XNAS:FSGI First Security Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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FSGI-2012.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
_________________________________________________
FORM 10-Q
_________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from              to             .
COMMISSION FILE NO. 000-49747
_________________________________________________
FIRST SECURITY GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
_________________________________________________
Tennessee
58-2461486
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
531 Broad Street, Chattanooga, TN
37402
(Address of principal executive offices)
(Zip Code)
 
(423) 266-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Not Applicable
 
 
(Former name, former address, and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
ý
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value:
1,772,342 shares outstanding and issued as of August 10, 2012



First Security Group, Inc. and Subsidiary
Form 10-Q
INDEX
 
 
 
Page
No.
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 



PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
 
 
June 30,
2012
 
December 31,
2011
 
June 30,
2011
(in thousands)
(unaudited)
 
 
(unaudited)
ASSETS
 
 
 
 
 
Cash and Due from Banks
$
8,768

 
$
8,884

 
$
9,713

Interest Bearing Deposits in Banks
182,944

 
249,297

 
213,678

Cash and Cash Equivalents
191,712

 
258,181

 
223,391

Securities Available-for-Sale
256,950

 
193,041

 
158,653

Loans Held for Sale
1,927

 
2,233

 
1,227

Loans
589,511

 
582,264

 
644,117

Total Loans
591,438

 
584,497

 
645,344

Less: Allowance for Loan and Lease Losses
19,600

 
19,600

 
22,485

Net Loans
571,838

 
564,897

 
622,859

Premises and Equipment, net
29,323

 
28,671

 
30,254

Intangible Assets
770

 
982

 
1,231

Other Real Estate Owned
20,280

 
25,141

 
27,486

Other Assets
41,675

 
43,988

 
44,547

TOTAL ASSETS
$
1,112,548

 
$
1,114,901

 
$
1,108,421



(See Accompanying Notes to Consolidated Financial Statements)
1


First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets

 
 
June 30,
2012
 
December 31,
2011
 
June 30,
2011
(in thousands, except share and per share data)
(unaudited)
 
 
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deposits
 
 
 
 
 
Noninterest Bearing Demand
$
164,130

 
$
159,735

 
$
160,390

Interest Bearing Demand
57,268

 
56,573

 
61,381

Savings and Money Market Accounts
179,111

 
156,402

 
150,182

Certificates of Deposit less than $100 thousand
234,721

 
222,371

 
197,804

Certificates of Deposit of $100 thousand or more
201,762

 
185,904

 
149,796

Brokered Deposits
193,245

 
238,437

 
277,827

Total Deposits
1,030,237

 
1,019,422

 
997,380

Federal Funds Purchased and Securities Sold under Agreements to Repurchase
15,458

 
14,520

 
15,239

Security Deposits
103

 
204

 
538

Other Borrowings

 
58

 
68

Other Liabilities
12,759

 
12,465

 
10,416

Total Liabilities
1,058,557

 
1,046,669

 
1,023,641

STOCKHOLDERS’ EQUITY
 
 
 
 
 
Preferred Stock – no par value – 10,000,000 shares authorized; 33,000 issued as of June 30, 2012, December 31, 2011 and June 30, 2011; Liquidation value of $37,331 as of June 30, 2012, $36,506 as of December 31, 2011 and $35,681 as of June 30, 2011
32,331

 
32,121

 
31,916

Common Stock – $.01 par value – 150,000,000 shares authorized; 1,762,342 shares issued as of June 30, 2012, 1,684,342 issued as of December 31, 2011, and 1,642,054 issued as of June 30, 2011
115

 
114

 
114

Paid-In Surplus
108,241

 
109,525

 
110,967

Common Stock Warrants
2,006

 
2,006

 
2,006

Unallocated ESOP Shares
(1,906
)
 
(3,290
)
 
(4,781
)
Accumulated Deficit
(89,882
)
 
(75,743
)
 
(59,706
)
Accumulated Other Comprehensive Income
3,086

 
3,499

 
4,264

Total Stockholders’ Equity
53,991

 
68,232

 
84,780

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,112,548

 
$
1,114,901

 
$
1,108,421



(See Accompanying Notes to Consolidated Financial Statements)
2


First Security Group, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands, except per share data)
2012
 
2011
 
2012
 
2011
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
8,235

 
$
9,708

 
$
16,567

 
$
19,894

Debt Securities – taxable
953

 
882

 
1,884

 
1,746

Debt Securities – non-taxable
270

 
321

 
553

 
649

Other
123

 
103

 
266

 
227

Total Interest Income
9,581

 
11,014

 
19,270

 
22,516

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest Bearing Demand Deposits
39

 
40

 
76

 
81

Savings Deposits and Money Market Accounts
298

 
272

 
584

 
550

Certificates of Deposit of less than $100 thousand
701

 
726

 
1,406

 
1,538

Certificates of Deposit of $100 thousand or more
666

 
593

 
1,317

 
1,262

Brokered Deposits
1,459

 
1,956

 
3,118

 
4,019

Other
113

 
108

 
229

 
221

Total Interest Expense
3,276

 
3,695

 
6,730

 
7,671

NET INTEREST INCOME
6,305

 
7,319

 
12,540

 
14,845

Provision for Loan and Lease Losses
4,149

 
2,625

 
5,950

 
3,509

NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
2,156

 
4,694

 
6,590

 
11,336

NONINTEREST INCOME
 
 
 
