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

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 March 31, 2005

o	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 x No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Common Stock, $.0069 par value:

12,733,340 shares outstanding and issued as of April 23, 2005

First Security Group, Inc. and Subsidiary

Form 10-Q

INDEX

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements

	Consolidated Balance Sheets -
	March 31, 2005, December 31, 2004 and March 31, 2004	3

	Consolidated Income Statements -
	Three months ended March 31, 2005 and 2004	5

	Consolidated Statement of Stockholders' Equity -
	Three months ended March 31, 2005	6

	Consolidated Statements of Cash Flows -
	Three months ended March 31, 2005 and 2004	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	31

Part II	OTHER INFORMATION

Item 6.	Exhibits	33

SIGNATURES		34

Index

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
	March 31,		December 31,		March 31,
	2005		2004		2004
(In thousands)	(unaudited)				(unaudited)

ASSETS
Cash and Due from banks	$	21,131	$	15,935	$	18,406
Federal Funds Sold and Securities Purchased
Under Agreements to Resell		-		-		4,690
Cash and Cash equivalents		21,131		15,935		23,096
Interest-Bearing Deposits in Banks		2,834		605		2,897
Securities Available For Sale		108,127		110,023		89,407
Loans Held for Sale		5,766		6,073		3,517
Loans		608,651		586,284		485,786
Total Loans		614,417		592,357		489,303
Less: Allowance for Loan Losses		8,866		8,312		5,641
		605,551		584,045		483,662
Premises and Equipment, net		25,977		26,295		25,118
Goodwill		12,430		12,430		12,424
Core Deposit and License Fee Intangibles, net		2,663		2,844		2,970
Other Assets		19,059		14,514		8,326
TOTAL ASSETS	$	797,772	$	766,691	$	647,900

(See Accompanying Notes to Consolidated Financial Statements)

Index

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
	March 31,			December 31,		March 31,
	2005			2004		2004
(In thousands, except share amounts)	(unaudited)					(unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest - Bearing Demand	$	121,103		$	109,325	$	101,692
Interest - Bearing Demand		56,473			54,454		51,047
		177,576			163,779		152,739
Savings and Money Market Accounts		146,301			147,342		129,398
Time Deposits:
Certificates of Deposit of $100 thousand or more		111,179			106,474		95,773
Certificates of Deposit less than $100 thousand		158,612			157,886		164,160
Brokered Certificates of Deposit		74,693			65,045		2,143
		344,484			329,405		262,076
Total Deposits		668,361			640,526		544,213
Federal Funds Purchased and Securities Sold
under Agreements to Repurchase		28,279			23,255		12,234
Security Deposits - Leases		3,447			3,379		-
Other Borrowings		2,147			4,150		4,157
Other Liabilities		8,917			8,936		3,800
Total Liabilities		711,151			680,246		564,404

STOCKHOLDERS' EQUITY
Common stock - $.01 par value - 20,000,000 shares authorized; 12,726,140 issued as of March 31, 2005; 12,705,044 issued as of December 31, 2004; and 12,705,044 issued as of March 31, 2004		88			88		88
Paid-In Surplus		78,096			77,981		77,981
Retained Earnings		9,368			8,262		4,645
Accumulated Other Comprehensive (Loss) Income		(931	)		114		782
Total Stockholders' Equity		86,621			86,445		83,496
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	797,772		$	766,691	$	647,900

(See Accompanying Notes to Consolidated Financial Statements)

Index

First Security Group, Inc. and Subsidiary
Consolidated Income Statements
(Unaudited)
	Three Months Ended
	March 31,
(In thousands except per share amounts)	2005		2004
INTEREST INCOME
Loans, including fees	$	10,923	$	7,755
Debt Securities -taxable		774		558
Debt Securities -non-taxable		240		169
Other		95		68
Total Interest Income		12,032		8,550

INTEREST EXPENSE
Interest-Bearing Demand Deposits		57		41
Savings Deposits and Money Market Accounts		428		255
Certificates of Deposit of $100 thousand or more		764		607
Certificates of Deposit of less than $100 thousand		1,026		1,018
Brokered Certificates of Deposit		557		26
Other		155		87
Total Interest Expense		2,987		2,034

NET INTEREST INCOME		9,045		6,516
Provision for Loan Losses		1,143		675
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		7,902		5,841

NONINTEREST INCOME
Service Charges on Deposit Accounts		903		771
Gain on Sales of Available-for-Sale Securities, net		-		84
Other		760		451
Total Noninterest Income		1,663		1,306

NONINTEREST EXPENSES
Salaries and Employee Benefits		4,575		3,430
Expense on Premises and Fixed Assets, net of rental income		1,318		936
Other		2,073		1,861
Total Noninterest Expenses		7,966		6,227

INCOME BEFORE INCOME TAX PROVISION		1,599		920
Income Tax Provision		493		270
NET INCOME	$	1,106	$	650

NET INCOME PER SHARE
BASIC	$	0.09	$	0.05
DILUTED	$	0.09	$	0.05
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC		12,722		12,703
DILUTED		12,992		12,916

(See Accompanying Notes to Consolidated Financial Statements)

Index

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

									Accumulated
									Other
	Common Stock				Paid-In		Retained		Comprehensive
(In thousands)	Shares		Amount		Surplus		Earnings		Income			Total
Balance - December 31, 2004		12,705	$	88	$	77,981	$	8,262	$	114		$	86,445
Comprehensive income -
Net Income (unaudited)								1,106					1,106
Change in Net Unrealized
Gain on Securities Available
for Sale, net of tax (unaudited)										(1,045	)		(1,045	)
Proceeds from Exercise of Stock Options (unaudited)		21				115							115
Balance - March 31, 2005 (unaudited)		12,726	$	88	$	78,096	$	9,368	$	(931	)	$	86,621

(See Accompanying Notes to Consolidated Financial Statements)

Index

First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(Unaudited)
	Three Months Ended
	March 31,
(In thousands)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,106		$	650
Adjustments to Reconcile Net Income to Net Cash (Used
In) Provided by Operating Activities -
Provision for loan losses		1,143			675
Gain on sale of available-for-sale securities		-			(84	)
Amortization of premiums and discounts on securities, net		97			223
Amortization of intangibles		181			229
Amortization of deferred stock compensation		-			33
Depreciation		490			397
(Gain) Loss on sale of assets		(53	)		11
Write-down of other real estate and repossessions		62			-
Changes in operating assets and liabilities -
Interest receivable		(145	)		(8	)
Other assets		(4,835	)		476
Interest payable		572			(310	)
Other liabilities		15			134
Net cash (used in) provided by operating activities		(1,367	)		2,426

CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits		(2,229	)		1,615
Activity in available-for-sale securities -
Sales		-			8,412
Maturities, prepayments, and calls		18,413			7,098
Purchases		(18,197	)		(18,024	)
Loan originations and principal collections, net		(23,515	)		(12,151	)
Proceeds from sale of assets		1,292			-
Additions to premises and equipment		(172	)		(1,009	)
Net cash used in investing activities		(24,408	)		(14,059	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		27,835			3,909
Net increase in federal funds purchased and
securities sold under agreements to repurchase		5,024			165
Repayments of other borrowings		(2,003	)		(2,002	)
Proceeds from exercise of stock options		115			-
Proceeds from sale of common stock, net		-			23
Net cash provided by financing activities		30,971			2,095
NET CHANGE IN CASH AND CASH EQUIVALENTS		5,196			(9,538	)
CASH AND CASH EQUIVALENTS - beginning of period		15,935			32,634
CASH AND CASH EQUIVALENTS - end of period	$	21,131		$	23,096

(See Accompanying Notes to Consolidated Financial Statements)

Index

	Three Months Ended
	March 31,
(In thousands)	2005			2004
Supplemental disclosures of noncash investing and financing activities
Change in unrealized (depreciation) appreciation of securities,
net of deferred taxes of $538 for 2005 and $181 for 2004	$	(1,045	)	$	352
Supplemental schedule of cash flows
Interest paid	$	2,415		$	2,344
Income taxes paid	$	514		$	166

(See Accompanying Notes to Consolidated Financial Statements)

Index

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

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.

The consolidated financial statements include the accounts of First Security Group, Inc. and its subsidiary, which is wholly-owned. All significant intercompany balances and transactions have been eliminated.

Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 or any other period. These interim financial statements should be read in conjunction with the Company’s latest annual consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE B - COMPREHENSIVE INCOME

In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (“SFAS”) 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 period ended March 31, 2005 and 2004, respectively, was as follows:

	Three Months Ended
	March 31,
(in thousands)	2005			2004

Net income	$	1,106		$	650
Unrealized (loss) gain on securities, net of tax		(1,045	)		352
Comprehensive income, net of tax	$	61		$	1,002

Index

NOTE C - EARNINGS PER SHARE

The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding options using the treasury stock method. The computation of basic and diluted earnings per share is as follows:

	Three Months Ended
	March 31,
(in thousands, except per share data)	2005		2004

Net income	$	1,106	$	650
Denominator:
Weighted average common shares outstanding		12,722		12,703
Equivalent shares issuable upon exercise of stock options		270		213
Diluted shares		12,992		12,916
Net income per share
Basic	$	0.09	$	0.05
Diluted shares	$	0.09	$	0.05

NOTE D - STOCK-BASED COMPENSATION

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for stock options. Accordingly, no compensation expense has been recognized in net income as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for the plan been determined based on the fair value at the date of grant consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” net income and earnings per share would have been reduced to the proforma amounts indicated in the table below.

	Three Months Ended
	March 31,
(in thousands, except per share data)	2005			2004

Net income, as reported	$	1,106		$	650
Compensation expense, net of tax		(72	)		(74	)
Pro forma net income	$	1,034		$	576
Basic net income per share:
As reported	$	0.09		$	0.05
Pro forma	$	0.08		$	0.05
Diluted net income per share:
As reported	$	0.09		$	0.05
Pro forma	$	0.08		$	0.04

Index

NOTE E - GUARANTEES

First Security Group, Inc., as part of its ongoing business operations, issues financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by the Company to guarantee the performance of a customer to a third-party. A financial standby letter of credit is a commitment to guarantee a customer’s repayment of an outstanding loan or debt instrument. In a performance standby letter of credit, the Company guarantees a customer’s performance under a contractual nonfinancial obligation for which it receives a fee. The maximum potential amount of future payments the Company could be required to make under its stand-by letters of credit at March 31, 2005, December 31, 2004, and March 31, 2004 was $10,109 thousand, $6,239 thousand, and $3,857 thousand, respectively. The Company’s outstanding standby letters of credit generally have a term of one year and some may have renewal options. The amount of collateral obtained, if deemed necessary by the Company on extension of credit, is based on management’s credit evaluation.

NOTE F - RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, (“SFAS No. 123R”). This Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. Under APB No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. SFAS No. 123R requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period which is usually the vesting period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. For public entities that do not file as small business issuers, SFAS No. 123R is effective as of the beginning of the next fiscal year beginning after June 15, 2005. We are currently evaluating the provisions of SFAS No. 123R to determine its impact on our future financial statements.

In March 2004, the FASB’s Emerging Issues Task Force (EITF) concluded its discussion of Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” A consensus was reached regarding disclosures about unrealized losses on available-for-sale debt and equity securities accounted for under FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations.” The EITF provided guidance for evaluating whether an investment is other-than-temporarily impaired. Initially, this guidance was to be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The EITF has subsequently delayed the effective date of this pronouncement as it relates to other-than-temporary impairment valuation pending further discussion of the definition of “other-than-temporarily impaired.” The EITF consensus also requires certain quantitative and qualitative disclosures which were effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under Statements 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. The additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. The EITF consensus is not expected to have a material effect on First Security’s consolidated financial statements.

In December 2003, the Financial Accounting Standards Board issued FIN 46-R, Consolidation of Variable Interest Entities, (“FIN 46-R”). This Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities. For enterprises that are not small business issuers, FIN 46-R is to be applied to all variable interest entities by the end of the first reporting period ending after March 15, 2004. Our adoption of FIN 46-R did not have an impact on our financial condition or results of operations.

Index

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer” (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows expected to be collected and an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans and debt securities acquired in purchase business combinations. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference on the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as an impairment. SOP 03-3 prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of SOP 03-3. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The Company’s adoption of SOP 03-3 has not had a material impact on our financial condition or results of operations.

NOTE G- RECLASSIFICATIONS

Certain reclassifications have been made to the financial statements presented for prior periods to conform to the 2005 presentation.

Index

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Form 10-Q, "First Security," "FSG," "we," "us," “the Company” and "our" refer to First Security Group, Inc.

