10-Q 1 fsgi-2013331x10q.htm 10-Q FSGI-2013.3.31-10Q
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 March 31, 2013
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: 62,423,367 shares outstanding and issued as of May 15, 2013



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
 
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
(in thousands)
(unaudited)
 
 
(unaudited)
ASSETS
 
 
 
 
 
Cash and Due from Banks
$
9,407

 
$
12,806

 
$
8,244

Interest Bearing Deposits in Banks
157,931

 
159,665

 
217,142

Cash and Cash Equivalents
167,338

 
172,471

 
225,386

Securities Available-for-Sale
258,175

 
254,057

 
223,155

Loans Held for Sale
3,708

 
25,920

 
2,136

Loans
540,288

 
541,130

 
601,779

Less: Allowance for Loan and Lease Losses
13,500

 
13,800

 
18,990

Net Loans
526,788

 
527,330

 
582,789

Premises and Equipment, net
29,239

 
29,304

 
29,076

Bank Owned Life Insurance
27,760

 
27,576

 
24,716

Intangible Assets
526

 
600

 
863

Other Real Estate Owned
12,706

 
13,441

 
26,926

Other Assets
14,513

 
12,856

 
15,075

TOTAL ASSETS
$
1,040,753

 
$
1,063,555

 
$
1,130,122



(See Accompanying Notes to Consolidated Financial Statements)
1


First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets

 
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
(in thousands, except share and per share data)
(unaudited)
 
 
(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deposits
 
 
 
 
 
Noninterest Bearing Demand
$
145,207

 
$
141,400

 
$
168,809

Interest Bearing Demand
88,184

 
86,575

 
59,840

Savings and Money Market Accounts
191,889

 
184,597

 
167,308

Certificates of Deposit less than $100 thousand
224,494

 
228,144

 
231,686

Certificates of Deposit of $100 thousand or more
201,405

 
201,873

 
197,221

Brokered Deposits
139,715

 
165,477

 
213,682

Total Deposits
990,894

 
1,008,066

 
1,038,546

Federal Funds Purchased and Securities Sold under Agreements to Repurchase
13,048

 
12,481

 
16,629

Security Deposits
42

 
58

 
187

Other Liabilities
15,775

 
13,840

 
12,928

Total Liabilities
1,019,759

 
1,034,445

 
1,068,290

SHAREHOLDERS’ EQUITY
 
 
 
 
 
Preferred Stock – no par value – 10,000,000 shares authorized; 33,000 issued as of March 31, 2013, December 31, 2012 and March 31, 2012; Liquidation value of $38,569 as of March 31, 2013, $38,156 as of December 31, 2012 and $36,919 as of March 31, 2012
32,660

 
32,549

 
32,225

Common Stock – $.01 par value – 150,000,000 shares authorized; 1,772,342 shares issued as of March 31, 2013, 1,772,342 issued as of December 31, 2012, and 1,762,342 issued as of March 31, 2012
115

 
115

 
115

Paid-In Surplus
106,622

 
106,531

 
109,027

Common Stock Warrants
2,006

 
2,006

 
2,006

Unallocated ESOP Shares

 

 
(2,746
)
Accumulated Deficit
(123,293
)
 
(115,391
)
 
(82,087
)
Accumulated Other Comprehensive Income
2,884

 
3,300

 
3,292

Total Shareholders’ Equity
20,994

 
29,110

 
61,832

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,040,753

 
$
1,063,555

 
$
1,130,122



(See Accompanying Notes to Consolidated Financial Statements)
2


First Security Group, Inc. and Subsidiary
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
 
Three Months Ended
 
March 31,
(in thousands, except per share data)
2013
 
2012
INTEREST INCOME
 
 
 
Loans, including fees
$
6,670

 
$
8,332

Investment Securities – taxable
812

 
931

Investment Securities – non-taxable
205

 
283

Other
122

 
143

Total Interest Income
7,809

 
9,689

INTEREST EXPENSE
 
 
 
Interest Bearing Demand Deposits
74

 
37

Savings Deposits and Money Market Accounts
222

 
286

Certificates of Deposit of less than $100 thousand
564

 
705

Certificates of Deposit of $100 thousand or more
556

 
651

Brokered Deposits
1,136

 
1,659

Other
16

 
116

Total Interest Expense
2,568

 
3,454

NET INTEREST INCOME
5,241

 
6,235

Provision for Loan and Lease Losses
678

 
1,801

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
4,563

 
4,434

NONINTEREST INCOME
 
 
 