 
 
 
 
Service Charges on Deposit Accounts
718

 
778

 
1,435

 
1,560

Gain on Sales of Available-for-Sale Securities
1

 

 
1

 

Other
1,593

 
1,278

 
2,859

 
2,760

Total Noninterest Income
2,312

 
2,056

 
4,295

 
4,320

NONINTEREST EXPENSES
 
 
 
 
 
 
 
Salaries and Employee Benefits
5,003

 
4,051

 
9,636

 
8,527

Expense on Premises and Fixed Assets, net of rental income
1,639

 
1,214

 
2,882

 
2,547

Other
5,722

 
6,985

 
11,981

 
12,549

Total Noninterest Expenses
12,364

 
12,250

 
24,499

 
23,623

LOSS BEFORE INCOME TAX PROVISION
(7,896
)
 
(5,500
)
 
(13,614
)
 
(7,967
)
Income Tax Provision (Benefit)
(619
)
 
(105
)
 
(510
)
 
86

NET LOSS
(7,277
)
 
(5,395
)
 
(13,104
)
 
(8,053
)
Preferred Stock Dividends
412

 
413

 
825

 
826

Accretion on Preferred Stock Discount
106

 
100

 
210

 
198

NET LOSS ALLOCATED TO COMMON STOCKHOLDERS
$
(7,795
)
 
$
(5,908
)
 
$
(14,139
)
 
$
(9,077
)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net loss
(7,277
)
 
(5,395
)
 
(13,104
)
 
(8,053
)
Change in unrealized gains (losses) on securities, net of reclassifications and taxes
310

 
726

 
458

 
908

Unrealized loss on cash flow swaps, net
(516
)
 
(311
)
 
(871
)
 
(683
)
COMPREHENSIVE LOSS
(7,483
)
 
(4,980
)
 
(13,517
)
 
(7,828
)
NET LOSS PER SHARE:
 
 
 
 
 
 
 
Net Loss Per Share – Basic
$
(4.82
)
 
$
(3.72
)
 
$
(8.75
)
 
$
(5.73
)
Net Loss Per Share – Diluted
$
(4.82
)
 
$
(3.72
)
 
$
(8.75
)
 
$
(5.73
)

(See Accompanying Notes to Consolidated Financial Statements)
3


First Security Group, Inc. and Subsidiary
Consolidated Statement of Stockholders’ Equity
(unaudited)
 
 
 
 
Common Stock
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
 
 
 
 
(in thousands)
Preferred
Stock
 
Shares
 
Amount
 
Paid-In
Surplus
 
Common
Stock
Warrants
 
Accumulated
Deficit
 
Unallocated ESOP Shares
 
Total
Balance - December 31, 2011
$
32,121

 
1,684

 
$
114

 
$
109,525

 
$
2,006

 
$
(75,743
)
 
$
3,499

 
$
(3,290
)
 
$
68,232

Issuance of Common Stock
 
 
78

 

 

 
 
 
 
 
 
 
 
 

Comprehensive Loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss
 
 
 
 
 
 
 
 
 
 
(13,104
)
 
 
 
 
 
(13,104
)
Change Unrealized Gain:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities Available-for-Sale
 
 
 
 
 
 
 
 
 
 
 
 
458

 
 
 
458

Fair Value of Derivatives, net of reclassification adjustments
 
 
 
 
 
 
 
 
 
 
 
 
(871
)
 
 
 
(871
)
Total Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(13,517
)
Accretion of Discount Associated with Preferred Stock
210

 
 
 
 
 
 
 
 
 
(210
)
 
 
 
 
 

Preferred Stock Dividend
 
 
 
 
 
 
 
 
 
 
(825
)
 
 
 
 
 
(825
)
Stock-based Compensation, net of forfeitures
 
 

 
1

 
55

 
 
 
 
 
 
 
 
 
56

ESOP Allocation
 
 
 
 
 
 
(1,339
)
 
 
 
 
 
 
 
1,384

 
45

Balance - June 30, 2012
$
32,331

 
1,762

 
$
115

 
$
108,241

 
$
2,006

 
$
(89,882
)
 
$
3,086

 
$
(1,906
)
 
$
53,991



(See Accompanying Notes to Consolidated Financial Statements)
4


First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
 
 
Six Months Ended
 
June 30,
(in thousands)
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net Loss
$
(13,104
)
 
$
(8,053
)
Adjustments to Reconcile Net Loss to Net Cash From Operating Activities -
 
 
 
Provision for Loan and Lease Losses
5,950

 
3,509

Amortization, net
1,632

 
616

Stock-Based Compensation
56

 
9

ESOP Compensation
45

 
49

Depreciation
676

 
755

Gain on Sale of Premises and Equipment

 
(6
)
Loss on Sale of Other Real Estate and Repossessions, net
327

 
585

Write-down of Other Real Estate and Repossessions
3,187

 
2,601

Deferred Tax Expense Net of Valuation Allowance

 