FIRST QUARTER 2005 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 periods ended March 31, 2005 and 2004. Such discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the notes attached thereto.

All per share data has been retroactively adjusted for the 12 for 10 stock split distributed on December 22, 2004, to shareholders of record on December 10, 2004. As a result of the split, the par value has been adjusted from $0.0083 to $0.0069 per share; however, the par value has been rounded to $0.01 per share for presentation purposes.

OVERVIEW

As of March 31, 2005, First Security had total consolidated assets of $797.8 million, total loans of $614.4 million, total deposits of $668.4 million and stockholders' equity of $86.6 million.

Net income for the three months ended March 31, 2005, was $1,106 thousand, or $.09 per share (basic and diluted), compared to net income of $650 thousand, or $.05 per share (basic and diluted) for the comparative period in March 2004. Net interest income and noninterest income increased by $2.9 million, collectively, while noninterest expense, including provision for loan losses, increased by $2.2 million. Income increases outpaced expense increases as a result of the additional earning assets acquired through our acquisition and branching activity during 2004 and the first quarter of 2005.

We believe that our net income will continue to improve throughout 2005 as a result of our above-average net interest margin, our growth in 2004, and our anticipated growth through branching and marketing efforts in 2005.

RESULTS OF OPERATIONS

The following table summarizes components of income and expense and the changes in those components for the period ended March 31, 2005 as compared to the same period in 2004.

Condensed Consolidated Statements of Income
For the Three Months Ended March 31
(all dollar amounts in thousands)			Change
			From Prior
	2005		Year		%

Interest income	$	12,032	$	3,482		40.7	%
Interest expense		2,987		953		46.9	%
Net interest income		9,045		2,529		38.8	%
Provision for loan losses		1,143		468		69.3	%
Net interest income after provision for loan losses		7,902		2,061		35.3	%
Noninterest income		1,663		357		27.3	%
Noninterest expense		7,966		1,739		27.9	%
Income before income taxes		1,599		679		73.8	%
Income tax provision		493		223		82.6	%
Net income	$	1,106	$	456		70.2	%

Index

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. For the three months ended March 31, 2005, net interest income increased by $2.5 million, or 38.8%, to $9.0 million for the first quarter of 2005 compared to $6.5 million for the same period in 2004.

The level of net interest income is determined primarily by the average balances (volume) of interest earning assets and the various rate spreads between our interest-earning assets and our funding sources. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as noninterest-bearing deposits.

Interest income for the first quarter of 2005 was $12.0 million, a 40.7% increase as compared to the same period in 2004. The increase is due to an increase in the quarter-to-date average earning assets of $135.4 million, or 23.2%, to $719.1 million compared to average earning assets of $583.7 million for the same period in 2004. Our earning assets increased in the first quarter of 2005 on a comparative basis due to the deposit gathering activities (including the issuance of brokered CDs) of FSGBank. Deposits raised were used to fund or acquire earning assets, including our acquisition of Kenesaw Leasing and J&S Leasing in the fourth quarter of 2004. These additional earning assets have enabled First Security to earn more interest income.

Supplementing the additional earnings from increased volumes was the increase in yield on earning assets. The tax equivalent yield on earning assets increased 93 basis points for the period ended March 31, 2005 to 6.90% from 5.97% for the same period in 2004. The changes in the yield relate to our changing the mix of earning assets from lower yielding assets such as federal funds sold to higher yielding loans and investment securities combined with the Federal Reserve increasing the federal funds rate and the discount rate in 2004 and the first quarter of 2005, which caused increases in the prime-lending rate.

Total interest expense was $3.0 million in the first quarter of 2005, or 46.9% higher, as compared to the same period in 2004. Interest expense increased primarily due to the additional volume of interest bearing liabilities. Average interest bearing liabilities increased $107.6 million, or 23.4%, for the three months ended March 31, 2005 compared to the same period in 2004. The significant increase in interest bearing liabilities was due to FSGBank’s market penetration and the issuance of brokered CD’s. The average rate paid on interest-bearing liabilities increased 35 basis points to 2.13% from 1.78% for the period ended March 31, 2005 and 2004, respectively. The increase is the result of the Federal Reserve rate increase initiative.

The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of noninterest bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing noninterest-bearing deposits in earning assets.

The Company’s net interest rate spread (on a tax equivalent basis) was 4.77% for the period ended March 31, 2005 compared to 4.19% for the same period in 2004. Net interest margin (on a tax equivalent basis) was 5.19% for the period ended March 31, 2005 compared to 4.57% for the same period in 2004. The increased net interest margin is the result of (1) our earning assets repricing faster than our interest bearing liabilities in an increasing interest rate environment, (2) changes in the mix of our earning assets (we invested federal funds sold in higher yielding assets such as loans and investment securities), and (3) the acquisition of Kenesaw Leasing and J&S Leasing in the fourth quarter of 2004. Average interest bearing liabilities as a percentage of average earning assets was 78.9% for the period ended March 31, 2005 compared to 78.8% for the same period in 2004.

Index

In 2005, the Federal Reserve has raised the federal funds rate by 25 basis points to 2.50%. Throughout 2005, we believe our net interest margin will remain relatively stable due to anticipated Federal Reserve rate increases. However, our net interest margin could decline due to increasing competitive deposit pricing pressure from the seven increases in interest rates by the Federal Reserve.

The following table summarizes net interest income and average yields and rates paid for the quarters ended March 31, 2005 and 2004.

