First Security (FSGI) 10-K 2014 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

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)
	Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		The NASDAQ Stock Market LLC
	Securities Registered Pursuant to Section 12(g) of the Act:
	None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  ý

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

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	ý
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

The aggregate market value of the registrant’s outstanding common stock held by nonaffiliates of the registrant as of June 30, 2014 was approximately $141.6 million, based on the registrant’s closing sales price as reported on the NASDAQ Capital Market. There were 66,826,134 shares of the registrant’s common stock outstanding as of March 12, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
Portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders	III

First Security Group, Inc. and Subsidiary

Form 10-K

INDEX

		Page No.
PART I.		1
Item 1.	Business	1
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	23
Item 3.	Legal Proceedings	25
Item 4.	Mine Safety Disclosures	25
PART II.		26
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Financial Data	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	75
Item 8.	Financial Statements and Supplementary Data	76
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	137
Item 9A.	Controls and Procedures	137
Item 9B.	Other Information	139
PART III.		139
Item 10.	Directors, Executive Officers and Corporate Governance	139
Item 11.	Executive Compensation	139
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	139
Item 13.	Certain Relationships and Related Transactions, and Director Independence	139
Item 14.	Principal Accounting Fees and Services	139
PART IV.		140
Item 15.	Exhibits, Financial Statement Schedules	140
SIGNATURES		143

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of our statements contained in this Annual Report, including, without limitation, matters discussed under the captions "Risk Factors" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future events or our future financial performance and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” “will,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared.

These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors. There can be no assurance that the results, performance or achievements of the Company will not differ materially from those expressed or implied by forward-looking statements. Factors that could cause actual events or results to differ significantly from those described in the forward-looking statements include, but are not limited to the following:

• deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;

• changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;

• changes in business policies or practices as a result of the changes in management;

• changes in local, national or international political and economic conditions;

• changes in financial market conditions, either internationally, nationally or locally in areas in which First Security conducts its operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;

• First Security’s ability to comply with any requirements imposed on it or FSGBank by their respective regulators, and the potential negative consequences that result;

• the failure of assumptions underlying the establishment of reserves for possible loan losses;

• changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

• the impacts of renewed regulatory scrutiny on consumer protection and compliance led by the newly created Consumer Finance Protection Bureau;

• fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;

• governmental monetary and fiscal policies as well as legislative and regulatory changes, including, but not limited to, implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

• First Security’s lack of participation in a “stress test” under the Federal Reserve’s Supervisory Capital Assessment Program; the diagnostic and stress testing we conducted differs from that administered under the Supervisory Capital Assessment Program, and the results of our test may be inaccurate;

• the risk that First Security may be required to contribute additional capital to FSGBank in the future to enable it to meet its regulatory capital requirements or otherwise;

• 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;

• the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet; and

• the effect of any mergers, acquisitions or other transactions, to which we or our subsidiary may from time to time be a party, including, without limitation, our ability to successfully integrate any businesses that we acquire.

Many of these risks are beyond our ability to control or predict, and you are cautioned not to put undue reliance on such forward-looking statements. First Security does not intend to update or reissue any forward-looking statements contained in this Annual Report as a result of new information or other circumstances that may become known to First Security, and undertakes no obligation to provide any such updates.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results and conditions may differ significantly from those we discuss in these forward-looking statements.

For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” section of this Annual Report beginning on page 15.

PART I

ITEM 1. Business

Unless otherwise indicated, all references to “First Security,” “we,” “us,” and “our” in this Annual Report on Form 10-K refer to First Security Group, Inc. and our wholly-owned subsidiary, FSGBank, National Association (“FSGBank” or the "Bank").

BUSINESS

Company Overview

First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee. We currently operate 26 full-service banking offices through our wholly-owned bank subsidiary, FSGBank, N.A. We serve the banking and financial needs of various communities in eastern and middle Tennessee, as well as northern Georgia.

