FSGI (MM)

Strong Deposit and Loan Growth Achieved in 2014

First Security Group, Inc. (NASDAQ: FSGI) (“First Security” or “FSG”) reported net income for the fourth quarter of 2014 of $922 thousand, or $0.01 per basic and diluted share, and $2.4 million for the year ended December 31, 2014, or $0.04 per basic and diluted share.

Financial Highlights

• Net income of $922 thousand for the fourth quarter of 2014, consistent with the $927 thousand net income of the third quarter 2014 and a $1.6 million improvement from the fourth quarter of 2013.
• Loans held-for-investment totaled $663.6 million at year-end, an increase of $80.5 million, or 13.8%, from 2013. Loan sales, excluding mortgage activity, totaled approximately $27.9 million during the fourth quarter and $75.1 million for 2014. Loans held-for-sale at year-end totaled $72.2 million.
• Pure deposits as of December 31, 2014 increased by $83.7 million, or 18.8%, to $529.7 million compared to $446.0 million as of December 31, 2013.

“The primary goals of 2014 were returning to core profitability, net loan production of $50 million per quarter, and funding the resulting asset growth with pure deposits,” said Michael Kramer, First Security’s President and Chief Executive Officer. “We achieved each of these goals. Total loans, including held-for-sale, increased by $153 million during 2014, and when combined with our loan sale transactions, we exceeded our $200 million net production goal. We also achieved the desired growth in pure deposits and earned $2.4 million in net income.”

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 year ended December 31, 2014, net interest income totaled $30.9 million, an increase of $7.5 million, or 32.2%, as compared to $23.4 million for 2013. For the fourth quarter of 2014, net interest income declined by $543 thousand to $7.9 million compared to $8.5 million for the third quarter of 2014. During the third quarter, approximately $650 thousand of discount accretion was earned as a result of the resolution of various loans purchased at discounts. Excluding the discount accretion from the third quarter, the net interest margin remained consistent at 3.32% for the fourth quarter as compared to 3.33% for the third quarter.

Loans

Loans, excluding held-for-sale, totaled $663.6 million as of December 31, 2014, an increase of $80.5 million, or 13.8%, from December 31, 2013. Loans held-for-sale totaled $72.2 million as of year-end as compared to $220 thousand as of December 31, 2013. During the fourth quarter, an additional $53.2 million of loans were transferred or originated into the held-for-sale category, net of loan sales of approximately $27.9 million.

Deposits

Pure deposits, defined as transaction accounts, increased $83.7 million, or 18.8%, to $529.7 million as of December 31, 2014 compared to year-end 2013. FSG continued to improve its deposit mix, reducing the overall cost of deposits from 0.55% for the third quarter of 2014 to 0.49% for the fourth quarter of 2014. Average pure deposits accounted for 59.3% of average total deposits during the fourth quarter, up from 56.8% for the third quarter of 2014. Average core deposits, defined as transaction accounts plus retail CDs, increased to 76.7% of average total deposits as compared to 75.3% for the third quarter.

Non-Interest Income

Non-interest income totaled $12.3 million for the year ended December 31, 2014, an increase of $3.6 million, or 41.2%, compared to 2013. For the fourth quarter of 2014, non-interest income totaled $3.8 million, an increase of $983 thousand as compared to the third quarter. For the quarter- and year-to-date periods, gains on sales of loans were the primary driver for the increased earnings. During the fourth quarter, approximately $27.9 million of SBA and commercial real estate loans were sold resulting in gains of $886 thousand. As of December 31, 2014, loans held-for-sale total $72.2 million, which are expected to sell for gains during the first quarter of 2015.

“Given the current rate and competitive environment, additional improvements to our net interest margin will be challenging in 2015. This further emphasizes the importance of maintaining and increasing our level of non-interest income,” said John Haddock, First Security’s EVP and Chief Financial Officer. “We are actively adding additional resources to our SBA department and will continue to evaluate our TriNet production to assist in managing our commercial real estate concentration and to capitalize on market opportunities.”

Non-Interest Expense

Non-interest expense improved by $6.1 million, or 12.8%, to $41.7 million in 2014 as compared to 2013. For the fourth quarter of 2014, non-interest expense increased from $10.2 million to $10.9 million as a result of additional incentive compensation expense and elevated professional fees. As of December 31, 2014, full-time equivalent employees totaled 268 as compared to 264 as of September 30, 2014 and 285 as of December 31, 2013.

