FIRST SECURITY GROUP INC/TN - 10-Q Quarterly Report

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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 June 30, 2003 

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.) 

817 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  x No  o 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes    o No  x

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: 

10,497,404 shares outstanding and issued as of August 4, 2003 

First Security Group, Inc. and Subsidiaries 

Form 10-Q 

INDEX 

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

		Consolidated Balance Sheets - June 30, 2003, December 31, 2002 and June 30, 2002	3

		Consolidated Income Statements - Three months and six months ended June 20, 2003 and 2002	4

		Consolidated Statement of Stockholders' Equity - Six months ended June 30, 2003	6

		Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002	7

		Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		30

Item 4.	Controls and Procedures		31

Part II	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders		32

Item 6.	Exhibits and Reports on Form 8-K		32

SIGNATURES			34


	2

PART I - FINANCIAL INFORMATION 

ITEM 1. Financial Statements 

First Security Group, Inc. and Subsidiaries
Consolidated Balance Sheets	June 30,			December 31,		June 30,
	2003			2002		2002
	(unaudited)					(unaudited)

	(in thousands)
ASSETS
Cash and due from banks	$	21,641		$	14,429	$	11,953
Federal funds sold and securities purchased
under agreements to resell		43,222			30,044		18,740

Cash and cash equivalents		64,863			44,473		30,693

Interest-bearing deposits in banks		3,664			3,706		8,250

Securities available for sale		71,985			54,442		42,589

Loans		436,174			348,582		296,215
Less: Allowance for loan losses		6,415			5,362		3,944

		429,759			343,220		292,271

Premises and equipment, net		18,976			12,995		10,000

Intangible assets		12,601			8,526		6,193

Other assets		9,817			5,562		7,401

TOTAL ASSETS	$	611,665		$	472,924	$	397,397


LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing demand	$	88,021		$	64,336	$	54,792
Interest bearing demand		38,762			27,679		21,600
Savings		116,865			99,580		76,069
Certificates of deposit of $100 thousand or more		105,092			75,160		62,551
Certificates of deposit less than $100 thousand		155,645			117,728		98,210

Total deposits		504,385			384,483		313,222
Federal funds purchased and securities sold
under agreement to repurchase		12,211			11,722		11,767
Other borrowings		9,164			6,168		6,000
Other liabilities		5,289			2,618		3,203

Total liabilities		531,049			404,991		334,192

STOCKHOLDERS' EQUITY
Common stock - $.01 par value - 20,000,000 shares
authorized; 10,497,404 issued as of June 30,
2003; 9,094,915 issued as of December 31, 2002;
and 8,673,907 issued as of June 30, 2002		88			76		72
Paid-in surplus		77,397			65,723		62, 220
Retained earnings		2,446			1,539		522
Accumulated other comprehensive income		818			595		391
Deferred compensation on restricted stock		(133	)		-		-

Total stockholders' equity		80,616			67,933		63,205

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	611,665		$	472,924	$	397,397


	3

First Security Group, Inc. and Subsidiaries
Consolidated Income Statements
(Unaudited)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In thousands except per share amounts)		2003		2002		2003		2002
INTEREST INCOME
Loans, including fees	$	7,379	$	5,455	$	13,553	$	10,784
Debt securities -taxable		428		447		837		882
Debt securities -non-taxable		126		29		221		40
Other		158		93		278		105

Total interest income		8,091		6,024		14,889		11,811


INTEREST EXPENSE
Interest bearing demand deposits		32		64		65		113
Savings deposits		378		368		762		688
Certificates of deposit of $100 thousand or more		780		593		1,418		1,237
Certificates of deposit of less than $100 thousand		1,172		837		2,086		1,746
Other		130		108		231		238

Total interest expense		2,492		1,970		4,562		4,022


NET INTEREST INCOME		5,599		4,054		10,327		7,789
Provision for loan losses		381		139		1,133		249

NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		5,218		3,915		9,194		7,540


NONINTEREST INCOME
Service charges on deposit accounts		585		472		1,051		887
Mortgage loan fee income		602		257		1,062		548
Gain on securities		24		52		27		75
Other noninterest income		195		122		382		240

Total noninterest income		1,406		903		2,522		1,750


NONINTEREST EXPENSE
Salaries and employee benefits		3,118		1,945		5,730		3,790
Net occupancy		365		254		663		503
Equipment expense		422		253		744		479
Data processing fees		273		174		503		335
Amortization expense - CDI		162		-		222		-
Advertising expense		69		72		137		140
Supplies expense		138		90		246		155
Communications expense		106		63		199		137
Professional services		297		287		511		481
Postage expense		123		69		222		136
Other noninterest expense		570		358		1,070		578

Total noninterest expense		5,643		3,565		10,247		6,734


	4

INCOME BEFORE INCOME TAX PROVISION		981		1,253		1,469		2,556
Income tax provision		410		474		562		971

NET INCOME	$	571	$	779	$	907	$	1,585


NET INCOME PER SHARE
BASIC	$	0.05	$	0.11	$	0.09	$	0.24
DILUTED	$	0.05	$	0.11	$	0.09	$	0.24
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC		10,497		7,170		9,812		6,594
DILUTED		10,591		7,268		9,907		6,692


	5

First Security Group, Inc. and Subsidiaries 

Consolidated Statement of Stockholders' Equity 

Accumulated 

Other 

Deferred 

Common Stock 

Paid-In 

Retained 

Comprehensive 

Compensation on 

(in thousands) 

Shares 

Amount 

Surplus 

Earnings 

Income 

Restricted Stock 

Total 

Balance - December 31, 2002 

9,095 

$ 

76 

$ 

65,723 

$ 

1,539 

$ 

595 

$ 

- 

$ 

67,933 

Comprehensive income - 

Net income (unaudited) 

907 

907 

Change in net unrealized 

gain on securities available 

for sale, net of tax (unaudited) 

223 

223 

Total comprehensive income (unaudited) 

1,130 

Common stock issued (unaudited) 

1,402 

12 

11,674 

(133

) 

11,553 

Balance – June 30, 2003 (unaudited) 

10,497 

$ 

88 

$ 

77,397 

$ 

2,446 

$ 

818 

$ 

(133 

) 

$ 

80,616


	6

First Security Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
	Six Months Ended
	June 30,

(In thousands)	2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	907		$	1,585
Provision for loan losses		1,133			249
Net amortization of securities		498			15
Amortization of intangibles		222			-
Amortization of deferred stock compensation		67			-
Depreciation		486			364
Gain on sale of available-for-sale securities		(27	)		(75	)
Changes in operating assets and liabilities -
Decrease (increase) in -
Interest receivable		129			45
Other assets		(3,497	)		(4,115	)
Increase (decrease) in -
Interest payable		320			445
Other liabilities		1,146			172

Net cash provided (used) by operating activities		1,384			(1,315	)


CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits		42			(8,250	)
Activity in available-for-sale securities -
Sales		15,676			6,045
Maturities, prepayments, and calls		12,211			5,053
Purchases		(36,636	)		(16,065	)
Loan originations and principal collections, net		(30,808	)		(5,301	)
Additions to premises and equipment		(2,243	)		(535	)
Net cash acquired in transaction accounted for
under the purchase method of accounting		14,198			-

