First Security (FSGI) 10-Q 2003 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
	OR
o	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.)
817 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 xNo o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).                  Yes   oNo  x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Common Stock, $.01 par value:

10,497,867shares outstanding and issued as of November 7, 2003

First Security Group, Inc. and Subsidiaries

Form 10-Q

INDEX

PART I.	FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
		Consolidated Balance Sheets - September 30, 2003, December 31, 2002 and September 30, 2002	3
		Consolidated Income Statements - Three months and nine months ended September 30, 2003 and 2002	4
		Consolidated Statement of Stockholders' Equity - Nine months ended September 30, 2003	6
		Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002	7
		Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		30
Item 4.	Controls and Procedures		31
Part II	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		32
SIGNATURES			33

2

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

First Security Group, Inc. and Subsidiaries
Consolidated Balance Sheets	September 30,			December 31,		September 30,
	2003			2002		2002
	(unaudited)					(unaudited)
	(in thousands)
ASSETS
Cash and due from banks	$	23,835		$	14,429	$	21,411
Federal funds sold and securities purchased
under agreements to resell		23,962			30,044		35,420
Cash and cash equivalents		47,797			44,473		56,831
Interest-bearing deposits in banks		3,681			3,706		1,766
Securities available for sale		86,650			54,442		55,195
Loans		446,578			348,582		332,548
Less: Allowance for loan losses		6,378			5,362		4,637
		440,200			343,220		327,911
Premises and equipment, net		21,463			12,995		12,183
Intangible assets		12,449			8,526		8,438
Other assets		9,422			5,562		5,657
TOTAL ASSETS	$	621,662		$	472,924	$	467,981
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing demand	$	99,832		$	64,336	$	63,321
Interest bearing demand		38,710			27,679		28,343
Savings		125,860			99,580		95,491
Certificates of deposit of $100 thousand or more		96,996			75,160		73,105
Certificates of deposit less than $100 thousand		149,605			117,728		115,472
Total deposits		511,003			384,483		375,732
Federal funds purchased and securities sold
under agreement to repurchase		16,039			11,722		14,962
Other borrowings		9,161			6,168		6,170
Other liabilities		4,507			2,618		3,573
Total liabilities		540,710			404,991		400,437
STOCKHOLDERS' EQUITY
Common stock - $.01 par value - 20,000,000 shares
authorized; 10,497,867 issued as of September 30,
2003; 9,094,915 issued as of December 31, 2002;
and 9,094,915 issued as of September 30, 2002		88			76		76
Paid-in surplus		77,397			65,723		65,723
Retained earnings		3,190			1,539		1,165
Accumulated other comprehensive income		360			595		580
Deferred compensation on restricted stock		(83	)		-		-
Total stockholders' equity		80,952			67,933		67,544
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	621,662		$	472,924	$	467,981

3

First Security Group, Inc. and Subsidiaries
Consolidated Income Statements
(Unaudited)
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands except per share amounts)	2003			2002		2003		2002
INTEREST INCOME
Loans, including fees	$	7,511		$	6,045	$	21,064	$	16,829
Debt securities -taxable		421			494		1,292		1,376
Debt securities -non-taxable		154			68		351		108
Other		152			146		417		251
Total interest income		8,238			6,753		23,124		18,564
INTEREST EXPENSE
Interest bearing demand deposits		27			79		92		192
Savings deposits		293			449		1,055		1,137
Certificates of deposit of $100 thousand or more		751			580		2,169		1,817
Certificates of deposit of less than $100 thousand		1,092			961		3,178		2,707
Other		120			115		353		353
Total interest expense		2,283			2,184		6,847		6,206
NET INTEREST INCOME		5,955			4,569		16,277		12,358
Provision for loan losses		366			561		1,499		810
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		5,589			4,008		14,778		11,548
NONINTEREST INCOME
Service charges on deposit accounts		642			462		1,693		1,349
Mortgage loan fee income		350			295		1,412		843
Gain (Loss) on securities		(3	)		-		24		75
Other noninterest income		481			151		867		391
Total noninterest income		1,470			908		3,996		2,658
NONINTEREST EXPENSE
Salaries and employee benefits		3,030			2,152		8,760		5,942
Net occupancy		415			282		1,078		785
Equipment expense		451			304		1,195		783
Data processing fees		348			199		851		534
Amortization expense - CDI		154			41		376		41
Advertising expense		86			86		223		226
Supplies expense		194			103		440		258
Communications expense		131			91		330		228
Professional services		151			157		662		638
Postage expense		134			79		356		215
Other noninterest expense		789			338		1,859		916
Total noninterest expense		5,883			3,832		16,130		10,566

4

INCOME BEFORE INCOME TAX PROVISION		1,176		1,084		2,644		3,640
Income tax provision		432		441		993		1,412
NET INCOME	$	744	$	643	$	1,651	$	2,228
NET INCOME PER SHARE
BASIC	$	0.07	$	0.07	$	0.16	$	0.30
DILUTED	$	0.07	$	0.07	$	0.16	$	0.30
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC		10,497		9,059		10,043		7,425
DILUTED		10,605		9,157		10,141		7,523

5

First Security Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
									Accumulated			Deferred
	Common Stock								Other			Compensation
						Paid-In		Retained	Comprehensive				on
(In thousands)		Shares		Amount		Surplus		Earnings		Income			Restricted Stock			Total
Balance - December 31, 2002		9,095	$	76	$	65,723	$	1,539	$	595		$	-		$	67,933
Comprehensive income -
Net income (unaudited)								1,651								1,651
Change in net unrealized
gain on securities available
for sale, net of tax (unaudited)										(235	)					(235	)
Total comprehensive income (unaudited)																1,416
Common stock issued (unaudited)		1,403		12		11,674							(83	)		11,603
Balance –September 30, 2003 (unaudited)		10,498	$	88	$	77,397	$	3,190	$	360		$	(83	)	$	80,952

6

First Security Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(Unaudited)
	Nine Months Ended
	September 30,
(In thousands)		2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,651		$	2,228
Provision for loan losses		1,499			810
Net amortization of securities		677			122
Amortization of intangibles		376			41
Amortization of deferred stock compensation		116			-
Depreciation		873			552
Loss (gain) on disposal of assets		( 9	)		33
Gain on sale of available-for-sale securities		(24	)		(75	)
Changes in operating assets and liabilities -
Decrease (increase) in -
Interest receivable		(22	)		165
Other assets		(2,717	)		(1,543	)
Increase (decrease) in -
Interest payable		(108	)		(604	)
Other liabilities		793			979
Net cash provided by operating activities		3,105			2,708
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest bearing deposits		25			(1,766	)
Activity in available-for-sale securities -
Sales		2,555			6,045
Maturities, prepayments, and calls		18,178			12,243
Purchases		(45,023	)		(22,530	)
Loan originations and principal collections, net		(41,615	)		(20,033	)
Proceeds from sale of fixed assets		43			0
Additions to premises and equipment		(5,151	)		(1,437	)
Net cash acquired in transaction accounted forunder the purchase method of accounting		14,198			7,060
Net cash used by investing activities		(56,790	)		(20,418	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		52,699			35,953
Net increase (decrease) in federal funds purchased andsecurities sold under agreements to repurchase		4,317			(6,566	)
Proceeds from (repayments of) other borrowings		(7	)		1,560
Proceeds from sale of common stock, net		-			25,695
Net cash provided by financing activities		57,009			56,642
NET INCREASE IN CASH ANDCASH EQUIVALENTS		3,324			38,932
CASH AND CASH EQUIVALENTS - beginning of period		44,473			17,899
CASH AND CASH EQUIVALENTS - end of period	$	47,797		$	56,831

7

Supplemental disclosures of noncash investing and financing activities
Change in unrealized appreciation of securities, net of deferred taxes of ($123) for 2003 and $234 for 2002	$	(235	)	$	355
Assets (noncash) acquired in business combination	$	75,314		$	39,220
Liabilities assumed in business combination	$	78,025		$	46,280
Issuance of common stock in business combination	$	11,487		$	-
Issuance of common stock pursuant to incentive plan	$	200		$	-
Supplemental schedule of cash flows
Interest paid	$	6,955		$	6,810
Income taxes paid	$	1,436		$	1,278

8

FIRST SECURITY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A – 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. Certain reclassifications have been made to prior year amounts to conform with the current year p resentation. Operating results for the nine-month period endedSeptember 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any other period. The balance sheet as of December 31, 2002 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K, for the year ended December 31, 2002.

