First Security Group Announces Third Quarter Profits

  • Tuesday, October 28, 2014

First Security Group, Inc. has reported net income for the third quarter of 2014 of $927,000, or $0.01 per basic and diluted share, and $1.5 million for the nine months ended Sept. 30, or $0.02 per basic and diluted share.

Financial Highlights 

Net income of $927,000 for the third quarter, a $314,000 or 51 percent, improvement from the second quarter and a $2.4 million improvement from the third quarter of 2013. 

Loans increased by $83.6 million, or 14.3 percent (19.2 percent annualized) from Dec. 31, 2013 to Sept. 30. Additionally, FSG has transferred $86.3 million of loans into the held-for-sale category during 2014 for net loan production of $169.9 million, or 29.1 percent (39.0 percent annualized) of the 2013 year-end balance of $583.1 million. 

Average pure deposits increased by $38.3 million, or 8.4 percent (33.4 percent annualized) comparing the second and third quarters of 2014. 

“Our goal for the near- and long-term is to enhance our profitability each and every quarter," said Michael Kramer, First Security's president and chief executive officer.  "We made additional progress building a balance sheet that will produce sustainable, predictable and consistently improving earnings.  In the current interest rate environment, we have placed a significant emphasis on growing our deposit base to support our loan growth and we are pleased with the progress achieved during the quarter.” 

Net Interest Income

For the third quarter of 2014, net interest income improved by $942,000, or 12.5 percent, to $8.5 million compared to $7.5 million for the second quarter of 2014. Interest income on loans, including fees, increased by $1.1 million while total interest income increased by $937,000 due to the continued reduction in the investment security portfolio. Included in the increase in interest income on loans is approximately $650 thousand of discount accretion as a result of the resolution of various loans purchased at discounts. The net interest margin improved by 30 basis points in the third quarter of 2014 from 3.30 percent to 3.60 percent compared to the second quarter. Excluding the discount accretion, the net interest margin for the third quarter improved by 3 basis points to 3.33 percent. 

Loans 

Loans totaled $666.7 million as of Sept. 30, compared to $659.5 million as of June 30. During the third quarter, approximately $52.7 million of loans were transferred into the held-for-sale category. Including the transfer into the held-for-sale category, net loan production totaled $59.9 million during the third quarter of 2014. 

“During the third quarter, we achieved significant loan production from our primary markets of Chattanooga and Knoxville as well as our TriNet line of business,” said John Haddock, First Security’s EVP and chief financial officer. “We will continue to evaluate and sell a portion of our TriNet production to capitalize on market opportunities and manage certain lending concentrations. We expect to realize solid gains on loan sales during the fourth quarter from the $50 million held-for-sale at the end of the quarter.” 

Deposits 

First Security continued to improve its deposit mix to reduce the overall cost of deposits from 0.59 percent for the second quarter of 2014 to 0.55 percent for the third quarter of 2014. Average transaction deposits accounted for 56.8 percent of average total deposits during the third quarter, up from 54.1 percent for the second quarter of 2014, totaling $493.7 million as compared to $455.4 million. Average core deposits, defined as transaction accounts plus retail CDs, increased to 75.3 percent of average total deposits as compared to 74.0 percent for the second quarter. Brokered CDs declined by $14.7 million during the third quarter, while customer deposits placed and reciprocated through the Promontory products increased by $11.6 million. 

Non-Interest Income

Non-interest income totaled $2.8 million for the third quarter of 2014 compared to $3.0 million for the second quarter of 2014. FSG reported $254,000 in net gains on sales of loans during the third quarter, or a decline of $196,000, as compared to $450,000 in the second quarter of 2014. This represents the aggregate gains from First Security’s SBA lending department as well as gains from certain commercial real estate loans that were classified as held-for-sale as of June 30. As of Sept. 30, loans held-for-sale totaled $46.9 million, which are expected to be sold for gains during the fourth quarter. Mortgage banking income increased by $183,000 to $462,000 for the third quarter, assisted by a sale of long-term fixed rate mortgages previously held-for-investment. 

Non-Interest Expense 

Non-interest expense increased by $121,000 to $10.2 million for the third quarter of 2014 as compared to the second quarter of 2014. Total non-performing asset costs, including write-downs, net gains or losses and associated expenses, increased by $135,000 during the third quarter of 2014. As of Sept. 30, full-time equivalent employees remained steady at 264 as compared June 30, and declined from the 313 as of Sept. 30, 2013. Salary expense declined slightly to $5.2 million in the third quarter as compared to the second quarter. 

Asset Quality 

First Security recorded provision expense of $11,000 to adjust the allowance for loan losses to FSG’s current estimate of $8.6 million as of Sept. 30. Net charge-offs during the third quarter totaled $664,000, of which approximately $500,000 was a release of a previously recorded specific reserve within the allowance. The ratio of the allowance to total loans declined from 1.43 percent as of June 30, to 1.29 percent as of Sept. 30. Total non-performing assets (“NPAs”) declined by $1.8 million to improve the NPA to total assets ratio from 1.35 percent to 1.16 percent comparing June 30 to Sept. 30. 

Capital 

Stockholders’ equity as of Sept. 30 totaled $88.0 million, a $1.4 million increase from June 30. As of Sept. 30, book value per share increased to $1.32 per share compared to $1.30 per share as of June 30 and $1.26 per share as of Dec. 31, 2013. 

“The banking teams that joined FSG this past spring are producing great results in new loan and deposit relationships,” said Mr. Kramer. “We believe that our East Tennessee and North Georgia markets will enable us to build a strong community bank that will provide our shareholders with solid returns.  While we are pleased with our progress and proud of our improvement, we are still a long way from satisfied with the level of our earnings.”

 

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