10-Q 1 fsgi-2012930x10q.htm FORM 10-Q FSGI-2012.9.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
_________________________________________________
FORM 10-Q
_________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from              to             .
COMMISSION FILE NO. 000-49747
_________________________________________________
FIRST SECURITY GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
_________________________________________________
Tennessee
58-2461486
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
531 Broad Street, Chattanooga, TN
37402
(Address of principal executive offices)
(Zip Code)
 
(423) 266-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Not Applicable
 
 
(Former name, former address, and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value:
1,772,342 shares outstanding and issued as of November 14, 2012



First Security Group, Inc. and Subsidiary
Form 10-Q
INDEX
 
 
 
Page
No.
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 



PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
(in thousands)
(unaudited)
 
 
(unaudited)
ASSETS
 
 
 
 
 
Cash and Due from Banks
$
10,204

 
$
8,884

 
$
9,595

Interest Bearing Deposits in Banks
201,631

 
249,297

 
267,184

Cash and Cash Equivalents
211,835

 
258,181

 
276,779

Securities Available-for-Sale
257,263

 
193,041

 
158,788

Loans Held for Sale
3,857

 
2,233

 
2,284

Loans
573,365

 
582,264

 
602,140

Total Loans
577,222

 
584,497

 
604,424

Less: Allowance for Loan and Lease Losses
17,490

 
19,600

 
18,750

Net Loans
559,732

 
564,897

 
585,674

Premises and Equipment, net
29,540

 
28,671

 
30,050

Bank Owned Life Insurance
27,364

 
26,722

 
26,504

Intangible Assets
677

 
982

 
1,116

Other Real Estate Owned
15,803

 
25,141

 
26,628

Other Assets
15,256

 
17,266

 
17,974

TOTAL ASSETS
$
1,117,470

 
$
1,114,901

 
$
1,123,513



(See Accompanying Notes to Consolidated Financial Statements)
1


First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets

 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
(in thousands, except share and per share data)
(unaudited)
 
 
(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deposits
 
 
 
 
 
Noninterest Bearing Demand
$
158,967

 
$
159,735

 
$
162,166

Interest Bearing Demand
68,387

 
56,573

 
60,761

Savings and Money Market Accounts
186,182

 
156,402

 
150,463

Certificates of Deposit less than $100 thousand
232,558

 
222,371

 
208,986

Certificates of Deposit of $100 thousand or more
204,789

 
185,904

 
171,256

Brokered Deposits
193,248

 
238,437

 
265,378

Total Deposits
1,044,131

 
1,019,422

 
1,019,010

Federal Funds Purchased and Securities Sold under Agreements to Repurchase
14,691

 
14,520

 
15,054

Security Deposits
88

 
204

 
242

Other Borrowings

 
58

 
63

Other Liabilities
13,838

 
12,465

 
11,098

Total Liabilities
1,072,748

 
1,046,669

 
1,045,467

SHAREHOLDERS’ EQUITY
 
 
 
 
 
Preferred Stock – no par value – 10,000,000 shares authorized; 33,000 issued as of September 30, 2012, December 31, 2011 and September 30, 2011; Liquidation value of $37,744 as of September 30, 2012, $36,506 as of December 31, 2011 and $36,094 as of September 30, 2011
32,439

 
32,121

 
32,018

Common Stock – $.01 par value – 150,000,000 shares authorized; 1,772,342 shares issued as of September 30, 2012, 1,684,342 issued as of December 31, 2011, and 1,649,249 issued as of September 30, 2011
115

 
114

 
114

Paid-In Surplus
107,146

 
109,525

 
110,231

Common Stock Warrants
2,006

 
2,006

 
2,006

Unallocated ESOP Shares
(759
)
 
(3,290
)
 
(4,019
)
Accumulated Deficit
(99,291
)
 
(75,743
)
 
(66,701
)
Accumulated Other Comprehensive Income
3,066

 
3,499

 
4,397

Total Shareholders’ Equity
44,722

 
68,232

 
78,046

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,117,470

 
$
1,114,901

 
$
1,123,513



(See Accompanying Notes to Consolidated Financial Statements)
2


First Security Group, Inc. and Subsidiary
Consolidated Statements of Comprehensive Loss
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands, except per share data)
2012
 
2011
 
2012
 
2011
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
7,722

 
$
9,020

 
$
24,289

 
$
28,914

Investment Securities – taxable
904

 
858

 
2,788

 
2,604

Investment Securities – non-taxable
227

 
316

 
780

 
965

Other
121

 
144

 
387

 
371

Total Interest Income
8,974

 
10,338

 
28,244

 
32,854

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest Bearing Demand Deposits
52

 
39

 
128

 
120

Savings Deposits and Money Market Accounts
247

 
261

 
831

 
811

Certificates of Deposit of less than $100 thousand
657

 
692

 
2,063

 
2,230

Certificates of Deposit of $100 thousand or more
631

 
606

 
1,948

 
1,868

Brokered Deposits
1,420

 
1,951

 
4,538

 
5,970

Other
118

 
113

 
347

 
334

Total Interest Expense
3,125

 
3,662

 
9,855

 
11,333

NET INTEREST INCOME
5,849

 
6,676

 
18,389

 
21,521

Provision for Loan and Lease Losses
4,543

 
3,882

 
10,492

 
7,391

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
1,306

 
2,794

 
7,897

 
14,130

NONINTEREST INCOME
 
 
 
 
 
 
 
Service Charges on Deposit Accounts
725

 
791

 
2,160

 
2,351

Mortgage Banking Income
249

 
169

 
718

 
470

Gain on Sales of Securities Available-for-Sale
143

 

 
144

 