Accretion of Fair Value Adjustment, net

(8
)
 
(16
)
Accretion of Terminated Cash Flow Swaps
(577
)
 
(1,272
)
Changes in Operating Assets and Liabilities -
 
 
 
Loans Held for Sale
306

 
1,329

Interest Receivable
(292
)
 
385

Other Assets
1,839

 
319

Interest Payable
45

 
(816
)
Other Liabilities
(834
)
 
685

Net Cash From Operating Activities
(752
)
 
679

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Activity in Available-for-Sale-Securities -
 
 
 
Maturities, Prepayments, and Calls
31,849

 
27,932

Sales
250

 

Purchases
(96,966
)
 
(31,431
)
Proceeds from sales of FRB Stock
454

 

Gain on Sale of Available-for-Sale Securities
(1
)
 

Loan Originations and Principal Collections, net
(18,238
)
 
64,283

Proceeds from Sale of Premises and Equipment

 
6

Proceeds from Sales of Other Real Estate and Repossessions
6,567

 
5,253

Additions to Premises and Equipment
(1,327
)
 
(192
)
Capital Improvements to Other Real Estate and Repossessions

 
(12
)
Net Cash From Investing Activities
(77,412
)
 
65,839

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net Increase (Decrease) in Deposits
10,815

 
(51,343
)
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
938

 
(694
)
Net Decrease of Other Borrowings
(58
)
 
(9
)
Net Cash From Financing Activities
11,695

 
(52,046
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(66,469
)
 
14,472

CASH AND CASH EQUIVALENTS – beginning of period
258,181

 
208,919

CASH AND CASH EQUIVALENTS – end of period
$
191,712

 
$
223,391

SUPPLEMENTAL CASH FLOW DISCLOSURES
 
 
 
 

(See Accompanying Notes to Consolidated Financial Statements)
5


 
Six Months Ended
 
June 30,
(in thousands)
2012
 
2011
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Loans and Leases Transfered to Foreclosed Properties and Repossessions
$
7,029

 
$
11,647

First Security Group, Inc. Financing of Sales of Foreclosed Properties and Repossessions
$
1,809

 
$
354

Accrued and Deferred Cash Dividends
$
825

 
$
826

SUPPLEMENTAL SCHEDULE OF CASH FLOWS
 
 
 
Interest Paid
$
6,685

 
$
8,487

Income Taxes Paid
$
70

 
$
245


(See Accompanying Notes to Consolidated Financial Statements)
6


FIRST SECURITY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of financial condition and the results of operations have been included. All such adjustments were of a normal recurring nature. Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
The consolidated financial statements include the accounts of First Security Group, Inc. (First Security or the Company)and its subsidiary bank, which is wholly-owned. All significant intercompany balances and transactions have been eliminated.
On September 19, 2011 (the Effective Date), First Security completed a one-for-ten reverse stock split of its common stock. In connection with the reverse stock split, every ten shares of issued and outstanding First Security common stock at the Effective Date were exchanged for one share of newly issued common stock. Fractional shares were rounded up to the next whole share. Other than the number of authorized shares of common stock disclosed in the Consolidated Balance Sheets, which did not change as a result of the reverse stock split, all prior period share amounts have been retroactively restated to reflect the reverse stock split. For additional information related to the reverse stock split, see Note 9, Stockholders’ Equity.
Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. These interim financial statements should be read in conjunction with the Company’s latest annual consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT'S PLANS
Regulatory Matters
First Security Group, Inc.
On September 7, 2010, the Company entered into a Written Agreement (the Agreement) with the Federal Reserve Bank of Atlanta (the Federal Reserve), the Company’s primary regulator. The Agreement is designed to enhance the Company’s ability to act as a source of strength to the Company's wholly owned subsidiary, FSGBank, National Association (FSGBank or the Bank).
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 was required to submit to the Federal Reserve a written plan designed to maintain sufficient capital at the Company and the Bank. The Company submitted a copy of the Bank’s capital plan that had previously been submitted to the Bank’s primary regulator, the Office of the Comptroller of the Currency (OCC). Neither the Federal Reserve nor the OCC accepted the initially submitted capital plan. A revised five-year strategic and capital plan is currently being reviewed by the Federal Reserve.
The Company is currently deemed not in compliance with certain provisions of the Agreement. Any material noncompliance may result in further enforcement actions by the Federal Reserve. Management believes the successful execution of the strategic initiatives discussed above will ultimately result in full compliance with the Agreement and position the Company for long-term growth and a return to profitability.
On September 14, 2010, the Company filed a current report on Form 8-K describing the Agreement. A copy of the Agreement is filed as Exhibit 10.1 to such Form 8-K. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Agreement.
FSGBank, N.A.
On April 28, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, FSGBank consented and agreed to the issuance of a Consent Order by the OCC (the Order).

