core profitability,” said CEO Kramer. “At the one year mark of the turnaround, we are focused on the fourth and final goal - achieving core profitability and building a sustainable and improving profitability profile.”

About First Security Group, Inc.

First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee, with $980.5 million in assets. Founded in 1999, First Security’s community bank subsidiary, FSGBank, N.A. has 28 full-service banking offices along the interstate corridors of eastern and middle Tennessee and northern Georgia. In Dalton, Georgia, FSGBank operates under the name of Dalton Whitfield Bank; along the Interstate 40 corridor in Tennessee, FSGBank operates under the name of Jackson Bank & Trust. FSGBank provides retail and commercial banking services, trust and investment management, mortgage banking, financial planning, 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. These forward-looking statements include, among others, an estimated goodwill impairment charge and the assumptions underlying this estimate. 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)

 
1st Quarter 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
2014 2013 2013 2013 2013
(in thousands, except per share amounts and full-time equivalent employees)
Earnings:
Net interest income $ 6,925 $ 6,478 $ 6,165 $ 5,486 $ 5,241
(Credit) Provision for loan and lease losses $ (972 ) $ (955 ) $ (1,632 ) $ (826 ) $ 678
Non-interest income1 $ 2,635 $ 2,188 $ 2,292 $ 2,190 $ 2,013
Non-interest expense1 $ 10,445 $ 10,150 $ 11,197 $ 12,578 $ 13,835
Income tax provision (benefit) $ 132 $ 119 $ 322 $ (83 ) $ 119
Dividends and accretion on preferred stock $ — $ — $ — $ 858 $ 524
Effect of exchange on preferred stock to common stock $ — $ — $ — $ 26,179 $ —
Net (loss allocated) income available to common stockholders $ (45 ) $ (648 ) $ (1,430 ) $ 21,328 $ (7,902 )
 
Per Share Data:
Net (loss allocated) income available to common stockholders, basic $ 0.00 $ (0.01 ) $ (0.02 ) $ 0.39 $ (4.90 )
Net (loss allocated) income available to common stockholders, diluted $ 0.00 $ (0.01 ) $ (0.02 ) $ 0.39 $ (4.90 )
Book value per common share $ 1.27 $ 1.26 $ 1.25 $ 1.39 $ (6.58 )
 
Performance Ratios:
Return on average assets -0.02 % -0.26 % -0.56 % 7.97 % -3.02 %
Return on average common equity -0.21 % -3.08 % -7.21 % 95.78 % NM
Efficiency ratio 109.26 % 117.12 % 132.40 % 163.86 % 190.72 %
Non-interest income to net interest income and non-interest income 27.56 % 25.25 % 27.10 % 28.53 % 27.75 %
 
Capital:
Total equity to total assets 8.63 % 8.56 % 8.24 % 8.12 % 2.02 %
 
Liquidity, Yields and Rates:
Interest-bearing cash - average balance $ 13,653 $ 34,075 $ 68,964 $ 122,499 $ 156,117
Investment securities - average balance 272,563 330,094 329,385 322,747 253,265
Loans - average balance 604,298   550,749   529,406   547,499   554,204  
Average Earning Assets $ 890,514   $ 914,918   $ 927,755   $ 992,745   $ 963,586  
Pure deposits2 - average balance $ 446,820 $ 452,495 $ 454,379 $ 431,988 $ 414,244
Core deposits3 - average balance 624,365 640,177 653,044 648,373 639,558
Customer deposits4 - average balance 773,336 801,827 829,926 847,007 839,307
Brokered deposits - average balance 70,204   84,143   90,323   111,801   153,741  
Total deposits - average balance $ 843,540   $ 885,970   $ 920,249   $ 958,808   $ 993,048  
Total loans to total deposits 71.85 % 68.02 % 58.76 % 56.59 % 54.53 %
Yield on earning assets 3.85 % 3.53 % 3.57 % 3.20 % 3.33 %
Rate on customer deposits (including impact of non-interest bearing DDAs) 0.41 % 0.48 % 0.56 % 0.63 % 0.68 %
Cost of deposits 0.65 % 0.74 % 0.84 % 0.94 % 1.04 %
Rate on interest-bearing funding 0.78 % 0.73 % 1.01 % 1.11 % 1.20 %
Net interest margin, taxable equivalent 3.21 % 2.89 % 2.71 % 2.27 % 2.25 %
 
Non-Interest Income:
Service Charges on Deposits $ 741 $ 800 $ 798 $ 763 $ 736
POS Fees 401 420 401 398 371
BOLI 351 239 238 241 242
Mortgage Banking Income 180 208 420 211 296
Trust 200 188 193 187 147
Other 391 165 242 236 221
Net Gains on AFS sales 371   168   0   154   0  
Total Non-Interest Income $ 2,635   $ 2,188   $ 2,292   $ 2,190   $ 2,013  
 