Other
1,577

 
1,144

 
3,967

 
3,603

Total Noninterest Income
2,694

 
2,104

 
6,989

 
6,424

NONINTEREST EXPENSES
 
 
 
 
 
 
 
Salaries and Employee Benefits
5,275

 
4,265

 
14,911

 
12,792

Expense on Premises and Fixed Assets, net of rental income
1,450

 
1,266

 
4,332

 
3,813

Other
6,056

 
5,902

 
18,037

 
18,451

Total Noninterest Expenses
12,781

 
11,433

 
37,280

 
35,056

LOSS BEFORE INCOME TAX PROVISION (BENEFIT)
(8,781
)
 
(6,535
)
 
(22,394
)
 
(14,502
)
Income Tax Provision (Benefit)
108

 
(54
)
 
(402
)
 
32

NET LOSS
(8,889
)
 
(6,481
)
 
(21,992
)
 
(14,534
)
Preferred Stock Dividends
413

 
412

 
1,238

 
1,238

Accretion on Preferred Stock Discount
108

 
102

 
318

 
300

NET LOSS ALLOCATED TO COMMON SHAREHOLDERS
$
(9,410
)
 
$
(6,995
)
 
$
(23,548
)
 
$
(16,072
)
OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
 
Net loss
(8,889
)
 
(6,481
)
 
(21,992
)
 
(14,534
)
Change in unrealized gains on securities, net of reclassifications and taxes
431

 
418

 
889

 
1,326

Unrealized loss on cash flow swaps, net
(451
)
 
(286
)
 
(1,322
)
 
(968
)
COMPREHENSIVE LOSS
(8,909
)
 
(6,349
)
 
(22,425
)
 
(14,176
)
NET LOSS PER SHARE:
 
 
 
 
 
 
 
Net Loss Per Share – Basic
$
(5.79
)
 
$
(4.40
)
 
$
(14.54
)
 
$
(10.13
)
Net Loss Per Share – Diluted
$
(5.79
)
 
$
(4.40
)
 
$
(14.54
)
 
$
(10.13
)

(See Accompanying Notes to Consolidated Financial Statements)
3


First Security Group, Inc. and Subsidiary
Consolidated Statement of Shareholders’ Equity
(unaudited)
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
 
 
 
 
(in thousands)
Preferred
Stock
 
Shares
 
Amount
 
Paid-In
Surplus
 
Common
Stock
Warrants
 
Accumulated
Deficit
 
Unallocated ESOP Shares
 
Total
Balance - December 31, 2011
$
32,121

 
1,684

 
$
114

 
$
109,525

 
$
2,006

 
$
(75,743
)
 
$
3,499

 
$
(3,290
)
 
$
68,232

Restricted Stock Grants
 
 
88

 
1

 
(1
)
 
 
 
 
 
 
 
 
 

Net Loss
 
 
 
 
 
 
 
 
 
 
(21,992
)
 
 
 
 
 
(21,992
)
Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
(433
)
 
 
 
(433
)
Accretion of Discount Associated with Preferred Stock
318

 
 
 
 
 
 
 
 
 
(318
)
 
 
 
 
 

Preferred Stock Dividend
 
 
 
 
 
 
 
 
 
 
(1,238
)
 
 
 
 
 
(1,238
)
Share-based Compensation, net of forfeitures
 
 

 

 
84

 
 
 
 
 
 
 
 
 
84

ESOP Allocation
 
 
 
 
 
 
(2,462
)
 
 
 
 
 
 
 
2,531

 
69

Balance - September 30, 2012
$
32,439

 
1,772

 
$
115

 
$
107,146

 
$
2,006

 
$
(99,291
)
 
$
3,066

 
$
(759
)
 
$
44,722



(See Accompanying Notes to Consolidated Financial Statements)
4


First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
 
 
Nine Months Ended
 
September 30,
(in thousands)
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net Loss
$
(21,992
)
 
$
(14,534
)
Adjustments to Reconcile Net Loss to Net Cash From Operating Activities -
 
 
 
Provision for Loan and Lease Losses
10,492

 
7,391

Amortization, net
2,685

 
974

Share-Based Compensation
84

 
14

ESOP Compensation
69

 
70

Depreciation
1,056

 
1,126

Income from Bank Owned Life Insurance
(778
)
 
(765
)
Gain on Sales of Available-for-Sale Securities
(144
)
 

(Gain) Loss on Sales of Premises and Equipment, net
(14
)
 
24

(Gain) Loss on Sales of Other Real Estate Owned and Repossessions, net
(36
)
 
979

Write-down of Other Real Estate Owned and Repossessions
4,500

 
4,139

Accretion of Fair Value Adjustment, net

(39
)
 
(34
)
Accretion of Terminated Cash Flow Swaps
(1,285
)
 
(1,856
)
Changes in Operating Assets and Liabilities -
 
 
 
Loans Held for Sale
(514
)
 
272

Interest Receivable
(404
)
 
437

Other Assets
2,081

 
1,113

Interest Payable
45

 
(1,009
)
Other Liabilities
(25
)
 
916

Net Cash From Operating Activities
(4,219
)
 
(743
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Activity in Securities Available-for-Sale:
 
 
 
Maturities, Prepayments, and Calls
48,175

 
46,462

Sales
6,952

 

Purchases
(120,696
)
 
(49,705
)
Proceeds from sales of FRB Stock
454

 

Loan Originations and Principal Collections, net
(10,047
)
 
94,794

Proceeds from Sales of Premises and Equipment
113

 
45

Proceeds from Sales of Other Real Estate and Repossessions
10,340

 
8,049

Additions to Premises and Equipment
(2,047
)
 
(436
)
Capital Improvements to Other Real Estate and Repossessions
(193
)
 

Net Cash From Investing Activities
(66,949
)
 
99,209

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net Increase (Decrease) in Deposits
24,709