Net cash used by investing activities		(27,560	)		(19,053	)


CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		46,081			19,345
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase		489			(9,761	)
Proceeds from (repayments of) other borrowings		(4	)		1,390
Proceeds from sale of common stock, net		-			22,188

Net cash provided by financing activities		46,566			33,162

NET INCREASE IN CASH AND
CASH EQUIVALENTS		20,390			12,794
CASH AND CASH EQUIVALENTS - beginning of period		44,473			17,899

CASH AND CASH EQUIVALENTS - end of period	$	64,863		$	30,693


	7

Supplemental disclosures of noncash investing and
financing activities
Unrealized appreciation of securities, net of deferred taxes
of $113 for 2003 and $109 for 2002	$	223	$	167
Assets (noncash) acquired in business combination	$	75,314	$	-
Liabilities assumed in business combination	$	78,025	$	-
Issuance of common stock in business combination	$	11,487	$	-
Issuance of common stock pursuant to incentive plan	$	200	$	-
Supplemental schedule of cash flows
Interest paid	$	4,242	$	4,467
Income taxes paid	$	450	$	951


	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. Certain reclassifications have been made to prior year amounts to c
onform with the current year presentation. Operating results for the six-month period ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any other period. The balance sheet as of December 31, 2002 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, 2002. 

On April 23, 2003, First Security’s board of directors approved a 12 for 10 stock split to be distributed on June 16, 2003 to shareholders of record on June 2, 2003. As a result of the split, the par value has been adjusted from $0.01 to $0.0083 per share; however, we have rounded the par value to $0.01 per share for presentation purposes. All share data has been retroactively adjusted for the 12 for 10 stock split, unless expressly noted otherwise. 

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 six-month periods ended June 30, 2003 and 2002, respectively, was as follows: 

	Three Months Ended				Six Months Ended
	June 30,				June 30,

(in thousands)	2003		2002		2003		2002


Net income	$	571	$	779	$	907	$	1,585
Unrealized gains - securities, net of tax		228		229		223		167
Comprehensive income, net of tax	$	799	$	1,008	$	1,130	$	1,752

NOTE C – EARNINGS PER SHARE 

On November 19, 2002, we entered into an Agreement and Plan of Merger 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, FSGBank, National Association (Dalton, Georgia), formerly known as Dalton Whitfield Bank. We agreed to exchange 0.425 common shares for each common stock share of Premier National Bank. This transaction closed on March 31, 2003 after receiving regulatory and shareholder approval, at which time Premier National Bank of Dalton was merged into FSGBank - Dalton. For this exchange transaction, 1,378,423 shares of First Security stock were issued. 

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 six months ended June 30, 2003. 

NOTE D – REGULATORY AND ACCOUNTING PRONOUNCEMENTS

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. Cert
ain provisions of this statement became effective January 1, 2003, while others became effective for transactions occurring and financial statement issued after May 15, 2002. The effect of adoption of SFAS 145 did not have a material impact on the First Security’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 adoption of SFAS 146 on January 1, 2003 did not have a material effect on First Security's results of operations or its financial position. 

In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. 45, (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability 
over the term of the related guarantee. FIN also incorporates, without change, the guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others," which is being superseded. The initial recognition and initial measurement provisions of FIN 45 were applicable on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on First Security’s results of operations or its financial position. 

In April 2003, the FASB issued Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires that contracts with comparable characteristics be accounted for similarly. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for provisions that relate to Statement 133 Implementation Issues, and for hedging relationships designated after June 30, 2003. Except as noted in SFAS 149, all provisions
 of the statement should be applied prospectively. The provisions of SFAS 149 that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. In addition, certain SFAS 149 paragraphs, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing and new contracts entered into after June 30, 2003. The effect of adoption of SFAS 145 is not expected to have a material impact on First Security’s results of operations or its financial position. 


	10

In May 2003, the FASB issued Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within the scope of the statement as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial i
nstruments of nonpublic entities. Adoption of SFAS 150 on July 1, 2003 did not have a significant impact on First Security’s results of operations or its financial position. 

NOTE E – ACQUISITION 

On March 31, 2003, First Security acquired 100% of the outstanding common shares of Premier National Bank of Dalton. Premier National Bank was an OCC chartered, FDIC insured, commercial bank in Dalton, Georgia, and, according to the merger agreement, Premier National Bank merged with and into FSGBank - Dalton, with FSGBank - Dalton being the surviving bank. The acquisition of Premier National Bank gives First Security greater market share within the Whitfield County, Georgia, area and provides us with two additional branches within that market. The results of Premier National Bank’s operation (now doing business as FSGBank - Dalton) are included in the consolidated financial statements after the acquisition date. 

The aggregate purchase price was $11,660 thousand, including common stock valued at $11,487 thousand, cash of less than $1 thousand (representing payments in lieu of fractional shares), and $173 thousand in acquisition costs, such as legal, accounting and investment banking fees. The value of the 1,378,423 shares issued was determined based on the estimated market price of First Security’s common shares before and after the terms of the acquisition were agreed to and announced. The transaction resulted in $3.0 million of goodwill and $1.3 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 th
e 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. 


	11

(In thousands)	(unaudited)
Cash and due from banks	$	4,851
Federal funds sold and securities purchased
under agreements to resell		9,520

Cash and cash equivalents		14,371

Securities available for sale		8,929

Loans		57,714
Less: Allowance for loan losses		850

Net loans		56,864

Premises and equipment, net		4,224

Intangible assets		4,303

Other assets		994

Total assets acquired		89,685

Deposits		(73,821	)

FHLB Advance		(3,000	)

Other liabilities		(1,204	)

Total liabilities assumed		(78,025	)

Net assets acquired	$	11,660

The following condensed income statements disclose the pro forma results of First Security as though the Premier National Bank acquisition had occurred at the beginning of 2002. 


	12

Pro Forma Condensed Statements of Income
(Unaudited)	Six Months Ended June 30, 2003
(In thousands except per share amounts)		First Security ¹		Premier National ²	Pro Forma Adjustments ³				Pro Forma Combined


Interest income	$	14,889	$	837	$	-		$	15,726
Interest expense		4,562		312					4,874


Net interest income		10,327		525		-			10,852
Provision for loan losses		1,133		21					1,154

Net interest income after provision for
loan losses		9,194		504		-			9,698


Noninterest income		2,522		107					2,629
Noninterest expense		10,247		493		142			10,882

Income (loss) before provision
for income taxes		1,469		118		(142	)		1,445
Income tax provision (benefit)		562		45		(1	)		606

Net income (loss)	$	907	$	73	$	(141	)	$	839


Net income per share
Basic and diluted	$	0.09						$	0.07

Pro Forma Condensed Statements of Income
(Unaudited)	Six Months Ended June 30, 2002
(In thousands except per share amounts)	First Security ⁴		Premier National ⁵		Pro Forma Adjustments ⁶			Pro Forma Combined


Interest income	$	11,811	$	2,751	$	-		$	14,562
Interest expense		4,022		1,178					5,200


Net interest income		7,789		1,573		-			9,362
Provision for loan losses		249		20					269

Net interest income after provision for
loan losses		7,540		1,553		-			9,093


Noninterest income		1,750		265					2,015
Noninterest expense		6,734		1,393		206			8,333

Income (loss) before provision
for income taxes		2,556		425		(206	)		2,775
Income tax provision (benefit)		971		145		(1	)		1,115

Net income (loss)	$	1,585	$	280	$	(205	)	$	1,660


Net income per share
Basic and diluted	$	0.24						$	0.21


	13

1 The reported income results of First Security for the six months ended June 30, 2003 do not include any results of operation for Premier National Bank for the first quarter. 

