UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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.
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(Exact Name of Registrant as Specified in its Charter)
Tennessee 58-2461486
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(State of Incorporation) (I.R.S. Employer
Identification No.)
817 Broad Street, Chattanooga, TN 37402
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(Address of principal executive offices) (Zip Code)
(423) 266-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value:
7,579,104 shares outstanding and issued as of November 7, 2002.
First Security Group, Inc. and Subsidiaries
Form 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2002, December 31, 2001 and
September 30, 2001 3
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2002 and 2001 4
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2002 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
Part II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 31
Item 4. Submission of Matters to a Vote 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST SECURITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
(UNAUDITED) (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Cash and due from banks $ 23,177 $ 17,899 $ 10,696
Federal funds sold and securities purchased
under agreements to resell 35,420 - -
--------------- -------------- ---------------
Cash and cash equivalents 58,597 17,899 10,696
--------------- -------------- ---------------
Securities available for sale 55,195 37,287 30,426
--------------- -------------- ---------------
Loans 332,548 291,043 267,494
Less: Allowance for loan losses 4,637 3,825 3,600
--------------- -------------- ---------------
327,911 287,218 263,894
--------------- -------------- ---------------
Premises and equipment, net 12,183 9,829 9,271
--------------- -------------- ---------------
Intangible assets 8,438 6,193 6,313
--------------- -------------- ---------------
Other assets 5,657 3,440 3,168
--------------- -------------- ---------------
TOTAL ASSETS $ 467,981 $ 361,866 $ 323,768
=============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing demand $ 63,321 $ 48,347 $ 45,471
Interest bearing demand 28,343 22,051 18,884
Savings 95,491 61,754 46,505
Certificates of deposit of $100 thousand or more 73,105 64,885 63,164
Certificates of deposit less than $100 thousand 115,472 96,840 96,395
--------------- -------------- ---------------
Total deposits 375,732 293,877 270,419
Federal funds purchased and securities sold
under agreement to repurchase 14,962 21,528 14,361
Other borrowings 6,170 4,610 -
Other liabilities 3,573 2,586 4,433
--------------- -------------- ---------------
Total liabilities 400,437 322,601 289,213
--------------- -------------- ---------------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value - 20,000,000 shares
authorized; 7,579,104 issued as of September 30,
2002; 5,002,644 issued as of December 31, 2001;
and 4,475,148 issued as of September 30, 2001 76 50 45
Paid-in surplus 65,723 40,054 35,230
Retained earnings (accumulated deficit) 1,165 (1,063) (1,154)
Accumulated other comprehensive income 580 224 434
--------------- -------------- ---------------
Total stockholders' equity 67,544 39,265 34,555
--------------- -------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 467,981 $ 361,866 $ 323,768
=============== ============== ===============
3
FIRST SECURITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001 2002 2001
- ----------------------------------------------------- ---------- ----------- --------- -----------
INTEREST INCOME
Loans, including fees $ 6,045 $ 5,164 $ 16,829 $ 13,556
Debt securities -taxable 494 439 1,376 1,191
Debt securities -non-taxable 68 - 108 -
Other 146 46 251 251
---------- ----------- --------- -----------
Total interest income 6,753 5,649 18,564 14,998
---------- ----------- --------- -----------
INTEREST EXPENSE
Interest bearing demand deposits 79 87 192 247
Savings deposits 449 389 1,137 962
Certificates of deposit of $100 thousand or more 580 787 1,817 2,081
Certificates of deposit of less than $100 thousand 961 1,308 2,707 3,757
Other 115 132 353 299
---------- ----------- --------- -----------
Total interest expense 2,184 2,703 6,206 7,346
---------- ----------- --------- -----------
NET INTEREST INCOME 4,569 2,946 12,358 7,652
Provision for loan losses 561 843 810 1,824
---------- ----------- --------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,008 2,103 11,548 5,828
---------- ----------- --------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 462 351 1,349 958
Mortgage loan fee income 295 217 843 531
Gain on securities - - 75 -
Other noninterest income 151 108 391 256
---------- ----------- --------- -----------
Total noninterest income 908 676 2,658 1,745
---------- ----------- --------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,152 1,617 5,942 4,232
Net occupancy 282 236 785 649
Equipment expense 304 209 783 558
Data processing fees 199 157 534 433
Amortization expense 41 120 41 362
Advertising expense 86 95 226 204
Supplies expense 103 81 258 224
Communications expense 91 62 228 148
Professional services 157 98 638 221
Postage expense 79 59 215 166
Other noninterest expense 338 223 916 475
---------- ----------- --------- -----------
Total noninterest expense 3,832 2,957 10,566 7,672
---------- ----------- --------- -----------
4
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) 1,084 (178) 3,640 (99)
Income tax provision (benefit) 441 (63) 1,412 (26)
---------- ----------- --------- -----------
NET INCOME (LOSS) $ 643 $ (115) $ 2,228 $ (73)
========== =========== ========= ============
NET INCOME (LOSS) PER SHARE
BASIC $ 0.09 $ (0.03) $ 0.36 $ (0.02)
DILUTED $ 0.08 $ (0.03) $ 0.36 $ (0.02)
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC 7,549 4,289 6,187 4,168
DILUTED 7,631 4,601 6,269 4,382
5
FIRST SECURITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
RETAINED ACCUMULATED
COMMON STOCK EARNINGS OTHER
--------------- PAID-IN (ACCUMULATED COMPREHENSIVE
(IN THOUSANDS) SHARES AMOUNT SURPLUS DEFICIT) INCOME TOTAL
- ----------------------------------------------- ------ ------- --------- -------------- -------------- --------
Balance - December 31, 2001 5,003 $ 50 $ 40,054 $ (1,063) $ 224 $39,265
--------
Comprehensive income -
Net income (unaudited) 2,228 2,228
Change in net unrealized
gain on securities available
for sale, net of tax (unaudited) 356 356
--------
Total comprehensive income
(unaudited) 2,584
Common stock sold (unaudited) 2,576 26 25,737 25,763
Offering related expenses
(unaudited) (68) (68)
----- ------------------------------------------------------------
Balance - September 30, 2002
(unaudited) 7,579 $ 76 $ 65,723 $ 1,165 $ 580 $67,544
===== ============================================================
6
FIRST SECURITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
(IN THOUSANDS) 2002 2001
- ------------------------------------------------------------ ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,228 $ (73)
Provision for loan losses 810 1,824
Net amortization (accretion) of securities 122 (87)
Amortization of intangibles 41 362
Depreciation 552 423
Gain on sale of available-for-sale securities (75) -
Loss on disposal of assets 33 -
Changes in operating assets and liabilities -
Decrease (increase) in -
Interest receivable 165 (628)
Other assets (1,543) (108)
Increase (decrease) in -
Interest payable (604) 720
Other liabilities 979 (624)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,708 1,809
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities -
Sales 6,045 -
Maturities, prepayments, and calls 12,243 6,021
Purchases (22,530) (15,605)
Loan originations and principal collections, net (20,033) (114,747)
Additions to premises and equipment (1,437) (2,673)
Net cash acquired in transaction accounted for
under the purchase method of accounting 7,060 -
---------- -----------
NET CASH USED BY INVESTING ACTIVITIES (18,652) (127,004)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 35,953 107,905
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (6,566) 9,773
Proceeds from other borrowings 1,560 -
Proceeds from issuance of subordinated debt - 2,250
Proceeds from sale of common stock, net 25,695 3,688
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 56,642 123,616
---------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 40,698 (1,579)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 17,899 12,275
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 58,597 $ 10,696
========== ===========
7
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized appreciation of securities,
net of deferred taxes of $234 for 2002 and $231 for 2001 $ 355 $ 346
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid $ 6,810 $ 6,626
ACQUISITION OF BANK
Loans $ 21,470 $ -
Investment securities 13,123 -
Premises and equipment 1,469 -
Interest receivable 292 -
Other assets 580 -
Goodwill 1,270 -
Core deposit intangible 1,016 -
Deposit liabilities (45,902) -
Interest payable (60) -
Other liabilities (318) -
---------- -----------
Net cash acquired $ (7,060) $ -
========== ===========
8
FIRST SECURITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - 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. Operating results for the
nine-month period ended September 30, 2002, are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002 or any
other period. The balance sheet as of December 31, 2001 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K, for the year ended December 31, 2001.
NOTE B - COMPREHENSIVE INCOME
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income," the
Company is required to report "comprehensive income," a measure of all changes
in equity, not only reflecting net income but certain other changes as well.