 
(29,713
)
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
171

 
(879
)
Net Decrease of Other Borrowings
(58
)
 
(14
)
Net Cash From Financing Activities
24,822

 
(30,606
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(46,346
)
 
67,860

CASH AND CASH EQUIVALENTS – beginning of period
258,181

 
208,919

CASH AND CASH EQUIVALENTS – end of period
$
211,835

 
$
276,779

 

(See Accompanying Notes to Consolidated Financial Statements)
5


 
Nine Months Ended
 
September 30,
(in thousands)
2012
 
2011
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Loans and leases transfered to OREO and repossessions
$
7,082

 
$
15,728

Transfers of loans to loans held for sale at fair value
$
1,110

 
$

Financed sales of OREO and repossessions
$
1,809

 
$

Accrued and deferred cash dividends on preferred stock
$
1,238

 
$
1,238

SUPPLEMENTAL SCHEDULE OF CASH FLOWS
 
 
 
Interest paid
$
10,003

 
$
12,342

Income taxes paid
$
70

 
$
304


(See Accompanying Notes to Consolidated Financial Statements)
6


FIRST SECURITY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of financial condition and the results of operations have been included. All such adjustments were of a normal recurring nature. Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net loss or shareholders’ equity.
The consolidated financial statements include the accounts of First Security Group, Inc. (First Security or the Company)and its subsidiary bank, which is wholly-owned. All significant intercompany balances and transactions have been eliminated.
On September 19, 2011 (the Effective Date), First Security completed a one-for-ten reverse stock split of its common stock. In connection with the reverse stock split, every ten shares of issued and outstanding First Security common stock at the Effective Date were exchanged for one share of newly issued common stock. Fractional shares were rounded up to the next whole share. Other than the number of authorized shares of common stock disclosed in the Consolidated Balance Sheets, which did not change as a result of the reverse stock split, all prior period share amounts have been retroactively restated to reflect the reverse stock split. For additional information related to the reverse stock split, see Note 9, Shareholders’ Equity.
Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. These interim financial statements should be read in conjunction with the Company’s latest annual consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

NOTE 2 – REGULATORY MATTERS, GOING CONCERN CONSIDERATIONS AND MANAGEMENT'S PLANS
Regulatory Matters
First Security Group, Inc.
On September 7, 2010, the Company entered into a Written Agreement (the Agreement) with the Federal Reserve Bank of Atlanta (the Federal Reserve), the Company’s primary regulator. The Agreement is designed to enhance the Company’s ability to act as a source of strength to the Company's wholly owned subsidiary, FSGBank, National Association (FSGBank or the Bank).
The Agreement prohibits the Company from declaring or paying dividends without prior written consent of the Federal Reserve. The Company is also prohibited from taking dividends, or any other form of payment representing a reduction of capital, from the Bank without prior written consent.
Within 60 days of the Agreement, the Company was required to submit to the Federal Reserve a written plan designed to maintain sufficient capital at the Company and the Bank. The Company submitted a copy of the Bank’s capital plan that had previously been submitted to the Bank’s primary regulator, the Office of the Comptroller of the Currency (OCC). Neither the Federal Reserve nor the OCC accepted the initially submitted capital plan. A revised five-year strategic and capital plan is currently being reviewed by the Federal Reserve.
The Company is currently deemed not in compliance with certain provisions of the Agreement. Any material noncompliance may result in further enforcement actions by the Federal Reserve. Management believes the successful execution of the strategic initiatives discussed below will ultimately result in full compliance with the Agreement and position the Company for long-term growth and a return to profitability.
On September 14, 2010, the Company filed a Current Report on Form 8-K describing the Agreement. A copy of the Agreement is filed as Exhibit 10.1 to such Form 8-K. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Agreement.
FSGBank, N.A.
On April 28, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, FSGBank consented and agreed to the issuance of a Consent Order by the OCC (the Order).

7


The Bank and the OCC agreed to the areas of the Bank’s operations that warrant improvement and on a plan for making those improvements. The Order required the Bank to develop and submit written strategic and capital plans covering at least a three-year period. The Board of Directors is required to ensure that competent management is in place in all executive officer positions to manage the Bank in a safe and sound manner. The Bank is also required to review and revise various policies and procedures, including those associated with credit concentration management, the allowance for loan and lease losses, liquidity management, criticized assets, loan review and credit. The Bank is continuing to work with the OCC to ensure the policies and procedures are both appropriate and fully implemented.
Within 120 days of the effective date of the Order, the Bank was required to achieve and thereafter maintain total capital at least equal to 13 percent of risk-weighted assets and Tier 1 capital at least equal to 9 percent of adjusted total assets. As of September 30, 2012, the ninth financial reporting period subsequent to the 120 day requirement, the Bank’s total capital to risk-weighted assets was 8.3 percent and the Tier 1 capital to adjusted total assets was 3.8 percent. The Bank has notified the OCC of its non-compliance with the requirements of the Order.
During the third quarter of 2010, the OCC requested additional information and clarifications to the Bank's submitted strategic and capital plans as well as the management assessments. Subsequent to the resignation of the CEO in April 2011, the Bank requested an extension on the submission date for the strategic and capital plans until a new CEO was appointed and had sufficient time to modify the strategic plan. A revised five-year strategic plan has been submitted and is currently being reviewed by the OCC.
Effective with the Order, the Bank has been restricted from paying interest on deposits that is more than 0.75% above the rate applicable to the applicable market of the Bank as determined by the Federal Deposit Insurance Corporation (FDIC). Additionally, the Bank may not accept, renew or roll over brokered deposits without prior approval of the FDIC.
The Bank is currently deemed not in compliance with some provisions of the Order, including the capital requirements. Any material noncompliance may result in further enforcement actions by the OCC, including the OCC requiring that FSGBank develop a plan to sell, merge or liquidate. Management believes the successful execution of the strategic initiatives discussed below will ultimately result in full compliance with the Order and position the Bank for long-term growth and a return to profitability.
On April 29, 2010, the Company filed a Current Report on Form 8-K describing the Order. A copy of the Order is filed as Exhibit 10.1 to such Form 8-K. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Order.
As of September 30, 2012, the Bank's Tier I leverage ratio fell below the minimum level for an "adequately capitalized" bank of 4%. Accordingly, the Bank is currently operating under additional Prompt Corrective Actions, as described below.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories in which all institutions are placed: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The federal banking agencies have also specified by regulation the relevant capital levels for each category.
The Bank had been deemed "adequately capitalized" for regulatory purposes since issuance of the Order in April 2010. As of October 30, 2012, based on the Bank's September 30, 2012 Report of Condition and Income, the Bank was deemed "undercapitalized" for regulatory purposes.
As a bank's capital position deteriorates, federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