Through FSGBank, we strive to be a top-tier community bank through a focus on business banking while leveraging our retail branch network and capitalizing on niche lending opportunities. This strategy focuses on serving the needs of small- to medium-sized businesses by offering a range of lending, deposit and wealth management services to these businesses and their owners. Additionally, FSGBank’s lending services include a private banking line of business as well as loans secured by single and multi-family real estate, residential construction and owner-occupied commercial real estate. Our principal source of funds for loans and investment securities is core deposits gathered through our branch network. We offer a wide range of deposit services, including checking, savings, money market accounts and certificates of deposit, and obtain most of our deposits from individuals and businesses in our market areas, including those of our loan customers. Our wealth management division offers financial planning, trust administration, investment management and estate planning services. We also provide mortgage banking and electronic banking services, such as Internet banking (www.fsgbank.com), online bill payment, cash management, ACH originations, and remote deposit capture. We actively pursue business relationships by utilizing the business contacts of our Board of Directors, senior management and local bankers, thereby capitalizing on our extensive knowledge of the local marketplace.

First Security Group, Inc. was incorporated in 1999 as a Tennessee corporation to serve as a bank holding company, and is regulated and supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As of December 31, 2014, we had total assets of approximately $1.1 billion, total deposits of approximately $905.6 million and stockholders’ equity of approximately $90.0 million.

FSGBank currently operates 26 full-service banking-offices along the Interstate corridors of eastern and middle Tennessee and northern Georgia, and is primarily regulated by the Office of the Comptroller of the Currency (the “OCC”).

FSGBank is the successor to our three previous banks: Dalton Whitfield Bank (organized in 1999), Frontier Bank (acquired in 2000) and First State Bank (acquired in 2002). Dalton Whitfield Bank was a state bank organized under the laws of Georgia engaged in a general commercial banking business. Dalton Whitfield Bank opened for business in September 1999, and simultaneously acquired selected assets and substantially all of the deposits of Colonial Bank’s three branches located in Dalton, Georgia. In 2003, Premier National Bank of Dalton merged with and into Dalton Whitfield Bank for an aggregate purchase price of $11.7 million in cash and stock.

Frontier Bank was a state savings bank organized under the laws of Tennessee in 2000 as First Central Bank of Monroe County. We acquired First Central Bank of Monroe County in 2000 for an aggregate purchase price of $2.3 million in cash. After the acquisition, First Central Bank of Monroe County was renamed Frontier Bank and re-chartered as a state bank under the laws of Tennessee to engage in a general commercial banking business. Outside of the Chattanooga market, Frontier Bank operated under the name of “First Security Bank.”

First State Bank was a state bank organized under the laws of Tennessee engaged in a general commercial banking business since its organization in 1974. We acquired First State Bank in 2002 for an aggregate purchase price of $8.6 million in cash.

During 2003, we converted each of our three subsidiary banks into national banks, renamed each bank “FSGBank, National Association” and merged the banks under the charter previously held by Frontier Bank. As a result, we consolidated our banking operations into one subsidiary, FSGBank.

Since the mergers in 2003, FSGBank has continued the commercial banking business of its predecessors. In addition, in December of 2003, FSGBank acquired certain assets and assumed substantially all of the deposits and other liabilities of National Bank of Commerce’s three branch offices located in Madisonville, Sweetwater and Tellico Plains, Tennessee.

In October 2004, FSGBank acquired 100% of the capital stock of Kenesaw Leasing, Inc. ("Kenesaw Leasing") and J&S Leasing, Inc. ("J&S Leasing"), both Tennessee corporations, from National Bank of Commerce for $13.0 million in cash. Both

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companies are wholly-owned subsidiaries of FSGBank although operations are now limited to collections efforts. Kenesaw Leasing leased new and used equipment, fixtures and furnishings to owner-managed businesses, while J&S Leasing leased forklifts, heavy equipment and other machinery primarily to companies in the trucking and construction industries.

In August 2005, we acquired Jackson Bank & Trust (“Jackson Bank”) for an aggregate purchase price of $33.3 million in cash. Jackson Bank was a state commercial bank headquartered in Gainesboro, Tennessee. Jackson Bank was merged into FSGBank.

Prior to 2014, FSGBank conducted its banking operations in Dalton, Georgia under the name “Dalton Whitfield Bank” and "Jackson Bank & Trust" in Jackson and Putnam Counties, Tennessee. During 2014, all locations operating under historical names were transitioned to operate as FSGBank.