On April 23, 2003, First Security’s board of directors approved a 12 for 10 stock split to be distributed on June 16, 2003 to shareholders of record on June 2, 2003. As a result of the split, the par value has been adjusted from $0.01 to $0.0083 per share; however, we have rounded the par value to $0.01 per share for presentation purposes. All share data has been retroactively adjusted for the 12 for 10 stock split, unless expressly noted otherwise.

NOTE B – COMPREHENSIVE INCOME

In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income," the Company is required to report "comprehensive income," a measure of all changes in equity, not only reflecting net income but certain other changes as well. Comprehensive income for the three-month and nine-month periods ended September 30, 2003 and 2002, respectively, was as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in thousands)	2003			2002		2003			2002
Net income	$	744		$	643	$	1,651		$	2,228
Unrealized gains - securities, net of tax		(458	)		188		(235	)		356
Comprehensive income, net of tax	$	286		$	831	$	1,416		$	2,584

NOTE C – EARNINGS PER SHARE

On November 19, 2002, we entered into an Agreement and Plan of Merger with Premier National Bank of Dalton in Dalton, Georgia. Dalton is located in Whitfield County, Georgia, and is the city location of FSG’s wholly owned subsidiary, FSGBank, National Association (Dalton, Georgia), formerly known as Dalton Whitfield Bank. We agreed to exchange 0.425 common shares for each common stock share of Premier National Bank. This transaction closed on March 31, 2003 after receiving regulatory and shareholder approval, at which time Premier National Bank of Dalton was merged into FSGBank - Dalton. For this exchange transaction, 1,378,423 shares of First Security stock were issued.

9

Reference is made to Note 14, Long-Term Incentive Plan, in the Notes to Consolidated Financial Statements in First Security's Form 10-K, which contains descriptions of First Security's Stock Option Plan (the "Plan"). Shares under option under the Plan had a dilutive impact of less than$.01on net income per share for the nine months ended September 30, 2003.

NOTE D – REGULATORY AND ACCOUNTING PRONOUNCEMENTS

In April 2002, FASB issued Statement No. 145, (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will not be used to classify those gains and losses. SFAS 145 also amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement also makes technical corrections to existing pronouncements. Certain provisions of this statement became effective January 1, 2003, while others became effective for transactions occurring and financial statement issued after May 15, 2002. The effect of adoption of SFAS 145 did not have a material impact on the First Security’s results of operations or its financial position.

In June 2002, FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The accounting for similar events and circumstances will be the same. This statement is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 on January 1, 2003 did not have a material effect on First Security's results of operations or its financial position.

In November 2002, the FASB issued Financial Accounting Standards Board Interpretation No. 45, (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. FIN also incorporates, without change, the guidance in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others," which is being superseded. The initial recognition and initial measurement provisions of FIN 45 were applicable on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements of FIN 45 were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on First Security’s results of operations or its financial position.

In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46, (FIN 46), "Consolidation of Variable Interest Entities," which explains how to apply the controlling financial interest criterion in Accounting Research Bulletin 51 to variable interest entities. Variable interest entities include many entities that have been referred to as special-purpose entities as well as other entities that are structured in such a way that (a) the equity investment at risk is not sufficient to permit the entity to finance itself with subordinated financial support in other forms or (b) the equity investors as a group lack decision-making powers, do not absorb losses, or do not receive residual returns. The objective of FIN 46 is to improve financial reporting by companies involved with variable interest entities by requiring that a variable interest entity be consolidated by the company that is subject to a majority of the economic risks and/or rewards related to that entity. The requirements of FIN 46 applied immediately to variable interest entities created after January 31, 2003.  However  in October 2003, the FASB issued FASB Staff Position 46-6 which defers implementation until the end of the first interim or annual period ending after December 15, 2003 for variable interest entities that existed prior to February 1, 2003. The adoption of FIN 46 did not have a material impact on First Security’s results of operations or its financial position.

10

In April 2003, the FASB issued Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires that contracts with comparable characteristics be accounted for similarly. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except for provisions that relate to Statement 133 Implementation Issues, and for hedging relationships designated after June 30, 2003. Except as noted in SFAS 149, all provisions of the statement should be applied prospectively. The provisions of SFAS 149 that relate to Statement 133 Implementation Issues that have been effective for fiscal quarters that began prior toJune 15, 2003 should continue to be applied in accordance with their respective effective dates. In addition, certain SFAS 149 paragraphs, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing and new contracts entered into after June 30, 2003. The effect of adoption of SFAS 149 did not have a material impact on First Security’s results of operations or its financial position.

In May 2003, the FASB issued Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that an issuer classify a financial instrument that is within the scope of the statement as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of SFAS 150 on July 1, 2003 did not have a significant impact on First Security’s results of operations or its financial position.

NOTE E – ACQUISITION

On March 31, 2003, First Security acquired 100% of the outstanding common shares of Premier National Bank of Dalton. Premier National Bank was an OCC chartered, FDIC insured, commercial bank in Dalton, Georgia, and, according to the merger agreement, Premier National Bank merged with and into FSGBank - Dalton, with FSGBank - Dalton being the surviving bank. The acquisition of Premier National Bank gives First Security greater market share within the Whitfield County, Georgia, area and provides us with two additional branches within that market. The results of Premier National Bank’s operation (now doing business as FSGBank - Dalton) are included in the consolidated financial statements after the acquisition date.

The aggregate purchase price was $11,660 thousand, including common stock valued at $11,487 thousand, cash of less than $1 thousand (representing payments in lieu of fractional shares), and $173 thousand in acquisition costs, such as legal, accounting and investment banking fees. The value of the 1,378,423 shares issued was determined based on the estimated market price of First Security’s common shares before and after the terms of the acquisition were agreed to and announced. The transaction resulted in $3.0 million of goodwill and $1.3 million of core deposit intangibles. The amount allocated to the core deposit intangible was determined by an independent valuation and is being amortized over the estimated useful life of ten years using an acc elerated basis reflecting the pattern of the expected run off of the related deposits.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition.

11

(In thousands)	(unaudited)
Cash and due from banks	$	4,851
Federal funds sold and securities purchased under agreements to resell		9,520
Cash and cash equivalents		14,371
Securities available for sale		8,929
Loans		57,714
Less: Allowance for loan losses		850
Net loans		56,864
Premises and equipment, net		4,224
Intangible assets		4,303
Other assets		994
Total assets acquired		89,685
Deposits		(73,821	)
FHLB Advance		(3,000	)
Other liabilities		(1,204	)
Total liabilities assumed		(78,025	)
Net assets acquired	$	11,660

The following condensed income statements disclose the pro forma results of First Security as though the Premier National Bank acquisition had occurred at the beginning of 2002.