2 The actual results of Premier National Bank from January 1, 2003 through March 30, 2003. 

3 Pro forma adjustments include the following items: $140 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 six months ended June 30, 2002. 

5 The reported results of Premier National Bank for the six months ended June 30, 2002. 

6 Pro forma adjustments include the following items: $204 thousand of 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. 


	14

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. 

SECOND QUARTER 2003 AND RECENT EVENTS 

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 six-month periods ended June 30, 2003 and 2002. Such discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the notes attached thereto. 

On November 19, 2002, we entered into an Agreement and Plan of Share Exchange among First Security, FSGBank - Dalton, and Premier National Bank of Dalton. We completed the acquisition effective March 31, 2003. The Plan of Merger provided that Premier National Bank merge with and into FSGBank - Dalton. Premier National Bank shareholders received 0.425 shares of First Security common stock in the merger in exchange for each share of Premier National Bank common stock they owned. As of December 31, 2002, Premier National Bank had consolidated assets of approximately $84.7 million, consolidated deposits of approximately $73.4 million, and consolidated shareholders’ equity of approximately $7.1 million. The results of operations of Premier National Bank (which was merged into and with FSGBank 
- - Dalton) are included in First Security’s results beginning April 1, 2003; the balance sheet of Premier National Bank was included with First Security’s balance sheet effective March 31, 2003, the acquisition date. 

On March 31, 2003, Dalton Whitfield Bank, Frontier Bank and First State Bank filed applications with the Office of the Comptroller of the Currency to convert from state chartered banks to national banks. On May 7, 2003, the OCC approved the conversion applications, and the Banks completed the conversions during the second quarter of 2003. After the conversions, each of the Banks became known as "FSGBank, National Association". For purposes of this form 10Q, each bank shall be referred to as follows: 

"FSGBank – Dalton": Formerly known as Dalton Whitfield Bank 

"FSGBank – Chattanooga": Formerly known as Frontier Bank 

"FSGBank – Maynardville": Formerly known as First State Bank 

On April 23, 2003, First Security’s board of directors approved a 12 for 10 stock split to be distributed on June 16, 2003 to shareholders of record on June 2, 2003. As a result of the split, the par value has been adjusted from $0.01 to $0.0083 per share; however, we have rounded the par value to $0.01 per share for presentation purposes. All share data has been retroactively adjusted for the 12 for 10 stock split, unless expressly noted otherwise. 

On July 23, 2003, we entered into a Purchase and Assumption Agreement by and between National Bank of Commerce ("NBC") and FSGBank, National Association. According to the terms of the agreement, we will purchase certain assets and assume substantially all of the deposits and other liabilities of all of NBC’s branch offices located at Madisonville, Tennessee, Sweetwater, Tennessee, and Tellico Plains, Tennessee. Upon the closing of this acquisition, which is subject to regulatory approval, the NBC branches will be merged into FSGBank – Chattanooga. As of June 30, 2003, NBC branches had loans of approximately $18 million and deposits of approximately $50 million. 
 
On August 6, 2003, we filed application with the Office of the Comptroller of the Currency to merge FSGBank -- Dalton with and into FSGBank -- Chattanooga and to merge FSGBank -- Maynardville with and into FSGBank -- Chattanooga.  Accordingly, FSGBank -- Chattanooga will be the surviving bank and none of the present banking locations operated by the banks will be eliminated, and as a result of the merger, the national bank charters of FSGBank -- Dalton and FSGBank -- Maynardville will be terminated.  

OVERVIEW 

As of June 30, 2003, First Security had total consolidated assets of $611.7 million, total loans of $436.2 million, total deposits of $504.4 million and stockholders' equity of $80.6 million. Our net income was $571 thousand and $907 thousand for the three and six months ended June 30, 2003. 


	15

RESULTS OF OPERATIONS 

Net income for the three months ended June 30, 2003, was $571 thousand, or $.05 per share (basic and diluted), compared to a net income of $779 thousand, or $.11 per share (basic and diluted), in the same period of 2002. Net income for the six months ended June 30, 2003, was $907 thousand, or $.09 per share (basic and diluted), compared to net income of $1.6 million or $.24 per share (basic and diluted), in the same period of 2002. While net interest income and noninterest income increased by $3.3 million, collectively, noninterest expense, including provision for loan losses, increased by $4.4 million. Expense increases outpaced income increases as a result of the additional costs associated with our branching efforts and the provision for inherent risks in the loan portfolio. 

Return on average assets (annualized) for the three months ended June 30, 2003 and 2002 was 0.4% and 0.8%, respectively. For the six months ended June 30, 2003 and 2002, return on average assets (annualized) was 0.3% and 0.9%, respectively. Return on average equity (annualized) for the three months ended June 30, 2003 and 2002 was 2.8% and 6.4%, respectively; and, for the six months ended June 30, 2003 and 2002, was 2.4% and 7.1%, respectively. 

Net Interest Income 

Net interest income increased by $1.5 million or 38% to $5.6 million for the second quarter of 2003 compared to the same period a year ago. For the six-month period ended June 30, 2003, net interest income increased by $2.5 million, or 33%, 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. 

Quarter-to-date average earning assets increased by $195.9 million or 55% to $550.6 million compared to average earning assets for the same period in 2002. On a year-to-date basis, average earning assets increased by $155.9 million or 45% to $499.6 million versus the same period in 2002. On a year-to-date basis, our earning assets increased due to (i) the deposit gathering activities of our Banks – deposits raised were used to fund or acquire earning assets, (ii) the acquisition of First State Bank – which had approximately $48 million in earning assets on the acquisition date, July 20, 2002, (iii) the non-underwritten private placement of First Security’s common stock – the proceeds from which were used to fund or acquire earning assets, and (iv) the acquisition of Premier
 National Bank – which had approximately $76.2 million in earning assets on the acquisition date, March 31, 2003. These additional earning assets have enabled First Security to earn more interest income. 

The other factors influencing net interest income are the yield on earning assets and the cost of funding liabilities. 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 43 basis points lower in the second quarter of 2003 compared to the same period in 2002, and 34 basis points lower for the first six months of 2003 versus the same period in 2002. 

For the second quarter of 2003, 78.5% of average earning assets were funded with interest bearing liabilities, compared to 77% for the same period in 2002. Our net interest margin decreased from period to period because our weighted average yield on interest earning assets decreased at a faster pace than our weighted average rate on interest bearing liabilities. The interest rate decreases in 2002 resulted from the Federal Reserve's initiative during the prior two years to stimulate economic growth in the weakening U.S. economy. The Federal Reserve also decreased interest rates during the second quarter of 2003. As a result of the 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 liabiliti
es may decrease slightly over the next several months barring a Federal Reserve interest rate increase. 


