First Security Group Announces Third Quarter Results

New Lending Initiatives Announced

Business Wire

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

First Security Group, Inc. (FSGI) today reported a net loss allocated to common shareholders of $1.4 million, or $0.02 per basic and diluted share, for the third quarter of 2013 as compared to a loss of $9.4 million, or $5.79 per basic and diluted share, for the same period in 2012. For the nine months ended September 30, 2013, First Security reported net income available to common shareholders of $12.0 million, or $0.30 per basic and diluted share, as compared to a $23.5 million loss, of $14.54 per basic and diluted share, for the same period in 2012.

“The third quarter represents the first full quarter after the April recapitalization,” said Michael Kramer, First Security’s President and Chief Executive Officer. “While we are pleased with our continued improvement in our deposit mix and associated cost, it is essential that we achieve significant improvement in loan and revenue growth.”

For the third quarter of 2013, net interest income improved by $679 thousand, or 12.4%, to $6.2 million compared to $5.5 million for the linked second quarter of 2013. Total interest income contributed an additional $386 thousand during the third quarter as First Security reduced cash and invested in higher yielding investment securities. Total interest expense declined by $293 thousand through reductions in the costs of deposits as well as reductions in total deposits.

During the third quarter, First Security continued to improve its deposit mix by increasing pure deposits, defined as transaction-based accounts, while reducing higher cost customer CDs as well as reducing brokered CDs as they matured with available cash. During the third quarter, average pure deposits increased by $22.4 million, or 5.2% (20.7% annualized) to $454.4 million while customer CDs and brokered CDs decreased by $61.0 million, or 11.6% (46.3% annualized). As of September 30, 2013, pure deposits totaled 50.0% of total deposits as compared to 39.6% as of September 30, 2012. The changes in deposit mix resulted in the average rate paid on customer deposits improving from 0.64% to 0.57% and the overall cost of deposits improving from 0.96% to 0.86% comparing the second and third quarters of 2013.

With continued asset quality improvement and minimal charge-offs, First Security recorded a $1.6 million negative provision to the allowance for loan and lease losses for the quarter and a $1.8 million negative provision for the year. First Security realized net recoveries of $32 thousand during the third quarter of 2013 and $1.3 million in net charge-offs for the year to date period. Nonaccrual loans declined by $1.8 million to $6.8 million as of September 30, 2013 compared to $8.6 million as of June 30, 2013. Nonperforming loans to total loans improved to 1.37% as of September 30, 2013 as compared to 1.65% as of June 30, 2013. Based on the continued improvement in asset quality and minimal charge-offs, the negative provision was appropriate to reduce the allowance to total loans from 2.27% as of June 30, 2013 to 2.00% as of September 30, 2013.

Non-interest income remained consistent quarter-over-quarter at $2.5 million. Non-interest expense decreased by $1.5 million to $11.4 million for the third quarter of 2013 as compared to the second quarter of 2013. During the third quarter, First Security announced the pending consolidations of two branches to be completed by December 31, 2013 as well as an overall 10% reduction in full-time equivalent employees. The associated cost savings with the reduced workforce is approximately $2.2 million in salary and benefits annually with full realization to begin in the first quarter of 2014. Various other cost saving are anticipated to further reduce non-expense expense for 2014.

“Over the last several quarters, we have seen significant pricing and credit concessions from the competition that has inhibited our ability to grow loans with the quality and yields that we seek,” said John Haddock, First Security’s EVP and Chief Financial Officer. “At the same time, we have been evaluating certain niche lending initiatives and have begun to implement four distinct initiatives to offset the impact of these competitive pressures.”

First Security has announced the implementation of four niche lending opportunities. First, Tri-Net Direct is a new division focused on national net lease lending and includes three full-time employees. Tri-Net will originate construction of preleased “build to suit” projects and provide interim and long term financing to professional developers and private investors for commercial real estate on long term lease to tenants that are investment grade or have investment grade attributes. Second, First Security has partnered with a third-party that originates small balance, unsecured consumer loans, primarily associated with home improvement projects. Third, First Security has built an asset-based lending unit to serve as a community bank alternative for asset-based lending within our markets that should generate above average return on a risk-adjusted basis. The fourth initiative is a dedicated team focused on originating and selling government guaranteed loans, including SBA and USDA loan products.