Comprehensive income for the three-month and nine-month periods ended September
30, 2002 and 2001, respectively, was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER, 30
------------------------------------------------
(IN THOUSANDS) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------
Net income (loss) $ 643 $ (115) $ 2,228 $ (73)
Unrealized gains - securities, net of tax 188 192 356 346
------------------------------------------------
Comprehensive income, net of tax $ 831 $ 77 $ 2,584 $ 273
================================================
NOTE C - EARNINGS PER SHARE
On March 19, 2002, First Security's non-underwritten private placement of
up to $20 million in shares of First Security's common stock at a price of $10
per share became effective. Subsequently, the private placement was increased
from $20 million to $25 million and then again to $27.5 million. The private
placement closed on August 8, 2002, by which time First Security had sold
2,576,460 shares in the offering.
Reference is made to Note 14, Long-Term Incentive Plan, in the Notes to
Consolidated Financial Statements in First Security's Form 10-K, which contains
descriptions of First Security's Stock Option Plan (the "Plan"). Shares under
option under the Plan had a dilutive impact of less than $.01 on net income per
share for the three months and nine months ended September 30, 2002.
9
NOTE D - REGULATORY AND ACCOUNTING PRONOUNCEMENTS
First Security adopted the provisions of FASB Statement No. 142 (SFAS
142), "Goodwill and Other Intangible Assets" on January 1, 2002. A discussion of
the effect of adopting SFAS 142 is included in management's discussion and
analysis of noninterest expense.
In April 2002, FASB issued Statement No. 145, (SFAS 145), "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS 145 rescinds Statement 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Opinion 30 will not be used to classify those gains and
losses. SFAS 145 also amends Statement 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements. The
effect of adoption of SFAS 145 is not expected to have a material impact on the
Company's results of operations or its financial position.
In June 2002, FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The accounting for
similar events and circumstances will be the same. This statement is effective
for exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. The effect of adoption of SFAS 146 is not expected
to have a material effect on First Security's results of operations or its
financial position.
In October 2002, FASB issued Statement of Financial Accounting Standards
No. 147, (SFAS 147), "Acquisitions of Certain Financial Institutions-an
amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." SFAS
147 removes acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, "Business
Combinations," and SFAS 142. As a result, the requirement in Statement 72 to
recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable assets no
longer applies to acquisitions within the scope of this statement. SFAS 147 also
amends FASB Statement No. 144, (SFAS 144), "Accounting for the Impairment or
Disposal of Long-Lived Assets," to include in its scope long-term
customer-relationship intangible assets of financial institutions. Thus, those
intangible assets are subject to the same undiscounted cash flow recoverability
test and impairment loss recognition and measurement provisions that SFAS 144
requires for other long-lived assets that are held and used. Provisions of this
statement are generally effective on or after October 1, 2002, with earlier
application of transition provisions for previously recognized unidentifiable
intangible assets being permitted. The effect of adoption of SFAS 147 is not
expected to have a material effect on First Security's results of operations or
its financial position.
Our Banks are members of the FDIC's Bank Insurance Fund ("BIF"), and
subject to FDIC deposit insurance assessments. FDIC annual deposit insurance
assessment rates currently range from 0 basis points on deposits for a financial
institution in the highest category to 27 basis points on deposits for an
institution in the lowest category, but may be as high as 31 basis points per
$100 of deposits. The FDIC also collects The Financing Corporation ("FICO")
deposit assessments on deposits, which for BIF members ranged from 1.84 to 1.96
basis points for BIF deposits. The Banks were not assessed any BIF premiums in
2001 or 2000. The Banks did pay $34 thousand in FICO assessments in 2001, and
$16 thousand in 2000. FICO assessments are 1.82 basis points, 1.76 basis points,
1.72 basis points, and 1.70 basis points, respectively for the first, second,
third, and fourth quarters of 2002.
On October 26, 2001, a new anti-terrorism bill, The International Money
Laundering Abatement and Anti-Terrorism Funding Act of 2001, was signed into
law. This law restricts money laundering by terrorists in the United States and
abroad. This act specifies new "know your customer" requirements that will
obligate financial institutions to take actions to verify the identity of the
account holders in connection with opening an account at any U.S. financial
institution. Banking regulators will consider compliance with the act's money
laundering provisions in making decisions regarding approval of acquisitions and
mergers.
10
In addition, sanctions for violations of the act can be imposed in an
amount equal to twice the sum involved in the violating transaction, up to $1
million.
NOTE E - ACQUISITION
On July 20, 2002, First Security acquired 100% of the outstanding common
shares of First State Bank. The results of First State Bank's operations have
been included in the consolidated financial statements since that date. First
State Bank is a Tennessee state charter, FDIC insured, commercial bank in
Maynardville, Tennessee, and is now operated as a wholly owned subsidiary of
First Security. Using the First State Bank charter, we plan to expand by
branching into nearby Knox and Jefferson Counties. As of the acquisition date,
First State Bank's leverage capital ratio was approximately 12.3% and its
liquidity ratio exceeded 60%, which will allow us to enhance earnings by
increasing the Bank's asset base and changing its mix of earning assets in favor
of higher yielding loans.
The aggregate purchase price was $8.5 million, all of which was paid in
cash. The purchase price included $8.2 million to First State Bank's
shareholders and $371 thousand in acquisition costs, such as legal, accounting
and investment banking fees. The transaction resulted in $1.3 million of
goodwill and $1.0 million of core deposit intangibles. The amount allocated to
the core deposit intangible was determined by an independent valuation and is
being amortized over the estimated useful life of ten years using an accelerated
basis reflecting the pattern of the expected run off of the related deposits.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the acquisition. First Security
is in the process of finalizing its estimates and valuations with regard to
assets acquired and liabilities assumed.
(In thousands) (unaudited)
- ----------------------------------------------------------
Cash and due from banks $ 4,005
Federal funds sold and securities purchased
under agreements to resell 11,592
------------
Cash and cash equivalents 15,597
------------
Securities available for sale 13,123
------------
Loans 21,847
Less: Allowance for loan losses 377
------------
Net loans 21,470
------------
Premises and equipment, net 1,469
------------
Intangible assets 2,286
------------
Other assets 872
------------
Total assets acquired 54,817
------------
Deposits (45,902)
------------
Other borrowings (171)
------------
Other liabilities (207)
------------
Total liabilities assumed (46,280)
------------
Net assets acquired $ 8,537
============
11
The following condensed income statements disclose the pro forma results of
First Security as though the First State Bank acquisition had occurred at the
beginning of the 2001.
Pro Forma Condensed Statements of Income
(Unaudited) Nine Months Ended September 30, 2002
(In thousands except per share amounts) First State Pro Forma Pro Forma
First Security(1) Bank (2) Adjustments(3) Combined
- --------------------------------------------------------------------------------------------------
Interest income $ 18,564 $ 1,531 $ - $ 20,095
Interest expense 6,206 526 6,732
--------------- ------------ ------------- ----------
Net interest income 12,358 1,005 - 13,363
Provision for loan losses 810 - 810
--------------- ------------ ------------- ----------
Net interest income after provision for
loan losses 11,548 1,005 - 12,553
--------------- ------------ ------------- ----------
Noninterest income 2,658 117 2,775
Noninterest expense 10,566 922 93 11,581
--------------- ------------ ------------- ----------
Income (loss) before provision
for income taxes 3,640 200 (93) 3,746
Income tax provision (benefit) 1,412 95 (1) 1,506
--------------- ------------ ------------- ----------
Net income (loss) $ 2,228 $ 105 $ (92) $ 2,241
=============== ============ ============= ==========
Net income per share
Basic and diluted $ 0.34 $ 0.34
Pro Forma Condensed Statements of Income
(Unaudited) Nine Months Ended September 30, 2001
(In thousands except per share amounts) First State Pro Forma Pro Forma
First Security(4) Bank(5) Adjustments(6) Combined
- ---------------------------------------------------------------------------------------------------
Interest income $ 14,998 $ 2,202 $ - $ 17,200
Interest expense 7,346 986 8,332
---------------- ------------ ------------- -----------
Net interest income 7,652 1,216 - 8,868
Provision for loan losses 1,824 32 1,856
---------------- ------------ ------------- -----------
Net interest income after provision for
loan losses 5,828 1,184 - 7,012
---------------- ------------ ------------- -----------
Noninterest income 1,745 168 1,913
Noninterest expense 7,672 1,035 249 8,956
---------------- ------------ ------------- -----------
Income (loss) before provision
for income taxes (99) 317 (249) (31)
Income tax provision (benefit) (26) 61 (26) 9
---------------- ------------ ------------- -----------
Net income (loss) $ (73) $ 256 $ (223) $ (40)
================ ============ ============= ===========
Net loss per share
Basic and diluted $ (0.02) $ (0.01)
12
1 The reported results of First Security for the nine months ended September 30,
2002 include the results of the First State Bank acquisition from the July 20,
2002 acquisition date.
