First Security Group, Inc. (NASDAQ: FSGI), reported a net loss available to common shareholders of $3.1 million, or $0.20 per diluted share for the fourth quarter of 2009, and a net loss of $35 million for 2009. Full year results included a non-cash goodwill impairment charge of $24.8 million, net of tax, in the third quarter of 2009. Excluding the goodwill impairment charge, the net loss was $10.2 million for 2009.

For the fourth quarter of 2009, First Security recorded a $4.8 million provision for loan and lease losses as the Company continues to employ a conservative approach to address the existing and emerging credit issues related to the national and regional economic slowdown and the corresponding increases in unemployment.

-- Capital: First Security is committed to maintaining strong capital levels and continues to remain significantly above the well-capitalized regulatory standards throughout this economic cycle. As of December 31, 2009, First Security's tangible capital ratio was 10.33 percent. In the fourth quarter, First Security engaged a nationally recognized consulting firm to complete a capital stress test that simulated an economic downturn scenario more adverse than the current economy. Test results indicate that First Security's tangible capital ratio, absent additional capital, would remain strong at 8.10 percent.
-- Allowance for Loan and Lease Losses and Asset Quality: First Security's allowance for loan and lease losses increased to $26.5 million, representing 2.78 percent of outstanding loans compared to 2.66 percent in the previous quarter. The increase in allowance follows an extensive loan review and an increase in total non-accrual loans and leases in the fourth quarter. Non-performing assets as of December 31, 2009 totaled
65.4 million, or 4.83 percent of total assets, compared to $47.7 million, or 3.97 percent, as of September 30, 2009.
-- Deposit Growth and Liquidity: First Security grew its in-market customer deposits by $22.5 million, or 10.9 percent annualized, to $842.9
million, during the fourth quarter of 2009; while all deposit categories
increased, the growth was led by money market accounts, non-interest
bearing demand deposit accounts and non-brokered jumbo CDs. In addition
and in light of economic conditions, First Security locked in historically attractive low-cost longer term brokered deposits in order to build a liquidity fortress.

"By all measures, 2009 was a difficult year for the banking industry, and for First Security. However, our strong capital positions us favorably compared to peers to manage problem assets aggressively and to weather the downturn. In the fourth quarter, we completed several strategic initiatives. Most importantly, we successfully conducted a comprehensive capital stress test, completed an extensive loan review and established a healthy liquidity reserve," said Rodger B. Holley, Chairman, CEO and President of First Security.

"Given the difficult economic conditions, increasing unemployment and subsequent credit costs, it also made sense for us to make some changes to our credit structure that will allow us to maintain local knowledge of our markets while strengthening our centralized oversight and control, maintaining our commitment to superior customer service and simultaneously managing overall asset quality and interest rate exposure."

Holley added, "We believe that taking these steps now will better position us for greater opportunities of growth and expansion in the future."

For the fourth quarter of 2009, net interest income totaled $10.6 million, a decline of 3.0 percent on a linked quarter basis and a decline of less than one percent from the fourth quarter of 2008. In 2009, net interest income totaled $42.2 million for the year, a 6.7 percent decline from full year 2008, due partly to the Federal Reserve's interest rate cuts, a strategic reduction of the loan portfolio and a rising level of non-accrual loans.

Non-interest income for the fourth quarter of 2009 declined by $234 thousand, or 8.5 percent, on a linked quarter basis to $2.5 million; the decrease was due largely to a decline in mortgage origination fees. In the fourth quarter of 2009, trust income increased to $204 thousand, an increase of 6.8 percent over the third quarter of 2009. For the full year 2009, non-interest income totaled $10.3 million, compared to $11.7 million for 2008.

In 2009, non-interest expense totaled $11.5 million for the fourth quarter, and $68.2 million for the year. In the third quarter of 2009, a non-cash goodwill impairment charge of $27.2 million was incurred. Excluding this goodwill impairment charge, non-interest expense would have been $41.1 million for 2009, a slight increase from the $40.4 million incurred in 2008. Consistent with First Security's focus on controlling costs whenever possible, a number of categories of non-interest expense in the fourth quarter of 2009 declined on a linked quarter basis, including occupancy, furniture and equipment, data processing and printing and supplies. The number of full-time equivalent employees declined to 347 as of December 31, 2009, from 361 a year ago and 348 at the end of the third quarter of 2009.

Economic uncertainty, higher unemployment rates and reduced consumer spending have created financial challenges for many owner-managed businesses and individuals, which have combined to result in an increase in non-performing loans. In the fourth quarter, First Security engaged an independent consulting firm to conduct an additional review of its loan portfolio. The primary purpose of the loan review was to evaluate individual credits for compliance with credit and underwriting standards, and to assess the potential impairment of certain credits in which First Security might experience additional risk of loss. The consultants reviewed over 50 percent of the entire loan portfolio. Combining this additional evaluation with existing loan review processes, approximately 71 percent of the entire loan portfolio was reviewed in the last few months of the year. The efforts of these combined loan reviews included approximately 85 percent of commercial real estate loans and 95 percent of construction and development loans. The results of these reviews are reflected in the year-end financial statements.