Non-Interest Expense:
Salaries and Benefits $ 5,274 $ 5,503 $ 5,807 $ 5,665 $ 5,609
Occupancy 820 799 891 794 818
Furniture and Fixtures 557 544 656 595 549
Professional Fees 599 417 533 706 601
FDIC insurance assessments 311 150 150 1,000 1,000
Write-downs on OREO and repossessions 309 375 374 309 1,315
Losses (Gains) on OREO, repossessions and fixed assets, net 10 57 (116 ) (153 ) (147 )
Non-performing asset expenses, net 221 450 488 1,142 1,877
Data processing 588 517 628 503 566
Communications 150 172 141 142 128
Debit card fees 258 181 207 201 217
Intangible asset amortization 48 57 67 71 75
Printing and supplies 207 121 213 176 138
Advertising 134 65 89 59 98
Insurance 325 251 523 946 405
Other 634   491   571   422   580  
Total Non-Interest Expense $ 10,445   $ 10,150   $ 11,222   $ 12,578   $ 13,829  
 
Asset Quality:
Net (recoveries) charge-offs $ 228 $ (754 ) $ (32 ) $ 374 $ 978
Net loan (recoveries) charged-offs to average loans, annualized 0.15 % -0.55 % -0.02 % 0.27 % 0.71 %
Non-accrual loans $ 6,027 $ 7,203 $ 6,803 $ 8,628 $ 10,194
Other real estate owned and repossessed assets, net $ 7,075 $ 8,213 $ 8,678 $ 10,549 $ 12,722
Loans 90 days past due $ 854 $ 928 $ 509 $ 332 $ 1,270
Non-performing assets (NPA) $ 13,956 $ 16,344 $ 15,990 $ 19,509 $ 24,186
NPA to total assets 1.42 % 1.67 % 1.58 % 1.83 % 2.32 %
Non-performing loans (NPL) $ 6,881 $ 8,131 $ 7,312 $ 8,960 $ 11,464
NPL to total loans 1.14 % 1.39 % 1.37 % 1.65 % 2.12 %
Allowance for loan and lease losses to total loans 1.52 % 1.80 % 2.00 % 2.27 % 2.50 %
Allowance for loan and lease losses to NPL 133.70 % 129.14 % 146.33 % 137.28 % 117.76 %
 
Period End Balances:
Loans, excluding HFS $ 604,859 $ 583,097 $ 534,627 $ 542,019 $ 540,288
Allowance for loan and lease losses $ 9,200 $ 10,500 $ 10,700 $ 12,300 $ 13,500
Intangible assets $ 282 $ 330 $ 388 $ 455 $ 526
Assets $ 980,505 $ 977,574 $ 1,011,855 $ 1,066,649 $ 1,040,753
Total deposits $ 841,832 $ 857,268 $ 909,848 $ 957,811 $ 990,894
Common stockholders' equity $ 84,654 $ 83,649 $ 83,388 $ 86,654 $ (11,666 )
Total stockholders' equity $ 84,654 $ 83,649 $ 83,388 $ 86,654 $ 20,994
Common stock market capitalization $ 138,601 $ 153,187 $ 138,534 $ 135,469 $ 4,678
Full-time equivalent employees 275 285 313 327 325
Common shares outstanding 66,635 66,603 66,603 62,428 1,772
 
Average Balances:
Loans, including HFS $ 604,298 $ 550,749 $ 529,406 $ 547,499 $ 554,204
Intangible assets $ 313 $ 363 $ 405 $ 476 $ 574
Earning assets $ 890,514 $ 914,918 $ 927,755 $ 992,745 $ 963,586
Assets $ 967,624 $ 993,447 $ 1,016,919 $ 1,070,895 $ 1,047,184
Deposits $ 843,540 $ 885,970 $ 920,249 $ 958,808 $ 993,048
Common stockholders' equity $ 84,340 $ 84,125 $ 79,382 $ 89,069 $ (5,402 )
Total stockholders' equity $ 84,340 $ 84,125 $ 79,382 $ 92,658 $ 27,184
Common shares outstanding, basic - wtd 65,726 66,603 62,600 55,174 1,613
Common shares outstanding, diluted - wtd 65,726 66,603 62,600 55,176 1,613
 
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 excluded brokered deposits.
 
                   

First Security Group, Inc. and Subsidiary

Consolidated Financial Highlights

Non-GAAP Reconciliation Table

(unaudited)

 
1st Quarter 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
2014 2013 2013 2013 2013
(in thousands, except per share data)
 
Total stockholders' equity $ 84,654 $ 83,649 $ 83,388 $ 86,654 $ 20,994
Effect of preferred stock —   —   —   —   (32,660 )
Common stockholders' equity $ 84,654   $ 83,649   $ 83,388   $ 86,654   $ (11,666 )
 
Average total stockholders' equity $ 84,340 $ 84,125 $ 79,382 $ 92,658 $ 27,184
Effect of average preferred stock —   —   —   (3,589 ) (32,586 )
Average common stockholders' equity $ 84,340   $ 84,125   $ 79,382   $ 89,069   $ (5,402 )
 
           