12

Pro Forma Condensed Statements of Income
(Unaudited)	Nine Months Ended September 30, 2003
(In thousands except per share amounts)	First Security		1	Premier National		2	Pro Forma Adjustments		3	Pro Forma Combined
Interest income	$	23,124		$	837		$	-		$	23,961
Interest expense		6,847			312						7,159
Net interest income		16,277			525			-			16,802
Provision for loan losses		1,499			21						1,520
Net interest income after provision for loan losses		14,778			504			-			15,282
Noninterest income		3,996			107						4,103
Noninterest expense		16,130			493			213			16,836
Income (loss) before provision for income taxes		2,644			118			(213	)		2,549
Income tax provision (benefit)		993			45			(1	)		1,037
Net income (loss)	$	1,651		$	73		$	(212	)	$	1,512
Net income per share
Basic and diluted	$	0.16								$	0.14

Pro Forma Condensed Statements of Income
(Unaudited)	Nine Months Ended September 30, 2002
(In thousands except per share amounts)	First Security		4	Premier National		5	Pro Forma Adjustments		6	Pro Forma Combined
Interest income	$	18,564		$	4,131		$	-		$	22,695
Interest expense		6,206			1,748						7,954
Net interest income		12,358			2,383			-			14,741
Provision for loan losses		810			242						1,052
Net interest income after provision for loan losses		11,548			2,141			-			13,689
Noninterest income		2,658			430						3,088
Noninterest expense		10,566			2,112			309			12,987
Income (loss) before provision for income taxes		3,640			459			(309	)		3,790
Income tax provision (benefit)		1,412			156			(1	)		1,567
Net income (loss)	$	2,228		$	303		$	(308	)	$	2,223
Net income per share
Basic and diluted	$	0.30								$	0.25

13

1 The reported income results of First Security for the nine months ended September 30, 2003 do not include any results of operation for Premier National Bank for the first quarter.

2 The actual results of Premier National Bank from January 1, 2003 through March 30, 2003.

3 Pro forma adjustments include the following items: $210thousand of additional amortization of core deposit intangibles, $3thousand of additional depreciation on write up of fixed assets, and $1 thousand of tax benefit related to the additional fixed asset depreciation.

4 The reported results of First Security for the nine months ended September 30, 2002.

5 The reported results of Premier National Bank for the nine months ended September 30, 2002.

6 Pro forma adjustments include the following items:$306thousand of amortization of core deposit intangibles, $3thousand of additional depreciation on write up of fixed assets, and $1 thousand of tax benefit related to the additional fixed asset depreciation.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Form 10-Q, "First Security," "FSG," "we," "us," and "our" refer to First Security Group, Inc.

THIRD QUARTER 2003 AND RECENT EVENTS

The following discussion and analysis sets forth the major factors that affected First Security's results of operations and financial condition reflected in the unaudited financial statements for the three-month and nine-month periods ended September 30, 2003 and 2002. Such discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the notes attached thereto.

On November 19, 2002, we entered into an Agreement and Plan of Share Exchange among First Security, FSGBank and Premier National Bank of Dalton. We completed the acquisition effective March 31, 2003. The Plan of Merger provided that Premier National Bank merge with and into FSGBank. Premier National Bank shareholders received 0.425 shares of First Security common stock in the merger in exchange for each share of Premier National Bank common stock they owned. As of December 31, 2002, Premier National Bank had consolidated assets of approximately $84.7 million, consolidated deposits of approximately $73.4 million, and consolidated shareholders’ equity of approximately $7.1 million. The results of operations of Premier National Bank (which was merge d into and with FSGBank) are included in First Security’s results beginning April 1, 2003; the balance sheet of Premier National Bank was included with First Security’s balance sheet effective March 31, 2003, the acquisition date.

On March 31, 2003, Dalton Whitfield Bank, Frontier Bank and First State Bank filed applications with the Office of the Comptroller of the Currency to convert from state chartered banks to national banks. On May 7, 2003, the OCC approved the conversion applications, and the Banks completed the conversions during the second quarter of 2003. After the conversions, each of the Banks became known as "FSGBank, National Association". For purposes of financial reporting, each bank was referred to as follows:

"FSGBank – Dalton": Formerly known as Dalton Whitfield Bank

"FSGBank – Chattanooga": Formerly known as Frontier Bank

"FSGBank – Maynardville": Formerly known as First State Bank 

On April 23, 2003, First Security’s board of directors approved a 12 for 10 stock split to be distributed on June 16, 2003 to shareholders of record on June 2, 2003. As a result of the split, the par value has been adjusted from $0.01 to $0.0083 per share; however, we have rounded the par value to $0.01 per share for presentation purposes. All share data has been retroactively adjusted for the 12 for 10 stock split, unless expressly noted otherwise.

On July 23, 2003, we entered into a Purchase and Assumption Agreement by and between National Bank of Commerce ("NBC") and FSGBank, National Association. According to the terms of the agreement, we will purchase certain assets and assume substantially all of the deposits and other liabilities of all of NBC’s branch offices located at Madisonville, Tennessee, Sweetwater, Tennessee, and Tellico Plains, Tennessee. Upon the closing of this acquisition, which has received regulatory approval, the NBC branches will be merged into FSGBank. As of September 30, 2003, NBC branches had loans of approximately $16 million and deposits of approximately $48 million. We anticipate consummating the acquisition on December 4, 2003.

On August 6, 2003, we filed an application with the Office of the Comptroller of the Currency to merge FSGBank – Dalton with and into FSGBank – Chattanooga and to merge FSGBank – Maynardville with and into FSGBank – Chattanooga. On September 24, 2003, the OCC approved this application and the banks were merged on that date. FSGBank – Chattanooga is the surviving bank and the national bank charters of FSGBank – Dalton and FSGBank – Maynardville were terminated. None of our present banking locations was or will be eliminated as a result of the merger. For purposes of this 10-Q, the consolidated results of FSGBank – Chattanooga will be referred to as "FSGBank".

15

OVERVIEW

As of September 30, 2003, First Security had total consolidated assets of $621.7 million, total loans of $440.2 million, total deposits of $511.0 million and stockholders' equity of $80.9 million. Our net income was $744 thousand and $1,651 thousand for the three and nine months ended September 30, 2003.

RESULTS OF OPERATIONS

Net income for the three months ended September 30, 2003, was $744 thousand, or $.07 per share (basic and diluted), compared to a net income of $643 thousand, or $.07 per share (basic and diluted) in the same period of 2002. Net income for the nine months ended September 30, 2003, was $1,651 thousand, or $.16 per share (basic and diluted), compared to net income of $2,228 thousand or $.30 per share (basic and diluted), in the same period of 2002. While net interest income and noninterest income increased by $5.2 million, collectively, noninterest expense, including provision for loan losses, increased by $6.2 million. Expense increases outpaced income increases as a result of the additional costs associated with our branching and acquisition efforts, as well as the provision expense associated with loan charge offs and the inherent risks in the loan portfolio.

Return on average assets (annualized) for the three months ended September 30, 2003 and 2002 was 0.5% and 0.6%, respectively. For the nine months ended September 30, 2003 and 2002, return on average assets (annualized) was 0.4% and 0.8%, respectively. Return on average equity (annualized) for the three months ended September 30, 2003 and 2002 was 3.7% and 3.9%, respectively; and, for the nine months ended September 30, 2003 and 2002, was 2.9% and 5.7%, respectively.

Net Interest Income

Net interest income increased by $1.4 million or 30% to $6.0 million for the third quarter of 2003 compared to the same period a year ago. For the nine month period ended September 30, 2003, net interest income increased by $3.9 million, or 32%, over the same period in the previous year. There are two factors that influence net interest income: (1) volume of earning assets, and (2) rate of net interest margin on those earning assets.