A “well capitalized” bank is one that is not required to meet and maintain a specific capital level for any capital measure, pursuant to any written agreement, order, capital directive, or other remediation, and significantly exceeds all of its capital requirements, which include maintaining a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a Tier 1 leverage ratio of at least 5%. Generally, a classification as well capitalized will place a bank outside of the regulatory zone for purposes of prompt corrective action. However, a well capitalized bank may be reclassified as “adequately capitalized” based on criteria other than capital if the federal regulator determines that a bank is in an unsafe or unsound condition, or is engaged in unsafe or unsound practices, which requires certain remedial action.

8


An “adequately capitalized” bank meets the required minimum level for each relevant capital measure, including a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least 4%. A bank that is adequately capitalized is prohibited from directly or indirectly accepting, renewing or rolling over any brokered deposits, absent applying for and receiving a waiver from the applicable regulatory authorities. Institutions that are not well capitalized are also prohibited, except in very limited circumstances where the FDIC permits use of a higher local market rate, from paying yields for deposits in excess of 75 basis points above a national average rate for deposits of comparable maturity, as calculated by the FDIC. In addition, all institutions are generally prohibited from making capital distributions and paying management fees to controlling persons if, subsequent to such distribution or payment, the institution would be undercapitalized. Finally, an adequately capitalized bank may be forced to comply with operating restrictions similar to those placed on undercapitalized banks.
An “undercapitalized” bank fails to meet the required minimum level for any relevant capital measure. A bank that reaches the undercapitalized level is likely subject to a formal agreement or another formal supervisory sanction. An undercapitalized bank is not only subject to the requirements placed on adequately capitalized banks, but also becomes subject to the following operating and managerial restrictions, which:
prohibit capital distributions;
prohibit payment of management fees to a controlling person;
require the bank to submit a capital restoration plan within 45 days of becoming undercapitalized;
require close monitoring of compliance with capital restoration plans, requirements and restrictions by the primary federal regulator;
restrict asset growth by requiring the bank to restrict its average total assets to the amount attained in the preceding calendar quarter;
prohibit the acceptance of employee benefit plan deposits;
require prior approval by the primary federal regulator for acquisitions, branching and new lines of business;
prohibit any material changes in accounting methods; and
other operating restrictions at the discretion of the bank's primary federal regulator.
The above requirements are generally consistent with the requirements under the Consent Order, with the primary exception of asset growth restriction. The Company has evaluated and determined that scheduled maturities of brokered deposits in the fourth quarter of 2012, as well as a maturing commercial repurchase agreement, will allow the Company to continue to seek growth in loans and customer deposits.
Going Concern Considerations
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this Note create substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern. Management believes the successful execution of the strategic initiatives discussed below should provide sufficient capital to alleviate any substantial doubt about the Company's ability to continue as a going concern.
The Company has experienced significant net operating losses for the three and nine months ended September 30, 2012 and years ended December 31, 2011, 2010, and 2009, substantially resulting from declining net interest margins and elevated levels of provision for loan losses. Losses on other real estate owned have also significantly impacted operating results of the company. Each of these financial trends was impacted by significant levels of nonperforming assets and related deterioration in the economy. As of September 30, 2012, the Bank's Tier 1 leverage ratio fell below 4%, which is the threshold for adequate capitalization, and thus triggering additional prompt corrective action restrictions, as described above.
The Company's ability to continue as a going concern is largely dependent on the ability of management to effectuate the strategic initiatives described below.

9


Management's Plans

The Company’s strategic initiatives address the actions necessary to restore profitability and achieve full compliance with all regulatory agreements, including, but not limited to, restoring capital to the prescribed regulatory levels of the Order. Management is pursuing various options to restore the Company’s capital to a satisfactory level, including, but not limited to, a private placement of common stock. Since December 2011, the Company has been in preliminary discussions with multiple potential investors. Currently, the Company has received non-binding indications with potential investors for a recapitalization that would provide sufficient capital to gain compliance with the capital requirements of the Order while ensuring the recapitalization transaction would not trigger an ownership change under applicable tax regulations. The Company can give no assurances as to the terms on which any such transaction may take place, if at all.

During 2011 and through the first quarter of 2012, the Company underwent significant change within the Board of Directors and executive management. The changes were predicated on strengthening and deepening the Company’s leadership in order to successfully execute a strategic and capital plan to return the Company to profitable operations, satisfy the requirements of the regulatory actions detailed above, and lower the level of problem assets to an acceptable level.

In December 2011, the Company appointed Michael Kramer as President and Chief Executive Officer. Subsequently, the Company appointed a Chief Credit Officer, Retail Banking Officer and Director of FSGBank’s Wealth Management and Trust Department. The Company added three additional directors to the Board in 2011 and has added three additional directors in 2012, including a new independent Chairman of the Board, Larry D. Mauldin.