FSGBank is a member of the Federal Reserve Bank of Atlanta (the "Federal Reserve Bank") and a member of the Federal Home Loan Bank of Cincinnati (the “FHLB”). FSGBank’s deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC"). FSGBank operates 21 full-service banking offices in eastern and middle Tennessee and five offices in northern Georgia.

Market Area and Competition

We currently conduct business principally through 26 branches in our market areas of Bradley, Hamilton, Jackson, Jefferson, Knox, Loudon, McMinn, Monroe, Putnam and Union Counties, Tennessee and Whitfield County, Georgia. Our markets follow the Interstate 75 corridor between Dalton, Georgia (approximately one hour north of Atlanta, Georgia) and Jefferson City, Tennessee (approximately 30 minutes north of Knoxville, Tennessee) and the Interstate 40 corridor between Nashville, Tennessee and Knoxville, Tennessee. Based upon data available from the FDIC as of June 30, 2014, FSGBank’s total deposits ranked 7th among financial institutions in our market area, representing approximately 3.5% of the total deposits in our market area.

The table below shows our deposit market share in the counties we serve according to data from the FDIC website as of June 30, 2014 (the most recent date for which data is available).

Market	Number of Branches	Our Market Deposits		Total Market Deposits		Ranking	Market Share Percentage (%)
	(dollar amounts in millions)
Tennessee
Bradley County	2	$	35	$	1,407	9	2.5	%
Hamilton County1	7	275		6,709		6	4.1	%
Jackson County	1	55		121		2	45.5	%
Jefferson County	2	111		557		1	19.9	%
Knox County	2	53		9,844		16	0.5	%
Loudon County	1	18		736		7	2.4	%
McMinn County	1	28		853		8	3.3	%
Monroe County	2	62		618		5	10.0	%
Putnam County	2	59		1,554		8	3.8	%
Union County	1	36		117		2	30.8	%
Georgia
Whitfield County	5	135		2,138		7	6.3	%
FSGBank	26	$	867	$	24,654	7	3.5	%
1 Our brokered deposits, totaling $87.0 million at June 30, 2014, are included in the totals for Hamilton County, TN.

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Our retail, commercial and mortgage divisions operate in highly competitive markets. We compete directly in retail and commercial banking markets with other commercial banks, savings and loan associations, credit unions, mortgage brokers and mortgage companies, mutual funds, securities brokers, consumer finance companies, other lenders and insurance companies, locally, regionally and nationally. Many of our competitors compete with offerings by mail, telephone, computer and/or the Internet. Interest rates, both on loans and deposits, and prices of services are significant competitive factors among financial institutions generally. Office locations, types and quality of services and products, office hours, customer service, a local presence, community reputation and continuity of personnel are also important competitive factors that we emphasize.

Many other commercial or savings institutions currently have offices in our primary market areas. These institutions include many of the largest banks operating in Tennessee and Georgia, including some of the largest banks in the country. Many of our competitors serve the same counties we do. Within our market area, there are 83 other commercial or savings institutions.

Virtually every type of competitor has offices in Atlanta, Georgia, approximately 75 miles from Dalton and 100 miles from Chattanooga. In our market area, our largest competitors include First Tennessee, SunTrust, Regions, BB&T, Bank of America and Wells Fargo. These institutions, as well as other competitors of ours, have greater resources, have broader geographic markets, have higher lending limits, offer various services that we do not offer and can better afford and make broader use of media advertising, support services and electronic technology than we do. To offset these competitive disadvantages, we depend on our reputation as being an independent and locally-based community bank and as having greater personal service, community involvement and ability to make credit and other business decisions quickly and locally.

Lending Activities

We originate loans primarily secured by single and multi-family real estate, residential construction, owner-occupied commercial buildings and investor-owned real estate. In addition, we make loans to small and medium-sized commercial businesses, as well as to consumers for a variety of purposes.