7


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 Board of Directors is required to ensure that competent management is in place in all executive officer positions to manage the Bank in a safe and sound manner. The Bank is also required to review and revise various policies and procedures, including those associated with credit concentration management, the allowance for loan and lease losses, liquidity management, criticized assets, loan review and credit. The Bank is continuing to work with the OCC to ensure the policies and procedures are both appropriate and fully implemented.
Within 120 days of the effective date of the Order, the Bank was 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 9 percent of adjusted total assets. As of June 30, 2012, the eighth financial reporting period subsequent to the 120 day requirement, the Bank’s total capital to risk-weighted assets was 9.3 percent and the Tier 1 capital to adjusted total assets was 4.5 percent. The Bank has notified the OCC of its non-compliance with the requirements of the Order.
During the third quarter of 2010, the OCC requested additional information and clarifications to the Bank's submitted strategic and capital plans as well as the management assessments. Subsequent to the resignation of the CEO in April 2011, the Bank requested an extension on the submission date for the strategic and capital plans until a new CEO was appointed and had sufficient time to modify the strategic plan. A revised five-year strategic and capital plan is currently being reviewed by the OCC.
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. As an adequately capitalized institution, the Bank may not pay interest on deposits that are more than 0.75% 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 Federal Deposit Insurance Corporation (FDIC).
The Bank is currently deemed not in compliance with some provisions of the Order, including the capital requirements. Any material noncompliance may result in further enforcement actions by the OCC, including the OCC requiring that FSGBank develop a plan to sell, merge or liquidate. Management believes the successful execution of the strategic initiatives discussed above will ultimately result in full compliance with the Order and position the Bank for long-term growth and a return to profitability.
On April 29, 2010, the Company filed a current report on Form 8-K describing the Order. A copy of the Order is filed as Exhibit 10.1 to such Form 8-K. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Order.
Management's Plans

The Company continues to operate in a difficult environment and has been significantly impacted by the downturn in real estate values and the general recessionary economy. The Company has experienced significant net operating losses for the three and six months ended June 30, 2012 and years ended December 31, 2011, 2010, and 2009, substantially resulting from declining net interest margins and elevated levels of provision for loan losses. Losses on other real estate owned have also significantly impacted operating results of the company. Each of these financial trends was impacted by significant levels of nonperforming assets and related deterioration in the economy.

During 2011 and through the first quarter of 2012, the Company underwent significant change within the Board of Directors and executive management. The changes were predicated on strengthening and deepening the Company’s leadership in order to successfully execute a strategic and capital plan to return the Company to profitable operations, satisfy the requirements of the regulatory actions detailed below, and lower the level of problem assets to an acceptable level.

In December 2011, the Company appointed Michael Kramer as President and Chief Executive Officer. Subsequently, the Company appointed a Chief Credit Officer, Retail Banking Officer and Director of FSGBank’s Wealth Management and Trust Department. The Company added three additional directors to the Board in 2011 and has added three additional directors in 2012, including a new independent Chairman of the Board, Larry D. Mauldin.

The Company’s strategic plan addresses the actions necessary to restore profitability and achieve full compliance with all regulatory agreements, including, but not limited to, restoring capital to the prescribed regulatory levels of the Order. Management is pursuing various options to restore the Company’s capital to a satisfactory level, including, but not limited to, a private stock placement and select asset divestitures of nonperforming assets. Since December 2011, the Company has been in preliminary discussions with multiple potential investors and asset disposition firms but can give no assurances as to the terms

8


on which any such transactions may take place if at all.

The Bank has successfully maintained elevated liquidity and has chosen to do so primarily by maintaining excess cash at the Federal Reserve. The Company’s cash position as of June 30, 2012 was $191,712 thousand compared to $258,181 thousand and $223,391 thousand at December 31, 2011 and June 30, 2011, respectively.

The Company’s strategic plan includes maintaining adequate liquidity, reducing nonperforming assets, and appropriately increasing the Company’s capital ratios. Compliance with the capital ratios required in the Order can be achieved by increasing capital and / or through asset sales. The Company is currently implementing the strategic initiatives within the applicable plan.

Any failure by the Company or the Bank to achieve compliance with the applicable regulatory enforcement order may result in additional adverse regulatory action.
Regulatory Capital Ratios
Banks and bank holding companies, as regulated institutions, must maintain required levels of capital. OCC and the Federal Reserve, the primary federal regulators for FSGBank and the Company, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. As described above, the Order requires FSGBank to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least 9%. The Order provided 120 days from April 28, 2010, the effective date of the Order, to achieve these ratios. FSGBank is currently not in compliance with the capital requirements.
The following table compares the required capital ratios maintained by the Company and FSGBank:
CAPITAL RATIOS
 
June 30, 2012
FSGBank
Consent  Order1
 
Minimum
Capital Requirements under Prompt Corrective Action Provisions
 
First
Security
 
FSGBank
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
7.9
%
 
8.1
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
9.2
%
 
9.3
%
Leverage ratio
9.0
%
 
4.0
%
 
4.5
%
 
4.5
%
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
9.7
%
 
9.7
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
11.0
%
 
10.9
%
Leverage ratio
9.0
%
 
4.0
%
 
5.7
%
 
5.6
%
 
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
Tier 1 capital to risk adjusted assets
n/a