The Bank has successfully maintained elevated liquidity and has chosen to do so primarily by maintaining excess cash at the Federal Reserve. The Company’s cash position as of September 30, 2012 was $211.8 million compared to $258.2 million and $276.8 million at December 31, 2011 and September 30, 2011, respectively.

The Company's contemplated recapitalization would enable the full implementation of the Company's strategic plan and should enable the Company to restore profitability and achieve full compliance with all regulatory agreements, including, but not limited to, restoring capital to the prescribed regulatory levels of the Order. The Company’s strategic plan includes maintaining adequate liquidity, reducing nonperforming assets, and appropriately increasing the Company’s capital ratios.
Regulatory Capital Ratios
Banks and bank holding companies, as regulated institutions, must maintain required levels of capital. OCC and the Federal Reserve, the primary federal regulators for FSGBank and the Company, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. As described above, the Order requires FSGBank to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least 9%. The Order provided 120 days from April 28, 2010, the effective date of the Order, to achieve these ratios. FSGBank is currently not in compliance with the capital requirements.

10


The following table compares the required capital ratios maintained by the Company and FSGBank:
CAPITAL RATIOS
 
September 30, 2012
FSGBank
Consent  Order1
 
Minimum
Capital Requirements under Prompt Corrective Action Provisions
 
First
Security
 
FSGBank
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
6.8
%
 
7.0
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
8.1
%
 
8.3
%
Leverage ratio
9.0
%
 
4.0
%
 
3.7
%
 
3.8
%
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
9.7
%
 
9.7
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
11.0
%
 
10.9
%
Leverage ratio
9.0
%
 
4.0
%
 
5.7
%
 
5.6
%
 
 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
 
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
10.8
%
 
10.6
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
12.0
%
 
11.9
%
Leverage ratio
9.0
%
 
4.0
%
 
6.5
%
 
6.4
%
_____________
1 FSGBank was required to achieve and maintain these capital ratios within 120 days from April 28, 2010.

11


NOTE 3 –SHARE-BASED COMPENSATION
As of September 30, 2012, the Company has three share-based compensation plans, the 2012 Long-Term Incentive Plan (the 2012 LTIP), the 2002 Long-Term Incentive Plan (the 2002 LTIP) and the 1999 Long-Term Incentive Plan (the 1999 LTIP). The plans are administered by the Compensation Committee of the Board of Directors (the Committee), which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the award. The plans are described in further detail below.
The 2012 LTIP was approved by the shareholders of the Company at the 2012 annual meeting as previously reported on a Current Report on Form 8-K filed June 26, 2012. The 2012 Long-Term Incentive Plan permits the Committee to make a variety of awards, including incentive and nonqualified options to purchase shares of First Security's common stock, stock appreciation rights, other share-based awards which are settled in either cash or shares of First Security's common stock and are determined by reference to shares of stock, such as grants of restricted common stock, grants of rights to receive stock in the future, or dividend equivalent rights, and cash performance awards, which are settled in cash and are not determined by reference to shares of First Security's common stock (Awards). These discretionary Awards may be made on an individual basis or through a program approved by the Committee for the benefit of a group of eligible persons. The number of shares available under the 2012 LTIP is 159,000.
The 2002 LTIP was approved by the shareholders of the Company at the 2002 annual meeting and subsequently amended by the shareholders of the Company at the 2004 and 2007 annual meetings to increase the number of shares available for issuance under the 2002 LTIP by 480 thousand and 750 thousand shares, respectively. The total number of shares authorized for awards prior to the 10-for-1 reverse stock split was 1.5 million. As a result of the 10-for-1 reverse stock split in 2011, the total shares currently authorized under the 2002 LTIP is 151,800, of which not more than 20% may be granted as awards of restricted stock. Eligible participants include eligible employees, officers, consultants and directors of the Company or any affiliate. The exercise price per share of a stock option granted may not be less than the fair market value as of the grant date. The exercise price must be at least 110% of the fair market value at the grant date for options granted to individuals, who at the grant date, are 10% owners of the Company’s voting stock (each a 10% owner). Restricted stock may be awarded to participants with terms and conditions determined by the Committee. The term of each award is determined by the Committee, provided that the term of any incentive stock option may not exceed ten years (five years for 10% owners) from its grant date. Each option award vests in approximately equal percentages each year over a period of not less than three years from the date of grant as determined by the Committee subject to accelerated vesting under terms of the 2002 LTIP or as provided in any award agreement. As a result of the Company's participation in TARP CPP, the terms of awards are also subject to compliance with applicable TARP compensation regulations.

Participation in the 1999 LTIP is limited to eligible employees. The total number of shares of stock authorized for awards prior to the 10-for-1 reverse stock split was 936 thousand. As a result of the 10-for-1 reverse stock split in 2011, the total shares currently authorized under the 1999 LTIP is 93,600, of which not more than 10% could be granted as awards of restricted stock. Under the terms of the 1999 LTIP, incentive stock options to purchase shares of the Company’s common stock may not be granted at a price less than the fair market value of the stock as of the date of the grant. Options must be exercised within ten years from the date of grant subject to conditions specified by the 1999 LTIP. Restricted stock could also be awarded by the Committee in accordance with the 1999 LTIP. Generally, each award vests in approximately equal percentages each year over a period of not less than three years and vest from the date of grant as determined by the Committee subject to accelerated vesting under terms of the 1999 LTIP or as provided in any award agreement. As a result of the Company's participation in TARP CPP, the terms of awards are also subject to compliance with applicable TARP compensation regulations.
Stock Options
The following table illustrates the effect on operating results for share-based compensation for the three and nine months ended September 30, 2012 and 2011.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Stock option compensation expense
$
1

 
$
5

 
$
3

 
$
15

Stock option compensation expense, net of tax 1
$
1

 
$
3

 
$
2

 
$
10

__________________
1 Due to the deferred tax valuation allowance, tax benefit is reversed through the valuation allowance.