Service Charges on Deposit Accounts
736

 
717

Mortgage Banking Income
296

 
175

Other
1,188

 
1,091

Total Noninterest Income
2,220

 
1,983

NONINTEREST EXPENSES
 
 
 
Salaries and Employee Benefits
5,609

 
4,633

Expense on Premises and Fixed Assets, net of rental income
1,447

 
1,243

Other
6,986

 
6,259

Total Noninterest Expenses
14,042

 
12,135

LOSS BEFORE INCOME TAX PROVISION (BENEFIT)
(7,259
)
 
(5,718
)
Income Tax Provision
119

 
109

NET LOSS
(7,378
)
 
(5,827
)
Preferred Stock Dividends
413

 
413

Accretion on Preferred Stock Discount
111

 
104

NET LOSS ALLOCATED TO COMMON SHAREHOLDERS
$
(7,902
)
 
$
(6,344
)
OTHER COMPREHENSIVE LOSS
 
 
 
Net loss
(7,378
)
 
(5,827
)
Unrealized net gain (loss) on securities
(412
)
 
148

Unrealized net loss on cash flow swaps
(4
)
 
(355
)
COMPREHENSIVE LOSS
(7,794
)
 
(6,034
)
NET LOSS PER SHARE:
 
 
 
Net Loss Per Share – Basic
$
(4.90
)
 
$
(3.94
)
Net Loss Per Share – Diluted
$
(4.90
)
 
$
(3.94
)

(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
 
Total
Balance - December 31, 2012
$
32,549

 
1772
 
$
115

 
$
106,531

 
$
2,006

 
$
(115,391
)
 
$
3,300

 
$
29,110

Net Loss

 
0
 

 

 

 
(7,378
)
 

 
(7,378
)
Other Comprehensive Loss

 
0
 

 

 

 

 
(416
)
 
(416
)
Accretion of Discount Associated with Preferred Stock
111

 
0
 

 

 

 
(111
)
 

 

Preferred Stock Dividend

 
0
 

 

 

 
(413
)
 

 
(413
)
Share-based Compensation, net of forfeitures

 
0
 

 
91

 

 

 

 
91

Balance - March 31, 2013
$
32,660

 
1772
 
$
115

 
$
106,622

 
$
2,006

 
$
(123,293
)
 
$
2,884

 
$
20,994



(See Accompanying Notes to Consolidated Financial Statements)
4


First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
 
 
Three Months Ended
 
March 31,
(in thousands)
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net Loss
$
(7,378
)
 
$
(5,827
)
Adjustments to Reconcile Net Loss to Net Cash From Operating Activities -
 
 
 
Provision for Loan and Lease Losses
678

 
1,801

Amortization, net
594

 
770

Share-Based Compensation
91

 
23

ESOP Compensation

 
24

Depreciation
425

 
341

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

Loss on Sales of Other Real Estate Owned and Repossessions, net
141

 
531

Write-down of Other Real Estate Owned and Repossessions
1,315

 
2,297

Accretion of Fair Value Adjustment, net

(3
)
 
(24
)
Accretion of Terminated Cash Flow Swaps

 
(289
)
Changes in Operating Assets and Liabilities -
 
 
 
Loans Held for Sale
(87
)
 
179

Interest Receivable
(152
)
 
(238
)
Other Assets
(1,683
)
 
2,041

Interest Payable
(72
)
 
127

Other Liabilities
1,578

 
(145
)
Net Cash From Operating Activities
(4,577
)
 
1,611

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Activity in Securities Available-for-Sale:
 
 
 
Maturities, Prepayments, and Calls
4,276

 
13,537

Sales
1,001

 

Purchases
(10,328
)
 
(44,154
)
Loan Originations and Principal Collections, net
(1,938
)
 
(27,895
)
Proceeds from Sales of Premises and Equipment
157

 

Proceeds from Sales of Other Real Estate and Repossessions
1,078

 
3,677

Proceeds from Sale of Loans to Third Party (see Note 7)
22,296

 

Additions to Premises and Equipment
(493
)
 
(746
)
Net Cash From Investing Activities
16,049

 
(55,581
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net Increase (Decrease) in Deposits
(17,172
)
 
19,124

Net Increase in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
567

 
2,109

Net Decrease of Other Borrowings

 
(58
)
Net Cash From Financing Activities
(16,605
)
 