	16

The interest rate earned on loans for the three months ended June 30, 2003 decreased 60 basis points compared to the same period in 2002. The decrease is primarily attributable to the decreases in the prime lending rate, which were effected by the Federal Reserve rate cut initiative and the subsequent repricing of loans at lower rates. The yields on investment securities and other earning assets also decreased over the same periods. The overall yield on earning assets decreased 85 basis points in the second quarter of 2003 compared to the same period in 2002. The decrease in yield on earn
ing 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 second quarter of 2003, compared to 83% in the same period of the prior year. The percentage of loans decreased due to our increase in liquid earning assets. Liquid earning assets include unpledged investment securities and federal funds sold. These liquid earning assets increased for three reasons: (i) we felt that our liquidity position was low in the first quarter of 2002, (ii) a percentage of the proceeds from our private placement stock offering are held in federal funds sold pending further investment into our subsidiary banks, and (iii) we acquired First State Bank and Premier National Bank, which had liquidity ratios greater than ours. 

For the second quarter of 2003, the yield on earning assets decreased 85 basis points and the cost of interest bearing liabilities decreased by 58 basis points from the same period in 2002. As a result, net interest spread for the second quarter of 2003 decreased 27 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 June 30, 2003 and 2002. 


	17

Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30
Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
	2003								2002

	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate

Assets
Earning assets:
Loans, net of unearned income	$	431,316		$	7,381		6.86	%	$	293,272		$	5,455		7.46	%
Investment securities		70,795			667		3.78	%		41,693			492		4.73	%
Other earning assets		48,513			158		1.31	%		19,769			93		1.89	%

Total earning assets		550,624			8,206		5.98	%		354,734			6,040		6.83	%

Allowance for loan losses		(6,815	)							(3,912	)
Intangible assets		12,736								6,192
Cash & due from banks		18,457								12,747
Premises & equipment		18,470								9,885
Other assets		6,690								3,391

TOTAL ASSETS	$	600,162							$	383,037


Liabilities and Stockholders' Equity

Interest bearing liabilities:
NOW accounts	$	37,262			32		0.34	%	$	22,790			64		1.13	%
Money market accounts		93,647			333		1.43	%		62,243			335		2.16	%
Savings deposits		22,677			45		0.80	%		10,115			33		1.31	%
Time deposits < $100		155,458			1,172		3.02	%		96,758			837		3.47	%
Time deposits > $100		100,365			780		3.12	%		63,768			593		3.73	%
Federal funds purchased		-			-		0.00	%		-			-		0.00	%
Repurchase agreements		13,529			35		1.04	%		11,717			43		1.47	%
Other borrowings		9,164			95		4.16	%		6,000			65		4.35	%

Total interest bearing liabilities		432,102			2,492		2.31	%		273,391			1,970		2.89	%

Net interest spread				$	5,714		3.67	%				$	4,070		3.94	%

Noninterest bearing demand deposits		82,490								57,968
Accrued expenses and other liabilities		3,713								3,018
Stockholders' equity		81,208								48,424
Unrealized gain on securities		649								236
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	600,162							$	383,037


Impact of noninterest bearing
sources and other changes in
balance sheet composition							0.50	%							0.66	%


Net yield on earning assets*							4.17	%							4.60	%

*Same as net interest margin


	18

The following table presents the dollar amount of changes in interest income and interest expense from the 3-month period ended June 30, 2002 to the 3-month period ended June 30, 2003. 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 June 30
(all dollar amounts in thousands)
	2003 Compared to 2002
	Increase (Decrease)
	in Interest Income and Expense
	Due to Changes in:

	Volume		Rate			Total

Interest earning assets:
Loans, net of unearned income	$	2,365	$	(439	)	$	1,926
Investment securities		274		( 99	)		175
Other earning assets		94		(29	)		65

Total earning assets		2,733		(567	)		2,166


Interest bearing liabilities:
NOW accounts		12		(44	)		(32	)
Money market accounts		112		(114	)		(2	)
Savings deposits		25		(13	)		12
Time deposits < $100		443		(108	)		335
Time deposits > $100		284		( 97	)		187
Federal funds purchased		-		-			-
Repurchase agreements		5		(13	)		(8	)
Other borrowings		33		(3	)		30

Total interest bearing liabilities		914		( 392	)		522

Increase (decrease) in net interest income	$	1,819	$	(175	)	$	1,644

Comparing the six months ended June 30, 2003 to the same period in 2002, the interest rate earned on loans decreased 49 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 86 basis points and the cost of interest bearing liabilities decreased 63 basis points, which caused the net interest spread to decrease by 23 basis points. The following table summarizes net interest income and average yields and rates paid for the six months ended June 30, 2003 and 2002. 


	19

Average Consolidated Balance Sheets and Net Interest Analysis
For the Six Months Ended June 30
Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
	2003								2002

	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate

Assets
Earning assets:
Loans, net of unearned income	$	393,314		$	13,556		6.95	%	$	292,276		$	10,784		7.44	%
Investment securities		63,699			1,219		3.86	%		39,583			943		4.80	%
Other earning assets		42,645			278		1.31	%		11,857			105		1.79	%

Total earning assets		499,658			15,053		6.08	%		343,716			11,832		6.94	%

Allowance for loan losses		(6,111	)							(3,896	)
Intangible assets		10,635								6,192
Cash & due from banks		16,015								11,925
Premises & equipment		16,049								9,855
Other assets		5,576								3,331
TOTAL ASSETS	$	541,822							$	371,123


Liabilities and Stockholders' Equity

Interest bearing liabilities:
NOW accounts	$	32,444			65		0.40	%	$	23,029			113		.99	%
Money market accounts		87,676			676		1.55	%		58,515			625		2.15	%
Savings deposits		20,436			86		0.85	%		9,739			63		1.30	%
Time deposits < $100		139,294			2,086		3.02	%		96,582			1,746		3.65	%
Time deposits > $100		89,439			1,418		3.20	%		63,600			1,237		3.92	%
Federal funds purchased		-			-		0.00	%		2,746			26		1.91	%
Repurchase agreements		12,943			70		1.09	%		11,085			89		1.62	%
Other borrowings		7,674			161		4.23	%		5,594			123		4.43	%

Total interest bearing liabilities		389,906			4,562		2.36	%		270,890			4,022		2.99	%

Net interest spread				$	10,491		3.72	%				$	7,810		3.95	%

Noninterest bearing demand deposits		73,532								52,951
Accrued expenses and other liabilities		3,088								2,900
Stockholders' equity		74,655								44,109
Unrealized gain on securities		641								273

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	541,822							$	371,123


Impact of noninterest bearing
sources and other changes in
balance sheet composition							0.52	%							0.63	%


Net yield on earning assets*							4.24	%							4.58	%

*Same as net interest margin

20

The following table presents the dollar amount of changes in interest income and interest expense from the six months ended June 30, 2002 to the six months ended June 30, 2003. 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 Six Months Ended June 30
(all dollar amounts in thousands)
	2003 Compared to 2002
	Increase (Decrease)
	in Interest Income and Expense
	Due to Changes in:

	Volume		Rate			Total

Interest earning assets:
Loans, net of unearned income	$	3,482	$	(710	)	$	2,772
Investment securities		462		(186	)		276
Other earning assets		201		(28	)		173