Index

Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31
Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
	2005								2004
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Earning assets:
Loans, net of unearned income	$	603,152		$	10,925		7.35	%	$	486,610		$	7,755		6.41	%
Investment securities		108,984			1,176		4.37	%		86,988			844		3.90	%
Other earning assets		6,987			93		5.40	%		10,132			69		2.74	%
Total earning assets		719,123			12,194		6.90	%		583,730			8,668		5.97	%
Allowance for loan losses		(8,617	)							(5,815	)
Intangible assets		15,189								15,499
Cash & due from banks		18,838								20,263
Premises & equipment		26,230								24,888
Other assets		9,952								4,854
TOTAL ASSETS	$	780,715							$	643,419

Liabilities and Stockholders' Equity

Interest bearing liabilities:
NOW accounts	$	55,232			57		0.42	%	$	50,158			42		0.34	%
Money market accounts		111,940			396		1.43	%		97,536			223		0.92	%
Savings deposits		32,482			32		0.40	%		31,706			32		0.41	%
Time deposits < $100		158,357			1,026		2.63	%		164,419			1,019		2.49	%
Time deposits > $100		108,749			764		2.85	%		93,103			606		2.62	%
Brokered CD’s		70,259			557		3.22	%		2,241			26		4.67	%
Federal funds purchased		14,705			101		2.79	%		5,016			18		1.44	%
Repurchase agreements		13,473			24		0.72	%		11,425			19		0.67	%
Other borrowings		2,376			30		5.12	%		4,365			52		4.79	%
Total interest bearing liabilities		567,573			2,987		2.13	%		459,969			2,037		1.78	%
Net interest spread				$	9,207		4.77	%				$	6,631		4.19	%
Noninterest bearing demand deposits		114,846								97,002
Accrued expenses and other liabilities		12,010								3,044
Stockholders' equity		86,249								82,843
Unrealized gain on securities		37								561
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$	780,715							$	643,419

Impact of noninterest bearing
Sources and other changes in
Balance sheet composition							0.42	%							0.38	%

Net interest margin							5.19	%							4.57	%

Index

The following table presents the relative impact on net interest income to changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by FSGBank on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.

Change in Interest Income and Expense on a Tax Equivalent Basis
For the Three Months Ended March 31
(all dollar amounts in thousands)
	2005 Compared to 2004
	Increase (Decrease)
	in Interest Income and Expense
	Due to Changes in:
	Volume			Rate			Total
Interest earning assets:
Loans, net of unearned income	$	2,111		$	1,059		$	3,170
Investment securities		238			94			332
Other earning assets		(42	)		66			24
Total earning assets		2,307			1,219			3,526

Interest bearing liabilities:
NOW accounts		5			10			15
Money market accounts		51			122			173
Savings deposits		-			-			-
Time deposits < $100		(40	)		47			7
Time deposits > $100		105			53			158
Brokered CD’s		539			(8	)		531
Federal funds purchased		67			16			83
Repurchase agreements		4			1			5
Other borrowings		(25	)		3			(22	)
Total interest bearing liabilities		706			244			950
Increase in net interest income	$	1,601		$	975		$	2,576

Provision for Loan Losses

The provision for loan losses charged to operations during the three months ended March 31, 2005 was $1.1 million compared to $675 thousand in the same period of 2004. Net charge-offs for the first quarter of 2005 were $590 thousand compared to net charge-offs of $861 thousand for the same period in 2004. Net charge-offs as a percentage of average loans were 0.10% for the three months ended March 31, 2005 compared to 0.18% for the same period in 2004. The Bank’s peer group averages (as reported in the December 31, 2004 Uniform Bank Performance Report) were 0.17% in 2004.

In 2005 the provision for loan losses has been more than 2004 as a result of our analysis of inherent risks in the loan portfolio in relation to the portfolio’s past and anticipated growth, the level of past due, charged-off, classified and nonperforming loans as well as general economic conditions. For the three months ended March 31, 2005, our loan portfolio increased by $22.1 million compared to $11.3 million in the same period in 2004. Year-over-year, the loan portfolio increased by $125.1 million from March 31, 2004 to March 31, 2005. During the fourth quarter of 2004, we acquired approximately $60.6 million in leases in the acquisition of Kenesaw Leasing and J&S Leasing. Excluding maturities, prepayments, and payoffs of the purchased loans, our organic loan growth for the twelve months ended March 31, 2005 as compared to the same period in 2004, was approximately $64.5 million as a result of the marketing efforts of our loan officers.

Index

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 regularly 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:

°	FSGBank’s loan loss experience;

°	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 affect 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 FSGBank’s credit administration department and presented to the board of directors or the directors’ loan committee on at least a quarterly basis. In addition, our loan review department performs a regular review of the quality of the loan portfolio and adequacy of the allowance. Based on our analysis, which includes risk factors such as charge-off rates, past dues, and loan growth, we may determine that our future provision expense may need to increase or decrease in order for us to remain adequately reserved for probable loan losses. As of March 31, 2005, our analysis indicated that our credit quality was improving, and as such management believes that it may be appropriate to reduce the monthly provision expense by $100 thousand. Management will re-analyze the allowance for loan losses at June 30, 2005, or sooner if necessary, and adjust the provision expense accordingly.

FSGBank’s 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.

Noninterest Income

Noninterest income totaled $1.7 million for the first quarter of this year, an increase of $357 thousand, or 27.3%, from the same period in 2004. The following table presents the components of noninterest income for the periods ended March 31, 2005 and 2004. We believe that our deposit related non-interest income will continue to improve throughout the remainder of 2005, but mortgage loan fee income may decrease due to declining mortgage originations resulting from increases in the 15- and 30- year mortgage interest rates.

Index

NONINTEREST INCOME

	Three Months Ended March 31,
			Percent
	2005		Change			2004
	(Dollar amounts in thousands)
NSF Fees	$	673		28.9	%	$	522
Service Charges on Deposit Accounts		230		-7.6	%		249
Mortgage Loan and Related Fees		346		40.1	%		247
Net Gain on Sales of Available for Sale Securities		-		-100.0	%		84
Other Income		414		102.9	%		204
Total Noninterest Income	$	1,663		27.3	%	$	1,306

One of the largest sources of noninterest income for First Security is service charges and fees on deposit accounts held by FSGBank. Total service charges, including non-sufficient funds fees, were $903 thousand for the first quarter of 2005, an increase of $132 thousand, or 17.1%, from the same period in 2004. During 2004, we implemented a “bounce protection” program for our customers. Bounce protection is an overdraft product that pays our customers’ non-sufficient fund checks (to a predetermined limit) for a fee. This program and our growing deposit base resulted in an increase in our NSF fee income. Effective January 1, 2005, we decreased the amount of time that we may hold an overdraft prior to charging it off from 60 days to 45 days in order to begin more aggressive recovery efforts earlier in the process. As a result of this change, we decreased our net overdraft charge-offs, as well as potential earnings on NSF fees from non sufficient fund items that may have been presented from the 46^th day to the 60^th day. Service charges on deposit accounts decreased for the period ending March 31, 2005 due to (1) an increase in the average balance of checking and savings account thus decreasing the amount of service charges assessed to the customer, (2) an increase in “free checking” due to competitive pressures, and (3) a reduction in commercial account analysis charges due to increases in the crediting rate which often occur in a rising interest rate environment.