 
4.0
%
 
11.2
%
 
11.0
%
Total capital to risk adjusted assets
13.0
%
 
8.0
%
 
12.5
%
 
12.3
%
Leverage ratio
9.0
%
 
4.0
%
 
7.2
%
 
7.1
%
__________________

1 
FSGBank was required to achieve and maintain the above capital ratios within 120 days from April 28, 2010.



9


NOTE 3 – STOCK-BASED COMPENSATION
As of June 30, 2012, the Company has three stock-based compensation plans, the 2012 Long-Term Incentive Plan (the 2012 LTIP), the 2002 Long-Term Incentive Plan (the 2002 LTIP) and the 1999 Long-Term Incentive Plan (the 1999 LTIP). The plans are administered by the Compensation Committee of the Board of Directors (the Committee), which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the award. The plans are described in further detail below.
The 2012 LTIP was approved by the shareholders of the Company at the 2012 annual meeting as previously reported on Form 8-K filed June 26, 2012. The 2012 Long-Term Incentive Plan permits the Committee to make a variety of awards, including incentive and nonqualified options to purchase shares of First Security's common stock, stock appreciation rights, other stock-based awards which are settled in either cash or shares of First Security's common stock and are determined by reference to shares of stock, such as grants of restricted common stock, grants of rights to receive stock in the future, or dividend equivalent rights, and cash performance awards, which are settled in cash and are not determined by reference to shares of First Security's common stock (Awards). These discretionary Awards may be made on an individual basis or through a program approved by the Committee for the benefit of a group of eligible persons. The number of shares available under the 2012 LTIP is 175 thousand.
The 2002 LTIP was approved by the shareholders of the Company at the 2002 annual meeting and subsequently amended by the shareholders of the Company at the 2004 and 2007 annual meetings to increase the number of shares available for issuance under the 2002 LTIP by 480 thousand and 750 thousand shares, respectively. The total number of shares authorized for awards prior to the 10-for-1 reverse stock split was 1.5 million. As a result of the 10-for-1 reverse stock split in 2011, the total shares currently authorized under the 2002 LTIP is 151,800, of which not more than 20% may be granted as awards of restricted stock. Eligible participants include eligible employees, officers, consultants and directors of the Company or any affiliate. The exercise price per share of a stock option granted may not be less than the fair market value as of the grant date. The exercise price must be at least 110% of the fair market value at the grant date for options granted to individuals, who at the grant date, are 10% owners of the Company’s voting stock (each a 10% owner). Restricted stock may be awarded to participants with terms and conditions determined by the Committee. The term of each award is determined by the Committee, provided that the term of any incentive stock option may not exceed ten years (five years for 10% owners) from its grant date. Each option award vests in approximately equal percentages each year over a period of not less than three years from the date of grant as determined by the Committee subject to accelerated vesting under terms of the 2002 LTIP or as provided in any award agreement. As a result of the Company's participation in TARP CPP, the terms of awards are also subject to compliance with applicable TARP compensation regulations.

Participation in the 1999 LTIP is limited to eligible employees. The total number of shares of stock authorized for awards prior to the 10-for-1 reverse stock split was 936 thousand. As a result of the 10-for-1 reverse stock split in 2011, the total shares currently authorized under the 1999 LTIP is 93,600, of which not more than 10% could be granted as awards of restricted stock. Under the terms of the 1999 LTIP, incentive stock options to purchase shares of the Company’s common stock may not be granted at a price less than the fair market value of the stock as of the date of the grant. Options must be exercised within ten years from the date of grant subject to conditions specified by the 1999 LTIP. Restricted stock could also be awarded by the Committee in accordance with the 1999 LTIP. Generally, each award vests in approximately equal percentages each year over a period of not less than three years and vest from the date of grant as determined by the Committee subject to accelerated vesting under terms of the 1999 LTIP or as provided in any award agreement. As a result of the Company's participation in TARP CPP, the terms of awards are also subject to compliance with applicable TARP compensation regulations.
Stock Options
The following table illustrates the effect on operating results for stock-based compensation for the three and six months ended June 30, 2012 and 2011.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
Stock option compensation expense
$
1

 
$
5

 
$
3

 
$
10

Stock option compensation expense, net of tax 1
$
1

 
$
3

 
$
2

 
$
7

__________________
1 Due to the deferred tax valuation allowance, tax benefit is reversed through the valuation allowance.

10


During the six months ended June 30, 2012 and 2011, no options were exercised.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the following assumptions: expected dividend yield, expected volatility, risk-free interest rate, expected life of the option and the grant date fair value. Expected volatilities are based on historical volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date. No options were granted during the six months ended June 30, 2011.
 
As of
 
June 30,
 
2012
Risk‑free interest rate
1.29
%
Expected term, in years
6.5

Expected stock price volatility
67.89
%
Dividend yield
%
The following table represents stock option activity for the six months ended June 30, 2012:
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value
 
Outstanding, January 1, 2012
48,205

 
$
82.58

 
 
 
 
 
Granted
77,000

 
$
3.06

 
 
 
 
 
Exercised

 
 
 
 
 
 
 
Forfeited
1,645

 
 
 
 
 
 
 
Outstanding, June 30, 2012
123,560

 
$
32.89

 
7.28

 
$
1,800

 
Exercisable, June 30, 2012
45,245

 
$
84.09

 
2.83

 

1 
__________________
1 As of June 30, 2012, the exercise price of all exercisable options exceeded the closing price of the Company's common stock of $3.00, resulting in no intrinsic value.
As of June 30, 2012, shares available for future option grants to employees and directors under existing plans were zero, 18,984, and 175,000 shares for the 1999 LTIP, 2002 LTIP, and 2012 LTIP respectively.
As of June 30, 2012, there was $139 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plans. The cost is expected to be recognized over a weighted-average period of 1.91 years.
Restricted Stock

The Plans described above allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to these awards is being amortized to compensation expense over the period the restrictions lapse. The share-based expense for these awards was determined based on the market price of the Company’s stock at the grant date applied to the total number of shares that were anticipated to fully vest and then amortized over the vesting period.