Total earning assets		4,145		(924	)		3,221


Interest bearing liabilities:
NOW accounts		19		(67	)		(48	)
Money market accounts		225		(174	)		51
Savings deposits		45		(22	)		23
Time deposits < $100		640		(300	)		340
Time deposits > $100		410		(229	)		181
Federal funds purchased		-		(26	)		(26	)
Repurchase agreements		10		(29	)		(19	)
Other borrowings		44		(6	)		38

Total interest bearing liabilities		1,393		(853	)		540

Increase (decrease) in net interest income	$	2,752	$	(71	)	$	2,681

Provision for Loan Losses 

The provision for loan losses charged to operations during the three months ended June 30, 2003 was $381 thousand compared to $139 thousand in the same period of 2002. Net charge-offs for the second quarter of 2003 were $735 thousand compared to net charge-offs of $132 thousand for the same period in 2002. The provision for the six months ended June 30, 2003 and 2002 was $1.1 million and $249 thousand, respectively. Net charge-offs for the six months ended June 30, 2003 and 2002 were $930 thousand and $130 thousand, respectively. 

The provision expense for 2003 increased from the amount in 2002 due to our analysis of inherent risks in the loan portfolio in relation to the portfolio's growth, the level of past due, classified, and nonperforming loans, as well as general economic weakness. From December 31, 2002 to June 30, 2003, the loan portfolio increased by $87.6 million, compared to an increase of $5.2 million for the six months ended June 30, 2002. Of this increase, $30.8 million was natural growth within existing markets and $56.8 million was purchased through the Premier National Bank acquisition. 


	21

We anticipate that during the remainder of 2003 our provision expense for loan losses may increase because we intend to increase the size of our loan portfolio. 

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, our Chief Loan Review Officer performs a regular 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 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 June 30, 2003, the allowance for loan loss for FSGBank – Chattanooga was $2.9 million or 1.42% of its outstanding loans. The peer group for FSGBank - Chattanooga, as defined by the Federal Financial Institutions Examination Council's March 31, 2003 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 839 banks, had a ratio of the allowance for loan losses divided by total loans of 1.28% as of March 31, 2003, or 14 basis points less than FSGBank Chattanooga. Net charge-offs for FSGBank – Chattanooga totaled $691 for the six months ended June 30, 2003. Using our methodology, we believe that the allowance for loan
 loss for FSGBank – Chattanooga was adequate as of June 30, 2003. 

As of June 30, 2003, the allowance for loan losses for FSGBank – Dalton was $2.9 million, or 1.59% of its loans outstanding. The peer group for FSGBank - Dalton, as defined by the Federal Financial Institutions Examination Council's March 31, 2003 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 921 banks, had a ratio of the allowance for loan losses divided by total loans of 1.38% as of March 31, 2003, or 21 basis points less than our Dalton facility. Net charge-offs for FSGBank – Dalton, totaled $230 for the six months ended June 30, 2003. Using our methodology, we believe that the allowance for loan losses
 for FSGBank – Dalton was adequate as of June 30, 2003. 


	22

As of June 30, 2003, the allowance for loan losses for FSGBank – Maynardville was $619 thousand, or 1.25% of its loans outstanding. The peer group for FSGBank - Maynardville, as defined by the Federal Financial Institutions Examination Council's March 31, 2003 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 519 banks, had a ratio of the allowance for loan losses divided by total loans of 1.32% as of March 31, 2003, or 7 basis points more than our Maynardville facility. Net charge-offs for FSGBank – Maynardville totaled $9 thousand for the six months ended June 30, 2003. Using our methodology, we believe that the allowance fo
r loan losses for FSGBank - Maynardville was adequate as of June 30, 2003. 

Noninterest Income 

Noninterest income totaled $1,406 thousand for the second quarter of this year, an increase of $503 thousand, or 56%, from the same period in 2002. Deposit related income, comprised primarily of account service charges and non-sufficient fund charges, totaled $585 thousand for the second quarter of 2003, which was $113 thousand, or 24%, more than the corresponding quarter in 2002. Deposit related income increased as we gained deposits and acquired First State Bank, and we believe that this source of income will continue to be boosted by further deposit growth and our acquisition of Premier National Bank. Mortgage loan fees increased by $345 thousand, or 134%, to $602 thousand for the second quarter of 2003 from the prior year. In the second quarter of 2003, rates for fixed rate residential 15-
 and 30-year loan products fell to levels that were lower than those in the preceding year, and as a result, the mortgage refinancing activity increased. Based on current loan volumes, we believe that mortgage loan fees will remain near first and second quarter 2003 levels for the third quarter of the year; however, based on current economic uncertainty and an increasing long term rate environment, mortgage fees may decrease during the second half of 2003. 

For the first six months of this year, noninterest income was $2.5 million, which is an increase of $772 thousand, or 44%, over the same period in 2002. For the first six months of 2003, deposit related income totaled $1,051 thousand, an increase of $164 thousand, or 18.5%, over the first six months of 2002. Mortgage loan fees totaled $1,062 for the six months ended June 30, 2003, which is $514 thousand, or 94%, more than the same period in 2002. 

Noninterest Expense 

Noninterest expense for the second quarter totaled $5.6 million, which was an increase of $2.1 million, or 58% over the second quarter of 2002. 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) increased from 72% in the second quarter of 2002 to 78% for the same period in 2003. This reflects our growth from the second quarter of 2002 to the same period in 2003 as described in "Net Interest Income" and "Noninterest Income." 

Compared to the second quarter of 2002, salaries and benefits for the second quarter of 2003 increased $1,173 thousand or 60% to $3.1 million. The majority of the increase in salaries and benefits is related to staff additions for our branch openings and our acquisition of FSGBank – Maynardville (formerly First State Bank) in June 2002 and Premier National Bank in March 2003. As of June 30, 2002, we had 12 full service branches and one loan production office and a total of 146 full time equivalent employees. As of June 30, 2003, we employed 239 full time equivalent employees and operated 19 full service branches and 2 loan production offices. We believe that salaries and benefits will increase for the remainder of 2003 as a result of our anticipated branching efforts. 

The following expense categories, except advertising, are higher in the second quarter 2003 versus the same period in the prior year as a result of our branching activities and acquisition of FSGBank – Maynardville (formerly First State Bank) and Premier National Bank. Occupancy expenses increased $111 thousand, or 44%, to $365 thousand. Furniture, fixtures and equipment expenses increased $169 thousand, or 67%, to $422 thousand. Data processing costs increased $99 thousand, or 57%, to $273 thousand. Supplies, communications, and postage expenses increased in aggregate by $145 thousand, or 65%, to $367 thousand. Advertising expense was $69 thousand for the second quarter ended June 30, 2003 and $72 thousand for the second quarter ended June 30, 2002. 


	23

Professional fees increased $10 thousand or 3% to $297 thousand from second quarter 2002 to second quarter 2003. These fees related to outsourcing of internal audit , loan review , information technology audit, and compliance to Professional Bank Services, as well as external audit and tax services and legal and accounting advice. Additionally, we engaged Ernst & Young LLP (Global Employment Solutions/Human Resource Services Division in Atlanta, Georgia), an independent consultant, to assist in implementing our compensation strategies. 