2 The estimated results of First State Bank from January 1, 2002 through July
19, 2002.
3 Pro forma adjustments include the following items: $91 thousand of additional
amortization of core deposit intangibles, $2 thousand of additional depreciation
on write up of fixed assets, and $1 thousand of tax benefit related to the
additional fixed asset depreciation.
4 The reported results of First Security for the nine months ended September 30,
2001.
5 The estimated results of First State Bank for the nine months ended September
30, 2001.
6 Pro forma adjustments include the following items: $183 thousand of
amortization of core deposit intangibles, $64 thousand of amortization of
goodwill, $2 thousand of additional depreciation on write up of fixed assets,
and $26 thousand of tax benefit related to the goodwill amortization and the
additional fixed asset depreciation.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Form 10-Q, "First Security," "FSG," "we," "us," and "our" refer to
First Security Group, Inc.
THIRD QUARTER 2002
The following discussion and analysis sets forth the major factors that
affected First Security's results of operations and financial condition
reflected in the unaudited financial statements for the three-month and
nine-month periods ended September 30, 2002 and 2001. Such discussion and
analysis should be read in conjunction with the Company's Consolidated Financial
Statements and the notes attached thereto.
On March 13, 2002, we entered into an Agreement and Plan of Share Exchange
with First State Bank in Maynardville, Tennessee. Maynardville is located in
Union County, Tennessee, which is adjacent to the northern side of Knox County,
Tennessee. We completed the acquisition effective July 20, 2002. First Security
paid approximately $8.2 million for all of the outstanding common stock of First
State Bank. First State Bank now operates as a wholly owned subsidiary of First
Security. As of December 31, 2001, First State Bank had consolidated assets of
approximately $43.1 million, consolidated deposits of approximately $36.9
million, and consolidated shareholders' equity of approximately $5.8 million.
On October 17, 2002, we entered into an Agreement and Plan of Share
Exchange with Premier National Bank of Dalton in Dalton, Georgia. Dalton is
located in Whitfield County, Georgia, and is the city location of FSG's wholly
owned subsidiary, Dalton Whitfield Bank. We have agreed to exchange 0.425 FSG
common stock shares for each common stock share of Premier National Bank of
Dalton. Upon the closing of this acquisition, which is subject to regulatory
approval and approval by Premier National Bank of Dalton's shareholders, Premier
National Bank of Dalton will be merged into Dalton Whitfield Bank. As of
December 31, 2001, Premier National Bank of Dalton had consolidated assets of
approximately $84.7 million, consolidated deposits of approximately $74.2
million, and consolidated shareholders' equity of approximately $6.6 million.
OVERVIEW
As of September 30, 2002, First Security had total consolidated assets of
$467.9 million, total loans of $332.5 million, total deposits of $375.7 million
and stockholders' equity of $67.5 million. Our net income was $643 thousand and
$2.2 million for the three and nine months ended September 30, 2002.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2002, was $643
thousand, or $.09 per basic share and $.08 per diluted share, compared to a net
loss of $115 thousand, or $.03 per share (basic and diluted), in the same period
of 2001. Net income for the nine months ended September 30, 2002, was $2.2
million, or $.36 per share (basic and diluted), compared to a net loss of $73
thousand or $.02 per share (basic and diluted) in the same period of 2001. As
with the first two quarters of 2002, our third quarter, as well as the nine
months ended September 30, 2002, resulted in significantly more net income than
2001 levels. The increases are due to the growth rate of net interest income and
noninterest income outpacing the growth rate of noninterest expenses, as well as
a decrease in loan loss provision. Each of these categories is explained in
detail in the following narrative.
Return on average assets (annualized) for the three months ended September
30, 2002 and 2001 was 0.6% and -0.1%, respectively. For the nine months ended
September 30, 2002 and 2001, return on average assets (annualized) was 0.8% and
0.0%, respectively. Return on average equity (annualized) for the three months
ended September 30, 2002 and 2001 was 3.9% and -1.4%, respectively; and, for the
nine months ended September 30, 2002 and 2001, it was 5.7% and -0.3%,
respectively.
14
Net Interest Income
Net interest income increased by $1.6 million or 55% to $4.6 million for
the third quarter of 2002 compared to the same period a year ago. For the
nine-month period ended September 30, 2002, net interest income increased by
$4.7 million, or 62%, over the same period in the previous year. There are two
factors that influence net interest income: (1) volume of earning assets, and
(2) rate of net interest margin on those earning assets. Both factors caused an
increase in our net interest income from 2001 to 2002.
Quarter-to-date average earning assets increased by $137 million or 50% to
$411.8 million compared to average earning assets for the same period in 2001.
On a year-to-date basis, average earning assets increased by $131.0 million or
56% to $366.1 million versus the same period in 2001. Our average earning assets
increased due to the acquisition of First State Bank and our branching
activities, which includes the increased loan demand due, in part, to our
management team's ties to the local communities in which they work. As of
September 30, 2002, our subsidiary banks had 15 full service branches (two of
which were included in the First State Bank acquisition) and three loan
production offices, compared to 10 full service branches and two loan production
offices as of September 30, 2001. Through our branch network, our bankers were
able to increase deposits and deploy those funds into earning assets. This
increase in earning assets has enabled First Security to earn more net interest
income. We currently have regulatory approval to convert one of our loan
production offices into a full service bank branch and we are applying to
convert our remaining two loan production offices into full service bank
branches. Furthermore, we are applying to open two additional bank branches on
identified sites. First Security anticipates that these efforts will increase
our earning assets and thus enhance our net interest income in the future.
The other factor influencing net interest income is net interest margin.
Positive changes in net interest margin did not influence net interest income as
significantly as the changes in earning assets. On a fully tax equivalent basis,
our net interest margin was 19 basis points higher in the third quarter of 2002
compared to the same period in 2001, and 19 basis points higher for the nine
months ended September 30, 2002 versus the same period in 2001.
For the third quarter of 2002, 76% of average earning assets were funded
with interest bearing liabilities, compared to 82% for the same period in 2001.
This decrease in reliance on interest bearing funding contributed to improving
our net interest margin. A second contributing factor to our improved net
interest margin was that our weighted average rate on interest bearing
liabilities decreased at a faster pace than our weighted average yield on
interest earning assets. Interest rate decreases in 2001 resulted from the
Federal Reserve's initiative to stimulate economic growth in the weakening U.S.
economy. In 2001 the Federal Reserve cut interest rates 11 times for an
aggregate total of 4.75%. At the beginning of 2001, the federal funds rate and
the prime lending rate were 6.5% and 9.5%, respectively. By the end of 2001,
these rates had decreased to 1.75% and 4.75%. On November 6, 2002, the Federal
Reserve dropped interest rates 0.5%, which effectively decreased the federal
funds rate and the prime lending rate to 1.25% and 4.25%, respectively.
Otherwise, the Federal Reserve has not increased or decreased interest rates
during 2002.
As a result of the recent rate decrease and the 2001 rate decreases, and as
assets and liabilities continue to mature and reprice, we believe that the
average rate earned on assets and our average rate paid on liabilities may
decrease slightly over the next several months barring a Federal Reserve
interest rate increase.
The interest rate earned on loans for the three months ended September 30,
2002 decreased 102 basis points compared to the same period in 2001. The
decrease is primarily attributable to the decreases in the prime lending rate
during 2001, which were effected by the Federal Reserve rate cut initiative. The
yields on investment securities and other earning assets also decreased over the
same periods. The overall yield on earning assets decreased 160 basis points in
the third quarter of 2002 compared to the same period in 2001. The decrease in
yield on earning assets exceeded the decrease in the yield on loans due to the
change in our mix of average earning assets. Average loans, which are our
highest yielding earning assets, comprised 78% of earning assets in the third
quarter of 2002, compared to 87% in the same period of the prior year. The
percentage of loans decreased due our increase in liquid earning assets. Liquid
earning assets include unpledged investment securities and federal funds sold.