Mortgage loan and related fees for the first quarter of 2005 increased $99 thousand, or 40.1% to $346 thousand compared to $247 thousand in the first quarter of 2004 due to increased volume. The average balance of long-term mortgages for the period ended March 31, 2005 and 2004 was $4.1 million and $3.2 million, respectively.

Other income for the first quarter of 2005 was $414 thousand, compared to $204 thousand for the same period in 2004. The components of other income primarily consist of point-of-sale fees on debit cards, credit card fee income, ATM fee income, gains on sales of other real estate and repossessions, safe deposit box fee income, and trust fee income. The majority of the increase in other income relates to point-of-sale fees on debit cards and gains on sales of other real estate and repossessions.

Noninterest Expense

Noninterest expense for the first quarter of 2005 increased $1.7 million, or 27.9%, to $8.0 million compared to $6.2 million for the same period in 2004. Unless indicated otherwise in the discussion below, we anticipate increases in noninterest expense throughout 2005 as a result of our branching activities. The following table represents the components of noninterest expense for the three month periods ended March 31, 2005 and 2004.

Index

NONINTEREST EXPENSE

	Three Months Ended March 31,
			Percent
	2005		Change			2004
	(Dollar amounts in thousands)
Salaries & Benefits	$	4,575		33.4	%		3,430
Occupancy		646		41.7	%		456
Furniture and Equipment		672		40.0	%		480
Professional Fees		313		43.6	%		218
Data Processing		266		-8.3	%		290
Printing & Supplies		115		-31.5	%		168
Communications		148		38.3	%		107
Advertising		150		35.1	%		111
Intangible Asset Amortization		182		-20.5	%		229
Other Expense		899		21.8	%		738
Total Noninterest Expense	$	7,966		27.9	%	$	6,227

Salaries and benefits for the first quarter of 2005 increased 33.4% as compared to the same period in 2004. The increase in salaries and benefits is related to staff additions to accommodate our growth, as well as the acquisition of the leasing companies in the fourth quarter of 2004, which added approximately $295 thousand in salaries and benefits for 2005. As of March 31, 2005, we had 311 full time equivalent employees and operated 30 full service banking offices, one loan production office, and three leasing offices. In 2005, we plan to build five new branches in markets not currently served by us. Additionally, we anticipate renovating our new corporate headquarters building located at 531 Broad Street, Chattanooga, Tennessee. We will most likely occupy the headquarters in the later part of 2005.

Occupancy expense for the first quarter of 2005 increased by 41.7% as compared to the same period in 2004. The increase in the first quarter of 2005 was due to our opening six de novo branches (four subsequent to March 31, 2004) and assuming three facility leases through our acquisition of Kenesaw Leasing and J&S Leasing. As of March 31, 2005, First Security leased 10 facilities and it leased the land for four branches. As a result, current period occupancy expense is higher than if we owned these facilities, including the real estate, but conversely and due to favorable market conditions and lease terms, we have been able to deploy the capital into earning assets rather than capital expenditures for facilities.

Similar to occupancy expense, furniture and equipment expense and communications expense increased in the first quarter of 2005 due to adding six new branches and the acquisition of the leasing companies.

Professional fees increased 43.6% for the first quarter of 2005 as compared to the same period in 2004. Professional fees include fees related to outsourcing internal audit, loan review, compliance and information technology audits to Professional Bank Services, as well as external audit (including Sarbanes Section 404 testing) and tax services and legal and accounting advice related to, among other things, potential acquisitions, investment securities, trademarks and intangible properties.

Data processing fees declined for the first quarter of 2005 primarily due to the conversion of our four banking regions into one data processing system.

Intangible asset amortization expense decreased 20.5% in the first quarter of 2005 as compared to the same period in 2004. The decline in amortization expense is due to core deposit intangible assets amortizing on a accelerated basis in which the expense recognized declines over the estimated useful life of the assets which is 10 years. In the fourth quarter of 2004, we added a new amortizing intangible asset associated with the purchase of license fee agreements related to operating Primer Banco Seguro branches within our market. These license fee agreements are amortized on a straight-line basis over a period of 10 years.

Index

Other expense increased 21.8% in the first quarter of 2005 as compared to the same period in 2004. The increase is primarily a function of our increased branching activities.

Income Taxes

The Company booked income tax expense of $493 for the first quarter of 2005 compared to $223 for the same period in 2004. Our effective tax rate for the period ended March 31, 2005 and 2004, was 30.8% and 32.8%, respectively.

STATEMENT OF FINANCIAL CONDITION

First Security's total assets at March 31, 2005 were $797.8 million, $766.7 million at December 31, 2004, and $647.9 million at March 31, 2004. Our asset growth is directly related to deposit growth and the funds available to First Security for investment. The increase in our consolidated assets is due to the branching and deposit activities of FSGBank and the acquisition of Kenesaw Leasing and J&S Leasing, which the Company funded by issuing brokered CD’s.

Throughout 2005, we expect our assets to continue to grow as we plan to further leverage our existing banking branches, build five new branches in markets not currently serviced by us, and actively pursue additional acquisitions of existing banks and bank branches.

Loans

Total loans increased 3.7% in the first quarter of 2005 as compared to December 31, 2004 and 25.6% compared to the first quarter of 2004. The quarter-to-quarter growth can be attributed to our acquisition of Kenesaw Leasing and J&S Leasing, and our branching efforts along with the lending efforts of our senior management lending team. We believe that general loan growth will remain strong. Funding of future loan growth may be restricted by our ability to raise core deposits, although we will use alternative funding sources if necessary and cost effective. Loan growth may also be restricted by the necessity for us to maintain appropriate capital levels, as well as adequate liquidity.

Asset Quality

We consider our asset quality to be of primary importance. At March 31, 2005, our loan portfolio was 77.0% of total assets. At the beginning of 2003, we hired an experienced senior credit administration officer and an experienced senior loan review officer to oversee these respective areas at First Security. We took this action because of the size of our loan portfolio and its historical and future projected growth, as well as the economy not showing signs of recovery and increases in our past due, classified and nonaccrual loans. As a result of these hires, we have gained a better understanding of our asset quality, established better warning and early detection systems regarding our loans, and developed a more comprehensive analysis of our allowance for loan losses. While FSGBank’s trend in nonaccrual loans is higher for the period ended March 31, 2005 as compared to year-end, its trend in loans 90 days past due is down. Furthermore, we remain below our peer group (as reported in the December 31, 2004 Uniform Bank Performance Report) on aggregated nonaccrual and 90-day past due loans as a percentage of gross loans. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Nonperforming Assets.”)