12


During the nine months ended September 30, 2012 and 2011, no options were exercised.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the following assumptions: expected dividend yield, expected volatility, risk-free interest rate, expected life of the option and the grant date fair value. Expected volatilities are based on historical volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date. No options were granted during the nine months ended September 30, 2011.
 
As of
 
September 30,
 
2012
Risk‑free interest rate
1.27
%
Expected term, in years
6.5

Expected stock price volatility
67.89
%
Dividend yield
%
The following table represents stock option activity for the nine months ended September 30, 2012:
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
 
Outstanding, January 1, 2012
48,205

 
$
82.58

 
 
 
 
 
Granted
83,000

 
$
3.03

 
 
 
 
 
Exercised

 
 
 
 
 
 
 
Forfeited
2,119

 
 
 
 
 
 
 
Outstanding, September 30, 2012
123,560

 
$
31.49

 
7.28

 
$
1,800

 
Exercisable, September 30, 2012
45,056

 
$
83.83

 
2.83

 

1 
__________________
1 As of September 30, 2012, the exercise price of all exercisable options exceeded the closing price of the Company's common stock of $2.25, resulting in no intrinsic value.
As of September 30, 2012, shares available for future option grants to employees and directors under existing plans were zero, zero, and 159,000 for the 1999 LTIP, 2002 LTIP, and 2012 LTIP, respectively.
As of September 30, 2012, there was $146 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plans. The cost is expected to be recognized over a weighted-average period of 2.56 years.
Restricted Stock

The Plans described above allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned share-based compensation related to these awards is being amortized to compensation expense over the period the restrictions lapse. The share-based expense for these awards was determined based on the market price of the Company’s stock at the grant date applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.


13


As of September 30, 2012, unearned share-based compensation associated with these awards totaled $278 thousand. The Company recognized $29 thousand and $82 thousand for the three and nine months ended September 30, 2012, respectively, and less than $1 thousand of compensation expense, net of forfeitures, in the three and nine months ended September 30, 2011, related to the amortization of deferred compensation that was included in salaries and benefits in the accompanying consolidated statements of operations. The remaining cost is expected to be recognized over a weighted-average period of 2.26 years.
The following table represents restricted stock activity for the period ended September 30, 2012:
 
Shares
 
Weighted Average Grant-Date Fair Value
Nonvested shares at January 1, 2012
41,940

1 
$
1.83

Granted
88,000

2 
 
Vested
(39
)
 
 
Forfeited
(120
)
 
 
Nonvested, September 30, 2012
129,781

3 
$
2.84

__________________
1 Includes 35,000 shares issued as an inducement grant from available and unissued shares and not from the Plans.
2 Includes 58,000 shares issued as inducement grants from available and unissued shares and not from the Plans.
3 Includes 93,000 shares issued as inducement grants from available and unissued shares and not from the Plans.
The restricted stock awards granted during 2012 vest according to the TARP CPP compensation regulations such that 66% vest after two years and the remainder vest after the third year. Additional transferability restrictions also apply.


NOTE 4 – LOSS PER SHARE
The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding stock options, restricted stock awards and common stock warrants using the treasury stock method. The Company has issued certain restricted stock awards, which are unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities. Accordingly, the Company calculated net income available to common shareholders pursuant to the two-class method, whereby net income is allocated between common shareholders and participating securities. In periods of a net loss, no allocation is made to participating securities as they are not contractually required to fund net losses. The computation of basic and diluted earnings per share is as follows:


14


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(8,889
)
 
$
(6,481
)
 
$
(21,992
)
 
$
(14,534
)
Preferred stock dividends
413

 
412

 
1,238

 
1,238

Accretion of preferred stock discount
108

 
102

 
318

 
300

Net loss allocated to common shareholders
$
(9,410
)
 
$
(6,995
)
 
$
(23,548
)
 
$
(16,072
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding including participating securities
1,753

 
1,591

 
1,731

 
1,587

Less: Participating securities
127

 

 
112

 

Weighted average basic common shares outstanding
1,626

 
1,591

 
1,619

 
1,587

Effect of diluted securities:
 
 
 
 
 
 
 
Equivalent shares issuable upon exercise of stock options, stock warrants and restricted stock awards

 

 

 

Weighted average diluted common shares outstanding
1,626

 
1,591

 
1,619

 
1,587

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(5.79
)
 
$
(4.40
)
 
$
(14.54
)
 
$
(10.13
)
Diluted
$
(5.79
)
 
$
(4.40
)
 
$
(14.54
)
 
$
(10.13
)

Due to the net loss allocated to common shareholders for all periods shown, all stock options, stock warrants, and restricted stock grants are considered anti-dilutive and are not included in the computation of diluted earnings per share. As of September 30, 2012 and September 30, 2011 a total of 327 thousand and 145 thousand stock options, stock warrants and restricted stock grants were considered anti-dilutive, respectively.

NOTE 5 – SECURITIES AVAILABLE-FOR-SALE
Investment Securities by Type
The following table presents the amortized cost and fair value of securities, with gross unrealized gains and losses.
 