Asset Quality

First Security recorded a negative provision expense of $221 thousand in the fourth quarter to adjust the allowance for loan losses to FSG’s current estimate of $8.6 million as of December 31, 2014. The negative provision was a direct result of net recoveries of $221 thousand during the fourth quarter. The ratio of the allowance to total loans remained consistent at 1.29% as of December 31, 2014 as compared to September 30, 2014. Total non-performing assets (“NPAs”) declined by $2.9 million during the fourth quarter to improve the NPA to total assets ratio from 1.16% to 0.84%. During 2014, total NPAs declined by $7.4 million, or 45.1%.

Capital

Shareholders’ equity as of December 31, 2014 totaled $90.0 million, a $2.0 million increase from September 30, 2014 and a $6.3 million increase from December 31, 2013. As of December 31, 2014, book value per share increased to $1.35 per share compared to $1.32 per share as of September 30, 2014 and $1.26 per share as of December 31, 2013.

“While we are pleased with our progress achieved during 2014, we remain committed to improving the level of earnings each and every quarter in 2015,” said CEO Kramer. “We believe the combination of our team of bankers in the East Tennessee and North Georgia markets as well as our niche lending initiatives provide a platform to build a strong community bank that will produce solid returns for our shareholders.”

About First Security Group, Inc.

First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee, with $1.1 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 significant gains, losses or expenses that are unusual in nature and not expected to recur. Non-GAAP measures may also exclude non-recurring charges, expenses and gains related to the consummation of mergers and acquisitions, and costs related to the integration of merged entities. 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 SubsidiaryConsolidated Financial Highlights(unaudited)

          4th Quarter     3rd Quarter     2nd Quarter     1st Quarter     4th Quarter     Year-to-Date 2014     2014     2014     2014     2013    

December 31,

2014

   