21,175

NET CHANGE IN CASH AND CASH EQUIVALENTS
(5,133
)
 
(32,795
)
CASH AND CASH EQUIVALENTS – beginning of period
172,471

 
258,181

CASH AND CASH EQUIVALENTS – end of period
$
167,338

 
$
225,386

 
 
Three Months Ended
 
March 31,
(in thousands)
2013
 
2012
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Loans and leases transfered to OREO and repossessions
$
1,805

 
$
5,766

Accrued and deferred cash dividends on preferred stock
$
413

 
$
413

SUPPLEMENTAL SCHEDULE OF CASH FLOWS
 
 
 
Interest paid
$
2,496

 
$
3,327

Income taxes paid
$

 
$
70


(See Accompanying Notes to Consolidated Financial Statements)
5


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.
Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 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, 2012.


NOTE 2 – MANAGEMENT'S PLANS AND REGULATORY MATTERS
Management's Plans
During 2012, the Company focused on operating under its strategic plan and executing on its capital plan. The execution of the capital plan, as described below, combined with the ongoing performance of the strategic plan should restore profitability and achieve compliance with all aspects of the regulatory agreements over the next twelve months.
On April 11, 2013, the Company completed a restructuring of the Company's Preferred Stock with the U.S. Treasury ("Treasury") by issuing $14.4 million of new common stock for $1.50 per share for the full satisfaction of the Treasury's 2009 investment in the Company. Pursuant to the exchange agreement ("Exchange Agreement"), as previously included in a Current Report on Form 8-K filed on February 26, 2013, the Company restructured the Company's Preferred Stock issued under the Capital Purchase Program ("CPP") by issuing new shares of common stock equal to 26.75% of the $33 million liquidation value of the Preferred Stock plus 100% of the accrued but unpaid dividends in exchange for the Preferred Stock, all accrued but unpaid dividends thereon, and the cancellation of stock warrants granted in connection with the CPP investment ("CPP Restructuring"). Immediately after the issuance of the common stock to the Treasury, the Treasury sold all of the Company's common stock to investors previously identified by the Company at the same $1.50 per share price.
On April 12, 2013, the Company completed the issuance of an additional $76.7 million of new common stock in a private placement to accredited investors. The private placement was previously announced on a Current Report on Form 8-K filed on February 26, 2013, in which the Company announced the execution of definitive stock purchase agreements with institutional investors as part of an approximately $90 million recapitalization ("Recapitalization"). In total, the Company issued 60,735,000 shares of common stock at $1.50 per share for gross proceeds of $91.1 million. The following chart presents pro-forma stockholders' equity based on the Recapitalization.

6


Pro-Forma Stockholders' Equity
 
March 31, 2013
 
Estimated Impact of CPP Restructuring 1
 
Estimated Impact of Recapotalization2
 
Pro-Forma
 
(amount in thousands)
Preferred Stock - no par value - 10,000,000 shares authorized; 33,000 issued as of March 31, 2013; Liquidation value of $38,569
$
32,660

 
$
(32,660
)
 
$

 
$

Common Stock - $0.01 par value - 150,000,000 shared authorized; 1,772,342 shares issued as of March 31, 2013
115

 
99

 
508

 
722

Paid-In Surplus
106,622

 
14,813

 
70,592

 
191,936

Common Stock Warrants
2,006

 
(2,006
)
 

 

Accumulated Deficit
(123,293
)
 
25,728

 

 
(89,663
)
Accumulated Other Comprehensive Income
2,884

 

 

 
2,884

Total Shareholders' Equity
$
20,994

 
5,974

 
71,100

 
105,879

 
 
 
 
 
 
 
 
1 
CPP Restructuring – The Company issued common stock equal to 26.75% of the $33 million liquidation value of the Preferred Stock plus 100% of the accrued but unpaid dividends on April 11, 2013. The net increase of $5,974 thousand represents the conversion of the accrued dividends from a liability into capital. The above is based on the accrued but unpaid dividends as of the transaction date.
2 
Recapitalization – The Company issued $91.1 million of aggregate new shares of common stock, inclusive of the shares issued to the U.S. Treasury as part of the CPP restructuring. The Company has deducted $5.1 million as the estimated transaction expenses that will reduce the net proceeds to the Company. The transaction expenses are an estimate and subject to change.