First Security is aggressively acknowledging and resolving problem credits. All non-accrual loans are reviewed for potential impairment and shortfalls in collateral are reserved accordingly. From September 30, 2009, non-accruals increased $14.0 million to $45.5 million at the end of the fourth quarter of 2009. The largest non-accrual loan categories were commercial and industrial (C&I) loans with $15.4 million, construction and development (C&D) with $13.7 million, and commercial real estate (CRE) with $6.2 million. Approximately 37.0 percent of First Security's year-end non-accrual loans are current with respect to contractual principal and/or interest payments. Also during the fourth quarter of 2009, other real estate owned increased $1.8 million to $16.0 million, and repossessed assets increased $1.8 million to $3.9 million.

As of December 31, 2009, the allowance for loan and lease losses was $26.5 million, or 2.78 percent of total loans, compared to $25.7 million, or 2.66 percent of total loans, as of September 30, 2009. As of December 31, 2009, approximately 83.1 percent of the allowance was allocated to loan pools based on common characteristics, whereas the remainder was allocated to impaired loans where the loss is deemed probable.

Net charge-offs totaled $4.0 million, or 1.68 percent of average loans, during the fourth quarter of 2009, compared to $2.9 million, or 1.18 percent, during the linked quarter. Additional detail on asset quality is available in the supplemental data following the financial highlights.

First Security continues its strategic focus of reducing certain balance sheet risks while also supporting economic growth in the region by meeting the loan needs of credit worthy businesses and consumers. During the fourth quarter of 2009, loan balances declined by $12.3 million, or 1.3 percent (5.1 percent annualized). This decline was concentrated in C&D loans of $23.4 million. First Security continues to decrease its C&D exposure and anticipates that by the end of the first quarter of 2010, the remaining exposure to this loan category will be further reduced.

First Security's loan portfolio consists of in-market loans originated throughout its branch network. The loan portfolio is well diversified with 29.6 percent in 1-4 family residential, 27.3 percent in CRE, 16.0 percent in C&D and 15.4 percent in C&I. Additional detail on the loan portfolio is available in the supplemental data following financial highlights.

At December 31, 2009, total deposits were $1.2 billion, an increase of 16.0 percent (64.1 percent annualized), compared to the end of the third quarter of 2009. Core deposits, which include non-interest bearing demand deposit accounts, interest-bearing demand deposit accounts, savings and money markets and certificates of deposit of less than $100 thousand, increased to $635.5 million at the end of the fourth quarter of 2009, an increase of $18.5 million from September 30, 2009. Savings and money market accounts increased by 7.9 percent (31.7 percent annualized) to $177.5 million, non-interest bearing demand deposit accounts increased by 3.0 percent (11.9 percent annualized) to $151.2 million and non-brokered jumbo CDs increased by 1.9 percent (7.7 percent annualized) to $207.5 million.

During the fourth quarter of 2009, brokered certificates of deposit increased by $140.9 million, or 115.9 percent, to $262.5 million from the third quarter of 2009 as a result of an initiative to strengthen First Security's liquidity base and to take advantage of historically low-cost longer term deposits.

As of December 31, 2009, First Security maintained capital levels significantly exceeding the well-capitalized regulatory standards. The tangible equity to tangible assets ratio as of December 31, 2009 was 10.33 percent. Stockholders' equity at the end of the third quarter of 2009 was $141.6 million, and common stockholders' equity was $110.3 million. In the fourth quarter, First Security filed a registration statement on Form S-1 to maintain flexibility in accessing capital markets. While First Security has no immediate plans to commence a stock offering, it will continue to monitor the current market environment.

Also in the fourth quarter of 2009, First Security engaged a nationally recognized, independent consulting firm to complete a stress test of its loan portfolio to assess the potential impact of future deterioration in asset quality on the capital position based on different economic scenarios. The method for stress testing the portfolio was based on the technique used by the federal regulators to evaluate the nation's largest 19 financial institutions in the Supervisory Capital Assessment Program (SCAP) and further tailored to reflect the risk inherent in First Security's portfolio and markets. While First Security was not one of the banks subject to the SCAP stress test, management believed that it was prudent risk management to conduct a similar test on its loan portfolio. The results from this stress test are not a prediction of the most likely scenario that exists for First Security, but rather simulate an estimate of losses that may occur in an economic downturn scenario that is more severe than what is currently being experienced. The results of the stress test, assuming First Security experiences the credit losses projected under a "more adverse" scenario, indicate that First Security's capital ratios, absent additional capital, would decline to 9.98 percent total risk-based, 8.65 percent Tier 1 risk-based, and 7.50 percent Tier 1 leverage.

"With our current proactive measures to fortify our balance sheet, enhance our credit structure and reduce risk in our loan portfolio, we remain focused on strategic initiatives to improve our position of strength," Mr. Holley concluded. "We target both consumers and small to medium-sized owner-operated businesses in our markets and have developed a localized approach that focuses on providing superior customer service through our employees who are relationship-oriented and committed to their respective communities. Through this strategy, we remain focused on our long term objectives to grow our business, expand our customer base, deepen our customer relationships, and improve our profitability."