“Our ability to supplement the lending activities of our traditional bankers with the niche lending initiatives should significantly enhance our ability to achieve our desired loan growth while providing value added services to our customers,” said CEO Kramer. “The return to core profitability is predominantly associated with our ability to increase loans and change our mix of earning assets.”

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 30 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)
                             
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Year-to-Date Year-to-date
2013     2013     2013     2012     2012     Sept. 30, 2013     Sept. 30, 2012
(in thousands, except per share amounts and full-time equivalent employees)
Earnings:
Net interest income $ 6,165 $ 5,486 $ 5,241 $ 5,191 $ 5,849 $ 16,893 $ 18,389
(Credit) Provision for loan and lease losses $ (1,632 ) $ (826 ) $ 678 $ 10,374 $ 4,543 $ (1,780 ) $ 10,492
Non-interest income $ 2,514 $ 2,521 $ 2,220 $ 2,306 $ 2,694 $ 7,255 $ 6,989
Non-interest expense $ 11,419 $ 12,909 $ 14,042 $ 11,528 $ 12,781 $ 38,372 $ 37,280
Dividends and accretion on preferred stock $ $ 858 $ 524 $ 522 $ 521 $ 1,381 $ 1,556
Effect of exchange on preferred stock to common stock $ $ 26,179 $ $ $ $ 26,179 $
Net (loss allocated) income available to common stockholders $ (1,430 ) $ 21,328 $ (7,902 ) $ (16,100 ) $ (9,410 ) $ 11,996 $ (23,548 )
 
Per Share Data:
Net (loss allocated) income available to common stockholders, basic $ (0.02 ) $ 0.39 $ (4.90 ) $ (9.90 ) $ (5.79 ) $ 0.30 $ (14.54 )
Net (loss allocated) income available to common stockholders, diluted $ (0.02 ) $ 0.39 $ (4.90 ) $ (9.90 ) $ (5.79 ) $ 0.30 $ (14.54 )
Book value per common share $ 1.25 $ 1.39 $ (6.58 ) $ (1.94 ) $ 6.93 $ 1.25 $ 6.93
 
Performance Ratios:
Return on average assets (0.56 )% 7.97 % (3.02 )% (5.91 )% (3.37 )% 1.52 % (2.81 )%
Return on average common equity (7.21 )% 95.78 % NM NM (189.98 )% 29.77 % (113.56 )%
Efficiency ratio 131.57 % 161.22 % 188.21 % 153.77 % 149.61 % 158.90 % 146.90 %
Non-interest income to net interest income and non-interest income 28.97 % 31.48 % 29.75 % 30.76 % 31.53 % 30.04 % 27.54 %
 
Capital:
Total equity to total assets 8.24 % 8.12 % 2.02 % 2.74 % 4.00 % 8.24 % 4.00 %
 
 
 
Liquidity, Yields and Rates:
Interest-bearing cash - average balance 68,964 122,499 156,117 179,116 187,248 137,291 201,663
Investment securities - average balance 329,385 322,747 253,265 252,356 254,362 291,698 233,670
Loans - average balance   529,406         547,499         554,204         574,768         593,164         544,136         595,278  
Average Earning Assets   927,755         992,745         963,586         1,006,240         1,034,774         973,125         1,030,611  
Pure deposits1 - average balance 454,379 431,988 414,244 408,804 409,810 428,826 394,101
Core deposits2 - average balance 653,044 648,373 639,558 640,328 642,426 646,062 625,791
Customer deposits3 - average balance 829,926 847,007 839,307 845,346 843,317 842,066 823,595
Brokered deposits - average balance   90,323         111,801         153,741         178,876         193,245         125,299         205,028  
Total deposits - average balance   920,249         958,808         993,048         1,024,222         1,036,562         967,365         1,028,623  
Total loans to total deposits 58.76 % 56.59 % 54.53 % 53.68 % 54.91 % 58.76 % 54.91 %
Yield on earning assets 3.57 % 3.20 % 3.33 % 3.63 % 3.50 % 3.32 % 3.72 %
Rate on customer deposits (including impact of non-interest bearing DDAs) 0.57 % 0.64 % 0.68 % 0.70 % 0.75 % 0.63 % 0.81 %
Cost of deposits 0.86 % 0.96 % 1.04 % 1.09 % 1.15 % 0.94 % 1.24 %
Rate on interest-bearing funding 1.01 % 1.11 % 1.20 % 1.30 % 1.40 % 1.09 % 1.49 %
Net interest margin, taxable equivalent 2.71 % 2.27 % 2.25 % 2.49 % 2.30 % 2.38 % 2.44 %
 