Quarter-to-date average earning assets increased by $146.2 million or 35% to $558.0 million compared to average earning assets for the same period in 2002. On a year-to-date basis, average earning assets increased by $153.2 million or 42% to $519.3 million versus the same period in 2002. On a year-to-date basis, our earning assets increased due to (i) deposit gathering activities – deposits raised were used to fund or acquire earning assets, (ii) the acquisition of First State Bank – which had approximately $48 million in earning assets on the acquisition date, July 20, 2002, (iii) the non-underwritten private placement of First Security’s common stock – the proceeds from which were used to fund or acquire earning assets, and (iv) the acquisition of Premier National Bank – which had approximately $76.2 million in earning assets on the acquisition date, March 31, 2003. These additional earning assets have enabled First Security to earn more interest income.

The other factors influencing net interest income are the yield on earning assets and the cost of funding liabilities. Changes in net interest margin did not influence net interest income as significantly as the changes in earning assets. On a fully tax equivalent basis, our net interest margin was 14 basis points lower in the third quarter of 2003 compared to the same period in 2002, and 28 basis points lower for the first nine months of 2003 versus the same period in 2002.

16

For the third quarter of 2003, 78% of average earning assets were funded with interest bearing liabilities, compared to 76% for the same period in 2002. Our net interest margin decreased from period to period because our weighted average yield on interest earning assets decreased at a faster pace than our weighted average rate on interest bearing liabilities. The weighted average rate on interest earning assets decreased 10%, while the weighted average rate on interest bearing liabilities decreased 25% The net interest margin has decreased because the increase in loan volume from period to period has outpaced the increase in the interest spread. The interest rate decreases in 2002 resulted from the Federal Reserve's initiative during the prior two yea rs to stimulate economic growth in the weakening U.S. economy. The Federal Reserve also decreased interest rates during the second quarter of 2003. As a result of the rate decreases and as assets and liabilities continue to mature and reprice, we believe that the average rate earned on assets and our average rate paid on liabilities may decrease slightly over the next several months barring a Federal Reserve interest rate increase.

The interest rate earned on loans for the three months ended September 30, 2003decreased 74basis points compared to the same period in 2002. The decrease is primarily attributable to the decreases in the prime lending rate, which were effected by the Federal Reserve rate cut initiative and the subsequent repricing of loans at lower rates. The yields on investment securities and other earning assets also decreased over the same periods. The overall yield on earning assets decreased 63 basis points in the third quarter of 2003 compared to the sam e period in 2002. The decrease in yield on earning assets was less than the decrease in the yield on loans due to the change in our mix of average earning assets. Average loans, which are our highest yielding earning assets, comprised 79% of earning assets in the third quarter of 2003, compared to 78% in the same period of the prior year.

For the third quarter of 2003, the cost of interest bearing liabilities decreased by 68 basis points from the same period in 2002. As a result, net interest spread for the third quarter of 2003 increased 5 basis points over the same period in the prior year. Deposit and loan rates are adjusted as market conditions and the Banks' needs allow. The following table summarizes net interest income and average yields and rates paid for the quarters ended September 30, 2003 and 2002.

17

Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended September 30
Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
	2003							2002
		Average			Income/	Yield/			Average			Income/	Yield/
		Balance			Expense	Rate			Balance			Expense	Rate
Assets
Earning assets:
Loans, net of unearned income	$	440,895		$	7,513	6.76	%	$	319,619		$	6,046	7.50	%
Investment securities		73,319			654	3.54	%		53,205			600	4.47	%
Other earning assets		43,814			152	1.38	%		39,015			146	1.48	%
Total earning assets		558,028			8,319	5.91	%		411,839			6,792	6.54	%
Allowance for loan losses		(6,423	)						(4,356	)
Intangible assets		12,534							7,664
Cash & due from banks		19,367							15,582
Premises & equipment		21,078							11,504
Other assets		5,706							5,133
TOTAL ASSETS	$	610,290						$	447,366
Liabilities and Stockholders' Equity
Interest bearing liabilities:
NOW accounts	$	39,250			27	0.27	%	$	25,208			79	1.24	%
Money market accounts		95,634			258	1.07	%		74,962			395	2.09	%
Savings deposits		24,397			35	0.57	%		15,790			54	1.36	%
Time deposits < $100		154,215			1,092	2.81	%		114,474			961	3.33	%
Time deposits > $100		102,048			751	2.92	%		65,437			580	3.52	%
Federal funds purchased		-			-	0.00	%		-			-	0.00	%
Repurchase agreements		12,407			26	0.83	%		12,855			48	1.48	%
Other borrowings		9,162			94	4.07	%		6,137			67	4.33	%
Total interest bearing liabilities		437,113			2,283	2.07	%		314,863			2,184	2.75	%
Net interest spread				$	6,036	3.84	%				$	4,608	3.79	%
Noninterest bearing demand deposits		88,679							63,562
Accrued expenses and other liabilities		3,616							2,951
Stockholders' equity		80,493							65,494
Unrealized gain on securities		389							496
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	610,290						$	447,366
Impact of noninterest bearing sources and other changes in balance sheet composition						0.46	%						0.65	%
Net yield on earning assets*						4.30	%						4.44	%
*Same as net interest margin

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The following table presents the dollar amount of changes in interest income and interest expense from the three month period ended September 30, 2002 to the three month period ended September 30, 2003. The table distinguishes between the changes related to average outstanding (volume) of earning assets and interest bearing liabilities, as well as the changes related to average interest rates (rate) on such assets and liabilities.

Change in Interest Income and Expense on a Tax Equivalent Basis
For the Three Months Ended September 30
(all dollar amounts in thousands)
	2003 Compared to 2002
	Increase (Decrease)
	in Interest Income and Expense
	Due to Changes in:
		Volume			Rate			Total
Interest earning assets:
Loans, net of unearned income	$	2,066		$	(600	)	$	1,466
Investment securities		180			(125	)		55
Other earning assets		17			(11	)		6
Total earning assets		2,263			(736	)		1,527
Interest bearing liabilities:
NOW accounts		10			(62	)		(52	)
Money market accounts		56			(193	)		(137	)
Savings deposits		12			(31	)		(19	)
Time deposits < $100		281			(150	)		131
Time deposits > $100		269			( 98	)		171
Federal funds purchased		-			-			-
Repurchase agreements		(1	)		(21	)		(22	)
Other borrowings		31			(4	)		27
Total interest bearing liabilities		658			( 559	)		99
Increase (decrease) in net interest income	$	1,605		$	(177	)	$	1,428

Comparing the nine months ended September 30, 2003 to the same period in 2002, the interest rate earned on loans decreased 58 basis points because of the Federal Reserve’s rate cut initiative. We believe that the yield on the loan portfolio, as well as the yield on earning assets and the cost of funding interest bearing liabilities will most likely decrease because these assets and liabilities will continue to reprice at lower rates. The yield on earning assets decreased by 78 basis points and the cost of interest bearing liabilities decreased 64 basis points, which caused the net interest spread to decrease by 14 basis points. The following table summarizes net interest income and average yields and rates paid for the nine months ended September 30, 2003 and 2002.