The $162 thousand of second quarter amortization expense resulted from the amortization of the core deposit intangible asset created by the acquisition of FSGBank – Maynardville (formerly First State Bank) and Premier National Bank. The core deposit intangible and goodwill created by the acquisition of First State Bank were $1 million and $1.4 million, respectively. The core deposit intangible and goodwill created by the acquisition of Premier National Bank were $1.3 million and $3 million, respectively. The estimated useful life of each core deposit intangible asset is 10 years. First Security Group’s adoption of SFAS 142 eliminated the requirement that companies amortize goodwill, rather the carrying value is written down if it becomes impaired. 

Noninterest expenses for the six-month period ended June 30, 2003 were $3.5 million, or 52%, higher and totaled $10.2 million compared to the same period in 2002. The changes are explained similarly to the quarterly data above and were as follows. Salaries and benefits increased $1.9 million or 51%. Occupancy expenses increased $160 thousand or 32%. Furniture, fixtures, and equipment expenses increased $265 thousand or 55%. Data processing costs increased $168 thousand or 50%. Supplies, communications, and postage expenses increased $239 thousand or 56%. Professional fees increased $30 thousand or 6%. Advertising expense decreased $3 thousand or 2%. 

STATEMENT OF FINANCIAL CONDITION 

First Security's total assets at June 30, 2003 and 2002, were $611.7 million and $397.4 million, respectively, and $472.9 million at December 31, 2002. Average assets for the second quarter of 2003 were $600 million versus $383 million for the same period a year earlier, an increase of 57%. Of the $138.7 million increase in total assets in the first six months of 2003, approximately $89.7 million resulted from our acquisition of Premier National Bank and approximately $46.0 million was from growth in deposits. 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 $431.3 million represented 78% of our average earning assets during the second quarter of 2003. From December 31, 2002, gross loans increased $87.6 million to $436.2 million at June 30, 2003. The increase in gross loans was comprised of $30.7 million in natural growth and $56.9 million through the Premier National Bank acquisition. Comparing the second quarter end of 2003 to 2002, gross loans increased $140 million, or 47%. The quarter to quarter growth is not only attributable to the Premier National Bank and FSGBank – Maynardville (formerly First State Bank) acquisition, but also to the ties of our bankers to the local communities in which they work. We believe that general loan demand will remain strong during 2003. Funding of future loan growth may be restricted by ou
r ability to raise core deposits, although we will use alternative funding sources if necessary and cost effective. Loan growth may 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 $6.4 million or 1.47% of outstanding loans at June 30, 2003 and $5.3 million or 1.54% of outstanding loans at December 31, 2002. The allowance for loan losses was 322.36% of nonperforming loans (defined as loans 90 days or more past due and nonaccrual loans) at June 30, 2003 and 709.26% of nonperforming loans at December 31, 2002. For the first six months of 2003, net charge-offs arising from loans secured by real estate totaled zero, commercial loans totaled $653 thousand, and consumer loans totaled $277 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; therefore, the adequacy of the allowance for loa
n 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. 


	24

Allocation for Allowance for Loan Losses
As of June 30, 2003 and 2002
(in thousands)
	2003					2002
			Percentage of loans in each					Percentage of loans in each
Loan Categories	Amount		category to total loans			Amount		category to total loans

Commercial	$	2,701		24.5	%	$	1,863		33.7	%
Real estate-construction		325		8.2	%		241		7.8	%
Real estate-mortgage		2,382		50.8	%		1,020		38.7	%
Consumer		790		16.5	%		555		19.8	%
Charter condition or unallocated		217		-			265		-

Total	$	6,415		100.0	%	$	3,944		100.0	%

Nonperforming Assets 

Nonaccrual loans were $690 thousand at June 30, 2003, $667 thousand at December 31, 2002 and $758 thousand at June 30, 2002. The nonaccrual loans in June 2003 included $542 thousand of commercial loans and $148 thousand of consumer loans. The ratio of nonaccrual loans to total loans was 0.16% at June 30, 2003 and 0.22% at December 31, 2002. At June 30, 2003, we owned other real estate in the amount of $450 thousand. 

Loans past due 90 days and still accruing were $1.3 million June 30, 2003, compared to $89 thousand at December 31, 2002. Of these past due loans at June 30, 2003, $202 thousand were secured by real estate, $991 thousand were commercial loans and $136 thousand were consumer loans. 

At June 30, 2003, nonperforming loans (nonaccrual loans and loans past due 90 days or more) were 0.46% of total outstanding loans, which is 34 basis points less than the average of our subsidiaries’ peer groups, or 0.80%. Although our nonperforming asset ratio remains below our peer group, our nonperforming loans increased, and, as a result, our Chief Loan Review Officer and Chief Credit Administration Officer are implementing new procedures for enhanced monitoring of problem loans, as well as early detection, prevention and corrective action plans. 

Investment Securities and Other Earning Assets 

Securities totaled $71.9 million at June 30, 2003, $54.4 million at December 31, 2002, and $42.6 million at June 30, 2002. From second quarter end 2002 to second quarter end 2003, the growth in the securities portfolio occurred as a result of our efforts to improve our liquidity, as well as the acquisitions of FSGBank – Maynardville (formerly First State Bank) and Premier National Bank.  At June 30, 2003, the securities portfolio had unrealized net gains of approximately $1,239 thousand. In addition, all investment securities purchased to date have been classified as available-for-sale. The following table provides the amortized cost of our investment securities by their stated maturities (this maturity schedule excludes security prepayme
nt and call features), as well as the approximate tax equivalent yields for each maturity range. 


	25

(in thousands)	Less than			One to			Five to			More than
	One Year			Five Years			Ten Years			Ten Years

Municipal	$	1,895		$	8,098		$	6,750		$	2,777
Agency		18,694			23,979			8,038			515

Total	$	20,589		$	32,077		$	14,788		$	3,292

Tax Equivalent Yield		3.0	%		3.6	%		4.5	%		5.1	%

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. Pledged securities as of June 30, 2003 totaled $21.9 million. 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 June 30, 2003, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of ou
r stockholders equity. As of the second quarter ended 2003, the amortized cost and market value of the securities from each such issuer are as follows: 

(in thousands)	Amortized Cost		Market Value
Fannie Mae	$	23,112	$	23,441
FHLMC*	$	17,299	$	17,502
FHLB**	$	8,471	$	8,728

* Federal Home Loan Mortgage Corporation 

** Federal Home Loan Bank 

The following table presents the amortized cost of the investments for the dates presented in the consolidated balance sheets. 

(in thousands)	June 30, 2003		December 31, 2002		June 30, 2002

Federal agencies	$	51,226	$	40,811	$	38,455
Municipal		19,520		12,728		3,482

Total	$	70,746	$	53,539	$	41,937

Federal funds sold increased to $43.2 million at June 30, 2003 from $30 million at December 31, 2002. The increase resulted in part from our acquisition of Premier National Bank, which held federal funds sold of $9.5 million on March 31, 2003. We plan to invest a portion of these federal funds into liquid investment securities and loans to improve our yield on these earning assets. 