15


 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
September 30, 2012
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
32,286

 
$
163

 
$
2

 
$
32,447

Mortgage-backed—residential
190,702

 
4,130

 
167

 
194,665

Municipals
29,057

 
1,158

 
106

 
30,109

Other
61

 

 
19

 
42

Total
$
252,106

 
$
5,451

 
$
294

 
$
257,263

 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
23,984

 
$
251

 
$

 
$
24,235

Mortgage-backed—residential
134,210

 
2,817

 
129

 
136,898

Municipals
30,453

 
1,419

 

 
31,872

Other
127

 

 
91

 
36

Total
$
188,774

 
$
4,487

 
$
220

 
$
193,041

 
 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
21,987

 
$
311

 
$

 
$
22,298

Mortgage-backed—residential
100,056

 
3,206

 
15

 
103,247

Municipals
31,752

 
1,455

 

 
33,207

Other
127

 

 
91

 
36

Total
$
153,922

 
$
4,972

 
$
106

 
$
158,788


During the three months ended September 30, 2012, the Company sold 21 municipal securities and one mortgage-backed security resulting in proceeds of $6.7 million and gross gains of $143 thousand. During the nine months ended September 30, 2012, the Company sold 22 municipal securities and one mortgage-backed security for $7.0 million, generating a gross gain of $144 thousand.
There were no sales of securities for the three and nine months ended September 30, 2011.
At September 30, 2012December 31, 2011 and September 30, 2011, securities with a carrying value of $28.7 million, $22.4 million and $21.3 million, respectively, were pledged to secure public deposits. At September 30, 2012December 31, 2011 and September 30, 2011, the carrying amount of securities pledged to secure repurchase agreements was $18.6 million, $26.6 million and $18.4 million, respectively. At September 30, 2012December 31, 2011 and September 30, 2011, securities of $6.6 million, $5.7 million and $6.0 million were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions. At September 30, 2012, December 31, 2011, and September 30, 2011 the carrying amount of securities pledged to secure lines of credit with the FHLB totaled $10.8 million, $10.1 million and $10.2 million, respectively. At September 30, 2012, pledged and unpledged securities totaled $64.6 million and $192.6 million, respectively.


16


Maturity of Securities
The following table presents the amortized cost and fair value of debt securities by contractual maturity at September 30, 2012.
 
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Within 1 year
$
484

 
$
485

Over 1 year through 5 years
17,900

 
18,493

5 years to 10 years
37,372

 
37,844

Over 10 years
5,648

 
5,776

 
61,404

 
62,598

Mortgage-backed residential securities
190,702

 
194,665

Total
$
252,106

 
$
257,263

Impairment Analysis
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012December 31, 2011 and September 30, 2011.
 
 
Less than 12 months
 
12 months or greater
 
Totals
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
998

 
$
2

 
$

 
$

 
$
998

 
$
2

Mortgage-backed—residential
29,165

 
167

 

 

 
29,165

 
167

Municipals
5,796

 
106

 

 

 
5,796

 
106

Other

 

 
42

 
19

 
42

 
19

Totals
$
35,959

 
$
275

 
$
42

 
$
19

 
$
36,001

 
$
294

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed—residential
$
26,780

 
$
129

 
$

 
$

 
$
26,780

 
$
129

Other

 

 
36

 
91

 
36

 
91

Totals
$
26,780


$
129

 
$
36

 
$
91

 
$
26,816

 
$
220

September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
9,482

 
$
15

 
$

 
$

 
$
9,482

 
$
15

Other

 

 
36

 
91

 
36

 
91

Totals
$
9,482

 
$
15

 
$
36

 
$
91

 
$
9,518

 
$
106


As of September 30, 2012, the Company performed an impairment assessment of the securities in its portfolio that had unrealized losses to determine whether the decline in the fair value of these securities below their cost was other-than-temporary. Under authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) the Company intends to sell the security, (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized costs basis or (3) the Company does not expect to recover the security’s entire amortized cost basis, even if the Company does not intend to sell. Additionally, accounting guidance requires that for impaired securities that the Company does not intend to sell and/or that it is not more-likely-than-not that the Company will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.

17


In evaluating the recovery of the entire amortized cost basis, the Company considers factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.
As of September 30, 2012, gross unrealized losses in the Company’s portfolio totaled $294 thousand, compared to $220 thousand as of December 31, 2011 and $106 thousand as of September 30, 2011. As of September 30, 2012, the unrealized losses in mortgage-backed securities (consisting of ten securities), municipals (consisting of seventeen securities) and federal agencies (consisting of one security) are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. The unrealized loss in other securities relates to one pooled trust preferred security. The unrealized loss in the pooled trust preferred security is primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities. The Company does not intend to sell the investments with unrealized losses and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Based on results of the Company’s impairment assessment, the unrealized losses at September 30, 2012 are considered temporary.

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans, including loans held for sale, by type are summarized in the following table. Loans held for sale are included in the residential and commercial real estate categories.
 
 
September 30,
2012
 
December 31,
2011
 
September 30,
2011
Loans secured by real estate—
(in thousands)
Residential 1-4 family
$
204,423

 
$
217,597

 
$
221,886

Commercial
232,470

 
195,062

 
200,228

Construction
37,744

 
53,807

 
54,793

Multi-family and farmland
24,075

 
31,668

 
32,914

 
498,712

 
498,134

 
509,821

Commercial loans
58,045

 
59,623

 
64,864

Consumer installment loans
14,757

 
20,011

 
22,632

Leases, net of unearned income
771

 
2,920

 
3,425

Other
4,937

 
3,809

 
3,682

Total loans
577,222

 
584,497

 
604,424

Allowance for loan and lease losses
(17,490
)
 
(19,600
)
 
(18,750
)
Net loans
$
559,732

 
$
564,897

 
$
585,674


The allowance for loan and lease losses is composed of two primary components: (1) specific impairments for substandard/nonaccrual loans and leases and (2) general allocations for classified loan pools, including special mention and substandard/accrual loans, as well as all remaining pools of loans. The Company accumulates pools based on the underlying classification of the collateral. Each pool is assigned a loss severity rate based on historical loss experience and various qualitative and environmental factors, including, but not limited to, credit quality and economic conditions. The Company determines the allowance on a quarterly basis. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may materially change in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
The following table presents an analysis of the activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2012 and September 30, 2011. The provisions for loan and lease losses in the table below do not include the Company’s provision accrual for unfunded commitments of $6 thousand and $18 thousand for both the three and nine months ended September 30, 2012 and September 30, 2011, respectively. The reserve for unfunded commitments is included in other liabilities in the consolidated balance sheets and totaled $252 thousand, $253 thousand and $247 thousand at September 30, 2012, December 31, 2011 and September 30, 2011, respectively.