19

Average Consolidated Balance Sheets and Net Interest Analysis
For the Nine Months Ended September 30
Fully Tax-Equivalent Basis
(all dollar amounts in thousands)
	2003							2002
		Average			Income/	Yield/			Average			Income/	Yield/
		Balance			Expense	Rate			Balance			Expense	Rate
Assets
Earning assets:
Loans, net of unearned income	$	409,349		$	21,069	6.88	%	$	301,490		$	16,820	7.46	%
Investment securities		66,940			1,887	3.77	%		44,588			1,547	4.64	%
Other earning assets		43,038			417	1.30	%		20,012			251	1.68	%
Total earning assets		519,327			23,373	6.02	%		366,090			18,618	6.80	%
Allowance for loan losses		(6,216	)						(4,052	)
Intangible assets		11,275							6,688
Cash & due from banks		17,145							12,557
Premises & equipment		17,745							10,411
Other assets		5,619							3,937
TOTAL ASSETS	$	564,895						$	395,631
Liabilities and Stockholders' Equity
Interest bearing liabilities:
NOW accounts	$	34,738			92	0.35	%	$	23,763			192	1.08	%
Money market accounts		90,359			931	1.38	%		64,058			1,021	2.13	%
Savings deposits		21,770			124	0.76	%		11,779			116	1.32	%
Time deposits < $100		144,323			3,178	2.94	%		102,611			2,707	3.53	%
Time deposits > $100		93,687			2,169	3.10	%		64,219			1,817	3.78	%
Federal funds purchased		-			-	0.00	%		1,837			25	1.82	%
Repurchase agreements		12,762			97	1.02	%		11,682			138	1.58	%
Other borrowings		8,175			256	4.19	%		5,777			190	4.40	%
Total interest bearing liabilities		405,814			6,847	2.26	%		285,726			6,206	2.90	%
Net interest spread				$	16,526	3.76	%				$	12,412	3.90	%
Noninterest bearing demand deposits		78,637							55,325
Accrued expenses and other liabilities		3,265							2,914
Stockholders' equity		76,623							51,317
Unrealized gain on securities		556							349
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	564,895						$	395,631
Impact of noninterest bearing sources and other changes in balance sheet composition						0.50	%						0.64	%
Net yield on earning assets*						4.26	%						4.54	%
*Same as net interest margin

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The following table presents the dollar amount of changes in interest income and interest expense from the nine months ended September 30, 2002 to the nine months ended September 30, 2003. The table distinguishes between the changes related to average outstanding (volume) of earning assets and interest bearing liabilities, as well as the changes related to average interest rates (rate) on such assets and liabilities.

Change in Interest Income and Expense on a Tax Equivalent Basis
For the Nine Months Ended September 30
(all dollar amounts in thousands)
	2003 Compared to 2002
	Increase (Decrease)
	in Interest Income and Expense
	Due to Changes in:
		Volume		Rate			Total
Interest earning assets:
Loans, net of unearned income	$	5,551	$	(1,302	)	$	4,249
Investment securities		630		(290	)		340
Other earning assets		223		(57	)		166
Total earning assets		6,404		(1,649	)		4,755
Interest bearing liabilities:
NOW accounts		29		(129	)		(100	)
Money market accounts		271		(361	)		(90	)
Savings deposits		57		(49	)		8
Time deposits < $100		919		(448	)		471
Time deposits > $100		682		(330	)		352
Federal funds purchased		-		(25	)		(25	)
Repurchase agreements		8		(49	)		(41	)
Other borrowings		75		(9	)		66
Total interest bearing liabilities		2,041		(1,400	)		641
Increase (decrease) in net interest income	$	4,363	$	(249	)	$	4,114

Provision for Loan Losses

The provision for loan losses charged to operations during the three months ended September 30, 2003 was $366 thousand compared to $561 thousand in the same period of 2002. Net charge-offs for the third quarter of 2003 were $403 thousand compared to net charge-offs of $245 thousand for the same period in 2002. The provision for the nine months ended September 30, 2003 and 2002 was $1.5 million and $810 thousand, respectively. Net charge-offs for the nine months ended September 30, 2003 and 2002 were $1,333 thousand and $375 thousand, respectively

The provision expense for 2003 increased from the amount in 2002 due to our analysis of inherent risks in the loan portfolio in relation to the portfolio's growth, the level of past due, classified, nonperforming loans and charged-off loans, as well as general economic weakness. From December 31, 2002 to September 30, 2003, the loan portfolio increased by $98.0 million, compared to an increase of $41.5 million for the nine months ended September 30, 2002. Of this increase, $41.6 million was natural growth within existing markets and $56.9 million was purchased through the Premier National Bank acquisition.

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We anticipate that during the remainder of 2003 our provision expense for loan losses may increase because we intend to increase the size of our loan portfolio.

The allowance for loan losses reflects management's assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. We periodically analyze our loan portfolio in an effort to establish an allowance for loan losses that we believe will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, we review the size, quality and risk of loans in the portfolio. We also consider such factors as:

o our loan loss experience;

o the amount of past due and nonperforming loans;

o specific known risks;

o the status and amount of past due and nonperforming assets;

o underlying estimated values of collateral securing loans;

o current and anticipated economic conditions; and

o other factors which management believes affect the allowance for potential credit losses.

An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan losses is prepared by FSGBank’s credit administration department and presented to the board of directors on a regular basis. In addition, our loan review department performs a regular review of the quality of the loan portfolio and adequacy of the allowance.

FSGBank’s allowance for loan losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses compared to a group of peer banks identified by the regulators. During their routine examinations of banks, the regulators may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, their credit evaluations and allowance for loan loss methodology differ materially from ours.

While it is our policy to charge off in the current period loans for which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management's judgment as to the adequacy of the allowance is necessarily approximate and imprecise.

As of September 30, 2003, the allowance for loan loss for FSGBank was $6.4 million or 1.43% of its outstanding loans. The peer group for FSGBank, as defined by the Federal Financial Institutions Examination Council's June 30, 2003 Uniform Bank Performance Report, includes all insured commercial banks between $500 million and $1 billion average assets. This peer group, which includes 377 banks, had a ratio of the allowance for loan losses divided by total loans of 1.38% as of June 30, 2003, or 5 basis points less than FSGBank. Net charge-offs for FSGBank totaled $1.3 million for the nine months ended September 30, 2003. Using our methodology, we believe that the allowance for loan loss for FSGBank was adequate as of September 30, 2003.

Noninterest Income

Noninterest income totaled $1,470 thousand for the third quarter of this year, an increase of $562 thousand, or 62%, from the same period in 2002. Deposit related income, comprised primarily of account service charges and non-sufficient fund charges, totaled $642 thousand for the third quarter of 2003, which was $180 thousand, or 39%, more than the corresponding quarter in 2002. Deposit related income increased as we gained deposits and assumed deposits through the acquisitions of First State Bank and Premier National Bank, and we believe that this source of income will continue to be boosted by further deposit growth and our acquisition of the Monroe County NBC bank branches. Mortgage loan fees increased by $55 thousand, or 19%, to $350 thousand for the third quarter of 2003 from the prior year. In the third quarter of 2003, rates for fixed rate residential 15- and 30-year loan products remained at levels that were lower than those in the preceding year, and as a result, the mortgage refinancing activity continued to be higher than the previous year. Based on current loan volumes, we believe that mortgage loan fees will remain near third quarter levels for the remainder of the year; however, based on current economic uncertainty and an increasing long term rate environment, mortgage fees may decrease during the last quarter of 2003.

For the first nine months of this year, noninterest income was $4.0 million, which is an increase of $1.3 million, or 50%, over the same period in 2002. For the first nine months of 2003, deposit related income totaled $1,693 thousand, an increase of $344 thousand, or 26%, over the first nine months of 2002. Mortgage loan fees totaled $1,412 for the nine months ended September 30, 2003, which is $569 thousand, or 68%, more than the same period in 2002.

22 

Noninterest Expense

Noninterest expense for the third quarter totaled $5.9 million, which was an increase of $2.0 million, or 54% over the third quarter of 2002. First Security's overhead ratio (noninterest expense, excluding amortization of intangible assets, provision for loan losses, and income tax expenses, as a percentage of net interest income and noninterest income) increased from 69% in the third quarter of 2002 to 77% for the same period in 2003. This reflects our growth from the third quarter of 2002 compared to the same period in 2003 as described in "Net Interest Income" and "Noninterest Income."