Asset Quality:
Net (recoveries) charge-offs $ (32 ) $ 374 $ 978 $ 14,064 $ 6,653 $ 1,320 $ 12,602
Net loan (recoveries) charged-offs to average loans, annualized (0.02 )% 0.27 % 0.71 % 9.79 % 4.49 % 0.32 % 2.83 %
Non-accrual loans $ 6,803 $ 8,628 $ 10,194 $ 25,071 $ 32,254 $ 6,803 $ 32,254
Other real estate owned and repossessed assets, net $ 8,678 $ 10,549 $ 12,722 $ 13,449 $ 15,854 $ 8,678 $ 15,854
Loans 90 days past due $ 509 $ 332 $ 1,270 $ 1,656 $ 2,572 $ 509 $ 2,572
Non-performing assets (NPA) $ 15,990 $ 19,509 $ 24,186 $ 40,176 $ 50,680 $ 15,990 $ 50,680
NPA to total assets 1.58 % 1.83 % 2.32 % 3.78 % 4.54 % 1.58 % 4.54 %
Non-performing loans (NPL) $ 7,312 $ 8,960 $ 11,464 $ 26,727 $ 34,826 $ 7,312 $ 34,826
NPL to total loans 1.37 % 1.65 % 2.12 % 4.94 % 6.07 % 1.37 % 6.07 %
Allowance for loan and lease losses to total loans 2.00 % 2.27 % 2.50 % 2.55 % 3.05 % 2.00 % 3.05 %
Allowance for loan and lease losses to NPL 146.33 % 137.28 % 117.76 % 51.63 % 50.22 % 146.33 % 50.22 %
 
Period End Balances:
Loans $ 534,627 $ 542,019 $ 540,288 $ 541,130 $ 573,365 $ 534,627 $ 573,365
Allowance for loan and lease losses $ 10,700 $ 12,300 $ 13,500 $ 13,800 $ 17,490 $ 10,700 $ 17,490
Intangible assets $ 388 $ 455 $ 526 $ 600 $ 677 $ 388 $ 677
Assets $ 1,011,855 $ 1,066,649 $ 1,040,753 $ 1,063,555 $ 1,117,470 $ 1,011,855 $ 1,117,470
Total deposits $ 909,848 $ 957,811 $ 990,894 $ 1,008,066 $ 1,044,131 $ 909,848 $ 1,044,131
Common stockholders' equity $ 83,388 $ 86,654 $ (11,666 ) $ (3,439 ) $ 12,283 $ 83,388 $ 12,283
Total stockholders' equity $ 83,388 $ 86,654 $ 20,994 $ 29,110 $ 44,722 $ 83,388 $ 44,722
Common stock market capitalization $ 138,534 $ 135,469 $ 4,678 $ 3,952 $ 3,987 $ 138,534 $ 3,987
Full-time equivalent employees 313 327 325 329 328 313 328
Common shares outstanding 66,603 62,428 1,772 1,772 1,772 66,603 1,772
 