As of June 30, 2012, unearned stock-based compensation associated with these awards totaled $272 thousand. The Company recognized $31 thousand and $53 thousand for the three and six months ended June 30, 2012, respectively, and less than $1 thousand of compensation expense, net of forfeitures, in the three and six months ended June 30, 2011, related to the

11


amortization of deferred compensation that was included in salaries and benefits in the accompanying consolidated statements of operations. The remaining cost is expected to be recognized over a weighted-average period of 1.89 years.
The following table represents restricted stock activity for the period ended June 30, 2012:
 
Shares
 
Weighted Average Grant-Date Fair Value
Nonvested shares at January 1, 2012
41,940

1 
$
1.83

Granted
78,000

2 
 
Vested
(39
)
 
 
Forfeited
(120
)
 
 
Nonvested, June 30, 2012
119,781

3 
$
2.88

__________________
1 Includes 35,000 shares issued as an inducement grant from available and unissued shares and not from the Plans.
2 Includes 58,000 shares issued as inducement grants from available and unissued shares and not from the Plans.
3 Includes 93,000 shares issued as inducement grants from available and unissued shares and not from the Plans.
The restricted stock awards granted during 2012 vest according to the TARP CPP compensation regulations such that 66% vest after two years and the remainder vest after the third year. Additional transferability restrictions also apply.

NOTE 4 – EARNINGS (LOSS) PER SHARE
The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding stock options, restricted stock awards and common stock warrants using the treasury stock method. The Company has issued certain restricted stock awards, which are unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities. Accordingly, the Company calculated net income available to common shareholders pursuant to the two-class method, whereby net income is allocated between common shareholders and participating securities. In periods of a net loss, no allocation is made to participating securities as they are not contractually required to fund net losses. The computation of basic and diluted earnings per share is as follows:

 

12


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net loss
$
(7,277
)
 
$
(5,395
)
 
$
(13,104
)
 
$
(8,053
)
Preferred stock dividends
412

 
413

 
$
825

 
$
826

Accretion of preferred stock discount
106

 
100

 
$
210

 
$
198

Dividends and undistributed earnings allocated on participating securities

 

 
$

 
$

Net loss allocated to common stockholders
$
(7,795
)
 
$
(5,908
)
 
$
(14,139
)
 
$
(9,077
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding including participating securities
1,738

 
1,587

 
1,720

 
1,585

Less: Participating securities
120

 

 
105

 

Weighted average basic common shares outstanding
1,618

 
1,587

 
1,615

 
1,585

Effect of diluted securities:
 
 
 
 
 
 
 
Equivalent shares issuable upon exercise of stock options, stock warrants and restricted stock awards

 

 

 

Weighted average diluted common shares outstanding
1,618

 
1,587

 
1,615

 
1,585

Net loss per share:
 
 
 
 
 
 
 
Basic
$
(4.82
)
 
$
(3.72
)
 
$
(8.75
)
 
$
(5.73
)
Diluted
$
(4.82
)
 
$
(3.72
)
 
$
(8.75
)
 
$
(5.73
)

Due to the net loss allocated to common shareholders for all periods shown, all stock options, stock warrants, and restricted stock grants are considered anti-dilutive and are not included in the computation of diluted earnings per share. As of June 30, 2012, a total of 327 thousand stock options, stock warrants and restricted stock grants were considered anti-dilutive. All prior periods have been restated to give retroactive effect to the one-for-ten reverse stock split that took effect on September 19, 2011.

NOTE 5 – SECURITIES
Investment Securities by Type
The following table presents the amortized cost and fair value of securities, with gross unrealized gains and losses.
 

13


 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
Securities available-for-sale
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
25,788

 
$
183

 
$
6

 
$
25,965

Mortgage-backed—residential
198,118

 
3,558

 
215

 
201,461

Municipals
28,206

 
1,276

 
23

 
29,459

Other
113

 

 
48

 
65

Total
$
252,225

 
$
5,017

 
$
292

 
$
256,950

Securities available-for-sale
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
23,984

 
$
251

 
$

 
$
24,235

Mortgage-backed—residential
134,210

 
2,817

 
129

 
136,898

Municipals
30,453

 
1,419

 

 
31,872

Other
127

 

 
91

 
36

Total
$
188,774

 
$
4,487

 
$
220

 
$
193,041

Securities available-for-sale
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
30,854

 
$
242

 
$
54

 
$
31,042

Mortgage-backed—residential
90,840

 
2,903

 

 
93,743

Municipals
32,601

 
1,245

 
17

 
33,829

Other
127

 