Compared to the third quarter of 2002, salaries and benefits for the third quarter of 2003 increased $878 thousand or 41% to $3.0 million. The majority of the increase in salaries and benefits is related to staff additions for our branch openings and our acquisitions of First State Bank in July 2002 and Premier National Bank in March 2003. As of September 30, 2002, we had 15 full service branches and three loan production office and a total of 181 full time equivalent employees. As of September 30, 2003, we employed 238 full time equivalent employees and operated 21full service branches and one loan production office. We believe that salaries and benefits will increase for the remainder of 2003 as a result of our anticipated branching efforts, as well as our acquisition of the Monroe County NBC bank branches.

The following expense categories are higher in the third quarter 2003 versus the same period in the prior year as a result of our branching activities and acquisitions of First State Bank and Premier National Bank. Occupancy expenses increased $133 thousand, or 47%, to $415 thousand. Furniture, fixtures and equipment expenses increased $147 thousand, or 48%, to $451 thousand. Data processing costs increased $149 thousand, or 75%, to $348 thousand. Supplies, communications, and postage expenses increased in aggregate by $186 thousand, or 68%, to $459 thousand. Advertising expense was $86 thousand for both the third quarter ended September 30, 2003 and for the third quarter ended September 30, 2002.

Professional fees decreased $6 thousand or 4% to $151 thousand from third quarter 2002 to third quarter 2003. These fees related to outsourcing of internal audit, loan review, information technology audit, and compliance to Professional Bank Services, as well as external audit and tax services and legal and accounting advice.

The $154 thousand of third quarter amortization expense resulted from the amortization of the core deposit intangible assets created by the acquisitions of First State Bank and Premier National Bank. The core deposit intangible and goodwill created by the acquisition of First State Bank were $1 million and $1.4 million, respectively. The core deposit intangible and goodwill created by the acquisition of Premier National Bank were $1.3 million and $3 million, respectively. The estimated useful life of each core deposit intangible asset is 10 years. First Security Group’s adoption of SFAS 142 eliminated the requirement that companies amortize goodwill, rather the carrying value is written down if it becomes impaired.

Noninterest expense for the nine-month period ended September 30, 2003 were $5.6 million, or 53%, higher and totaled $16 million compared to the same period in 2002. The changes are explained similarly to the quarterly data above and were as follows. Salaries and benefits increased $2.8 million or 47%. Occupancy expenses increased $293 thousand or 37%. Furniture, fixtures, and equipment expenses increased $412 thousand or 53%. Data processing costs increased $317 thousand or 59%. Supplies, communications, and postage expenses increased $425 thousand or 61%. Professional fees increased $24 thousand or 4%. Advertising expense decreased $3 thousand or 1%. For the nine months ended September 30, 2003, First Security Group, Inc. had incurred $440 thousand of pre-tax one-time expenses related to the ac quisition of Premier National Bank, the change of the bank names and the merger of our banks’ charters.

23

STATEMENT OF FINANCIAL CONDITION

First Security's total assets at September 30, 2003 and 2002 were $621.7 million and $468.0 million, respectively, and $472.9 million at December 31, 2002. Average assets for the third quarter of 2003 were $610 million versus $447 million for the same period a year earlier, an increase of 36%. Of the $148.7 million increase in total assets in the first nine months of 2003, approximately $89.7 million resulted from our acquisition of Premier National Bank and approximately $52.7 million was from growth in deposits. First Security continues to actively pursue acquisitions and will continue to seek means to enhance our market share through further branching.

Loans

Average loans of $440.9 million represented 79% of our average earning assets during the third quarter of 2003. From December 31, 2002, gross loans increased $98 million to $446.6 million at September 30, 2003. The increase in gross loans was comprised of approximately $42 million in natural growth and $56 million through the Premier National Bank acquisition. Comparing the third quarter end of 2003 to 2002, gross loans increased $114 million, or 34%. The quarter to quarter growth is not only attributable to the Premier National Bank acquisition, but also to the ties of our bankers to the local communities in which they work. We believe that general loan demand will remain strong during 2003. Funding of future loan growth may be restricted by our abil ity to raise core deposits, although we will use alternative funding sources if necessary and cost effective. Loan growth may be further restricted by the necessity for us to maintain appropriate capital levels, as well as adequate liquidity.

Asset Quality

The allowance for loan losses was $6.4 million or 1.43% of outstanding loans at September 30, 2003 and $5.3 million or 1.54% of outstanding loans at December 31, 2002. The allowance for loan losses was 382.37% of nonperforming loans (defined as loans 90 days or more past due and nonaccrual loans) at September 30, 2003 and 709.26% of nonperforming loans at December 31, 2002. For the first nine months of 2003, net charge-offs arising from loans secured by real estate totaled $11 thousand, commercial loans totaled $878 thousand, and consumer loans totaled $444 thousand. See "Provision for Loan Losses." We believe that our reserve for inherent loan losses is adequate based on our assessment of the information available. Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examinations of our banks, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant. The allocation of the allowance for loan losses by loan category at the dates indicated is presented below.

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Allocation for Allowance for Loan Losses
As of September 30, 2003 and 2002
(in thousands)
	2003				2002
			Percentage of loans in each				Percentage of loans in each
Loan Categories		Amount	category to total loans			Amount	category to total loans
Commercial	$	2,517	25.1	%	$	1,896	30.6	%
Real estate-construction		324	8.8	%		221	8.3	%
Real estate-mortgage		2,529	50.9	%		1,358	41.1	%
Consumer		883	15.2	%		615	20.0	%
Charter condition or unallocated		125	-			547	-
Total	$	6,378	100.0	%	$	4,637	100.0	%

Nonperforming Assets

Nonaccrual loans were $1.3 million at September 30, 2003, $667 thousand at December 31, 2002 and $1.2 million at September 30, 2002. The nonaccrual loans in September 2003 included $979 thousand of commercial loans, $39 thousand of consumer loans, and $248 thousand of 1-4 family secured loans. The ratio of nonaccrual loans to total loans was 0.29% at September 2003 and 0.22% at December 31, 2002. At September 30, 2003, we owned other real estate in the amount of $338 thousand.

Loans past due 90 days and still accruing were $402 thousand at September 30, 2003, compared to $89 thousand at December 31, 2002. Of these past due loans at September 30, 2003, $99 thousand were secured by real estate, $197 thousand were commercial loans and $106 thousand were consumer loans.

At September 30, 2003, nonperforming loans (nonaccrual loans and loans past due 90 days or more) were 0.38% of total outstanding loans, which is 41 basis points less than the average of our peer group, or0.79%. Although our nonperforming asset ratio remains below our peer group, our nonperforming loans increased, and, as a result, our Chief Loan Review Officer and Chief Credit Administration Officer are implementing new procedures for enhanced monitoring of problem loans, as well as early detection, prevention and corrective action plans.

Investment Securities and Other Earning Assets

Securities totaled $86.7 million at September 30, 2003, $54.4 million at December 31, 2002, and $55.2 million at September 30, 2002. From third quarter end 2002 to third quarter end 2003, the growth in the securities portfolio occurred as a result of our efforts to improve our liquidity, as well as the acquisition of Premier National Bank, Dalton, GA. At September 30, 2003, the securities portfolio had unrealized net gains of approximately $545 thousand. In addition, all investment securities purchased to date have been classified as available-for-sale. The following table provides the amortized cost of our investment securities by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the approxima te tax equivalent yields for each maturity range.