Deposits and Other Borrowings 

  Total deposits increased 61% from June 30, 2002 to June 30, 2003, and 31% from December 31, 2002 to June 30, 2003. For the first six months of 2003, our branching activities yielded deposit growth of approximately $46 million and Premier National Bank provided approximately $74 million in new deposits. We anticipate that our deposits will increase as a result of future branching activities. 

With the purchase of Premier National Bank, First Security acquired a Federal Home Loan Bank advance in the amount of $3 million (see "Liquidity"). The following table details the maturities and rates of the term borrowings from the Federal Home Loan Bank. 


	26

Date	Type	Principal		Term	Rate	Maturity

12/28/2001	Fixed Rate Advance		$ 3,000,000	24 months	3.60%	12/28/03
1/8/2002	Fixed Rate Advance		500,000	24 months	3.73%	1/8/04
1/8/2002	Fixed Rate Advance		500,000	36 months	4.48%	1/8/05
1/8/2002	Fixed Rate Advance		500,000	48 months	5.04%	1/8/06
1/10/2002	Fixed Rate Advance		500,000	24 months	3.65%	1/10/04
1/10/2002	Fixed Rate Advance		500,000	36 months	4.45%	1/10/05
1/10/2002	Fixed Rate Advance		500,000	48 months	5.00%	1/10/06
1/15/2002	Fixed Rate Advance		500,000	24 months	3.50%	1/15/04
1/15/2002	Fixed Rate Advance		500,000	36 months	4.22%	1/15/05
1/15/2002	Fixed Rate Advance		500,000	48 months	4.77%	1/15/06
1/17/2002	Fixed Rate Advance		500,000	24 months	3.63%	1/17/04
1/17/2002	Fixed Rate Advance		500,000	36 months	4.35%	1/17/05
1/17/2002	Fixed Rate Advance		500,000	48 months	4.88%	1/17/06

			$ 9,000,000

Composite rate	4.07%
Composite 24 month rate	3.61%
Composite 36 month rate	4.38%
Composite 48 month rate	4.92%

Liquidity 

Liquidity refers to First Security’s ability to adjust its future cash flows to meet the needs of our daily operation. First Security relies primarily on management service fees from its Banks to fund our daily operations liquidity needs. Additionally, in connection with our 2002 private placement stock offering, we retained a portion of the proceeds of the offering as working capital and a portion of the proceeds for future investment into our subsidiaries. First Security’s cash balance, which totaled approximately $7.3 million as of June 30, 2003, is available for funding activities for which our Banks would not receive direct benefit, such as acquisition due diligence, shareholder relations, and holding company reporting and operations. These funds should adequately meet our cash 
flow needs. If we determine that our cash flow needs will be satisfactorily met, we may deploy a portion of the funds into one or all of our subsidiaries or use them in an acquisition in order to support continued growth. 

The liquidity of our Banks refers to the ability or financial flexibility to adjust their future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost effective basis. The primary sources of funds for the Banks are cash generated by repayments of outstanding loans, interest payments on loans, and new deposits. Additional liquidity is available from the maturity and earnings on securities and liquid assets, as well as the ability to liquidate securities available for sale. 

At June 30, 2003, our liquidity ratio (defined as cash, due from banks, federal funds sold, and investment securities less securities pledged to liabilities divided by short-term funding liabilities less liabilities pledged by securities) was 24.6% (excluding anticipated loan repayments). As of December 31, 2002 and June 30, 2002, the liquidity ratios were 23.1% and 21.8% respectively. Our liquidity ratio improved due to the following reasons: (i) our acquisitions of FSGBank – Maynardville (formerly First State Bank) and Premier National Bank, each of which had liquidity ratios greater than First Security’s, (ii) we raised funds through our 2002 private placement stock offering, (iii) FSGBank - Chattanooga borrowed term funds from the Federal Home Loan Bank, (iv) we sold loan partici
pations, and (v) we increased our deposits. FSGBank - Chattanooga could increase its borrowing capacity at the FHLB, subject to more stringent collateral requirements, by pledging loans other than 1-4 family residential mortgage loans. FSGBank - Dalton assumed a $3 million FHLB advance with the Premier National Bank merger. This advance is collateralized with investment securities, as opposed to loans. FSGBank - Maynardville is a member of the Federal Home Loan Bank of Cincinnati; however, it does not currently have any FHLB borrowings. 


	27

Cumulatively, our Banks also had unsecured federal funds lines in the aggregate amount of $37.8 million at June 30, 2003, under which they could borrow funds to meet short-term liquidity needs. Another source of funding that we have used and may continue to use is loan participations sold to other commercial banks (in which we retain the service rights). As of June 30, 2003, we had $26.2 million in loan participations sold. An additional source of short-term funding would be to pledge investment securities against a line of credit at a commercial bank. As of June 30, 2003, we had no borrowings against our investment securities, except for repurchase agreements attained in the ordinary course of business and the $3 million advance assumed with the Premier National Bank acquisition. To date, Fir
st Security has not used brokered deposits or Internet deposits as a source of funding; however, we assumed $4.2 million in brokered deposits with our acquisition of Premier National Bank. Our certificates of deposit greater than $100 thousand were gathered in our Banks’ communities. Management believes that First Security’s liquidity sources are adequate to meet our Banks’ operating needs. 

First Security also has contractual cash obligations and commitments, which included certificates of deposit, other borrowings, operating leases, and loan commitments. As of June 30, 2003, certificates of deposit totaled $260.7 million. The scheduled maturities of certificates of deposit are as follows: 

 (Dollars amounts in thousands) 

 Less than 1 year 

 1 to 3 years 

 Over 3 years 

 Total 

 Certificates of Deposit 

 $189,004 

 $57,912 

 $13,821 

 $260,737

At June 30, 2003, other borrowings included $9 million in FHLB advances (see Management’s Discussion and Analysis of Financial Condition and Results of Operation Deposits and Other Borrowings). Unfunded loan commitments and stand by letters of credit totaled $100.9 million and $3.3 million, respectively, at June 30, 2003. The following table illustrates our lease obligations, which included property and equipment leases, as of June 30, 2003. 

(Dollars amounts in thousands)	Less than 1 year	1 to 3 years	3 to 5 years	After 5 years	Total
Lease Obligations	$564	$824	$715	$583	$2,686

Net cash provided from or used by operations results primarily from net income or loss, adjusted for the following noncash accounting items: provision for loan losses, depreciation and amortization, and deferred income taxes or benefits. These items amounted to cash provided of $1.4 million for the six months ended June 30, 2003. Cash provided by operations was available to increase earning assets. 

Capital Resources 

We continue to maintain capital ratios in excess of regulatory minimum requirements. The current capital standards to be well capitalized 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%. First Security, FSGBank – Chattanooga, FSGBank – Dalton, and FSGBank – Maynardville all maintain capital levels exceeding the minimum levels required for "well capitalized" banks and bank holding companies under applicable regulatory guidelines. 