7


The following chart presents pro-forma regulatory capital ratios based upon the Recapitalization:

Pro-Forma Regulatory Capital Ratios
 
March 31, 2013
 
Estimated Impact of Transaction
 
Pro-Forma
 
Minimum to be Well Capitalized under Prompt Corrective Action Provisions 1
 
(amounts in thousands)
Company Capital Levels
 
 
 
 
 
 
 
Tier 1 capital
$
17,584

 
$
77,074

 
$
94,658

 
 
Total risk-based capital
$
24,967

 
$
77,074

 
$
102,041

 
 
Tier 1 leverage ratio
1.68
%
 
 
 
9.04
%
 
n/a

Total risk-based capital
4.27
%
 
 
 
17.47
%
 
n/a

 
 
 
 
 
 
 
 
FSGBank Capital Levels
 
 
 
 
 
 
 
Tier 1 capital
$
19,932

 
$
65,000

 
$
84,932

 
 
Total risk-based capital
$
27,313

 
$
65,000

 
$
92,313

 
 
Tier 1 leverage ratio
1.90
%
 
 
 
8.12
%
 
5.00
%
Total risk-based capital
4.68
%
 
 
 
15.80
%
 
10.00
%
 
 
 
 
 
 
 
 
1 FSGBank continues to operate under a Consent Order with capital adequacy requirements. Accordingly, FSGBank would be considered “adequately capitalized” based on the estimated pro-forma capital levels.
In addition to the Recapitalization described above, the Company has strengthened its management team and board of directors and maintained evaluated levels of liquidity.
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 below, 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 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 March 31, 2013 was $167.3 million compared to $172.5 million and $225.4 million at December 31, 2012 and March 31, 2012, respectively. With the completion of the Recapitalization, the Company will begin deploying the excess liquidity into higher-earning assets.
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.

8



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. Strategic and capital plans covering five years are being revised to reflect the actual terms and timing of the Recapitalization.
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).
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 years 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 13.0% of risk-weighted assets and Tier 1 capital at least equal to 9% of adjusted total assets. As of March 31, 2013, the eleventh financial reporting period subsequent to the 120 day requirement, the Bank’s total capital to risk-weighted assets was 4.7% and the Tier 1 capital to adjusted total assets was 1.9%. 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. Strategic and capital plans covering five-years are being revised to reflect the actual terms and timing of the Recapitalization.
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. Management believes that the completed Recapitalization will provide compliance with most, if not all, requirements of the Order.
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%. As described below, there are three classifications for banks that are below "adequately capitalized," as follows: "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." As of December 31, 2012, the Bank was reclassified from "undercapitalized" to "significantly undercapitalized" upon the filing of the Call Report on January 30, 2013. As of March 31, 2013, the Bank was reclassified to "critically undercapitalized" upon the filing of the call report on April 30, 2013.

9



On April 23, 2013, FSGBank filed a cash contribution to capital notice with the OCC certifying a $65 million capital contribution by First Security Group into FSGBank. With the capital contribution, FSGBank's proforma regulatory capital ratios changed as follows: Tier 1 leverage ratio from less than 2.0% to 8.1%, Tier 1 risk-based capital from 3.4% to 14.5% and total risk-based capital from 4.7% to 15.8%. All proforma regulatory capital exceed the percentages of a well capitalized institution as defined under applicable regulatory guidelines. FSGBank will continue to be classified as adequately capitalized due to the capital requirement in the Order.
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.
The following table compares the required capital ratios maintained by the Company and FSGBank:
CAPITAL RATIOS
 
March 31, 2013
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
%
 
3.01
%
 
3.41
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
4.27
%
 
4.68
%
Leverage ratio
9.0
%
 
4.0
%
 
1.68
%
 
1.90
%
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
4.23
%
 
4.54
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
5.49
%
 
5.80
%
Leverage ratio
9.0
%
 
4.0
%
 
2.31
%
 
2.48
%
 
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
8.60
%
 
8.60
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
9.80
%
 
9.80
%
Leverage ratio
9.0
%
 
4.0
%
 
5.20
%
 
5.20
%
_____________
1 FSGBank was required to achieve and maintain these capital ratios within 120 days from April 28, 2010.
See "Proforma Regulatory Capital Ratios" table to see the effect of the Recapitalization completed on April 12, 2013.

10



NOTE 3 –OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) for the Company consists of changes in net unrealized gains and losses on investment securities available-for-sale and derivatives.  The following tables present a summary of the accumulated other comprehensive income balances, net of tax, as of March 31, 2013 and 2012.