The allowance for loan losses represents management’s estimate of an amount adequate in relation to the risk of losses inherent in the loan portfolio. We analyze the loan portfolio regularly to identify potential problems. We undertake this analysis in conjunction with the establishment of our allowance for loan losses to provide a basis for determining the adequacy of our loan loss reserves to absorb losses that we estimate might be experienced. Furthermore, our policy requires regularly scheduled problem-asset meetings in which past due and classified loans are thoroughly analyzed. These analyses are thoroughly reviewed by our credit administration group. In addition to these analyses of existing loans, management considers FSGBank’s loan growth, historical loan losses, past due and non-performing loans, current economic conditions, underlying loan collateral values and other factors which may affect probable loan losses. First Security’s methodology for determining the adequacy of the allowance for loan losses is explained in further detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Provision for Loan Losses.”

Index

In the first quarter of 2005, net charge-offs were $589 thousand compared to net charge-offs of $861 thousand for the same period in 2004. Our net charge-offs as a percentage of average loans were 0.10% for the three months ended March 31, 2005 compared to 0.18% for the same period in 2004. The Bank’s peer group averages were 0.17% in 2004. The following table presents an analysis of the changes in the allowance for loan losses for the three months ended March 31, 2005 and 2004.

ANALYSIS OF CHANGES IN ALLOWANCE FOR LOAN LOSSES

	For the three months ended March 31,
	2005			2004
Allowance for loan losses -	(Dollar amounts in thousands)
Beginning of period	$	8,312		$	5,827
Provision for loan losses		1,143			675
Sub-total		9,455			6,502
Charged off loans:
Commercial - leases		262			-
Commercial - loans		239			613
Real estate - construction		-			-
Real estate - residential mortgage		11			21
Consumer and other		143			342
Total charged off		655			976
Recoveries of charged-off loans:
Commercial - leases		11			-
Commercial - loans		6			114
Real estate - construction		-			-
Real estate - residential mortgage		2			-
Consumer		47			1
Total recoveries		66			115
Net charged-off loans		589			861
Allowance for loan losses - end of period	$	8,866		$	5,641

As a percentage of average loans:
Net loans charged-off		0.10	%		0.18	%
Provision for loan losses		0.19	%		0.14	%

The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percent of loans in each category to total loans. The comprehensive allowance analysis developed by our credit administration group enables us to allocate the allowance based on risk elements within the portfolio and has resulted in a larger unallocated general reserve than we had previously determined in prior years.

Index

Allocation of the Allowance for Loan Losses
As of March 31, 2005 and 2004
(all dollar amounts in thousands)
	2005					2004
	Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans
Commercial-leases	$	1,811		9.8	%	$	-		-
Commercial-loans		1,402		20.2	%		1,333		24.5	%
Real estate-construction		951		13.7	%		538		9.9	%
Real estate-mortgage		3,099		44.6	%		2,715		49.9	%
Consumer		808		11.6	%		854		15.7	%
Unallocated		795		-			201		-
Total	$	8,866		100.0	%	$	5,641		100.0	%

We believe that the allowance for loan losses at March 31, 2005 is sufficient to absorb losses inherent in the loan portfolio based on our assessment of the information available. Our assessment involves uncertainty and judgment; 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 FSGBank, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant. The unallocated reserve is available as a general reserve against the entire loan portfolio and is related to factors such as current economic conditions which are not directly associated with a specific loan pool. See “Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Provision for Loan Losses.”

Nonperforming Assets

Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, restructured loans, and other real estate under contract for sale. We place loans on non-accrual status when we have concerns relating to our ability to collect the loan principal and interest, and generally when such loans are 90 days or more past due. Nonaccrual loans totaled $1.8 million at March 31, 2005, $985 thousand at December 31, 2004, and $2.3 million at March 31, 2004. The nonaccrual loans at March 31, 2005 included $747 thousand of commercial loans, $244 thousand of consumer loans, and $803 thousand of real-estate secured loans. There are no commitments to lend additional funds to customers with loans on non-accrual status at March 31, 2005.

Loans 90 days past due and still accruing were $666 thousand at March 31, 2005, compared to $1.2 million at December 31, 2004, and $1.4 million at March 31, 2004. Of these past due loans at March 31, 2005, $132 thousand were secured by real estate, $101 thousand were commercial loans, $125 thousand were consumer loans and $308 thousand were leases.

At March 31, 2005, we owned other real estate in the amount of $1.5 million. First Security’s other real estate consisted of $379 thousand in vacant land, $836 thousand in residential real estate, and $332 in non-farm/nonresidential property. All of these properties have been written down to their respective fair values.

While nonperforming assets have increased over prior years, our nonperforming asset ratios generally remain below our peer group. At March 31, 2005, nonperforming loans (nonaccrual loans and loans past due 90 days or more) were 0.40% of total outstanding loans compared to 0.53% for our peer group. The ratio of nonaccrual loans and loans 90 days past due to the allowance for loan losses was 27.7% compared to 44.0% for our peer group. The ratio of nonaccrual loans and loans 90 days past due to equity capital was 2.84% compared to 4.10% for our peer group. The ratio of nonaccrual loans, loans 90 days past due and other real estate owned to total loans and other real estate owned was 0.65% compared to 0.70% for our peer group.

Index

Investment Securities and Other Earning Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: “held to maturity” or “available for sale.” Currently, none of First Security’s investments are classified as held to maturity. While First Security has no plans to liquidate a significant amount of any securities, the securities classified as available-for-sale may be used for liquidity purposes should management deem it to be in our best interest.

Securities totaled $108.1 million at March 31, 2005, $110.0 million at December 31, 2004 and $89.4 million at March 31, 2004. The growth in the securities portfolio year over year occurred as a result of our efforts to invest excess federal funds sold into investments and to maintain a certain level of liquid assets in correlation to our overall asset growth. At March 31, 2005, the securities portfolio had unrealized net losses of approximately $931 thousand, net of tax. All investment securities purchased to date have been classified as available-for-sale. Our securities portfolio at March 31, 2005 consisted of United States government agency bonds, federal agency bonds, mortgage backed securities, asset backed securities, tax-exempt municipal securities and taxable municipal securities. The following table provides the amortized cost of our 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.