15
These liquid earning assets increased for three reasons: (1) we felt that our
liquidity position was low at December 31, 2001 levels, so we enacted action
plans to improve it (see "Liquidity"), (2) a large percentage of the proceeds
from our private placement stock offering were held in federal funds sold
pending further investment into our subsidiary banks, and (3) we acquired First
State Bank which had a liquidity ratio of greater than 50% (we currently have an
initiative to grow First State Bank's asset base in Knox and Jefferson Counties,
Tennessee, and thus increase the size of its loan portfolio and enhance the net
interest margin).
For the third quarter of 2002, the cost of interest bearing liabilities
decreased by 198 basis points from the same period in 2001. As a result, net
interest spread for the third quarter of 2002 increased 38 basis points over the
same period in the prior year. Deposit and loan rates are adjusted as market
conditions and the Banks' needs allow. The following table summarizes net
interest income and average yields and rates paid for the quarters ended
September 30, 2002 and 2001.
16
Average Consolidated Balance Sheets and Net Interest Analysis
For the three months ended September 30
Yield / Rates on Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
---------------------------- ---------------------------
2002 2001
---------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------------------------- ----------------------------
Assets
Earning assets:
Loans, net of unearned income $319,619 $ 6,045 7.50% $240,431 $ 5,164 8.52%
Investment securities 53,205 562 4.47% 29,652 439 5.87%
Other earning assets 39,015 146 1.48% 5,184 46 3.52%
---------------------------- ---------------------------
Total earning assets 411,839 6,753 6.54% 275,267 5,649 8.14%
-------- -------
Allowance for loan losses (4,356) (3,015)
Intangible asset 7,664 6,378
Cash & due from banks 15,582 13,688
Premises & equipment 11,504 8,770
Other assets 5,133 2,278
--------- ---------
TOTAL ASSETS $447,366 $303,366
========= =========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
NOW accounts $ 25,208 79 1.24% $ 18,136 87 1.90%
Money market accounts 74,962 395 2.09% 36,443 337 3.67%
Savings deposits 15,790 54 1.36% 7,975 52 2.59%
Time deposits < $100 114,474 961 3.33% 92,658 1,308 5.60%
Time deposits > $100 65,437 580 3.52% 57,727 787 5.41%
Federal funds purchased - - 0.00% 3,544 29 3.25%
Repurchase agreements 12,855 48 1.48% 8,152 69 3.36%
Other borrowings 6,137 67 4.33% 2,250 34 6.00%
---------------------------- ----------------------------
Total interest bearing liabilities 314,863 2,184 2.75% 226,885 2,703 4.73%
--------------- -----------------
Net interest spread $ 4,569 3.79% $ 2,946 3.41%
======== ========
Noninterest bearing demand deposits 63,562 41,603
Accrued expenses and other liabilities 2,951 2,317
Stockholders' equity 65,494 32,304
Unrealized gain on securities 496 257
TOTAL LIABILITIES AND --------- ---------
STOCKHOLDERS' EQUITY $447,366 $303,366
========= =========
Impact of noninterest bearing
sources and other changes in
balance sheet composition 0.65% 0.84%
----- -----
Net yield on earning assets 4.44% 4.25%
===== =====
17
The following table presents the dollar amount of changes in interest
income and interest expense from the three month period ended September 30, 2001
to the three month period ended September 30, 2002. The table distinguishes
between the changes related to average outstanding (volume) of earning assets
and interest bearing liabilities, as well as the changes related to average
interest rates (rate) on such assets and liabilities.
Change in Interest Income and Expense on a Tax Equivalent Basis
For the Three Months Ended September 30
(all dollar amounts in thousands)
2002 Compared to 2001
Increase (Decrease) in
Interest Income and Expense
Due to Changes in:
--------------------------
Volume Rate Total
--------------------------
Percent change net interest income
Loans, net of unearned income $ 1,498 $ (617) $ 881
Investment securities 265 (142) 123
Other earning assets 127 (27) 100
--------------------------
Total earning assets 1,890 (786) 1,104
Interest bearing liabilities:
NOW accounts 22 (30) (8)
Money market accounts 203 (145) 58
Savings deposits 27 (25) 2
Time deposits < $100 183 (530) (347)
Time deposits > $100 68 (275) (207)
Federal funds purchased - (29) (29)
Repurchase agreements 18 (39) (21)
Other borrowings 42 (9) 33
--------------------------
Total interest bearing liabilities 563 (1,082) (519)
--------------------------
Increase in net interest income $ 1,327 $ 296 $1,623
==========================
Comparing the nine months ended September 30, 2002 to the same period in
2001, the interest rate earned on loans decreased 144 basis points because of
the Federal Reserve's rate cut initiative. We believe that the yield on the loan
portfolio, as well as the yield on earning assets and the cost of funding
interest bearing liabilities will most likely decrease because these assets and
liabilities will continue to reprice at lower rates. The yield on earning assets
decreased by 173 basis points and the cost of interest bearing liabilities
decreased 227 basis points, which caused the net interest spread to increase by
54 basis points. The following table summarizes net interest income and average
yields and rates paid for the nine months ended September 30, 2002 and 2001.
18
Average Consolidated Balance Sheets and Net Interest Analysis
For the nine months ended September 30
Yield / Rates on Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
---------------------------- ----------------------------
2002 2001
---------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
---------------------------- ----------------------------
Assets
Earning assets:
Loans, net of unearned income $301,490 $ 16,829 7.46% $203,730 $ 13,556 8.90%
Investment securities 44,588 1,484 4.64% 24,558 1,191 6.48%
Other earning assets 20,012 251 1.68% 6,768 251 4.96%
---------------------------- ----------------------------
Total earning assets 366,090 18,564 6.80% 235,056 14,998 8.53%
-------- --------
Allowance for loan losses (4,052) (2,488)
Intangible asset 6,688 6,497
Cash & due from banks 12,557 10,203
Premises & equipment 10,411 7,933
Other assets 3,937 1,939
--------- ---------
TOTAL ASSETS $395,631 $259,140
========= =========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
NOW accounts $ 23,763 192 1.08% $ 16,697 247 1.98%
Money market accounts 64,058 1,021 2.13% 27,010 810 4.01%
Savings deposits 11,779 116 1.32% 7,129 152 2.85%
Time deposits < $100 102,611 2,707 3.53% 82,900 3,757 6.06%
Time deposits > $100 64,219 1,817 3.78% 46,434 2,081 5.99%
Federal funds purchased 1,837 25 1.82% 1,907 49 3.44%
Repurchase agreements 11,682 138 1.58% 6,567 188 3.83%
Other borrowings 5,777 190 4.40% 1,385 62 6.00%
---------------------------- ----------------------------
Total interest bearing liabilities 285,726 6,206 2.90% 190,029 7,346 5.17%
----------------- -----------------
Net interest spread $ 12,358 3.90% $ 7,652 3.36%
======== ========
Noninterest bearing demand deposits 55,325 35,604
Accrued expenses and other liabilities 2,914 2,053
Stockholders' equity 51,317 31,242
Unrealized gain on securities 349 212
TOTAL LIABILITIES AND -------- --------
STOCKHOLDERS' EQUITY $395,631 $259,140
======== ========
Impact of noninterest bearing
sources and other changes in
balance sheet composition 0.64% 0.99%
----- -----
Net yield on earning assets 4.54% 4.35%
===== =====
19
The following table presents the dollar amount of changes in interest
income and interest expense from the nine months ended September 30, 2001 to the
nine months ended September 30, 2002. The table distinguishes between the
changes related to average outstanding (volume) of earning assets and interest
bearing liabilities, as well as the changes related to average interest rates
(rate) on such assets and liabilities.