 
 
Unrealized Gain (Loss) on Derivatives
 
Unrealized Gain (Loss) on Securities
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands)
 
 
 
 
 
 
 
Beginning balance, December 31, 2012
 
$
(54
)
 
$
3,354

 
$
3,300

Other comprehensive income before reclassification
 
(3
)
 
(413
)
 
(416
)
Amounts reclassified from accumulated other comprehensive income
 

 

 

Net current period other comprehensive income
 
(3
)
 
(413
)
 
(416
)
Ending balance, March 31, 2013
 
$
(57
)
 
$
2,941

 
$
2,884


 
 
Unrealized Gain (Loss) on Derivatives
 
Unrealized Gain (Loss) on Securities
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands)
 
 
 
 
 
 
 
Beginning balance, December 31, 2011
 
$
202

 
$
3,297

 
$
3,499

Other comprehensive income before reclassification
 
(792
)
 
148

 
(644
)
Amounts reclassified from accumulated other comprehensive income
 
(437
)
 

 
(437
)
Net current period other comprehensive income
 
(355
)
 
148

 
(207
)
Ending balance, March 31, 2012
 
$
(153
)
 
$
3,445

 
$
3,292


For the three months ended March 31, 2013 and 2012, zero and $437 thousand, respectively, were reclassified into interest income due to gains on derivatives. There were no reclassifications from gains or losses on securities for the three months ended March 31, 2013 and 2012.


11



NOTE 4 –SHARE-BASED COMPENSATION
As of March 31, 2013, 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 149,000.
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 months ended March 31, 2013 and 2012.
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in thousands)
Stock option compensation expense
$
28

 
$
2

Stock option compensation expense, net of tax 1
$
18

 
$
1

__________________
1 Due to the deferred tax valuation allowance, tax benefit is reversed through the valuation allowance.
During the three months ended March 31, 2013 and 2012, no options were exercised.

12


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.
During the three months ended March 31, 2013 and 2012, no options were granted.
The following table represents stock option activity for the three months ended March 31, 2013:
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
 
Outstanding, January 1, 2013
135,176

 
$
25.54

 
 
 
 
 
Granted

 
$

 
 
 
 
 
Exercised

 
$

 
 
 
 
 
Forfeited
2,980

 
$
82.49

 
 
 
 
 
Outstanding, March 31, 2013
132,196

 
$
24.26

 
7.58
 
$
850

 
Exercisable, March 31, 2013
36,782

 
$
79.19

 
3.43
 

1 
__________________
1 As of March 31, 2013, the exercise price of all exercisable options exceeded the closing price of the Company's common stock of $2.64, resulting in no intrinsic value.
As of March 31, 2013, shares available for future option grants to employees and directors under existing plans were zero, zero, and 149,000 for the 1999 LTIP, 2002 LTIP, and 2012 LTIP, respectively.
As of March 31, 2013, there was $92 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 1.57 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.
As of March 31, 2013, unearned share-based compensation associated with these awards totaled $147 thousand. The Company recognized compensation expense, net of forfeitures, of $61 thousand for the three months ended March 31, 2013 and $21 thousand for the three months ended March 31, 2012, 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 1.29 years.
The following table represents restricted stock activity for the period ended March 31, 2013:
 
Shares
 
Weighted Average Grant-Date Fair Value
Nonvested shares at January 1, 2013
129,781

1 
$
2.85

Granted


 
Vested
(40
)
 
 
Forfeited
(6,700
)
 
 
Nonvested, March 31, 2013
123,041

1 
$
2.89

__________________
1 Includes 93,000 shares issued as an inducement grant from available and unissued shares and not from the Plans.


13


On April 11, 2013, approximately 84,750 restricted stock shares were forfeited in connection with TARP CPP regulations associated with TARP redemptions.


NOTE 5 – 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 non-forfeitable 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:

 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(in thousands, except per share amounts)
Numerator:
 
 
 
Net loss
$
(7,378
)
 
$
(5,827
)
Preferred stock dividends
413

 
413

Accretion of preferred stock discount
111

 
104

Net loss allocated to common shareholders
$
(7,902
)
 
$
(6,344
)
Denominator:
 
 
 
Weighted average common shares outstanding including participating securities
1,990

 
1,702

Less: Participating securities
377

 
90

Weighted average basic common shares outstanding
1,613

 
1,612

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

 

Weighted average diluted common shares outstanding
1,613

 
1,612

Net loss per share:
 
 
 
Basic
$
(4.90
)
 
$
(3.94
)
Diluted
$
(4.90
)
 
$
(3.94
)
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 March 31, 2013 and March 31, 2012 a total of 172 thousand and 250 thousand stock options, stock warrants and restricted stock grants were considered anti-dilutive, respectively.