	28

June 30, 2003	Well Capitalized	Adequately Capitalized	First Security	FSGBank - Dalton	FSGBank - Chattanooga	FSGBank - Maynardville

Tier I capital to risk adjusted assets	6.0%	4.0%	14.8%	11.5%	10.5%	26.2%
Total capital to risk adjusted assets	10.0%	8.0%	16.2 %	12.7%	11.8%	27.4%
Leverage ratio	5.0%	4.0%	11.8 %	8.7%	8.8%	20.1%

December 31, 2002	Well Capitalized	Adequately Capitalized	First Security	FSGBank - Dalton	FSGBank - Chattanooga	FSGBank - Maynardville

Tier I capital to risk adjusted assets	6.0%	4.0%	16.4%	11.1%	11.0%	37.0%
Total capital to risk adjusted assets	10.0%	8.0%	17.6%	12.3%	12.3%	38.2%
Leverage ratio	5.0%	4.0%	12.6%	8.3%	9.2%	19.9%

June 30, 2002	Well Capitalized	Adequately Capitalized	First Security	FSGBank Dalton	FSGBank - Chattanooga	FSGBank - Maynardville*

Tier I capital to risk adjusted assets	6.0%	4.0%	18.0%	10.6%	10.4%	22.3%
Total capital to risk adjusted assets	10.0%	8.0%	19.2%	11.8%	11.7%	23.5%
Leverage ratio	5.0%	4.0%	15.2%	8.8%	8.7%	12.3%
*Acquired July 2002

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 2000, the Federal Reserve increased interest rates three times for a total of 100 basis points in an attempt to control inflation. However, in 2001 the Federal Reserve reduced interest rates on
 11 occasions for a total of 475 basis points in an effort to stimulate economic growth. On November 6, 2002, the Federal Reserve decreased interest rates by 50 basis points and on June 27, 2003, the Federal Reserve decreased interest rates 25 basis points in order to further stimulate economic growth. 

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," "contemp
late," "expect," "estimate," "continue," "may," "intend," "seeks," or other similar words and expressions of the future. 


	29

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 fun
ds 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. We manage several types of risk, such as credit, liquidity and interest rate. We consider interest rate risk to be a significant risk that could potentially have a large material effect on our financial condition. Further, we process hypothetical scenarios whereby we shock our balance sheet up and down for possible interest rate changes, we analyze the potential change (positive or negative) to net interest income, as well as the effect of changes in fair market values of assets and liabilities. First Security does not maintain a trading portfolio or deal in international instru
ments, 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. 

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, for the quarter ended June 30, 2003 the model forecasts a decline in net interest income of $1,341 thousand or 13.0%, as a result of a 200 basis point decline in rates. The model also predicts an $1,124 thousand increase in net interest income, or 10.9%, 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 June 30, 2003. The numbers are based on a static balance sheet, and the cha
rt assumes that pay downs 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. 


	30

Interest Rate Risk 

Income Sensitivity Summary 

As of June 30. 2003 

(in thousands) 

	DOWN 200 BP			CURRENT			UP 200 BP

Net interest income	$	8,986		$	10,327		$	11,451
Dollar change net interest income		(1,341	)		-			1,124
Percent change net interest income		-13.0	%		0.00	%		10.9	%

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 are no assumptions 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 

As of the end of the period covered by 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 Comm
ission. 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. 


	31

PART II. OTHER INFORMATION 

ITEM 4. Submission of Matters to a Vote of Security Holders 

We held our Annual Meeting of shareholders on May 22, 2003, where the following thirteen directors were elected: Rodger B. Holley, J.C. Harold Anders, Larry R. Belk, Clayton Causby, Kenneth C. Dyer, III, Douglas F. Heuer, III, Carol H. Jackson, Ralph L. Kendall, William B. Kilbride, D. Ray Marler, Lloyd L. Montgomery, III, Hugh J. Moser, III, and H. Patrick Wood. There were no broker non-votes. The votes were as follows: 

	FOR	AGAINST
Rodger B. Holley	4,735,519	0
J.C. Harold Anders	4,735,519	0
Larry R. Belk	4,735,519	0
Clayton Causby	4,735,519	0
Kenneth C. Dyer, III	4,735,519	0
Douglas F. Heuer, III	4,735,519	0
Carol H. Jackson	4,735,519	0
Ralph L. Kendall	4,733,019	2,500
William B. Kilbride	4,730,519	5,000
D. Ray Marler	4,733,019	2,500
Lloyd D. Montgomery, III	4,638,019	97,500
Hugh J. Moser, III	4,735,519	0
H. Patrick Wood	4,735,519	0

The second 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, 2003. The number of votes cast for this proposal was 4,709,869, the number of votes against was 8,150 and the number of abstentions was 17,500. There were no broker non-votes. 

ITEM 6. Exhibits and Reports on Form 8-K 

(a)    Exhibits: 

	EXHIBIT NUMBER	DESCRIPTION

	10.1	Employment Agreement Dated as of May 16, 2003 By and Between First Security Group, Inc. and Rodger B. Holley (Director and Executive Officer of First Security Group, Inc.)

	10.2	Employment Agreement Dated as of May 16, 2003 By and Between First Security Group, Inc. and Lloyd L. Montgomery, III (Director and Executive Officer of First Security Group, Inc.)

	10.3	Employment Agreement Dated as of May 16, 2003 By and Between First Security Group, Inc. and William L. Lusk, Jr. (Executive Officer of First Security Group, Inc.)

	10.4	Severance and Change in Control Agreement Dated as of May 16, 2003 By and Between First Security Group, Inc., FSGBank, NA (formerly Frontier Bank) and Larry R. Belk (Director of First Security Group, Inc.)

	10.5	2003 Incentive Compensation Plan

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended

	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended

	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section of the Sarbanes Oxley Act of 2002

	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section of the Sarbanes Oxley Act of 2002

(b)   Reports on Form 8-K: 

The following reports on Form 8-K were filed during the quarter ended June 30, 2003. 

Current Report on Form 8-K dated and filed April 7, 2003, Items 2 and 7. 

Current Report on Form 8-K/A dated and filed April 14, 2003, Items 2 and 7. 

Current Report on Form 8-K dated and filed June 17, 2003, Items 5 and 7. 


	33

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)


August 14, 2003	/s/ Rodger B. Holley

	Rodger B. Holley
	Chairman, Chief Executive Officer & President

August 14, 2003	/s/ William L. Lusk, Jr.

	William L. Lusk, Jr.
	Secretary, Chief Financial Officer &
	Executive Vice President


	34

Tennessee	58-2461486

(State of Incorporation)	(I.R.S. Employer
	Identification No.)

817 Broad Street, Chattanooga, TN	37402

(Address of principal executive offices)	(Zip Code)

First Security Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity

								Accumulated
								Other		Deferred
	Common Stock			Paid-In		Retained		Comprehensive		Compensation on
(in thousands)	Shares	Amount		Surplus		Earnings		Income		Restricted Stock			Total

Balance - December 31, 2002	9,095	$	76	$	65,723	$	1,539	$	595	$	-		$	67,933

Comprehensive income -
Net income (unaudited)							907							907
Change in net unrealized
gain on securities available
for sale, net of tax (unaudited)									223					223

Total comprehensive income (unaudited)														1,130
Common stock issued (unaudited)	1,402		12		11,674						(133	)		11,553

Balance – June 30, 2003 (unaudited)	10,497	$	88	$	77,397	$	2,446	$	818	$	(133	)	$	80,616