Change in Interest Income and Expense on a Tax Equivalent Basis
For the Nine Months Ended September 30
(all dollar amounts in thousands)
2002 Compared to 2001
Increase (Decrease) in
Interest Income and Expense
Due to Changes in:
----------------------------
Volume Rate Total
----------------------------
Percent change net interest income
Loans, net of unearned income $ 5,457 $(2,184) $ 3,273
Investment securities 695 (402) 293
Other earning assets 166 (166) -
----------------------------
Total earning assets 6,318 (2,752) 3,566
Interest bearing liabilities:
NOW accounts 57 (112) (55)
Money market accounts 590 (379) 211
Savings deposits 46 (82) (36)
Time deposits < $100 520 (1,570) (1,050)
Time deposits > $100 503 (767) (264)
Federal funds purchased (1) (23) (24)
Repurchase agreements 60 (110) (50)
Other borrowings 145 (17) 128
----------------------------
Total interest bearing liabilities 1,920 (3,060) (1,140)
----------------------------
Increase in net interest income $ 4,398 $ 308 $ 4,706
============================
Provision for Loan Losses
The provision for loan losses charged to operations during the three months
ended September 30, 2002 was $561 thousand compared to $843 thousand in the same
period of 2001. Net charge-offs for the third quarter of 2002 were $245 thousand
compared to net recoveries of $6 thousand for the same period in 2001. The
provision for the nine months ended September 30, 2002 and 2001 was $810
thousand and $1.8 million, respectively. Net charge-offs for the nine months
ended September 30, 2002 and 2001 were $375 thousand and $166 thousand,
respectively.
The provision expense for 2002 decreased from the amount in 2001 due to our
analysis of inherent risks in the loan portfolio in relation to the portfolio's
growth and changes in past due loans. From December 31, 2001 to September 30,
2002, the loan portfolio increased by $41.5 million (of which $19.5 million was
natural growth within existing markets and $22 million was purchased through the
First State Bank acquisition), compared to an increase of $114.6 million for the
nine months ended September 30, 2001. Loans increased at a slower rate this year
due to our efforts to improve our liquidity position. See "Liquidity."
We anticipate that during the last quarter of 2002 our provision expense
for loan losses may increase because we intend to increase the size of our loan
portfolio.
20
The allowance for loan losses reflects management's assessment and estimate
of the risks associated with extending credit and its evaluation of the quality
of the loan portfolio. We periodically analyze our loan portfolio in an effort
to establish an allowance for loan losses that we believe will be adequate in
light of anticipated risks and loan losses. In assessing the adequacy of the
allowance, we review the size, quality and risk of loans in the portfolio. We
also consider such factors as:
- - our banks' loan loss experience;
- - the amount of past due and nonperforming loans;
- - specific known risks;
- - the status and amount of past due and nonperforming assets;
- - underlying estimated values of collateral securing loans;
- - current and anticipated economic conditions; and
- - other factors which management believes affects the allowance for potential
credit losses.
An analysis of the credit quality of the loan portfolio and the adequacy of
the allowance for loan losses is prepared by our banks and presented to the
respective boards of directors on a regular basis. In addition, beginning in
2001, we engaged an outside loan review consultant to perform, on an annual
basis, an independent review of the quality of the loan portfolio and adequacy
of the allowance.
The Banks' allowance for loan losses is also subject to regulatory
examinations and determinations as to adequacy, which may take into account such
factors as the methodology used to calculate the allowance for loan losses and
the size of the allowance for loan losses compared to a group of peer banks
identified by the regulators. During their routine examinations of banks, the
federal and/or state regulators may require a bank to make additional provisions
to its allowance for loan losses when, in the opinion of the regulators, their
credit evaluations and allowance for loan loss methodology differ materially
from ours.
While it is our policy to charge off in the current period loans for which
a loss is considered probable, there are additional risks of future losses which
cannot be quantified precisely or attributed to particular loans or classes of
loans. Because these risks include the state of the economy, management's
judgment as to the adequacy of the allowance is necessarily approximate and
imprecise.
As of September 30, 2002, as well as December 31, 2001, Frontier Bank's
allowance for loan losses was $2.2 million or 1.25% of its outstanding loans.
Frontier Bank's peer group, as defined by the Federal Financial Institutions
Examination Council's June 30, 2002 Uniform Bank Performance Report, includes
all insured commercial banks between $100 million and $300 million average
assets with three or more banking offices located in a metropolitan area. This
peer group, which includes 837 banks, had a ratio of the allowance for loan
losses divided by total loans of 1.26% as of June 30, 2002, or one basis point
more than Frontier Bank. Upon attaining the charter for Frontier Bank in 2000,
the Tennessee Department of Financial Institutions imposed a three-year charter
condition that "at all times during the first three (3) years of operation, the
Bank shall maintain a minimum allowance for loan losses ratio of 1.25 percent of
total loans." We believe that this requirement has resulted in an allowance of
$277 thousand more as of September 30, 2002 than our methodology and assessments
would indicate is necessary. Using our methodology, which incorporates the
aforementioned factors, we believe that as of September 30, 2002 an adequate
allowance for loan losses is approximately $2.0 million, or 1.10% of outstanding
loans.
As of September 30, 2002, Dalton Whitfield Bank's allowance for loan losses
was $2.0 million, or 1.54% of its loans outstanding. Dalton Whitfield Bank's
peer group, as defined by the Federal Financial Institutions Examination
Council's June 30, 2002 Uniform Bank Performance Report, includes all insured
commercial banks between $100 million and $300 million average assets with three
or more banking offices located in a non-metropolitan area. This peer group,
which includes 898 banks, had a ratio of the allowance for loan losses divided
by total loans of 1.32% as of June 30, 2002, or 22 basis points less than Dalton
Whitfield Bank. Using our methodology, which incorporates the aforementioned
factors, we believe that Dalton Whitfield Bank's allowance for loan losses was
adequate as of September 30, 2002.
As of September 30, 2002, First State Bank's allowance for loan losses was
$375 thousand, or 1.70% of its loans outstanding. First State Bank's peer group,
as defined by the Federal Financial Institutions Examination Council's June 30,
21
2002 Uniform Bank Performance Report, includes all insured commercial banks
between $25 million and $50 million average assets with one banking office
located in a metropolitan area. This peer group, which includes 185 banks, had a
ratio of the allowance for loan losses divided by total loans of 1.55% as of
June 30, 2002, or 15 basis points less than First State Bank. Using our
methodology, which incorporates the aforementioned consideration factors, we
believe that First State Bank's allowance for loan losses was adequate as of
September 30, 2002.
Noninterest Income
Noninterest income totaled $908 thousand for the third quarter of this
year, an increase of $232 thousand, or 34%, from the same period in 2001.
Deposit related income, comprised primarily of account service charges and
non-sufficient fund charges, totaled $462 thousand for the third quarter of
2002, which was $111 thousand, or 32%, more than the corresponding quarter in
2001. Deposit related income increased as we gained deposits, and we believe
that this source of income will continue to be boosted by further deposit growth
and our pending acquisition of Premier National Bank of Dalton. Mortgage loan
fees increased by $78 thousand, or 36%, to $295 thousand for the third quarter
of 2002 from the prior year. In the third quarter of 2002, rates for fixed rate
residential 15- and 30-year loan products fell to levels that were lower that
those in the fourth quarter of 2001, and as a result, the mortgage refinancing
activity increased. From December 2001 to June 2002, the mortgage refinancing
market had slowed; however, we enhanced our aggregate production, and thus
mortgage loan fee income, by opening a mortgage department at Dalton Whitfield
Bank. That department opened on August 1, 2001, and was in full production
during the first quarter of 2002. We believe that mortgage loan fees will remain
near third quarter 2002 levels for the final quarter of the year.
For the first nine months of this year, noninterest income was $2.7
million, which is an increase of $913 thousand, or 52%, over the same period in
2001. For the nine months ended September 30, 2002, deposit related income
totaled $1.3 million, an increase of $391 thousand, or 41%, over the same period
of 2001. Mortgage loan fees totaled $843 thousand for the first nine months of
2002, which is $312 thousand, or 59%, more than the same period in 2001.
Noninterest Expense
Noninterest expense for the third quarter totaled $3.8 million, which was
an increase of $875 thousand, or 30% over the third quarter of 2001. First
Security's overhead ratio (noninterest expense, excluding amortization of
intangible assets, provision for loan losses, and income tax expenses, as a
percentage of net interest income and noninterest income) decreased from 78% in
the third quarter of 2001 to 69% for the same period in 2002. This reflects our
growth and the subsequent increase in earnings from the third quarter of 2001 to
the same period in 2002 as described in "Net Interest Income" and "Noninterest
Income."
Compared to the third quarter of 2001, salaries and benefits for the third
quarter of 2002 increased $535 thousand or 33% to $2.2 million. The majority of
the increase in salaries and benefits is related to staff additions for our
branch openings and our acquisition of First State Bank. As of September 30,
2001, we had ten full service branches and two loan production offices and a
total of 138 full time equivalent employees. As of September 30, 2002, we
employed 181 full time equivalent employees and operated 15 full service
branches and three loan production offices. We believe that salaries and
benefits will increase for the remainder of 2002 as a result of our anticipated
branching efforts.