14



NOTE 6 – 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.
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
March 31, 2013
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
65,837

 
$
215

 
$
192

 
$
65,860

Mortgage-backed—residential
148,820

 
3,306

 
242

 
151,884

Municipals
35,545

 
960

 
115

 
36,390

Other
4,061

 

 
20

 
4,041

Total
$
254,263

 
$
4,481

 
$
569

 
$
258,175

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
57,393

 
$
256

 
$
104

 
$
57,545

Mortgage-backed—residential
157,191

 
3,424

 
138

 
160,477

Municipals
35,088

 
1,028

 
122

 
35,994

Other
61

 

 
20

 
41

Total
$
249,733

 
$
4,708

 
$
384

 
$
254,057

 
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
21,989

 
$
155

 
$
2

 
$
22,142

Mortgage-backed—residential
167,115

 
3,253

 
181

 
170,187

Municipals
29,507

 
1,287

 
14

 
30,780

Other
128

 

 
82

 
46

Total
$
218,739

 
$
4,695

 
$
279

 
$
223,155


During the three months ended March 31, 2013, the Company sold one federal agency security resulting in proceeds of $1.0 million and gross gains of less than 1 thousand dollars. There were no sales of securities for the three months ended March 31, 2012.
At March 31, 2013December 31, 2012 and March 31, 2012, securities with a carrying value of $28.0 million, $28.1 million and $32.0 million, respectively, were pledged to secure public deposits. At March 31, 2013December 31, 2012 and March 31, 2012, the carrying amount of securities pledged to secure repurchase agreements was $16.6 million, $18.5 million and $19.5 million, respectively. At March 31, 2013December 31, 2012 and March 31, 2012, securities of $7.6 million, $6.5 million and $5.9 million were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions. At March 31, 2013, December 31, 2012, and March 31, 2012 the carrying amount of securities pledged to secure lines of credit with the Federal Home Loan Bank (the "FHLB") totaled $4.0 million, $5.5 million and $10.1 million, respectively. At March 31, 2013, pledged and unpledged securities totaled $56.3 million and $201.9 million, respectively.


15


Maturity of Securities
The following table presents the amortized cost and fair value of debt securities by contractual maturity at March 31, 2013.
 
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Within 1 year
$
1,131

 
$
1,150

Over 1 year through 5 years
14,980

 
15,440

5 years to 10 years
70,497

 
70,641

Over 10 years
18,835

 
19,060

 
105,443

 
106,291

Mortgage-backed residential securities
148,820

 
151,884

Total
$
254,263

 
$
258,175

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 March 31, 2013December 31, 2012 and March 31, 2012.
 
 
Less than 12 months
 
12 months or greater
 
Totals
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
29,857

 
$
192

 
$

 
$

 
$
29,857

 
$
192

Mortgage-backed—residential
27,341

 
240

 
2,030

 
2

 
29,371

 
242

Municipals
9,099

 
108

 
199

 
7

 
9,298

 
115

Other
3,993

 
7

 
48

 
13

 
4,041

 
20

Totals
$
70,290

 
$
547

 
$
2,277

 
$
22

 
$
72,567

 
$
569

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
20,199

 
$
104

 
$

 
$

 
$
20,199

 
$
104

Mortgage-backed—residential
15,509

 
138

 

 

 
15,509

 
138

Municipals
8,012

 
122

 

 

 
8,012

 
122

Other

 

 
41

 
20

 
41

 
20

Totals
$
43,720


$
364

 
$
41

 
$
20

 
$
43,761

 
$
384

March 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
2,994

 
$
2

 
$

 
$

 
$
2,994

 
$
2

Mortgage-backed—residential
35,384

 
181

 

 

 
35,384

 
181

Municipals
200

 
14

 

 

 
200

 
14

Other

 

 
45

 
82

 
45

 
82

Totals
$
38,578

 
$
197

 
$
45

 
$
82

 
$
38,623

 
$
279


As of March 31, 2013, 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

16


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.
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 March 31, 2013, gross unrealized losses in the Company’s portfolio totaled $569 thousand, compared to $384 thousand as of December 31, 2012 and $279 thousand as of March 31, 2012. As of March 31, 2013, the unrealized losses in mortgage-backed securities (consisting of twelve securities), municipals (consisting of twenty-three securities) and federal agencies (consisting of twenty securities) 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 March 31, 2013 are considered temporary.


