First Security Group, Inc. (NASDAQ: FSGI), parent company of Chattanooga-based FSG Bank, on Tuesday reported net income for the second quarter of 2014 of $613,000, or $0.01 per basic and diluted share, as compared to a loss of $45,000 in the first quarter of 2014, or $0.00 per basic and diluted share. Loans increased by $54.7 million, or nine percent (36.2 percent annualized), since March 31, 2014 and $117.5 million, or 21.7 percent, since June 30, 2013.
“We are pleased to have achieved core profitability in the second quarter. We believe that we have reached an inflection point in our recovery and that barring any unforeseen events, First Security is on a path to healthy profitability built on a strong, and improving, balance sheet,” said Michael Kramer, First Security’s president and chief executive officer. “Our loan growth, combined with improvements in our deposit mix and enhancements to our non-interest income, are all on positive trajectories to produce both sustainable and increasing profitability.”
For the second quarter of 2014, net interest income improved by $620 thousand, or nine percent, to $7.5 million compared to $6.9 million for the first quarter of 2014. Interest income on loans, including fees, increased by $656 thousand while total interest income increased by only $514,000 due to reduction in the investment security portfolio. During the first and second quarters of 2014, First Security sold approximately $64.5 million of lower yielding investment securities to redeploy into loans. Total interest expense improved by $106 thousand through reductions in the cost of deposits partially offset by the increase in total deposits. For the second quarter of 2014, the net interest margin improved by 9 basis points to 3.30 percent compared to 3.21 percent in the first quarter of 2014.
Loans totaled $659.5 million as of June 30, 2014, a $54.7 million increase, or 9.0% (36.2% annualized), from the March 31, 2014 total of $604.9 million, and a $76.4 million increase, or 13.1% (26.1% annualized), from the December 31, 2013 total of $583.1 million. The main categories of loan growth during the first six months of 2014 included: commercial real estate by $49.6 million, or 18.9%; construction and land development by $12.8 million, or 32.2%; and commercial loans by $10.6 million, or 19.2%. The growth in commercial real estate is primarily reflective of First Security’s Tri-Net Direct line of business, which provides interim and long-term financing to professional developers and private investors of commercial real estate on long-term leases to tenants that are investment grade or have investment grade attributes.
During the second quarter, First Security continued to improve its deposit mix to reduce the overall cost of deposits from 0.65% for the first quarter of 2014 to 0.59% for the second quarter of 2014. Average pure deposits, defined as transaction accounts, for the second quarter of 2014 accounted for 54.1% of average total deposits as compared to 53.0% for the first quarter of 2014. As of June 30, 2014, pure deposits totaled $485.2 million which is $29.8 million greater than the average balance during the second quarter as solid growth was achieved late in the second quarter. Average core deposits, defined as transaction accounts plus retail CDs, remained steady at 74.0% of average total deposits during the second quarter. Brokered deposits increased by a net $14.5 million from March 31, 2014 to June 30, 2014 to $87.0 million. This increase includes $17.7 million of customer deposits placed and reciprocated through FSG's CDARS® and Insured Cash Sweep® products.
Non-interest income totaled $3 million for the second quarter of 2014 compared to $2.6 million for the first quarter of 2014. FSG reported $450 thousand in net gains on sales of loans during the second quarter as compared to $22 thousand in the first quarter of 2014. This represents the aggregate gains from First Security’s SBA lending department as well as gains from $12.5 million of the $33.6 million of commercial real estate loans that were transferred to held-for-sale as of March 31, 2014. First Security expects to sell the remaining $21.1 million during the third quarter of 2014. Additionally, income from mortgage banking increased by $99 thousand to $279 thousand in the second quarter of 2014.
“Since the low water mark for loan balances on September 30, 2013, we have increased our loan portfolio by nearly $125 million in the last nine months,” said John Haddock, First Security’s EVP and Chief Financial Officer. “In addition to the loan growth, we realized $450 thousand in gains from loan sales during the quarter. Given the specialized nature of these loans, and our embedded capacity, we believe these gains will prove to be recurring over time.”
Non-interest expense decreased by $344,000 to $10.1 million for the second quarter of 2014 as compared to the first quarter of 2014. Total non-performing asset costs, including write-downs, net gains or losses and associated expenses, declined by $295 thousand in the second quarter of 2014. As of June 30, 2014, full-time equivalent employees declined to 264 as compared to 275 as of March 31, 2014 and 327 as of June 30, 2013. Salary expense remained consistent in the second quarter as compared to the first quarter.
First Security recorded a $270,000 negative provision to adjust the allowance for loan losses to First Security’s current estimate of $9.4 million as of June 30, 2014. The ratio of the allowance to total loans declined from 1.52% as of March 31, 2014 to 1.43% as of June 30, 2014. Total non-accrual loans declined by $1.1 million, or 18.8%, to $4.9 million as of June 30, 2014 compared to March 31, 2014. NPAs to total assets as of June 30, 2014 improved to 1.35% compared to 1.42% as of March 31, 2014.
Stockholders’ equity as of June 30, 2014 totaled $86.6 million, a $1.9 million increase from March 31, 2014. As of June 30, 2014, book value per share increased to $1.30 per share compared to $1.27 per share as of March 31, 2014.
“The recent announcement of the $600 million Volkswagen expansion in Chattanooga that includes an estimated 2,000 direct and 3,600 indirect jobs as well as the South’s first automotive research and development center speaks volumes to the economic activity and growth potential within our east Tennessee markets,” said CEO Kramer. “We believe that we are uniquely positioned to build a successful community bank that provides solid returns to its shareholders while serving the banking needs of its communities.”