December 31,

2013

(in thousands, except per share amounts and full-time equivalent employees) Earnings:     Net interest income $ 7,944 $ 8,487 $ 7,545 $ 6,925 $ 6,478 $ 30,901 $ 23,370 Credit for loan and lease losses $ (221 ) $ 11 $ (270 ) $ (972 ) $ (955 ) $ (1,452 ) $ (2,735 ) Non-interest income1 $ 3,788 $ 2,805 $ 3,030 $ 2,635 $ 2,188 $ 12,258 $ 8,683 Non-interest expense1 $ 10,900 $ 10,222 $ 10,101 $ 10,445 $ 10,150 $ 41,668 $ 47,760 Income tax provision (benefit) $ 131 $ 132 $ 131 $ 132 $ 119 $ 526 $ 477 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 shareholders $ 922 $ 927 $ 613 $ (45 ) $ (648 ) $ 2,417 $ 11,349   Per Share Data: Net income available (loss allocated) to common shareholders, basic $ 0.01 $ 0.01 $ 0.01 $ 0.00 $ (0.01 ) $ 0.04 $ 0.24 Net income available (loss allocated) to common shareholders, diluted $ 0.01 $ 0.01 $ 0.01 $ 0.00 $ (0.01 ) $ 0.04 $ 0.24 Book value per common share $ 1.35 $ 1.32 $ 1.30 $ 1.27 $ 1.26 $ 1.35 $ 1.26   Performance Ratios: Return on average assets 0.36 % 0.36 % 0.24 % (0.02 )% (0.26 )% 0.24 % 1.09 % Return on average common equity 4.13 % 4.23 % 2.86 % (0.21 )% (3.08 )% 2.79 % 18.49 % Efficiency ratio 92.91 % 90.52 % 95.52 % 109.26 % 117.12 % 96.55 % 149.00 % Non-interest income to net interest income and non-interest income 32.29 % 24.84 % 28.65 % 27.56 % 25.25 % 28.40 % 27.09 %   Capital: Total equity to total assets 8.41 % 8.56 % 8.55 % 8.63 % 8.56 % 8.41 % 8.56 %   Liquidity, Yields and Rates: Interest-bearing cash - average balance $ 9,757 $ 8,436 $ 8,997 $ 13,653 $ 34,075 $ 10,195 $ 111,276 Investment securities - average balance 225,253 230,297 247,459 272,563 330,094 243,726 301,375 Loans - average balance   718,917         702,271         673,175         604,298         550,749         675,055         545,803   Average Earning Assets $ 953,927       $ 941,004       $ 929,631       $ 890,514       $ 914,918       $ 928,976       $ 958,454   Pure deposits2 - average balance $ 525,691 $ 493,707 $ 455,407 $ 446,820 $ 452,495 $ 480,659 $ 434,792 Core deposits3 - average balance 680,008 654,893 622,636 624,365 640,177 645,654 644,579 Customer deposits4 - average balance 802,837 783,996 757,704 773,336 801,827 779,561 831,924 Brokered deposits - average balance   83,490         85,369         84,021         70,204         84,143         80,820         114,926   Total deposits - average balance $ 886,327       $ 869,365       $ 841,725       $ 843,540       $ 885,970       $ 860,381       $ 946,850   Total loans to total deposits 73.28 % 75.85 % 76.01 % 71.85 % 68.02 % 73.28 % 68.02 % Yield on earning assets 3.79 % 4.14 % 3.86 % 3.85 % 3.53 % 3.90 % 3.39 % Rate on customer deposits (including impact of non-interest bearing DDAs) 0.37 % 0.37 % 0.37 % 0.41 % 0.48 % 0.38 % 0.59 % Cost of deposits 0.49 % 0.55 % 0.59 % 0.65 % 0.74 % 0.57 % 0.89 % Rate on interest-bearing funding 0.58 % 0.66 % 0.68 % 0.78 % 0.73 % 0.65 % 1.04 % Net interest margin, taxable equivalent 3.32 % 3.60 % 3.30 % 3.21 % 2.89 % 3.36 % 2.50 %   Non-Interest Income: Service Charges on Deposits $ 793 $ 778 $ 769 $ 741 $ 800 $ 3,081 $ 3,097 POS Fees 426 436 439 401 420 1,702 1,590 BOLI 235 234 235 351 239 1,055 960 Mortgage Banking Income 357 462 279 180 208 1,278 1,135 Trust 245 233 235 200 188 913 715 Other 846 398 376 369 165 1,989 864 Net Gains on Sales of Loans 886 254 450 22 — 1,612 — Net Gains on AFS sales   —         10         247         371         168         628         322   Total Non-Interest Income $ 3,788       $ 2,805       $ 3,030       $ 2,635       $ 2,188       $ 12,258       $ 8,683     Non-Interest Expense: Salaries and Benefits $ 5,576 $ 5,153 $ 5,225 $ 5,274 $ 5,503 $ 21,228 $ 22,584 Occupancy 732 814 776 820 799 3,142 3,301 Furniture and Fixtures 580 565 520 557 544 2,222 2,343 Professional Fees 888 658 690 599 417 2,835 4,893 FDIC insurance assessments 336 336 336 311 150 1,319 2,300 Write-downs on OREO and repossessions 59 289 76 309 375 733 2,373 Losses (Gains) on OREO, repossessions and fixed assets, net (369 ) (113 ) (15 ) 10 57 (487 ) (359 ) Non-performing asset expenses, net 193 204 184 221 450 802 1,320 Data processing 618 577 506 588 517 2,289 2,214 Communications 120 129 147 150 172 546 583 Debit card fees 307 244 232 258 181 1,041 806 Intangible asset amortization 50 49 49 48 57 196 270 Printing and supplies 147 144 150 207 121 648 649 Advertising 147 140 135 134 65 556 311 Insurance 296 295 303 325 251 1,219 2,125 Other   1,220         738         787         634         491         3,379         2,047   Total Non-Interest Expense $ 10,900       $ 10,222       $ 10,101       $ 10,445       $ 10,150       $ 41,668       $ 47,760     Asset Quality: Net (recoveries) charge-offs $ (221 ) $ 664 $ (470 ) $ 228 $ (754 ) $ 201 $ 565 Net loan (recoveries) charge-offs to average loans, annualized (0.03 )% 0.19 % (0.14 )% 0.15 % (0.55 )% 0.03 % 0.10 % Non-accrual loans $ 4,348 $ 4,000 $ 4,891 $ 6,027 $ 7,203 $ 4,348 $ 7,203 Other real estate owned and repossessed assets, net $ 4,519 $ 5,960 $ 7,725 $ 7,075 $ 8,213 $ 4,519 $ 8,213 Loans 90 days past due $ 100 $ 1,951 $ 1,083 $ 854 $ 928 $ 100 $ 928 Non-performing assets (NPA) $ 8,967 $ 11,911 $ 13,699 $ 13,956 $ 16,344 $ 8,967 $ 16,344 NPA to total assets 0.84 % 1.16 % 1.35 % 1.42 % 1.67 % 0.84 % 1.67 % Non-performing loans (NPL) $ 4,448 $ 5,951 $ 5,974 $ 6,881 $ 8,131 $ 4,448 $ 8,131 NPL to total loans 0.67 % 0.89 % 0.91 % 1.14 % 1.39 % 0.67 % 1.39 % Allowance for loan and lease losses to total loans 1.29 % 1.29 % 1.43 % 1.52 % 1.80 % 1.29 % 1.80 % Allowance for loan and lease losses to NPL 192.22 % 144.51 % 157.35 % 133.70 % 129.14 % 192.22 % 129.14 %   Period End Balances: Loans, excluding HFS $ 663,622 $ 666,728 $ 659,539 $ 604,859 $ 583,097 $ 663,622 $ 583,097 Allowance for loan and lease losses $ 8,550 $ 8,600 $ 9,400 $ 9,200 $ 10,500 $ 8,550 $ 10,500 Loans held-for-sale $ 72,242 $ 46,904 $ 28,547 $ 35,503 $ 220 $ 72,242 $ 220 Intangible assets $ 134 $ 184 $ 233 $ 282 $ 330 $ 134 $ 330 Assets $ 1,070,244 $ 1,027,882 $ 1,012,685 $ 980,505 $ 977,574 $ 1,070,244 $ 977,574 Deposits $ 905,613 $ 879,029 $ 867,709 $ 841,832 $ 857,269 $ 905,613 $ 857,269