Our loan portfolio at December 31, 2014 was comprised as follows:

	Amount		Percentage of     Portfolio
	(in thousands, except percentages)
Loans secured by real estate—
Residential 1-4 family	$	181,655	27.4	%
Commercial	314,843		47.4	%
Construction	47,840		7.2	%
Multi-family and farmland	18,108		2.7	%
	562,446		84.7	%
Commercial loans	73,985		11.1	%
Consumer installment loans	22,539		3.4	%
Other	4,652		0.8	%
Total loans	$	663,622	100.0	%

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In addition, we have entered into contractual obligations, via lines of credit and standby letters of credit, to extend approximately $132.4 million and $3.3 million, respectively, in credit as of December 31, 2014. We use the same credit policies in making these commitments as we do for our other loans. At December 31, 2014, our contractual obligations to extend credit were comprised as follow:

	Amount		Percentage of     Contractual Obligations
	(in thousands, except percentages)
Contractual obligations secured by real estate—
Residential 1-4 family	$	47,520	35.0	%
Commercial	25,717		19.0	%
Construction	8,448		6.2	%
	81,685		60.2	%
Commercial loans	33,415		24.6	%
Other	20,559		15.2	%
Total contractual obligations	$	135,659	100.0	%

Real Estate—Residential 1-4 Family. Our residential mortgage loan department primarily originates loans for sale into the secondary market. We generally do not retain long-term, fixed rate residential real estate loans in our portfolio due to interest rate and collateral risks and low levels of profitability.

Those residential loans to individuals that are retained in our loan portfolio primarily consist of first liens on 1-4 family residential mortgages, home equity loans and lines of credit. These held-for-investment loans are generally made on the basis of the borrower’s ability to repay the loan from his or her employment and other income and are secured by residential real estate, the value of which is reasonably ascertainable. We also expect that the loan-to-value ratios for held-to-investment loans will be sufficient to compensate for fluctuations in real estate market value and to minimize losses that could result from a downturn in the residential real estate market.

Real Estate—Commercial, Multi-Family and Farmland. We make commercial mortgage loans to finance the purchase of real property as well as loans to smaller business ventures, credit lines for working capital and short-term seasonal or inventory financing, including letters of credit, that are also secured by real estate. Commercial mortgage lending typically involves higher loan principal amounts, and the repayment of loans is dependent, in large part, on sufficient income from the properties collateralizing the loans to cover operating expenses and debt service. As a general practice, we require our commercial mortgage loans to be collateralized by well-managed income-producing property with adequate margins and to be guaranteed by responsible parties. In addition, approximately 40% of our commercial mortgage loan portfolio is secured by owner-occupied commercial buildings. We look for opportunities where cash flow from the business located in the owner-occupied building provides adequate debt service coverage and the guarantor’s net worth is primarily based on assets other than the project we are financing. Our commercial mortgage loans are generally collateralized by first liens on real estate, have fixed or floating interest rates and amortize over a 10 to 25-year period with balloon payments generally due at the end of one to seven years. Payments on loans collateralized by such properties are often dependent on the successful operation or management of the properties. Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market.

In underwriting commercial mortgage loans, we seek to minimize our risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition. Our underwriting analysis also includes credit checks, reviews of appraisals and environmental hazards or EPA reports and a review of the financial condition of the borrower. We attempt to limit our risk by analyzing our borrowers’ cash flow and collateral value on a regular and ongoing basis.

Real Estate—Construction. We also make construction and development loans to residential and, to a lesser extent, commercial contractors and developers located within our market areas. Construction loans generally are secured by first liens on real estate and have floating interest rates. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the value of the project is dependent on its successful completion. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, upon the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover all of the unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While we have underwriting procedures designed to identify what we believe to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent

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losses from the risks described above. To further minimize our risk, we have identified and targeted certain builders within our markets with satisfactory performance throughout the last recession.

Commercial. Our commercial loan portfolio includes loans to smaller business ventures, credit lines for working capital and short-term seasonal or inventory financing, as well as letters of credit that are generally secured by collateral other than real estate. Commercial borrowers typically secure their loans with assets of the business, personal guaranties of their principals and often mortgages on the principals’ personal residences. Our commercial loans are primarily made within our market areas and are underwritten on the basis of the commercial borrower’s ability to service the debt from income. In general, commercial loans involve more credit risk than residential and commercial mortgage loans, but less risk than consumer loans. The increased risk in commercial loans is generally due to the type of assets collateralizing these loans. The increased risk also derives from the expectation that commercial loans generally will be serviced from the operations of the business, and those operations may not be successful.

