FSG Bank Says Losses "Raise Possible Doubt" That It Can Stay In Operation

Analyst Sees "Very Few Strategic Options" For The Bank

Thursday, December 16, 2010

Chattanooga-based FSG Bank said in its latest quarterly report that it "has experienced losses from operations during the last two years that raise possible doubt as to its ability to continue as a going concern."

FSG Bank reported a net loss to common stockholders of $34.5 million for the nine-month period ended Sept. 30.

The report says, "The company’s ability to continue as a going concern is contingent upon its ability to devise and successfully execute a management plan to develop profitable operations, satisfy the requirements of the regulatory actions detailed below, and lower the level of problem assets to an acceptable level."

It says bank management "has developed strategic and capital plans, which include, but are not limited to: (1) reorganizing management into a line of business structure, (2) restructuring credit and lending functions with new policies and centralized processes, (3) reducing adversely classified assets, (4) maintaining a Tier 1 leverage capital ratio of not less than nine percent, (5) maintaining a total risk-based capital ratio of not less than 13 percent, (6) maintaining an adequate allowance for loan losses and (7) actively working to maintain appropriate liquidity while reducing reliance on non-core sources of funding."

Bank officials said, "The company continues to operate in a difficult environment and has been significantly impacted by the unprecedented credit and economic market turmoil, as well as the recessionary economy. Deterioration in the Tennessee and Georgia commercial and residential real estate markets and related declines in property values in those markets has had a negative impact on our operating results since the latter half of 2008."

Analyst Michael Rose of the Raymond James firm on Wednesday downgraded FSG's shares to "underperform".

He said, "We see very few strategic options for the company. Hence, we expect shares to underperform unless it is able to raise capital, which would likely be highly dilutive, or if it were to sell itself."

Analyst Rose said if the bank were to sell, it is believed the price would come "at a discount from current levels".

The board of directors of First Security Group, Inc. in early December appointed Ralph E. “Gene” Coffman Jr. as president and chief operating officer of the company. Rodger B. Holley served as the president of the company prior to the appointment of Mr. Coffman. Officials said Mr. Holley would remain as chairman of the board and chief executive officer of the company.

In July, the size of the bank's board of directors was increased to six. Ralph E. Mathews Jr. and Bill Hall were added to the board. Mr. Hall is the former owner of the Town and Country Restaurant.

In September, First Security Group (parent of FSG Bank) entered a written agreement with the Federal Reserve Bank of Atlanta, requiring it to submit a capital plan and its board to take steps to ensure FSG Bank complies with a previous regulatory action from the Office of the Comptroller of the Currency.

On Sept. 7, the bank entered into a written agreement with the Federal Reserve Bank of Atlanta, the company’s primary regulator.

The agreement prohibits the company from declaring or paying dividends without prior written consent of the Federal Reserve. The company is also prohibited from taking dividends, or any other form of payment representing a reduction of capital, from the bank without prior written consent.

Within 60 days of the agreement, the company is required to submit to the Federal Reserve a written plan designed to maintain sufficient capital at the company and the bank.

On April 28, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, FSG Bank agreed to the issuance of a Consent Order by the Office of the Comptroller of the Currency.

The bank and the OCC agreed as to the areas of the bank’s operations that warrant improvement and a plan for making those improvements. The Order required the bank to develop and submit written strategic and capital plans covering at least a three-year period. The bank is required to review and revise various policies and procedures, including those associated with concentration management, the allowance for loan and lease losses, liquidity management, criticized asset, loan review and credit.

Within 120 days of the effective date of the order, the bank is required to achieve and thereafter maintain total capital at least equal to 13 percent of risk-weighted assets and Tier 1 capital at least equal to nine percent of adjusted total assets. As of Sept. 30, the first financial reporting period subsequent to the 120 day requirement, the bank’s total capital to risk-weighted assets was 12.93 percent and the Tier 1 capital to adjusted total assets was 7.43 percent. The bank has notified the OCC of the non-compliance.

During the third quarter of 2010, the OCC requested additional information and clarifications to the bank’s submitted strategic and capital plans. The bank is currently preparing the response and anticipates submitting the response during the fourth quarter of 2010.

Because the order established specific capital amounts to be maintained by the bank, the bank may not be considered better than “adequately capitalized” for capital adequacy purposes, even if the bank exceeds the levels of capital set forth in the order, the report says.

As an adequately capitalized institution, the bank may not pay interest on deposits that are more than 75 basis points above the rate applicable to the applicable market of the bank as determined by the FDIC. Additionally, the bank may not accept, renew or roll over brokered deposits without prior approval of the FDIC.

The company’s board of directors has elected on recent occasions to suspend the dividend on the company’s common stock.

On July 22, the company filed with the state of Tennessee, Articles of Amendment to the Charter of Incorporation to increase the number of authorizes shares of common stock from 50 million to 150 million, in accordance with shareholder approval obtained on June 30.

The company released has released 22,189, 70,701 and 65,655 shares from the Employee Stock Ownership Plan for the employer matching contribution. Prior to July 1, the employer match was 100 percent of the employee’s contribution up to six percent of the employee’s compensation for the first six months of 2010. Effective July 1, the six percent employer match was reduced to one percent of the employee’s compensation for the remainder of the plan year.

First Security Group, Inc. is a bank holding company headquartered in Chattanooga with $1.2 billion in assets as of Sept. 30, 2010. Founded in 1999, First Security’s community bank subsidiary, FSGBank, N.A. has 37 full-service banking offices, including the headquarters, along the interstate corridors of eastern and middle Tennessee and northern Georgia and 325 full-time equivalent employees. In Dalton, Ga., FSGBank operates under the name of Dalton Whitfield Bank; along the Interstate 40 corridor in Tennessee, FSGBank operates under the name of Jackson Bank & Trust. FSGBank provides retail and commercial banking services, trust and investment management, mortgage banking, financial planning and internet banking services.

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