First Security Group, Inc., parent firm of FSG Bank, announced Tuesday that it has entered into definitive stock purchase agreements with institutional investors as part of an approximate $90 million recapitalization. Four investors will lead the recapitalization, which also includes a conversion of the bank’s TARP CPP preferred stock to common stock and sale of under- and non-performing loans. The lead investors will each invest approximately $9 million to acquire pro-forma ownership of approximately 9.9 percent of the total outstanding common stock, respectively. The recapitalization is priced at $1.50 per share and was unanimously approved by the company’s board of directors.

“Today marks an important milestone for First Security Group and FSGBank and reflects the culmination of our efforts over the last 15 months,” said Michael Kramer, president and chief executive officer of First Security. “We have rebuilt our executive management team with talented and experienced bankers, solidified our board with four new directors, three of which are former bank CEOs, and initiated the execution of our strategic plan. We appreciate the confidence and support of our lead investors. Their commitment to our recapitalization will enable us to strengthen our balance sheet and provide growth capital to complete the transformation of FSGBank into a banking franchise that our clients, communities and shareholders can be proud of.

“We are also pleased to announce that our current shareholders will have the opportunity to buy additional shares in First Security at the same price as the recapitalization through a follow-on rights offering.”

The bank plans to downstream a majority of the net proceeds to FSGBank in order to support future balance sheet growth as well as fund the losses associated with the recently completed loan sale. The combined effects of the additional capital and the loan sale are expected to result in an improved risk profile, enhanced profitability and compliance with most, if not all, aspects of the regulatory orders of the company and FSGBank.

The recapitalization is subject to a number of conditions, including the lead investors receiving the necessary bank regulatory determinations. On Monday, the bank executed definitive stock purchase agreements, including subscription agreements to accredited individual investors, totaling in excess of $90 million. Under the terms of the recapitalization, First Security is permitted to conduct a $5-million follow-on rights offering after the closing of the recapitalization that would allow existing shareholders to purchase shares of common stock at the same price as the recapitalization.

Capital Structure and Tax Preservation Plan

The recapitalization is structured to preserve the bank’s net operating losses under Section 382 of the Internal Revenue Code. As announced on Oct. 30, 2012, First Security enacted a Tax Benefit Preservation Plan to ensure the anticipated recapitalization was not impacted by changes in ownership between the enacting of the preservation plan and the closing of the recapitalization.

“The ability to organize the capital structure to fully preserve our net operating losses was an important component of our value proposition of the recapitalization,” said John R. Haddock, executive vice president and chief financial officer of First Security. “As of Dec. 31, 2012, the valuation allowance against our net deferred tax assets, primarily consisting of the NOLs, exceeded $50 million. This $50 million valuation allowance can be released back into earnings and capital once profitability is restored and we achieve consistent and predictable earnings.”

TARP CPP Restructuring

In connection with the recapitalization, the bank negotiated with the U.S. Treasury a restructuring of the bank’s preferred stock issued under the capital purchase program. The bank will issue common stock to the Treasury for satisfaction of the par value of the preferred stock, accrued dividends and common stock warrants previously issued to the Treasury. The bank has deferred payment on the preferred stock dividends since January 2010. Treasury will contemporaneously sell the common stock to investors identified by the bank.

Loan Sale

On Dec. 10, 2012, the bank entered into an asset purchase agreement with a third party to sell certain loans. During the fourth quarter of 2012, the bank identified $36.2 million of under- and non-performing loans to sell and recorded a $13.9-million loss to reduce the loan balances to the expected net proceeds. The bank completed the loan sale during February. As a result of the loan sale, the bank’s non-performing assets as a percentage of total assets was 2.36 percent as of Dec. 31.