NOTE 7 – LOANS HELD FOR SALE
On December 10, 2012, the Company entered into an asset purchase agreement with a third party to sell certain loans. During the fourth quarter of 2012, the Company identified $36.2 million of under- and non-performing loans to sell and recorded a $13.9 million loss to reduce the loan balance to the expected net proceeds. Loans held-for-sale due to the asset purchase agreement totaled approximately $22.3 million at December 31, 2012. The Loan sale was completed during February 2013.
Other loans held-for-sale consisted of residential 1-4 family loans and totaled $3.7 million, $3.6 million and $2.1 million at March 31, 2013, December 31, 2012 and March 31, 2012, respectively. In the tables below, the residential 1-4 family real estate loans have been split out between loan originated to be held-for-sale and those loans that were transferred into the loans held-for-sale category. Amounts listed in all other loan categories are from loans transferred to loans held-for-sale.

Loans held for sale by type are summarized as follows:

 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
Loans secured by real estate—
 
 
(in thousands)
Residential 1-4 family originated to be held-for-sale
$
3,708

 
$
3,624

 
$
2,136

Residential 1-4 family transferred to held-for-sale

 
7,964

 

Commercial

 
6,906

 

Construction

 
2,537

 

Multi-family and farmland

 
3,962

 

               Total Real Estate
3,708

 
24,993

 
2,136

Commercial loans

 
895

 

Consumer installment loans

 
32

 

Total loans held for sale
$
3,708

 
$
25,920

 
$
2,136


17



The following table presents the Company’s internal risk rating by loan classification for loans held for sale as of December 31, 2012:

 
Pass
 
Special
Mention
 
Substandard –
Non-impaired
 
Substandard –
Impaired
 
Total
 
(in thousands)
Loans by Classification
 
 
 
 
 
 
 
 
 
Real estate: Residential 1-4 family originated to be held-for-sale
$
3,624

 
$

 
$

 
$

 
$
3,624

Real estate: Residential 1-4 family transferred to held-for-sale
264

 
511

 
4,229

 
2,960

 
7,964

Real estate: Commercial

 
438

 
2,922

 
3,546

 
6,906

Real estate: Construction
23

 
16

 
754

 
1,744

 
2,537

Real estate: Multi-family and farmland
281

 

 
2,788

 
893

 
3,962

Commercial
21

 

 
372

 
502

 
895

Consumer
22

 

 
2

 
8

 
32

Total Loans
$
4,235

 
$
965

 
$
11,067

 
$
9,653

 
$
25,920


Loans held-for-sale at March 31, 2013 and 2012 of $3.7 million and $2.1 million, respectively, were all rated as pass.
Nonaccrual loans held for sale were $13.4 million at December 31, 2012. There were no non-accrual loans held for sale at March 31, 2013 or 2012. The following table provides nonaccrual loans by type:
 
As of December 31, 2012
 
(in thousands)
Nonaccrual Loans by Classification
 
Real estate: Residential 1-4 family
$
5,311

Real estate: Commercial
4,336

Real estate: Construction
1,967

Real estate: Multi-family and farmland
1,152

Commercial
580

Consumer and other
27

Total Loans
$
13,373

All nonaccrual loans in the held-for-sale category are from loans transferred to loans held-for-sale and not from loans that were originated to be sold.
The following table provides the past due status for all loans held for sale as of December 31, 2012. Nonaccrual loans are included in the applicable classification. There were no past due loans held for sale at March 31, 2013 or 2012.