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

 
March 31, 2014 December 31, 2013 March 31, 2013
(in thousands, except share data)     (unaudited) (unaudited)
ASSETS
Cash & Due from Banks $ 7,896 $ 10,742 $ 9,407
Interest Bearing Deposits in Banks 11,503   10,126   157,931  
Cash and Cash Equivalents 19,399 20,868 167,338
Securities Available-for-Sale 120,087 172,830 258,175
Securities Held-to-Maturity, at amortized cost (fair value - $132,695) 131,819 132,568 —
Loans Held for Sale 35,503 220 3,708
Loans 604,859 583,097 540,288
Less: Allowance for Loan and Lease Losses 9,200   10,500   13,500  
Net Loans 595,659 572,597 526,788
Premises and Equipment, net 28,143 27,888 29,239
Bank Owned Life Insurance 28,649 28,346 27,760
Intangible Assets 282 330 526
Other Real Estate Owned 7,067 8,201 12,706
Other Assets 13,897   13,726   14,513  
TOTAL ASSETS $ 980,505   $ 977,574   $ 1,040,753  
 
LIABILITIES
Deposits
Noninterest-Bearing Demand $ 150,075 $ 144,365 $ 145,207
Interest-Bearing Demand 100,495 95,559 88,184
Savings and Money Market Accounts 204,007 206,125 191,889
Certificates of Deposit of less than $100 thousand 172,449 182,408 224,494
Certificates of Deposit of $100 thousand or more 142,247 153,750 201,405
Brokered Deposits 72,559   75,062   139,715  
Total Deposits 841,832 857,269 990,894

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

12,661 12,520 13,048
Security Deposits — 14 42
Other Borrowings 37,585 20,000 —
Other Liabilities 3,773   4,123   15,775  
Total Liabilities 895,851   893,926   1,019,759  
STOCKHOLDERS' EQUITY
Preferred Stock - no par value 10,000,000 authorized; no shares issued as of March 31, 2014 or December 31, 2013; 33,000 issued as of March 31, 2013; Liquidation value of $0 as of March 31, 2014 and December 31, 2013 and $38,569 as of March 31, 2013 — — 32,660
Common Stock - $.01 par value 150,000,000 shares authorized; 66,635,101 shares issued as of March 31, 2014; 66,602,601 shares issued as of December 31, 2013, 1,772,342 shares issued as of March 31, 2013 764 764 115
Paid-In Surplus 196,841 196,536 106,622
Common Stock Warrants — — 2,006
Accumulated Deficit (104,087 ) (104,042 ) (123,293 )
Accumulated Other Comprehensive Income (8,864 ) (9,610 ) 2,884  
Total Stockholders' Equity 84,654   83,648   20,994  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 980,505   $ 977,574   $ 1,040,753  
 
   

First Security Group, Inc. and Subsidiary

Consolidated Statements of Operations

(unaudited)

 
Three Months Ended March 31,
(in thousands except per share amounts) 2014     2013  
INTEREST INCOME  
Loans, including fees $ 7,016 $ 6,670
Investment Securities - taxable 1,060 812
Investment Securities - non-taxable 240 205
Other 13   122  
Total Interest Income 8,329   7,809  
 
INTEREST EXPENSE
Interest Bearing Demand Deposits 47 74
Savings Deposits and Money Market Accounts 130 222
Certificates of Deposit of less than $100 thousand 309 564
Certificates of Deposit of $100 thousand or more 304 556
Brokered Deposits 561 1,136
Other 53   16  
Total Interest Expense 1,404   2,568  
 
NET INTEREST INCOME 6,925 5,241
(Credit) Provision for Loan and Lease Losses (972 ) 678  
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 7,897   4,563  
 
NON-INTEREST INCOME1
Service Charges on Deposit Accounts 741 736
Mortgage Banking Income 180 296
Gain on Sales of Available for Sale Securities, net 371 —
Other 1,343   1,188  
Total Non-interest Income 2,635   2,220  
 
NON-INTEREST EXPENSE1
Salaries and Employee Benefits 5,274 5,609
Expense on Premises and Fixed Assets, net of rental income 1,377 1,447
Other 3,794   6,986  
Total Non-interest Expense 10,445   14,042  
 
INCOME (LOSS) BEFORE INCOME TAX PROVISION 87 (7,259 )
Income Tax Expense 132   119  
NET LOSS (45 ) (7,378 )
Preferred Stock Dividends — (413 )
Accretion on Preferred Stock Discount — (111 )
Effect of Exchange of Preferred Stock to Common Stock —   —  
NET LOSS ALLOCATED TO COMMON STOCKHOLDERS $ (45 ) $ (7,902 )
 
NET INCOME (LOSS) PER SHARE:
Net Income (Loss) Per Share - basic $ 0.00 $ (4.90 )
Net Income (Loss) Per Share - diluted $ 0.00 $ (4.90 )
 
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 65,726 1,613
DILUTED 65,726 1,613
 
1 Certain amounts were reclassified between non-interest income and non-interest expense to conform with the current presentation.