MATURITY OF INVESTMENT SECURITIES - AMORTIZED COST

(in thousands)	Less than			One to			Five to			More than
	One Year			Five Years			Ten Years			Ten Years
Municipal-tax exempt	$	1,130		$	2,580		$	11,931		$	11,904
Municipal-taxable		50			-			-			-
Agency Bonds		1,676			24,998			-			-
Agency issued remics		4,674			23,603			-			-
Agency issued pools		110			16,985			7,887			1,106
Asset backed & CMO		-			904			-			-
Total	$	7,640		$	69,070		$	19,818		$	13,010
Tax Equivalent Yield		3.98	%		3.99	%		5.01	%		5.76	%

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 March 31, 2005, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our stockholders’ equity. As of the first quarter ended 2005, the amortized cost and market value of the securities from each such issuer are as follows:

Index

(in thousands)	Book Value	Market Value
Fannie Mae	$ 28,672	$ 28,179
FHLMC*	$ 42,559	$ 41,807
FHLB**	$ 9,250	$ 9,179

* Federal Home Loan Mortgage Corporation

** Federal Home Loan Bank

At March 31, 2005 and December 31, 2004, First Security had no federal funds sold, a decrease of $4.7 million from our March 31, 2004 balance. The decrease resulted from strong loan demand and our efforts to invest a portion of these federal funds into liquid investment securities and loans to improve our average yield on earning assets.

As of March 31, 2005, First Security held $95 thousand in certificates of deposit at other FDIC insured financial institutions. First State Bank purchased these earning assets prior to its acquisition by First Security. We do not intend to renew the certificates upon maturity, but rather we will invest the funds in liquid investment securities.

Deposits and Other Borrowings

Deposits increased by 4.3% as of March 31, 2005 compared to December 31, 2004 and 21.8% compared to the same period in 2004 due to (1) our management team drawing customers away from other financial institutions, (2) our branching efforts which are discussed in “Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations - Statement of Financial Condition” and (3) our issuance of brokered CDs to fund our acquisition of Kenesaw Leasing and J&S Leasing. We believe that by improving our branching network, we will provide more convenient opportunities for customers to bank with us, and thus improve our core deposit funding. For this reason, in 2005 we plan to build five new branches. As a result of these future branches, we anticipate that our deposits will continue to increase throughout 2005.

Federal funds purchased and securities sold under agreements to repurchase were $28.2 million as of March 31, 2005, compared to $23.3 million and $12.2 million as of December 31, 2004 and March 31, 2004, respectively. The increase in fed funds purchased and repurchase agreements has been used as a source to fund the significant growth in the Company’s loan portfolio.

The following table details the maturities and rates of the term borrowings from the Federal Home Loan Bank of Cincinnati as of March 31, 2005.

Date

Type

Principal

Term

Rate

Maturity

1/8/2002

Fixed Rate Advance

500,000

48 months

5.04

1/6/06

1/10/2002

Fixed Rate Advance

500,000

48 months

5.00

1/10/06

1/15/2002

Fixed Rate Advance

500,000

48 months

4.77

1/13/06

1/17/2002

Fixed Rate Advance

500,000

48 months

4.90

1/17/06

2,000,000

Composite rate

4.93%

Liquidity

Liquidity refers to First Security’s ability to adjust its future cash flows to meet the needs of our daily operations. First Security relies primarily on management fees from FSGBank to fund its daily operations liquidity needs. First Security’s cash balance on deposit with FSGBank, which totaled approximately $4.5 million as of March 31, 2005, is available for funding activities for which FSGBank 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 FSGBank or use them in an acquisition in order to support continued growth.

Index

The liquidity of FSGBank refers to the ability or financial flexibility to adjust its 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 FSGBank 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 March 31, 2005, our liquidity ratio (defined as cash, due from banks, federal funds sold, and investment securities less securities pledged to secure liabilities divided by short-term funding liabilities less liabilities secured by pledged securities) was 18.1% (excluding anticipated loan repayments). As of December 31, 2004 and March 31, 2004, the liquidity ratios were 16.4% and 18.0% respectively.

FSGBank is a member of the Federal Home Loan Bank of Cincinnati and has attained borrowing capability secured by a blanket lien on its 1-4 family residential mortgage loan portfolio, as well as the commercial real estate loan portfolio. As of March 31, 2005, the outstanding term debt in FHLB borrowings was $2.0 million. See “Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Deposits and Other Borrowings.” FSGBank also used its borrowing capacity at FHLB to purchase a letter of credit that we pledged to the State of Tennessee Bank Collateral Pool. The letter of credit allows us to release investment securities from the Collateral Pool and thus improve our liquidity ratio. Additionally, FSGBank could increase its borrowing capacity at FHLB, subject to more stringent collateral requirements, by pledging loans other than 1-4 family residential mortgage and commercial real estate loans. As of March 31, 2005 our unused borrowing capacity (using 1-4 family residential mortgage and commercial real estate loans) at FHLB was $33.0 million. FHLB maintains standards for loan collateral files. Therefore, our borrowing capacity may be restricted if our collateral file has exceptions, such as expired property insurance.

FSGBank also had unsecured federal funds lines in the aggregate amount of $82.5 million at March 31, 2005 under which it can borrow funds to meet short-term liquidity needs. Another source of funding is loan participations sold to other commercial banks (in which we retain the service rights). As of quarter end, we had $9.6 million in loan participations sold. FSGBank may continue to sell loan participations as a source of liquidity. An additional source of short-term funding would be to pledge investment securities against a line of credit at a commercial bank. As of quarter-end, we had no borrowings against our investment securities, except for repurchase agreements and public-fund deposits attained in the ordinary course of business. During 2004 First Security entered the brokered deposits market as a source of funding, generating approximately $65 million in new monies in order to fund additional interest earning assets, specifically the acquisition of Kenesaw Leasing and J&S Leasing. As of March 31, 2005 we had $74.7 million in brokered CDs outstanding with a weighted average remaining life of approximately 15 months, a weighted average coupon rate of 2.98% and a weighted average all-in cost (which includes fees paid to deposit brokers) of 3.19%. Our certificates of deposit greater than $100 thousand were generated in FSGBank’s communities and are considered relatively stable. Management believes that FSGBank’s liquidity sources are adequate to meet its operating needs.