18



As of December 31, 2012
 
 
30-89
Days
Past Due
 
Greater
than
90 Days
Past Due
 
Total
Past Due
 
Current
 
Total
 
Greater
than
90 Days
Past Due
and
Accruing
 
(in thousands)
Loans by Classification
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family originated to be held-for-sale
$

 
$

 
$

 
$
3,624

 
$
3,624

 
$

Residential 1-4 family transferred to held-for-sale
436

 
697

 
1,133

 
6,831

 
7,964

 
697

Real estate: Commercial
63

 

 
63

 
6,843

 
6,906

 

Real estate: Construction
16

 

 
16

 
2,521

 
2,537

 

Real estate: Multi-family and farmland
1,428

 

 
1,428

 
2,534

 
3,962

 

Subtotal of real estate secured loans
1,943

 
697

 
2,640

 
22,353

 
24,993

 
697

Commercial
292

 
21

 
313

 
582

 
895

 
21

Consumer

 

 

 
32

 
32

 

Leases

 

 

 

 

 

Other

 

 

 

 

 

Total Loans
$
2,235

 
$
718

 
$
2,953

 
$
22,967

 
$
25,920

 
$
718



NOTE 8 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans by type are summarized in the following table.
 
March 31,
2013
 
December 31,
2012
 
March 31,
2012
Loans secured by real estate—
(in thousands)
Residential 1-4 family
$
181,624

 
$
188,191

 
$
210,557

Commercial
223,737

 
221,655

 
226,367

Construction
37,894

 
33,407

 
49,442

Multi-family and farmland
16,530

 
17,051

 
31,532

 
459,785

 
460,304

 
517,898

Commercial loans
61,904

 
61,398

 
60,835

Consumer installment loans
11,880

 
13,387

 
16,450

Leases, net of unearned income
373

 
568

 
2,072

Other
6,346

 
5,473

 
4,524

Total loans
540,288

 
541,130

 
601,779

Allowance for loan and lease losses
(13,500
)
 
(13,800
)
 
(18,990
)
Net loans
$
526,788

 
$
527,330

 
$
582,789

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 months ended March 31, 2013 and March 31, 2012. 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 $6 thousand for the three months ended March 31, 2013 and March 31, 2012, respectively. The reserve for unfunded commitments is included in other liabilities in the consolidated balance sheets and totaled $264 thousand, $258 thousand and $255 thousand at March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

19


Allowance for Loan and Lease Losses
For the Three Months Ended March 31, 2013
 
 
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, January 1, 2013
$
6,207

 
$
3,736

 
$
667

 
$
741

 
$
2,103

 
$
272

 
$
47

 
$
27

 
$
13,800

Charge-offs
(651
)
 
(126
)
 
(468
)
 

 
(25
)
 
(184
)
 

 

 
(1,454
)
Recoveries
111

 
37

 
40

 
6

 
122

 
104

 
55

 
1

 
476

Provision
312

 
(235
)
 
723

 
359

 
(382
)
 
(3
)
 
(91
)
 
(5
)
 
678

Ending balance, March 31, 2013
$
5,979

 
$
3,412

 
$
962

 
$
1,106

 
$
1,818

 
$
189

 
$
11

 
$
23

 
$
13,500



Allowance for Loan and Lease Losses
For the Three Months Ended March 31, 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, January 1, 2012
$
6,368

 
$
6,227

 
$
1,485

 
$
728

 
$
3,649

 
$
405

 
$
718

 
$
20

 
$
19,600

Charge-offs
(1,147
)
 
(537
)
 
(638
)
 
(15
)
 
(231
)
 
(89
)
 
(494
)
 

 
(3,151
)
Recoveries
19

 
23

 
486

 
4

 
112

 
55

 
36

 
5

 
740

Provision
1,016

 
(414
)
 
(265
)
 
787

 
446

 
(17
)
 
251

 
(3
)
 
1,801

Ending balance, March 31, 2012
$
6,256

 
$
5,299

 
$
1,068

 
$
1,504

 
$
3,976

 
$
354

 
$
511

 
$
22

 
$
18,990


20



The following table presents an analysis of the end of period balance of the allowance for loan and lease losses as of March 31, 2013.
As of March 31, 2013
 
 
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
$
1,155

 
$
51

 
$
710

 
$

 
$
26

 
$

 
$

 
$

 
$
1,891

 
$
51

Collectively evaluated
180,469

 
5,928

 
223,027

 
3,412

 
37,868

 
962

 
16,530

 
1,106

 
457,894

 
11,408

Total evaluated
$
181,624

 
$
5,979

 
$
223,737

 
$
3,412

 
$
37,894

 
$
962

 
$
16,530

 
$
1,106

 
$
459,785

 
$
11,459

 
 
Commercial
 
Consumer
 
Leases
 
Other
 
Grand Total
(continued from above)
Carrying
Value
 
Associated
Allowance