The following expense categories, except advertising, are higher in the
third quarter 2002 versus the same period in the prior year as a result of our
branching activities and acquisition of First State Bank. Occupancy expenses
increased $46 thousand, or 19%, to $282 thousand. Furniture, fixtures and
equipment expenses increased $95 thousand, or 45%, to $304 thousand. Data
processing costs increased $42 thousand, or 27%, to $199 thousand. Supplies,
communications, and postage expenses increased in aggregate by $71 thousand, or
35%, to $273 thousand. Advertising decreased $9 thousand, or 9%, to $86
thousand.
22
Professional fees increased $59 thousand or 60% to $157 thousand from third
quarter 2001 to third quarter 2002. The increase was due to fees related to
outsourcing of internal audit, loan review, and compliance to Professional Bank
Services, as well as external audit and tax services and legal and accounting
advice. Additionally, we outsourced some of our information technology support
functions.
Intangible asset amortization expense decreased from $120 thousand for the
third quarter of 2001 to $41 for the same period in 2002 as a result of FSG's
adoption of SFAS 142, which eliminated the requirement that companies amortize
goodwill; however, goodwill must still be written down if the carrying value
becomes impaired. The $41 thousand of amortization expense resulted from the
core deposit intangible asset created by the acquisition of First State Bank.
The core deposit intangible and goodwill created by this acquisition were $1
million and $1.3 million, respectively. The estimated useful life of the core
deposit intangible asset is 10 years.
Noninterest expenses for the nine-month period ended September 30, 2002
were $2.9 million, or 38%, higher and totaled $10.6 million compared to the same
period in 2001. The explanation for the changes is the same as that for the
quarterly data above. The changes were as follows. Salaries and benefits
increased $1.7 million or 40%. Occupancy expenses increased $136 thousand or
21%. Furniture, fixtures, and equipment expenses increased $225 or 40%. Data
processing costs increased $101 thousand or 23%. Advertising increased $22
thousand or 11%. Supplies, communications, and postage expenses increased $163
thousand or 30%. Professional fees increased $417 thousand or 189%. Goodwill
amortization decreased $321 thousand or 89%.
STATEMENT OF FINANCIAL CONDITION
First Security's total assets at September 30, 2002 and 2001, were $468
million and $323.8 million, respectively, and $361.9 million at December 31,
2001. Average assets for the third quarter of 2002 were $447.4 million versus
$303.4 million for the same period a year earlier, an increase of 48%. With the
completion of the acquisition of Premier National Bank of Dalton, our total
assets will exceed $550 million. First Security continues to actively pursue
acquisitions and will continue to seek means to enhance our market share through
further branching.
Loans
Average loans of $319.6 million represented 78% of our average earning
assets during the third quarter of 2002. From December 31, 2001, gross loans
increased $41.5 million to $332.5 million at September 30, 2002. The increase
in gross loans was comprised of $19.5 million in natural growth and $22 million
through the First State Bank acquisition. The $19.5 million increase in loans
was rather modest (compared to prior years) due to our efforts to improve our
liquidity. Comparing the third quarter end of 2001 to 2002, gross loans
increased $65.1 million, or 24%. The growth in the loan portfolio is primarily
attributable to our business strategy and the ties of our bankers to the local
communities in which they work. We believe that general loan demand will remain
strong, however, we do not anticipate annual growth in 2002 at the same level
that we experienced during 2001. Funding of future loan growth will be
restricted by our ability to raise core deposits, although we will use
alternative funding sources if necessary and cost effective. Loan growth will be
further restricted by the necessity for us to maintain appropriate capital
levels, as well as adequate liquidity.
Asset Quality
The allowance for loan losses was $4.6 million or 1.39% of outstanding
loans at September 30, 2002 and $3.8 million or 1.31% of outstanding loans, at
December 31, 2001. The allowance for loan losses was 291% of nonperforming loans
(defined as loans 90 days or more past due and nonaccrual loans) at September
30, 2002 and 634% of nonperforming loans at December 31, 2001. For the first
nine months of 2002, net charge-offs arising from loans secured by real estate
totaled $23 thousand, commercial loans totaled $79 thousand, and consumer loans
totaled $273 thousand. See "Provision for Loan Losses." We believe that our
reserve for inherent loan losses is adequate based on our assessment of the
information available. Our assessment involves uncertainty and judgment;
23
therefore, the adequacy of the allowance for loan losses cannot be determined
with precision and may be subject to change in future periods. In addition, bank
regulatory authorities, as part of their periodic examinations of our banks, may
require additional charges to the provision for loan losses in future periods if
the results of their reviews warrant.
The allocation of the allowance for loan losses by loan category at the
dates indicated is presented below.
Allocation for Allowance for Loan Losses
As of September 30, 2002 and 2001
(in thousands)
September 30,
2002 2001
Percentage of loans in each Percentage of loans in each
Loan Categories Amount category to total loans Amount category to total loans
------------------------------------- ------------------------------------
Commercial $ 1,896 30.6% $ 1,485 33.8%
Real estate-construction 221 8.3% 197 6.2%
Real estate-mortgage 1,358 41.1% 1,199 40.2%
Consumer 615 20.0% 587 19.8%
Charter condition or unallocated 547 - 132 -
------------------------------------- ------------------------------------
Total $ 4,637 100.0% $ 3,600 100.0%
===================================== ====================================
Nonperforming Assets
Nonaccrual loans were $1.2 million at September 30, 2002, $519 thousand at
December 31, 2001 and $961 thousand at September 30, 2001. The nonaccrual loans
in September 2002 included $146 thousand secured by real estate, $991 thousand
of commercial loans and $41 thousand of consumer loans. The ratio of nonaccrual
loans to total loans was 0.35% at September 30, 2002 and 0.18% at December 31,
2001. At each date, we did not own any other real estate.
Loans past due 90 days and still accruing were $412 thousand at September
30, 2002, compared to $21 thousand at December 31, 2001. Of these past due loans
at September 30, 2002, $79 thousand were secured by real estate, $250 thousand
were commercial loans and $83 thousand were consumer loans.
At September 30, 2002, nonperforming loans were 0.48% of total outstanding
loans, which is 38 basis points less than the average of our subsidiaries' peer
groups, or 0.86%.
Investment Securities and Other Earning Assets
Securities totaled $55.2 million at September 30, 2002, $37.3 million at
December 31, 2001, and $30.4 million at September 30, 2001. The growth in the
securities portfolio has occurred as a result of our efforts to improve our
liquidity, as well as the acquisition of First State Bank. At September 30,
2002, the securities portfolio had unrealized net gains of approximately $965
thousand. In addition, all investment securities purchased to date have been
classified as available-for-sale. The following table provides the carrying
values of our federal agency and municipal securities by their stated maturities
(this maturity schedule excludes security prepayment and call features), as well
as the tax equivalent yields for each maturity range.
(in thousands) Less than One to Five to More than
One Year Five Years Ten Years Ten Years
---------------------------------------------------
Municipal $ 1,436 $ 4,314 $ 2,533 $ 3,222
Agency 3,106 16,881 13,674 9,064
---------------------------------------------------
Total $ 4,542 $ 21,195 $ 16,207 $ 12,286
===================================================
Tax Equivalent Yield 3.5% 3.8% 3.9% 5.5%
===================================================
24
We currently have the ability and intent to hold our available-for-sale
investment securities to maturity. However, should conditions change, we may
sell unpledged securities. Our management considers the overall quality of the
securities portfolio to be high. All securities held are traded in liquid
markets, except for one bond. This $250 thousand investment is a Qualified Zone
Academy Bond (within the meaning of Section 1379E of the Internal Revenue Code
of 1986, as amended) issued by The Health, Educational and Housing Facility
Board of the County of Knox under the authority from the State of Tennessee. As
of September 30, 2002, we owned securities from issuers in which the aggregate
book value from such issuers exceeded 10% of our stockholders equity. As of the
third quarter ended 2002, the book value and market value of the securities from
each such issuer are as follows:
(in thousands) Book Value Market Value
Fannie Mae $ 15,546 $ 15,336
FHLMC* $ 14,297 $ 14,453
FHLB** $ 8,375 $ 8,437
* Federal Home Loan Mortgage Corporation
** Federal Home Loan Bank
The following table presents the book values of the investments for the
dates presented in the consolidated balance sheets.