Average Balances:
Loans $ 529,406 $ 547,499 $ 554,204 $ 574,768 $ 593,164 $ 544,136 $ 595,278
Intangible assets $ 405 $ 476 $ 574 $ 649 $ 726 $ 501 $ 825
Earning assets $ 927,755 $ 992,745 $ 963,586 $ 1,006,240 $ 1,034,774 $ 973,125 $ 1,030,611
Assets $ 1,016,919 $ 1,070,895 $ 1,047,184 $ 1,089,841 $ 1,117,494 $ 1,055,611 $ 1,117,831
Deposits $ 920,249 $ 958,808 $ 993,048 $ 1,024,222 $ 1,036,562 $ 967,365 $ 1,028,623
Common stockholders' equity $ 79,382 $ 89,069 $ (5,402 ) $ 10,108 $ 19,813 $ 53,720 $ 27,648
Total stockholders' equity $ 79,382 $ 92,658 $ 27,184 $ 42,584 $ 52,181 $ 65,659 $ 59,910
Common shares outstanding, basic - wtd 62,600 55,174 1,613 1,626 1,626 40,020 1,619
Common shares outstanding, diluted - wtd 62,600 55,176 1,613 1,626 1,626 40,020 1,619
 
(1) Pure Deposits are all transaction-based accounts, including non-interest bearing DDA's, interest bearing DDA's, money market accounts and savings accounts.
 
(2) Core deposits are Pure deposits plus customer certificates of deposits less than $100,000.
 
(3) Customer deposits excluded 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 Year-to-date
2013     2013     2013     2012     2012     Sept. 30, 2013     Sept. 30, 2012
(in thousands, except per share amounts and full-time equivalent employees)
 
Total stockholders' equity $ 83,388 $ 86,654 $ 20,994 $ 29,110 $ 44,722 $ 83,388 $ 44,722
Effect of preferred stock               (32,660 )       (32,549 )       (32,439 )               (32,439 )
Common stockholders' equity $ 83,388     $ 86,654     $ (11,666 )     $ (3,439 )     $ 12,283       $ 83,388       $ 12,283  
 
Average total stockholders' equity $ 79,382 $ 92,658 $ 27,184 $ 42,584 $ 52,181 $ 65,659 $ 59,910
Effect of average preferred stock         (3,589 )     (32,586 )       (32,476 )       (32,368 )       (11,939 )       (32,262 )
Average common stockholders' equity $ 79,382 $ 89,069 $ (5,402 ) $ 10,108 $ 19,813 $ 53,720 $ 27,648
 
 
First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
 
     

September 30,
2013

   

December 31,
2012

   

September 30,
2012

(in thousands)

(unaudited) (unaudited)
ASSETS
Cash and Due from Banks $ 10,357 $ 12,806 $ 10,204
Interest Bearing Deposits in Banks   59,943     159,665     201,631  
Cash and Cash Equivalents 70,300 172,471 211,835
Securities Available-for-Sale 207,009 254,057 257,263
Securities Held-to-Maturity, at amortized cost (fair value - $130,170) 129,164
Loans Held for Sale 1,661 25,920 3,857
Loans 534,627 541,130 573,365
Less: Allowance for Loan and Lease Losses   10,700     13,800     17,490  
Net Loans 523,927 527,330 555,875
Premises and Equipment, net 28,810 29,304 29,540
Bank Owned Life Insurance 28,155 27,576 27,364
Intangible Assets, net 388 600 677
Other Real Estate Owned 8,662 13,441 15,803
Other Assets   13,779     12,856     15,256  
TOTAL ASSETS $ 1,011,855   $ 1,063,555   $ 1,117,470  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest Bearing Demand $ 147,865 $ 141,400 $ 158,967
Interest Bearing Demand 92,108 86,575 68,387
Savings and Money Market Accounts 215,293 184,597 186,182
Certificates of Deposit less than $100 thousand 195,129 228,144 232,558
Certificates of Deposit of $100 thousand or more 170,466 201,873 204,789
Brokered Deposits   88,987     165,477     193,248  
Total Deposits 909,848 1,008,066 1,044,131
Federal Funds Purchased and Securities Sold under Agreements to Repurchase 12,657 12,481 14,691
Security Deposits 14 58 88
Other Borrowings
Other Liabilities   5,948     13,840     13,838  
Total Liabilities   928,467     1,034,445     1,072,748  
SHAREHOLDERS’ EQUITY
Preferred Stock – no par value – 10,000,000 shares authorized; no shares issued as of September 30, 2013; 33,000 issued as of December 31, 2012 and September 30, 2012; Liquidation value of $0 at September 30, 2013, $38,156 as of December 31, 2012 and $37,744 as of September 30, 2012 32,549 32,439
Common Stock – $.01 par value – 150,000,000 shares authorized; 66,602,601 shares issued as of September 30, 2013, 1,772,342 issued as of December 31, 2012, and 1,772,342 issued as of September 30, 2012 764 115 115
Paid-In Surplus 196,059 106,531 107,146
Common Stock Warrants 2,006 2,006
Unallocated ESOP Shares (759 )
Accumulated Deficit (103,395 ) (115,391 ) (99,291 )
Accumulated Other Comprehensive (Loss) Income   (10,040 )   3,300     3,066  
Total Shareholders’ Equity   83,388     29,110     44,722  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,011,855   $ 1,063,555   $ 1,117,470  
 