 
88

 
39

Total
$
154,422

 
$
4,390

 
$
159

 
$
158,653


The company sold one security in the three and six months ended June 30, 2012. A Qualified Zone Academy Bond (within the meaning of Section 1379E of the Internal Revenue Code of 1986, as amended) issued by the Health, Educational and Housing Facility Board of the County of Knox under the authority from the State of Tennessee was sold for $251 thousand, generating a gross gain of $1 thousand. The tax provision related to this net realized gain was less than $1 thousand.
There were no sales of securities for the three and six months ended June 30, 2011.
At June 30, 2012December 31, 2011 and June 30, 2011, federal agencies, municipals and mortgage-backed securities with a carrying value of $32,538 thousand, $22,449 thousand and $22,273 thousand, respectively, were pledged to secure public deposits. At June 30, 2012December 31, 2011 and June 30, 2011, the carrying amount of securities pledged to secure repurchase agreements was $23,096 thousand, $26,635 thousand and $18,969 thousand, respectively. At June 30, 2012December 31, 2011 and June 30, 2011, securities of $6,333 thousand, $5,678 thousand and $5,972 thousand were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions. At June 30, 2012, the carrying amount of securities pledged to secure lines of credit with the FHLB totaled $10,095 thousand. At June 30, 2012, pledged and unpledged securities totaled $72,062 thousand and $184,888 thousand, respectively.

Maturity of Securities
The following table presents the amortized cost and fair value of debt securities by contractual maturity at June 30, 2012.
 

14


 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Within 1 year
$
2,838

 
$
2,871

Over 1 year through 5 years
20,423

 
21,042

5 years to 10 years
27,805

 
28,410

Over 10 years
3,042

 
3,166

 
54,108

 
55,489

Mortgage-backed residential securities
198,117

 
201,461

Total
$
252,225

 
$
256,950


Impairment Analysis
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2012December 31, 2011 and June 30, 2011.
 
 
Less than 12 months
 
12 months or greater
 
Totals
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
4,794

 
$
6

 
$

 
$

 
$
4,794

 
$
6

Mortgage-backed—residential
41,246

 
215

 

 

 
41,246

 
215

Municipals
1,604

 
23

 

 

 
1,604

 
23

Other

 

 
65

 
46

 
65

 
46

Totals
$
47,644

 
$
244

 
$
65

 
$
46

 
$
47,709

 
$
290

December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed—residential
$
26,780

 
$
129

 
$

 
$

 
$
26,780

 
$
129

Other

 

 
36

 
91

 
36

 
91

Totals
$
26,780


$
129

 
$
36

 
$
91

 
$
26,816

 
$
220

June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
8,940

 
$
54

 
$

 
$

 
$
8,940

 
$
54

Municipals
447

 
7

 
391

 
10

 
838

 
17

Other

 

 
39

 
88

 
39

 
88

Totals
$
9,387

 
$
61

 
$
430

 
$
98

 
$
9,817

 
$
159


As of June 30, 2012, the Company performed an impairment assessment of the securities in its portfolio that had an unrealized loss to determine whether the decline in the fair value of these securities below their cost was other-than-temporary. Under authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) the Company intends to sell the security, (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized costs basis or (3) the Company does not expect to recover the security’s entire amortized cost basis, even if the Company does not intend to sell. Additionally, accounting guidance requires that for impaired securities that the Company does not intend to sell and/or that it is not more-likely-than-not that the Company will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.

15


In evaluating the recovery of the entire amortized cost basis, the Company considers factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.
As of June 30, 2012, gross unrealized losses in the Company’s portfolio totaled $290 thousand, compared to $220 thousand as of December 31, 2011 and $159 thousand as of June 30, 2011. The unrealized losses in mortgage-backed securities (consisting of fourteen securities), municipals (consisting of six securities) and federal agencies (consisting of four securities) are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. The unrealized losses in other securities are two pooled trust preferred securities. The unrealized losses in the pooled trust preferred securities are primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities. The Company does not intend to sell the investments with unrealized losses and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity. Based on results of the Company’s impairment assessment, the unrealized losses at June 30, 2012 are considered temporary.

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans by type are summarized as follows:
 
 
June 30,
2012
 
December 31,
2011
 
June 30,
2011
Loans secured by real estate—
(in thousands)
Residential 1-4 family
$
204,600

 
$
217,597

 
$
232,417

Commercial
229,663

 
195,062

 
209,871

Construction
46,453

 
53,807

 
68,887

Multi-family and farmland
26,932

 
31,668

 
33,347

 
507,648

 
498,134

 
544,522

Commercial loans
62,515

 
59,623

 
68,300

Consumer installment loans
15,683

 
20,011

 
24,606

Leases, net of unearned income
926

 
2,920

 
4,429

Other
4,666

 
3,809

 
3,487

Total loans
591,438

 
584,497

 
645,344

Allowance for loan and lease losses
(19,600
)
 
(19,600
)
 