18


Allowance for Loan and Lease Losses
For the Three Months Ended September 30, 2012
 
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Total
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, June 30, 2012
$
6,064

 
$
5,137

 
$
1,668

 
$
1,592

 
$
4,633

 
$
359

 
$
125

 
$
22

 
$
19,600

Charge-offs
(644
)
 
(2,801
)
 
(2,334
)
 
(13
)
 
(2,388
)
 
(166
)
 
(1
)
 

 
(8,347
)
Recoveries
53

 
8

 
467

 
3

 
109

 
385

 
668

 
1

 
1,694

Provision
1,321

 
2,319

 
1,256

 
58

 
473

 
(181
)
 
(705
)
 
2

 
4,543

Ending balance, September 30, 2012
$
6,794

 
$
4,663

 
$
1,057

 
$
1,640

 
$
2,827

 
$
397

 
$
87

 
$
25

 
$
17,490


Allowance for Loan and Lease Losses
For the Nine Months Ended September 30, 2012
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Total
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, December 31, 2011
$
6,368

 
$
6,227

 
$
1,485

 
$
728

 
$
3,649

 
$
405

 
$
718

 
$
20

 
$
19,600

Charge-offs
(2,532
)
 
(3,930
)
 
(5,246
)
 
(28
)
 
(2,659
)
 
(304
)
 
(864
)
 
(3
)
 
(15,566
)
Recoveries
145

 
116

 
991

 
9

 
340

 
479

 
877

 
7

 
2,964

Provision
2,813

 
2,250

 
3,827

 
931

 
1,497

 
(183
)
 
(644
)
 
1

 
10,492

Ending balance, September 30, 2012
$
6,794

 
$
4,663

 
$
1,057

 
$
1,640

 
$
2,827

 
$
397

 
$
87

 
$
25

 
$
17,490



19


Allowance for Loan and Lease Losses
For the Three Months Ended September 30, 2011
 
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Unallocated
 
Total
 
(in thousands)
Beginning balance, June 30, 2011
$
6,875

 
$
5,708

 
$
4,089

 
$
541

 
$
3,929

 
$
517

 
$
816

 
$
10

 
$

 
$
22,485

Charge-offs
(924
)
 
(2,706
)
 
(3,631
)
 
(82
)
 
(899
)
 
(92
)
 
(10
)
 

 

 
(8,344
)
Recoveries
177

 
15

 
260

 
1

 
126

 
68

 
80

 

 

 
727

Provision
37

 
2,354

 
197

 
242

 
994

 
53

 
(32
)
 
7

 
30

 
3,882

Ending balance, September 30, 2011
$
6,165

 
$
5,371

 
$
915

 
$
702

 
$
4,150

 
$
546

 
$
854

 
$
17

 
$
30

 
$
18,750


Allowance for Loan and Lease Losses
For the Nine Months Ended September 30, 2011
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Unallocated
 
Total
 
(in thousands)
Beginning balance, December 31, 2010
$
7,346

 
$
5,550

 
$
2,905

 
$
761

 
$
5,692

 
$
813

 
$
917

 
$
16

 
$

 
$
24,000

Charge-offs
(1,451
)
 
(5,780
)
 
(5,062
)
 
(82
)
 
(2,336
)
 
(275
)
 
(929
)
 

 

 
(15,915
)
Recoveries
358

 
215

 
565

 
383

 
526

 
753

 
470

 
4

 

 
3,274

Provision
(88
)
 
5,386

 
2,507

 
(360
)
 
268

 
(745
)
 
396

 
(3
)
 
30

 
7,391

Ending balance, September 30, 2011
$
6,165

 
$
5,371

 
$
915

 
$
702

 
$
4,150

 
$
546

 
$
854

 
$
17

 
$
30

 
$
18,750



20


The following table presents an analysis of the end of period balance of the allowance for loan and lease losses as of September 30, 2012.
As of September 30, 2012
 
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family and
farmland
 
Total Real Estate
Loans
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
(in thousands)
Individually evaluated
$
4,214

 
$
82

 
$
9,183

 
$
16

 
$
4,091

 
$

 
$
805

 
$

 
$
18,293

 
$
98

Collectively evaluated
200,209

 
6,712

 
223,287

 
4,647

 
33,653

 
1,057

 
23,270

 
1,640

 
480,419

 
14,056

Total evaluated
$
204,423

 
$
6,794

 
$
232,470

 
$
4,663

 
$
37,744

 
$
1,057

 
$
24,075

 
$
1,640

 
$
498,712

 
$
14,154

 
 
Commercial
 
Consumer
 
Leases
 
Other
 
Grand Total
(continued from above)
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance
 
(in thousands)
Individually evaluated
$
1,297

 
$

 
$

 
$

 
$
422

 
$

 
$

 
$

 
$
20,012

 
$
98

Collectively evaluated
56,748

 
2,827

 
14,757

 
397

 
349

 
87

 
4,937

 
25

 
557,210

 
17,392

Total evaluated
$
58,045

 
$
2,827

 
$
14,757

 
$
397

 
$
771