(in thousands)		Less than			One to			Five to			More than
		One Year			Five Years			Ten Years			Ten Years
Municipal	$	1,452		$	8,597		$	7,764		$	3,066
Federal Agencies		8,998			50,275			5,953			0
Total	$	10,450		$	58,872		$	13,717		$	3,066
Tax Equivalent Yield		3.6	%		3.2	%		4.4	%		5.5	%

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We currently have the ability and intent to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities. Pledged securities as of September 30, 2003 totaled $22.8 million. Our management considers the overall quality of the securities portfolio to be high. All securities held are traded in liquid markets, except for one bond. This $250 thousand investment is 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. As of September 30, 2003, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10 % of our stockholders equity. As of the third quarter ended 2003, the amortized cost and market value of the securities from each such issuer are as follows:

(in thousands)	Amortized Cost	Market Value
Fannie Mae	$ 27,410	$ 27,543
FHLMC*	$ 20,728	$ 20,770
FHLB**	$ 15,419	$ 15,591

* Federal Home Loan Mortgage Corporation

** Federal Home Loan Bank

The following table presents the amortized cost of the investments for the dates presented in the consolidated balance sheets.

(in thousands)		September 30, 2003		December 31, 2002		September 30, 2002
Federal agencies	$	65,226	$	40,811	$	42,725
Municipal		20,879		12,728		11,505
Total	$	86,105	$	53,539	$	54,230

Federal funds sold decreased to $24 million at September 30, 2003 from $30 million at December 31, 2002. The decrease in federal funds is a direct result of investing a portion of these funds into liquid investment securities and loans to improve our yield on these earning assets.

Deposits and Other Borrowings

Total deposits increased 36% from September 30, 2002 to September 30, 2003, and 33% fromDecember 31, 2002 to September 30, 2003. For the first nine months of 2003, our branching activities yielded deposit growth of approximately $53 million and Premier National Bank provided approximately $74 million in new deposits. We anticipate that our deposits will increase as a result of future branching activities.

With the purchase of Premier National Bank, First Security acquired a Federal Home Loan Bank advance in the amount of $3 million (see "Liquidity"). The following table details the maturities and rates of the term borrowings from the Federal Home Loan Bank.

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Date	Type		Principal		Term		Rate			Maturity
12/28/2001		Fixed Rate Advance	$	3,000,000		24 months		3.60	%		12/28/03
1/8/2002		Fixed Rate Advance		500,000		24 months		3.73	%		1/8/04
1/8/2002		Fixed Rate Advance		500,000		36 months		4.48	%		1/8/05
1/8/2002		Fixed Rate Advance		500,000		48 months		5.04	%		1/8/06
1/10/2002		Fixed Rate Advance		500,000		24 months		3.65	%		1/10/04
1/10/2002		Fixed Rate Advance		500,000		36 months		4.45	%		1/10/05
1/10/2002		Fixed Rate Advance		500,000		48 months		5.00	%		1/10/06
1/15/2002		Fixed Rate Advance		500,000		24 months		3.50	%		1/15/04
1/15/2002		Fixed Rate Advance		500,000		36 months		4.22	%		1/15/05
1/15/2002		Fixed Rate Advance		500,000		48 months		4.77	%		1/15/06
1/17/2002		Fixed Rate Advance		500,000		24 months		3.63	%		1/17/04
1/17/2002		Fixed Rate Advance		500,000		36 months		4.35	%		1/17/05
1/17/2002		Fixed Rate Advance		500,000		48 months		4.88	%		1/17/06
			$	9,000,000

Composite rate	4.07%
Composite 24 month rate	3.61%
Composite 36 month rate	4.38%
Composite 48 month rate	4.92%

Liquidity

Liquidity refers to First Security’s ability to adjust its future cash flows to meet the needs of our daily operations. First Security relies primarily on management service fees from FSGBank to fund our daily operations liquidity needs. Additionally, in connection with our 2002 private placement stock offering, we retained a portion of the proceeds of the offering as working capital and a portion of the proceeds for future investment into our subsidiaries. First Security’s cash balance, which totaled approximately $6 million as of September 30, 2003, is available for funding activities for which FSGBank would not receive direct benefit, such as acquisition due diligence, shareholder relations, and holding company reporting and operations. T hese funds should adequately meet our cash flow needs. If we determine that our cash flow needs will be satisfactorily met, we may deploy a portion of the funds into FSGBank or use them in an acquisition in order to support continued growth.

The liquidity of FSGBank refers to the ability or financial flexibility to adjust its future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost effective basis. The primary sources of funds for FSGBank are cash generated by repayments of outstanding loans, interest payments on loans, and new deposits. Additional liquidity is available from the maturity and earnings on securities and liquid assets, as well as the ability to liquidate securities available for sale.

At September 30, 2003, our liquidity ratio (defined as cash, due from banks, federal funds sold, and investment securities less securities pledged to liabilities divided by short-term funding liabilities less liabilities pledged by securities) was 22.9% (excluding anticipated loan repayments). As of December 31, 2002 and September 30, 2002, the liquidity ratios were 23.1% and 25.9% respectively. FSGBank could increase its borrowing capacity at the FHLB, subject to more stringent collateral requirements, by pledging loans other than 1-4 family residential mortgage loans. Our Dalton operation assumed a $3 million FHLB advance with the Premier National Bank merger. This advance is collateralized with investment securities, as opposed to loans.

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Cumulatively, FSGBank also had unsecured federal funds lines in the aggregate amount of $42.8 million at September 30, 2003, under which it could borrow funds to meet short-term liquidity needs. Another source of funding that we have used and may continue to use is loan participations sold to other commercial banks (in which we retain the service rights). As of September 30, 2003, we had $18.7 million in loan participations sold. An additional source of short-term funding would be to pledge investment securities against a line of credit at a commercial bank. As of September 30, 2003, we had no borrowings against our investment securities, except for repurchase agreements attained in the ordinary course of business and the $3 million advance assumed wi th the Premier National Bank acquisition. To date, First Security has not initiated the use of brokered deposits or Internet deposits as a source of funding; however, we assumed $4.2 million in brokered deposits with our acquisition of Premier National Bank, with $2.6 million remaining on deposit at September 30, 2003. Our certificates of deposit greater than $100 thousand were gathered in our local communities. Management believes that First Security’s liquidity sources are adequate to meet FSGBank’s operating needs.

First Security also has contractual cash obligations and commitments, which included certificates of deposit, other borrowings, operating leases, and loan commitments. As of September 30, 2003, certificates of deposit totaled $246.6 million. The scheduled maturities of certificates of deposit are as follows:

(Dollars amounts in thousands)	Less than 1 year	1 to 3 years	Over 3 years	Total
Certificates of Deposit	$182,368	$50,299	$13,934	$246,601

At September 30, 2003, other borrowings included $9 million in FHLB advances (see Management’s Discussion and Analysis of Financial Condition and Results of Operation Deposits and Other Borrowings). Unfunded loan commitments and stand by letters of credit totaled $112.0 million and $3.3 million, respectively, at September 30, 2003. The following table illustrates our lease obligations, which included property and equipment leases, as of September 30, 2003.

(Dollars amounts in thousands)	Less than 1 year	1 to 3 years	3 to 5 years	After 5 years	Total
Lease Obligations	$717	$1,240	$1,047	$2,982	$5,986

Net cash provided from or used by operations results primarily from net income or loss, adjusted for the following noncash accounting items: provision for loan losses, depreciation and amortization, and deferred income taxes or benefits. These items amounted to cash provided of $3.1 million for the nine months ended September 30, 2003. Cash provided by operations was available to increase earning assets.

Capital Resources

We continue to maintain capital ratios in excess of regulatory minimum requirements. The current capital standards to be well capitalized call for a minimum total capital of 10% of risk-adjusted assets, including 6% Tier I capital, and a minimum leverage ratio of Tier I capital to total tangible assets of at least 5%. First Security and FSGBank maintain capital levels exceeding the minimum levels required for "well capitalized" banks and bank holding companies under applicable regulatory guidelines.