(22,485
)
Net loans
$
571,838

 
$
564,897

 
$
622,859


The allowance for loan and lease losses is composed of two primary components: (1) specific impairments for substandard/nonaccrual loans and leases and (2) general allocations for classified loan pools, including special mention and substandard/accrual loans, as well as all remaining pools of loans. The Company accumulates pools based on the underlying classification of the collateral. Each pool is assigned a loss severity rate based on historical loss experience and various qualitative and environmental factors, including, but not limited to, credit quality and economic conditions. The Company determines the allowance on a quarterly basis. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may materially change in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
The following table presents an analysis of the activity in the allowance for loan and lease losses for the three and six months ended June 30, 2012 and June 30, 2011. The provisions for loan and lease losses in the table below do not include the Company’s provision accrual for unfunded commitments of $6 thousand and $12 thousand for both the three and six months ended June 30, 2012 and June 30, 2011, respectively. The reserve for unfunded commitments is included in other liabilities in the consolidated balance sheets and totaled $261 thousand, $253 thousand and $241 thousand at June 30, 2012, December 31, 2011 and June 30, 2011, respectively.

16


Allowance for Loan and Lease Losses
For the Three Months Ended June 30, 2012
 
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Unallocated
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, March 31, 2012
$
6,256

 
$
5,299

 
$
1,068

 
$
1,504

 
$
3,976

 
$
354

 
$
511

 
$
22

 
$

 
$
18,990

Charge-offs
(741
)
 
(593
)
 
(2,274
)
 

 
(40
)
 
(49
)
 
(369
)
 
(3
)
 

 
(4,069
)
Recoveries
73

 
85

 
38

 
2

 
119

 
39

 
173

 
1

 

 
530

Provision
476

 
346

 
2,836

 
86

 
578

 
15

 
(190
)
 
2

 

 
4,149

Ending balance, June 30, 2012
$
6,064

 
$
5,137

 
$
1,668

 
$
1,592

 
$
4,633

 
$
359

 
$
125

 
$
22

 
$

 
$
19,600


Allowance for Loan and Lease Losses
For the Six Months Ended June 30, 2012
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Unallocated
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, December 31, 2011
$
6,368

 
$
6,227

 
$
1,485

 
$
728

 
$
3,649

 
$
405

 
$
718

 
$
20

 
$

 
$
19,600

Charge-offs
(1,888
)
 
(1,130
)
 
(2,912
)
 
(15
)
 
(271
)
 
(138
)
 
(863
)
 
(3
)
 

 
(7,220
)
Recoveries
92

 
108

 
524

 
6

 
231

 
94

 
209

 
6

 

 
1,270

Provision
1,492

 
(68
)
 
2,571

 
873

 
1,024

 
(2
)
 
61

 
(1
)
 

 
5,950

Ending balance, June 30, 2012
$
6,064

 
$
5,137

 
$
1,668

 
$
1,592

 
$
4,633

 
$
359

 
$
125

 
$
22

 
$

 
$
19,600



17


Allowance for Loan and Lease Losses
For the Three Months Ended June 30, 2011
 
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Unallocated
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, March 31, 2011
$
6,680

 
$
5,381

 
$
3,379

 
$
685

 
$
4,685

 
$
598

 
$
1,082

 
$
10

 
$

 
$
22,500

Charge-offs
(257
)
 
(2,412
)
 
(731
)
 

 
(1,085
)
 
(61
)
 

 

 

 
(4,546
)
Recoveries
175

 
199

 
267

 
376

 
147

 
649

 
89

 
4

 

 
1,906

Provision
277

 
2,540

 
1,174

 
(520
)
 
182

 
(669
)
 
(355
)
 
(4
)
 

 
2,625

Ending balance, June 30, 2011
$
6,875

 
$
5,708

 
$
4,089

 
$
541

 
$
3,929

 
$
517

 
$
816

 
$
10

 
$

 
$
22,485


Allowance for Loan and Lease Losses
For the Six Months Ended June 30, 2011
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family
and
farmland
 
Commercial
 
Consumer
 
Leases
 
Other
 
Unallocated
 
Total
 
(in thousands)
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, December 31, 2010
$
7,346

 
$
5,550

 
$
2,905

 
$
761

 
$
5,692

 
$
813

 
$
917

 
$
16

 
$

 
$
24,000

Charge-offs
(527
)
 
(3,074
)
 
(1,431
)
 

 
(1,437
)
 
(183
)
 
(919
)
 

 

 
(7,571
)
Recoveries
181

 
200

 
305

 
382

 
400

 
685

 
390

 
4

 

 
2,547

Provision
(125
)
 
3,032

 
2,310

 
(602
)
 
(726
)
 
(798
)
 
428

 
(10
)
 

 
3,509

Ending balance, June 30, 2011
$
6,875

 
$
5,708

 
$
4,089

 
$
541

 
$
3,929

 
$
517

 
$
816

 
$
10

 
$

 
$
22,485



18


The following table presents an analysis of the end of period balance of the allowance for loan and lease losses as of June 30, 2012.
As of June 30, 2012
 
 
Real estate:
Residential
1-4 family
 
Real estate:
Commercial
 
Real estate:
Construction
 
Real estate:
Multi-family and
farmland
 
Total Real Estate
Loans
 
Carrying
Value
 
Associated
Allowance
 
Carrying
Value
 
Associated
Allowance