Total shareholders' equity

$ 89,980 $ 87,963 $ 86,566 $ 84,654 $ 83,648 $ 89,980 $ 83,648 Common stock market capitalization $ 151,027 $ 132,315 $ 144,594 $ 138,601 $ 153,187 $ 151,027 $ 153,187 Full-time equivalent employees 268 264 264 275 285 268 285 Common shares outstanding 66,826 66,826 66,633 66,635 66,603 66,826 66,603   Average Balances: Loans, including HFS $ 718,917 $ 702,271 $ 673,175 $ 604,298 $ 550,749 $ 675,055 $ 545,803 Intangible assets $ 166 $ 217 $ 265 $ 313 $ 363 $ 240 $ 466 Earning assets $ 953,927 $ 941,004 $ 929,631 $ 890,514 $ 914,918 $ 928,976 $ 958,453 Assets $ 1,033,327 $ 1,017,631 $ 1,006,143 $ 967,624 $ 993,447 $ 1,006,392 $ 1,039,941 Deposits $ 886,327 $ 869,365 $ 841,725 $ 843,540 $ 885,970 $ 860,381 $ 946,850 Common shareholders' equity $ 89,205 $ 87,656 $ 85,613 $ 84,340 $ 84,125 $ 86,720 $ 61,382 Total shareholders' equity $ 89,205 $ 87,656 $ 85,613 $ 84,340 $ 84,125 $ 86,720 $ 70,312 Common shares outstanding, basic - wtd 65,915 65,869 65,731 65,726 66,603 65,811 46,495 Common shares outstanding, diluted - wtd 65,950 65,874 65,737 65,726 66,603 65,815 46,504  

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 SubsidiaryConsolidated Financial HighlightsNon-GAAP Reconciliation Table(unaudited)

    4th Quarter 3rd Quarter 2nd Quarter 1st Quarter 4th Quarter Year-to-Date 2014     2014     2014     2014     2013    

December 31,

2014

   

December 31,

2013

(in thousands, except per share data)   Average total shareholders' equity $ 89,205 $ 87,657 $ 85,613 $ 84,340 $ 84,125 $ 86,720 $ 70,312 Effect of average preferred stock   —         —         —         —         —         —         (8,930 ) Average common shareholders' equity $ 89,205       $ 87,657       $ 85,613       $ 84,340       $ 84,125       $ 86,720       $ 61,382              

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

         

December 31,

2014

   

December 31,

2013

(in thousands, except share amounts)