(in thousands) September 30, 2002 December 31, 2001 September 30, 2001
------------------------------------------------------------
Federal agencies $ 42,725 $ 36,674 $ 29,703
Municipal $ 11,505 $ 236 $ -
------------------------------------------------------------
Total $ 54,230 $ 36,910 $ 29,703
============================================================
Federal funds sold increased to $35.4 million at September 30, 2002 from $0
at December 31, 2001. The increase resulted from our efforts to increase our
liquidity (see "Liquidity"), as well as our efforts to sell our common stock
through our recent private placement offering. We plan to invest a portion of
these federal funds into liquid investment securities and loans to improve our
yield on these earning assets; however, we intend to transition the funds into
investment securities and loans over the course of several months in order to
dollar-cost-average into the market.
Deposits and Other Borrowings
Total deposits increased 39% from September 30, 2001 to September 30, 2002,
and 28% from December 31, 2001 to September 30, 2002. For the first nine months
of 2002, our branching activities yielded natural deposit growth of
approximately $39.4 million; whereas, First State Bank provided approximately
$42.5 million in new deposits. We anticipate our deposits to increase as a
result of future branching activities and the acquisition of Premier National
Bank of Dalton.
25
In January of this year, First Security borrowed $6 million in term notes
(see "Liquidity") from the Federal Home Loan Bank of Cincinnati. The following
table details the maturities and rates of the term debt.
Date Type Principal Term Rate Maturity
- --------------------------------------------------------------------------------
1/8/2002 Fixed Rate Advance $500,000.00 24 mos. 3.73% 1/8/04
1/8/2002 Fixed Rate Advance 500,000.00 36 mos. 4.48% 1/8/05
1/8/2002 Fixed Rate Advance 500,000.00 48 mos. 5.04% 1/8/06
1/10/2002 Fixed Rate Advance 500,000.00 24 mos. 3.65% 1/10/04
1/10/2002 Fixed Rate Advance 500,000.00 36 mos. 4.45% 1/10/05
1/10/2002 Fixed Rate Advance 500,000.00 48 mos. 5.00% 1/10/06
1/15/2002 Fixed Rate Advance 500,000.00 24 mos. 3.50% 1/15/04
1/15/2002 Fixed Rate Advance 500,000.00 36 mos. 4.22% 1/15/05
1/15/2002 Fixed Rate Advance 500,000.00 48 mos. 4.77% 1/15/06
1/17/2002 Fixed Rate Advance 500,000.00 24 mos. 3.63% 1/17/04
1/17/2002 Fixed Rate Advance 500,000.00 36 mos. 4.35% 1/17/05
1/17/2002 Fixed Rate Advance 500,000.00 48 mos. 4.88% 1/17/06
$6,000,000.00
=============
- -----------------------------
Composite rate 4.31%
Composite 2 yr. 3.63%
Composite 3 yr. 4.38%
Composite 4 yr. 4.92%
- -----------------------------
Liquidity
The liquidity position of the Banks primarily depends upon their need to
respond to withdrawals from deposit accounts and upon the liquidity of their
assets. Primary liquidity sources include cash and due from banks, federal funds
sold, short-term investment securities and loan repayments. At September 30,
2002, the liquidity ratio was 25.9% (excluding anticipated loan repayments).
Three, six and nine months earlier on June 30th, March 31st and December 31st,
our liquidity was 21.8%, 16.8% and 12.7%, respectively. Throughout the 2002, our
liquidity ratio has steadily increased, as the following explains. During the
third quarter, our liquidity increased due primarily to our acquisition of First
State Bank, which had a liquidity ratio above 50%. We do not intend to maintain
First State Bank's liquidity ratio at this high level; instead, we plan to
change its mix of earning assets so that a greater percentage of them are
invested in higher yielding loans. During the second quarter, the majority of
our liquidity improvement resulted from selling 2,225,620 shares of our common
stock. During the first quarter, we improved our liquidity ratio and reduced our
dependency on overnight borrowings using two methods: (i) replacing Federal Home
Loan Bank overnight funds with FHLB term funds and (ii) selling loan
participations. Frontier Bank is a member of the Federal Home Loan Bank of
Cincinnati and, prior to year-end, attained borrowing capability secured by a
blanket lien on its 1-4 family residential mortgage loan portfolio. Subsequent
to year-end, management determined, because interest rates were at low levels,
to convert the FHLB overnight funding, as well as a portion of federal funds
purchased, into $6 million of FHLB term borrowings. The terms on the borrowings
are $2 million for two years, $2 million for three years, and $2 million for
four years. By using term borrowings we locked in low cost funding and we
improved our liquidity ratio by decreasing our dependency on overnight
liabilities. Frontier Bank also used its borrowing capacity to purchase a letter
of credit from FHLB that we pledged to the State of Tennessee Bank Collateral
Pool. The letter of credit allows us to release investment securities at the
Collateral Pool and thus improve our liquidity ratio. Additionally, Frontier
Bank could increase its borrowing capacity at FHLB, subject to more stringent
collateral requirements, by pledging loans other than 1-4 family residential
mortgage loans. Dalton Whitfield Bank and First State Bank are members of the
Federal Home Loan Bank of Atlanta and the Federal Home Loan Bank of Cincinnati,
respectively; however, neither Dalton Whitfield Bank nor First State Bank
currently has any FHLB borrowings but may in the future. First Security has sold
and may continue to sell loan participations as a source of liquidity.
26
Management believes the liquidity sources are adequate to meet operating
needs. Management is not aware of any known trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on our
liquidity, capital resources or operations.
Capital Resources
We continue to maintain capital ratios in excess of regulatory minimum
requirements. The current capital standards call for a minimum total capital of
10% of risk-adjusted assets, including 6% Tier I capital, and a minimum leverage
ratio of Tier I capital to total tangible assets of at least 5%. Frontier Bank
has a regulatory chartering condition requiring leverage ratios to not fall
below 8% for the first three years of its operations. Dalton Whitfield Bank had
a similar chartering condition which expired on its third anniversary in
September 2002. First Security, Dalton Whitfield Bank, Frontier Bank, and First
State Bank all maintain capital levels exceeding the minimum levels required by
the Frontier Bank's chartering condition, in addition to exceeding those capital
requirements for "Well Capitalized" banks and bank holding companies under
applicable regulatory guidelines. First State Bank capital ratios for December
31, 2001 and September 30, 2001 are provided for informational purposes only and
were not used to calculate First Security's consolidated capital ratios.
Well Adequately First Dalton Frontier First State
September 30, 2002 Capitalized Capitalized Security Whitfield Bank Bank Bank
Tier I capital to risk adjusted assets 6.0% 4.0% 16.7% 10.4% 10.1% 25.6%
Total capital to risk adjusted assets 10.0% 8.0% 18.0% 11.6% 11.3% 26.8%
Leverage ratio 5.0% 4.0% 13.1% 8.2% 8.6% 11.8%
Well Adequately First Dalton Frontier First State
December 31, 2001 Capitalized Capitalized Security Whitfield Bank Bank Bank
Tier I capital to risk adjusted assets 6.0% 4.0% 11.0% 10.6% 9.9% 25.0%
Total capital to risk adjusted assets 10.0% 8.0% 12.2% 11.9% 11.1% 26.2%
Leverage ratio 5.0% 4.0% 9.9% 9.1% 9.2% 13.0%
Well Adequately First Dalton Frontier First State
September 30, 2001 Capitalized Capitalized Security Whitfield Bank Bank Bank
Tier I capital to risk adjusted assets 6.0% 4.0% 10.0% 9.2% 9.9% 23.6%
Total capital to risk adjusted assets 10.0% 8.0% 11.2% 10.4% 11.2% 24.8%
Leverage ratio 5.0% 4.0% 9.2% 8.5% 8.8% 13.0%
We have never paid any cash dividends on our common stock, and we do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to support the development and growth
of our business. Payment of future dividends, if any, will be at the discretion
of our board of directors and will depend upon our earnings, our financial
condition, the capital adequacy of First Security and our subsidiaries,
opportunities for growth and expansion, our subsidiaries' need for funds, and
other relevant factors, including applicable restrictions and governmental
policies and regulations.