First Security also has contractual cash obligations and commitments, which included certificates of deposit, other borrowings, operating leases, and loan commitments. Unfunded loan commitments totaled $177.8 million at March 31, 2005. The following table illustrates our significant contractual obligations at March 31, 2005, by future payment period.

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CONTRACTUAL OBLIGATIONS

		Total		Less than One Year		One to Three Years		Three to Five Years		More than Five Years
		(Dollar amounts in thousands)
Certificates of deposit	(1)	$	344,484	$	217,113	$	111,360	$	16,011	$	-
Federal funds purchased and securities sold under agreements to repurchase	(2)		28,279		28,279		-		-		-
FHLB borrowings	(3)		2,000		2,000		-		-		-
Operating lease obligations	(4)		6,471		984		1,530		1,392		2,565
Purchase obligations - investment securities	(5)		2,988		2,988		-		-		-
Note payable	(6)		147		10		24		27		86
Total		$	384,369	$	251,374	$	112,914	$	17,430	$	2,651

_______________

¹Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. For more information regarding certificates of deposit, see “Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operation - Deposits and Other Borrowings.”

²We expect securities repurchase agreements to be re-issued and, as such, do not necessarily represent an immediate need for cash.

³ For more information regarding FHLB borrowings, see “Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Financial Statements.”

⁴ Operating lease obligations include existing and future property and equipment non-cancelable lease commitments.

⁵ In March 2005 we purchased four securities with a settlement date in April 2005. For more information regarding investment securities, see “Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operation - Investment Securities and Other Earning Assets.”

⁶ This note payable is a mortgage on the land of our branch facility located at 2905 Maynardville Highway, Maynardville, Tennessee.

Net cash used in operations during the first quarter of 2005 totaled $1.4 million compared to net cash provided by operations of $2.4 million for the same period in 2004. The change can be attributed to an increase in other non-earning assets including other real estate and repossessions combined with the purchase of bank owned life insurance, offset by an increase in earnings and the provision for loan losses. Net cash used in investing activities increased to $24.4 million as compared to $14.1 million primarily due to the increase in the loan portfolio and proceeds from sales of other real estate. Net cash provided by financing activities increased significantly quarter over quarter to $31.0 million compared to $2.1 million in 2004. The increase is due to the increase in deposits as a result of our branching activities combined with the issuance of brokered CD’s.

Capital Resources

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Comptroller of the Currency and the Federal Reserve, the primary federal regulators for FSGBank and First Security, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. First Security and FSGBank both maintain capital levels exceeding the minimum capital levels required in addition to exceeding those capital requirements for well capitalized banks and holding companies under applicable regulatory guidelines.

The following table compares the required capital ratios maintained by First Security and FSGBank (including its predecessor institutions for prior years).

Index

March 31, 2005	Well Capitalized	Adequately Capitalized	First Security	FSGBank

Tier I capital to risk adjusted assets	6.0%	4.0%	10.7%	9.2%
Total capital to risk adjusted assets	10.0%	8.0%	11.9%	10.4%
Leverage ratio	5.0%	4.0%	9.4%	8.5%

December 31, 2004

Tier I capital to risk adjusted assets	6.0%	4.0%	11.2%	10.0%
Total capital to risk adjusted assets	10.0%	8.0%	12.4%	11.2%
Leverage ratio	5.0%	4.0%	9.9%	8.8%

March 31, 2004

Tier I capital to risk adjusted assets	6.0%	4.0%	12.8%	11.2%
Total capital to risk adjusted assets	10.0%	8.0%	13.9%	12.3%
Leverage ratio	5.0%	4.0%	10.7%	9.3%

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 subsidiary, opportunities for growth and expansion, the need for funds of our subsidiary, 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. If the Federal Reserve believes that the rate of inflation is likely to increase to undesired levels, its method of curbing inflation in the past has been to increase the interest rate charged on short-term federal borrowings.

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.

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RECENT ACCOUNTING PRONOUNCEMENTS

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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," "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. 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 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 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.

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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 the end of the quarter, an exposure to falling rates and a benefit from rising rates. More specifically, for the period ended March 31, 2005 the model forecasts a decline in net interest income of $967 thousand or 10.69%, as a result of a 200 basis point decline in rates. The model also predicts a $971 thousand increase in net interest income, or 10.74% 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 March 31, 2005. The numbers are based on a static balance sheet, and the chart 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.

	INTEREST RATE RISK INCOME SENSITIVITY SUMMARY
(Dollar amounts in thousands)		DOWN 200 BP			CURRENT			UP 200 BP
Net interest income		$	8,078		$	9,045		$	10,016
$ change net interest income			(967	)		-			971
% change net interest income			-10.69	%		0.00	%		10.74	%

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, reinvestments of paydowns and maturities of loans, investments and deposits, and other assumptions. 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 management might take in responding to or anticipating changes in interest rates.

First Security uses the Sendero Vision Asset/Liability system which is a comprehensive interest rate risk measurement tool that is widely used in the banking industry. Generally, it provides the user with the ability to more accurately model both static and dynamic gap, economic value of equity, duration, and income simulations using a wide range of scenarios including interest rate shocks and rate ramps. The system also has the capability to model derivative instruments such as interest rate swap contracts.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Annual Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.

There have been no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As discussed in Management’s Report on Internal Controls over Financial Reporting in the amended 10-K filed May 2, 2005, the Company elected to exclude from the scope of its assessment of internal control over financial reporting as of December 31, 2004, Kenesaw Leasing, Inc. and J&S Leasing, Inc. (the “Leasing Companies”). During the first quarter of 2005, we conducted an internal audit of the Leasing Companies in which potential deficiencies were identified in internal controls over financial reporting. Management is promptly remediating the potential deficiencies and will conduct additional testing in the second quarter of 2005. At this time management is not aware of any facts that lead it to believe any of the potential deficiencies will constitute, individually or collectively, a material weakness in our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 6. Exhibits

(a)	Exhibits:

		EXHIBIT NUMBER	DESCRIPTION


		31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

		31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

		32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934

		32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934

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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)

May 9, 2004	/s/ Rodger B. Holley
	Rodger B. Holley
	Chairman, Chief Executive Officer & President

May 9, 2004	/s/ William L. Lusk, Jr.
	William L. Lusk, Jr.
	Secretary, Chief Financial Officer &
	Executive Vice President