(unaudited) ASSETS Cash and Due from Banks $ 18,447 $ 10,742 Interest Bearing Deposits in Banks   29,582     10,126   Cash and Cash Equivalents 48,029 20,868 Securities Available-for-Sale 95,571 172,830 Securities Held-to-Maturity, at amortized cost (fair value - $128,058 at December 31, 2014 and $132,104 at December 31, 2013) 124,485 132,568 Loans Held-for-Sale 72,242 220 Loans 663,622 583,097 Less: Allowance for Loan and Lease Losses   8,550     10,500   Net Loans 655,072 572,597 Premises and Equipment, net 28,347 27,888 Bank Owned Life Insurance 29,204 28,346 Intangible Assets 134 330 Other Real Estate Owned 4,511 8,201 Other Assets   12,649     13,726   TOTAL ASSETS $ 1,070,244   $ 977,574     LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits Noninterest Bearing Demand $ 159,996 $ 144,365 Interest Bearing Demand 111,021 95,559 Savings and Money Market Accounts 258,694 206,125 Certificates of Deposit less than $100 thousand 151,089 182,408 Certificates of Deposit of $100 thousand or more 119,514 153,750 Brokered Deposits   105,299     75,062   Total Deposits 905,613 857,269 Federal Funds Purchased and Securities Sold under Agreements to Repurchase 12,750 12,520 Other Borrowings 56,000 20,000 Other Liabilities   5,901     4,137   Total Liabilities   980,264     893,926   SHAREHOLDERS’ EQUITY Common Stock – $.01 par value – 150,000,000 shares authorized; 66,826,134 shares issued as of December 31, 2014 and 66,602,601 shares issued as of December 31, 2013 766 764 Paid-In Surplus 197,614 196,536 Accumulated Deficit (101,625 ) (104,042 ) Accumulated Other Comprehensive Loss   (6,775 )   (9,610 ) Total Shareholders’ Equity   89,980     83,648   TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,070,244   $ 977,574              

First Security Group, Inc. and SubsidiaryConsolidated Statements of Operations(unaudited)

            Three Months Ended     Year Ended December 31, December 31, (in thousands, except per share data) 2014     2013 2014     2013 INTEREST INCOME Loans, including fees $ 8,104 $ 6,562 $ 31,464 $ 26,099 Investment Securities – taxable 886 1,224 3,769 4,366 Investment Securities – non-taxable 81 323 605 1,071 Other   1     40     53     378   Total Interest Income   9,072     8,149     35,891     31,914   INTEREST EXPENSE Interest Bearing Demand Deposits 45 46 182 259 Savings Deposits and Money Market Accounts 209 142 676 770 Certificates of Deposit of less than $100 thousand 243 387 1,067 1,938 Certificates of Deposit of $100 thousand or more 245 395 1,038 1,953 Brokered Deposits 361 682 1,937 3,554 Other   25     19     90     70   Total Interest Expense   1,128     1,671     4,990     8,544   NET INTEREST INCOME 7,944 6,478 30,901 23,370 Credit for Loan and Lease Losses   (221 )   (955 )   (1,452 )   (2,735 ) NET INTEREST INCOME AFTER CREDIT FOR LOAN AND LEASE LOSSES   8,165     7,433     32,353     26,105   NONINTEREST INCOME Service Charges on Deposit Accounts 793 800 3,081 3,097 Mortgage Banking Income 357 208 1,278 1,135 Gain on Sales of Securities Available-for-Sale — 168 628 322 Gain on Sales of Loans 886 — 1,612 — Other   1,752     1,012     5,659     4,129   Total Noninterest Income   3,788     2,188     12,258     8,683   NONINTEREST EXPENSES Salaries and Employee Benefits 5,576 5,503 21,228 22,584 Expense on Premises and Fixed Assets, net of rental income 1,312 1,341 5,364 5,644 Other   4,012     3,306     15,076     19,532   Total Noninterest Expenses   10,900     10,150     41,668     47,760   INCOME (LOSS) BEFORE INCOME TAX PROVISION 1,053 (529 ) 2,943 (12,972 ) Income Tax Provision   131     119     526     477   NET INCOME (LOSS) 922 (648 ) 2,417 (13,449 ) 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 $ 922   $ (648 ) $ 2,417   $ 11,349   NET INCOME (LOSS) PER SHARE: Net Income (Loss) Per Share – Basic $ 0.01 $ (0.01 ) $ 0.04 $ 0.24 Net Income (Loss) Per Share – Diluted $ 0.01 $ (0.01 ) $ 0.04 $ 0.24 Dividends Declared Per Common Share $ — $ — $ — $ —        

First Security Group, Inc.John R. Haddock, EVP & CFO, 423-308-2075jhaddock@FSGBank.com