EFFECTS OF INFLATION
Inflation generally increases the cost of funds and operating overhead,
and, to the extent loans and other assets bear variable rates, the yields on
such assets. Unlike most industrial companies, virtually all of our assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on our performance than the effects of general levels of
inflation. Although interest rates do not necessarily move in the same
direction, or to the same extent, as the prices of goods and services, increases
in inflation generally have resulted in increased interest rates. In 1999, the
Federal Reserve increased the interest rate three times for a total of 75 basis
points in an attempt to control inflation. Again in 2000, the Federal Reserve
increased interest rates three times for a total of 100 basis points in an
attempt to control inflation. However, the Federal Reserve reduced interest
rates on 11 occasions for a total of 475 basis points in 2001 in an effort to
stimulate economic growth. On November 6, 2002, the Federal Reserve decreased
interest rates by 50 basis points in order to further stimulate economic growth.
This was the only time the Federal Reserve adjusted interest rates in 2002.
27
In addition, inflation results in an increased cost of goods and services
purchased, cost of salaries and benefits, occupancy expense and similar items.
Inflation and related increases in interest rates generally decrease the market
value of investments and loans held and may adversely affect the liquidity and
earnings of our commercial banking and mortgage banking business, and our
shareholders' equity. With respect to our mortgage banking business, mortgage
originations and refinancings tend to slow as interest rates increase, and
increased interest rates would likely reduce our earnings from such activities
and the income from the sale of residential mortgage loans in the secondary
market.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere
throughout this Form 10-Q are forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking
statements relate to future events or our future financial performance and may
involve known or unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of First Security to be
materially different from future results, performance, or achievements expressed
or implied by such forward-looking statements. Forward-looking statements
include statements using the words such as "may," "will," "anticipate,"
"should," "would," "believe," "contemplate," "expect," "estimate," "continue,"
"may," "intend," "seeks," or other similar words and expressions of the future.
These forward-looking statements involve risks and uncertainties, and may
not be realized due to a variety of factors, including, without limitation: the
effects of future economic conditions, governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and interest sensitive assets and
liabilities; interest rate risks; the costs of evaluating possible acquisitions
and the risks inherent in integrating acquisitions; the effects of competition
from other commercial banks, thrifts, mortgage banking firms, consumer finance
companies, credit unions, securities brokerage firms, insurance companies, money
market and other mutual funds and other financial institutions operating in
First Security's market area and elsewhere, including institutions operating
regionally, nationally and internationally, together with such competitors
offering banking products and services by mail, telephone, computer and the
Internet; and the failure of assumptions underlying the establishment of
reserves for possible loan losses. All written or oral forward-looking
statements attributable to First Security are expressly qualified in their
entirety by this Special Note.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk, with respect to First Security, is the risk of loss arising
from adverse changes in interest rates and prices. The risk of loss can result
in either lower fair market values or reduced net interest income. Although we
manage other risk, such as credit and liquidity, management considers interest
rate risk to be the more significant market risk and it could potentially have
the largest material effect on our financial condition. Further, we believe the
potential reduction of net interest income to be more significant than the
effect of reduced fair market values. First Security does not maintain a trading
portfolio or deal in international instruments, and therefore First Security is
not exposed to risk inherent to trading activities and foreign currency.
First Security's interest rate risk management is the responsibility of the
Asset/Liability Management Committee ("ALCO"). ALCO has established policies and
limits to monitor, measure and coordinate First Security's sources, uses, and
pricing of funds.
28
Interest rate risk represents the sensitivity of earnings to changes in
interest rates. As interest rates change the interest income and expense
associated with First Security's interest sensitive assets and liabilities also
change, thereby impacting net interest income, the primary component of our
earnings. ALCO utilizes the results of both a static and dynamic Gap report to
quantify the estimated exposure of net interest income to a sustained change in
interest rates.
The Gap analysis projected net interest income based on both a rise and
fall in interest rates of 200 basis points (i.e. 2.00%) over a twelve-month
period. The model is based on actual repricing dates of interest sensitive
assets and interest sensitive liabilities. The model incorporates assumptions
regarding the impact of changing interest rates on the prepayment rates of
certain assets.
First Security measures this exposure based on an immediate change in
interest rates of up or down 200 basis points. Given this scenario, First
Security had, at year-end, an exposure to falling rates and a benefit from
rising rates. More specifically, the model forecasts a decline in net interest
income of $1.0 million or 8.4%, as a result of a 200 basis point decline in
rates. The model also predicts an $851 thousand increase in net interest income,
or 6.9%, as a result of a 200 basis point increase in rates. The forecasted
results of the model are within the limits specified by ALCO. The following
chart reflects First Security's sensitivity to changes in interest rates as of
September 30, 2002. Numbers are based on a flat balance sheet and assumes
paydowns and maturities of both assets and liabilities are reinvested in like
instruments at current interest rates, rates down 200 basis points, and rates up
200 basis points.
Interest Rate Risk
Income Sensitivity Summary
As of September 30, 2002
(in thousands)
DOWN UP
200 BP CURRENT 200 BP
Net interest income $ 11,324 $ 12,358 $ 13,209
Dollar change net interest income (1,034) - 851
Percent change net interest income -8.37% 0.00% 6.89%
The preceding sensitivity analysis is a modeling analysis, which changes
periodically and consists of hypothetical estimates based upon numerous
assumptions including interest rate levels, shape of the yield curve,
prepayments on loans and securities, rates on loans and deposits, reinvestment
of paydowns and maturities of loans, investments and deposits, among others. In
addition, there is no input for growth or a change in asset mix. While
assumptions are developed based on the current economic and market conditions,
management cannot make any assurances as to the predictive nature of these
assumptions including how customer preferences or competitor influences might
change.
As market conditions vary from those assumed in the sensitivity analysis,
actual results will differ. Also, the sensitivity analysis does not reflect
actions that ALCO might take in responding to or anticipating changes in
interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) that is required to be
included in the Company's periodic filings with the Securities and Exchange
29
Commission. There have been no significant changes in the Company's internal
controls or, to the Company's knowledge, in other factors that could
significantly affect those internal controls subsequent to the date the Company
carried out its evaluation, and there have been no corrective actions with
respect to significant deficiencies or material weaknesses.
30
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
During the nine months ended September 30, 2002, First Security sold
2,576,460 shares of its $.01 par value common stock at $10.00 per share to
accredited investors. We relied upon Rule 506 of regulation D of the Securities
Act of 1933 to exempt this transaction from registration under the federal
securities laws. No underwriters were involved in this transaction.
ITEM 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on September 26, 2002 where the
following seven directors were elected: Rodger B. Holley, Larry R. Belk,
Clayton Causby, Kenneth C. Dyer, III, Douglas F. Heuer, III, Ralph L. Kendall,
and D. Ray Marler. These were all of our directors on the meeting date. The
directors were voted on as a slate. The slate received votes as follows:
FOR WITHHELD
---------- --------
Rodger B. Holley 4,452,621 5,200
Larry R. Belk 4,452,621 5,200
Clayton Causby 4,452,621 5,200
Kenneth C. Dyer, III 4,452,621 5,200
Douglas F. Heuer, III 4,452,621 5,200
Ralph L. Kendall 4,452,621 5,200
D. Ray Marler 4,446,121 11,700
The second matter put to a vote was the approval of the First Security
Group, Inc. 2002 Long-Term Incentive Plan. The number of votes cast for this
proposal was 4,137,815, the number of votes against was 210,006, and the number
of abstentions was 110,000.
The third matter put to a vote at the Annual Meeting was a ratification of
the appointment of Joseph Decosimo and Company, LLP, as independent auditors for
First Security for the fiscal year ending December 31, 2002. The number of
votes cast for this proposal was 4,395,721, the number of votes against was
52,600, and the number of abstentions was 9,500.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350
99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter ended
September 30, 2002.
Current Report on Form 8-K dated August 15, 2002 and filed August 16,
2002, Items 5 and 7.
Current Report on Form 8-K dated August 16, 2002 and filed August 16,
2002, Item 9.
31
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed by the undersigned,
thereunto duly authorized.
FIRST SECURITY GROUP, INC.
(Registrant)
November 14, 2002 /s/ Rodger B. Holley
--------------------
Rodger B. Holley
Chairman, Chief Executive Officer & President
November 14, 2002 /s/ William L. Lusk, Jr.
------------------------
William L. Lusk, Jr.
Secretary, Chief Financial Officer &
Executive Vice President
32
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rodger B. Holley, Chief Executive Officer of First Security Group, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Security Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer(s) and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Rodger B. Holley
-----------------------------
Rodger B. Holley
Chief Executive Officer
33
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William L. Lusk, Jr., Chief Financial Officer of First Security Group, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Security Group,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer(s) and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ William L. Lusk, Jr.
------------------------------
William L. Lusk, Jr.
Chief Financial Officer
34