         
First Security Group, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
 
 
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share data) 2013     2012 2013     2012
INTEREST INCOME
Loans, including fees $ 6,461 $ 7,722 $ 19,537 $ 24,289
Investment Securities – taxable 1,321 904 3,143 2,788
Investment Securities – non-taxable 312 227 749 780
Other   77     121     338     387  
Total Interest Income   8,171     8,974     23,767     28,244  
INTEREST EXPENSE
Interest Bearing Demand Deposits 62 52 213 128
Savings Deposits and Money Market Accounts 188 247 628 831
Certificates of Deposit of less than $100 thousand 466 657 1,551 2,063
Certificates of Deposit of $100 thousand or more 475 631 1,558 1,948
Brokered Deposits 795 1,420 2,873 4,538
Other   20     118     51     347  
Total Interest Expense   2,006     3,125     6,874     9,855  
NET INTEREST INCOME 6,165 5,849 16,893 18,389
(Credit) Provision for Loan and Lease Losses   (1,632 )   4,543     (1,780 )   10,492  
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES   7,797     1,306     18,673     7,897  
NONINTEREST INCOME

Service Charges on Deposit Accounts

798 725 2,298 2,160
Mortgage Banking Income 420 249 927 718
Gain on Sales of Securities Available-for-Sale 143 154 144
Other   1,296     1,577     3,876     3,967  
Total Noninterest Income   2,514     2,694     7,255     6,989  
NONINTEREST EXPENSES
Salaries and Employee Benefits 5,807 5,275 17,081 14,911
Expense on Premises and Fixed Assets, net of rental income 1,546 1,450 4,302 4,332
Other   4,066     6,056     16,989     18,037  
Total Noninterest Expenses   11,419     12,781     38,372     37,280  
LOSS BEFORE INCOME TAX PROVISION (BENEFIT) (1,108 ) (8,781 ) (12,444 ) (22,394 )
Income Tax Provision (Benefit)   322     108     358     (402 )
NET LOSS (1,430 ) (8,889 ) (12,802 ) (21,992 )
Preferred Stock Dividends (413 ) (929 ) (1,238 )
Accretion on Preferred Stock Discount (108 ) (452 ) (318 )
Effect of Exchange of Preferred Stock to Common Stock           26,179      
NET (LOSS ALLOCATED) INCOME AVAILABLE TO COMMON SHAREHOLDERS $ (1,430 ) $ (9,410 ) $ 11,996   $ (23,548 )
NET INCOME (LOSS) PER SHARE:
Net Income (Loss) Per Share – Basic $ (0.02 ) $ (5.79 ) $ 0.30 $ (14.54 )
Net Income (Loss) Per Share – Diluted $ (0.02 ) $ (5.79 ) $ 0.30 $ (14.54 )
Dividends Declared Per Common Share $ $ $ $
 

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

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