September 30, 2003	Well Capitalized		Adequately Capitalized		First Security		FSGBank*
Tier I capital to risk adjusted assets	6.0	%	4.0	%	14.3	%	12.6	%
Total capital to risk adjusted assets	10.0	%	8.0	%	15.5	%	13.9	%
Leverage ratio	5.0	%	4.0	%	11.4	%	10.1	%
*Banks merged September 2003
December 31, 2002	Well Capitalized		Adequately Capitalized		First Security		FSGBank - Dalton		FSGBank - Chattanooga		FSGBank - Maynardville
Tier I capital to risk adjusted assets	6.0	%	4.0	%	16.4	%	11.1	%	11.0	%	37.0	%
Total capital to risk adjusted assets	10.0	%	8.0	%	17.6	%	12.3	%	12.3	%	38.2	%
Leverage ratio	5.0	%	4.0	%	12.6	%	8.3	%	9.2	%	19.9	%
September 30, 2002	Well Capitalized		Adequately Capitalized		First Security		FSGBank Dalton		FSGBank - Chattanooga		FSGBank - Maynardville
Tier I capital to risk adjusted assets	6.0	%	4.0	%	16.7	%	10.4	%	10.1	%	25.6	%
Total capital to risk adjusted assets	10.0	%	8.0	%	18.0	%	11.6	%	11.3	%	26.8	%
Leverage ratio	5.0	%	4.0	%	13.1	%	8.2	%	8.6	%	11.8	%

*On September 24, 2003, our three FSGBank charters (Dalton, Chattanooga, and Maynardville) were

merged into one bank charter.

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We have never paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to support the development and growth of our business. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend upon our earnings, our financial condition, the capital adequacy of First Security and our subsidiaries, opportunities for growth and expansion, our subsidiaries' need for funds, and other relevant factors, including applicable restrictions and governmental policies and regulations.

EFFECTS OF INFLATION

Inflation generally increases the cost of funds and operating overhead, and, to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In 2000, the Federal Reserve increased interest rates three times for a total of 100 basis points in an attempt to control inflation. However, in 2001 th e Federal Reserve reduced interest rates on 11 occasions for a total of 475 basis points in an effort to stimulate economic growth. On November 6, 2002, the Federal Reserve decreased interest rates by 50 basis points and on June 27, 2003, the Federal Reserve decreased interest rates 25 basis points in order to further stimulate economic growth.

In addition, inflation results in an increased cost of goods and services purchased, cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect the liquidity and earnings of our commercial banking and mortgage banking business, and our shareholders' equity. With respect to our mortgage banking business, mortgage originations and refinancings tend to slow as interest rates increase, and increased interest rates would likely reduce our earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere throughout this Form 10-Q are forward-looking statements for purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements relate to future events or our future financial performance and may involve known or unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of First Security to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements include statements using the words such as "may," "will," "anticipa te," "should," "would," "believe," "contemplate," "expect," "estimate," "continue," "intend," "seeks," or other similar words and expressions of the future.

These forward-looking statements involve risks and uncertainties, and may not be realized due to a variety of factors, including, without limitation: the effects of future economic conditions, governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities; interest rate risks; the costs of evaluating possible acquisitions and the risks inherent in integrating acquisitions; the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance c ompanies, money market and other mutual funds and other financial institutions operating in First Security's market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet; and the failure of assumptions underlying the establishment of reserves for possible loan losses. All written or oral forward-looking statements attributable to First Security are expressly qualified in their entirety by this Special Note.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk, with respect to First Security, is the risk of loss arising from adverse changes in interest rates and prices. The risk of loss can result in either lower fair market values or reduced net interest income. We manage several types of risk, such as credit, liquidity and interest rate. We consider interest rate risk to be a significant risk that could potentially have a large material effect on our financial condition. Further, we process hypothetical scenarios whereby we shock our balance sheet up and down for possible interest rate changes, we analyze the potential change (positive or negative) to net interest income, as well as the effect of changes in fair market values of assets and liabilities. First Security does not maintain a tradin g portfolio or deal in international instruments, and therefore First Security is not exposed to risk inherent to trading activities and foreign currency.

First Security's interest rate risk management is the responsibility of the Asset/Liability Committee ("ALCO"). ALCO has established policies and limits to monitor, measure and coordinate First Security's sources, uses, and pricing of funds.

Interest rate risk represents the sensitivity of earnings to changes in interest rates. As interest rates change, the interest income and expense associated with First Security's interest sensitive assets and liabilities also change, thereby impacting net interest income, the primary component of our earnings. ALCO utilizes the results of both a static and dynamic gap report to quantify the estimated exposure of net interest income to a sustained change in interest rates.

The gap analysis projected net interest income based on both a rise and fall in interest rates of 200 basis points (i.e. 2.00%) over a twelve-month period. The model is based on actual repricing dates of interest sensitive assets and interest sensitive liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rates of certain assets.

First Security measures this exposure based on an immediate change in interest rates of up or down 200 basis points. Given this scenario, First Security had, at the end of the period, an exposure to falling rates and a benefit from rising rates. More specifically, for the period ended September 30, 2003 the model forecasts a decline in net interest income of $1,954 thousand or 12.0%, as a result of a 200 basis point decline in rates. The model also predicts a $1,364 thousand increase in net interest income, or 8.4%, as a result of a 200 basis point increase in rates. The forecasted results of the model are within the limits specified by ALCO. The following chart reflects First Security's sensitivity to changes in interest rates as of September 30, 200 3. The numbers are based on a static balance sheet, and the chart assumes that pay downs and maturities of both assets and liabilities are reinvested in like instruments at current interest rates, rates down 200 basis points, and rates up 200 basis points.

Interest Rate Risk

Income Sensitivity Summary

As of September 30. 2003

(in thousands)

		DOWN200 BP			CURRENT			UP200 BP
Net interest income	$	14,323		$	16,277		$	17,641
Dollar change net interest income		(1,954	)		-			1,364
Percent change net interest income		-12.0	%		0.00	%		8.4	%

The preceding sensitivity analysis is a modeling analysis, which changes periodically and consists of hypothetical estimates based upon numerous assumptions including interest rate levels, shape of the yield curve, prepayments on loans and securities, rates on loans and deposits, reinvestment of paydowns and maturities of loans, investments and deposits, among others. In addition, there are no assumptions for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, management cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

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As market conditions vary from those assumed in the sensitivity analysis, actual results will differ. Also, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic fi lings with the Securities and Exchange Commission.  There have been no changes in the Company's internal controls over financial reporting during the quarter ended September 30, 2003 that have materially affected, or are resonably likely to material affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 6. Exhibits and Reports on Form 8-K

(a)	Exhibits:
	EXHIBIT NUMBER	DESCRIPTION
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 (a) under the Securities Exchange Act of 1934
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 (a) under the Securities Exchange Act of 1934
	32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 (b) under the Securities Exhange Act of 1934
	32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 (b) under the Securities Exchange Act of 1934
(b)	Reports on Form 8-K:
	The following reports on Form 8-K were filed during the quarter ended September 30, 2003.
	Current Report on Form 8-K dated and filed August 13, 2003, Items 5 and 7.
	Current Report on Form 8-K dated and filed September 16, 2003, Item 12.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed by the undersigned, thereunto duly authorized.

	FIRST SECURITY GROUP, INC.
	(Registrant)
November 14, 2003	/s/ Rodger B. Holley
	Rodger B. Holley
	Chairman, Chief Executive Officer & President
November 14, 2003	/s/ William L. Lusk, Jr.
	William L. Lusk, Jr.
	Secretary, Chief Financial Officer &
	Executive Vice President

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