Consumer. We make a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. Consumer loans entail greater risk than other loans, particularly in the case of consumer loans that are unsecured or secured by depreciating assets such as automobiles. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by job loss, divorce, illness or personal hardships.

Niche Lending Initiatives. In the fourth quarter of 2013, we implemented four new lending initiatives. First, TriNet Direct is a division focused on national net lease lending and originates construction of pre-leased "build to suit" projects and provides interim and long-term financing to professional developers and private investors of commercial real estate on long-term leases to tenants that are investment grade or have investment grade attributes. Second, we entered into a partnership with an unaffiliated third-party that originates small balance, unsecured consumer loans, primarily associated with home improvement additions, including financing new or replacement HVAC units, roofs, windows and other improvements. We are purchasing these consumer loans at a discount from the originator. Third, we have established a business credit sales and support team that originates structured loans secured by accounts receivable and inventory within our markets. The business credit department was implemented as we believe properly structured and monitored asset-based lending at the community bank level is an under-served market that can generate above-average returns on a risk-adjusted basis. The fourth lending initiative is a lending unit focused on government lending, primarily originating and selling the guaranteed portion of Small Business Administration ("SBA") and United State Department of Agriculture ("USDA") loans. This fourth initiative provides a greater impact on non-interest income through the premium and servicing of sold loans. These initiatives are operating with distinct concentration limits and will only supplement the loan growth generated by our traditional banking officers.

Credit Risks. The principal economic risk associated with each category of the loans that we make is the creditworthiness of the borrower and the ability of the borrower to repay the loan. General economic conditions and the strength of the services and retail market segments affect borrower creditworthiness. General factors affecting a commercial borrower’s ability to repay include interest rates, inflation and the demand for the commercial borrower’s products and services, as well as other factors affecting a borrower’s customers, suppliers and employees.

Risks associated with real estate loans also include fluctuations in the value of real estate, new job creation trends, tenant vacancy rates and, in the case of commercial borrowers, the quality of the borrower’s management. Consumer loan repayments depend upon the borrower’s financial stability and are more likely to be adversely affected by divorce, job loss, illness and personal hardships.

Lending Policies. Our Board of Directors has established and periodically reviews FSGBank’s lending policies and procedures. We have established common documentation and standards based on the applicable type of loan. There are regulatory restrictions on the dollar amount of loans available for each lending relationship. National banking regulations provide that no loan relationship may exceed 15% of a bank’s Tier 1 capital. At December 31, 2014, our legal lending limit was approximately $13.8 million. In addition, we have established a tiered “house” limit based on the credit risk rating of the loan. However, these limits may not exceed our legal lending limit for each lending relationship. Any loan request exceeding the house limit must be approved by a management committee and is reported to a committee of our Board of Directors. We occasionally sell participation interests in loans to other lenders, primarily when a loan exceeds our house lending limits.

Concentrations. The retail nature of our commercial banking operations allows for diversification of depositors and borrowers, and we believe that our business does not depend upon a single or a few customers. We also do not believe that our credits are concentrated within a single industry or group of related industries.

The economy in our Dalton, Georgia market area is generally dependent upon the carpet industry and changes in construction of residential and commercial establishments. While the Dalton economy is dominated by the carpet and carpet-related industries, we do not have any one customer from whom more than 10% of our revenues are derived. However, we have multiple customers, commercial and retail, that are directly or indirectly affected by, or are engaged in businesses related to the carpet industry that, in the aggregate, have historically provided greater than 10% of our revenues.

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The federal banking regulators have issued guidance regarding the risks posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans and loans secured by multifamily property, and non-farm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines to help identify institutions that are potentially exposed to significant CRE risk:

• total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or

• total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

As of December 31, 2014, our concentrations were within the thresholds of the CRE guidance.

In addition to considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral. At December 31, 2014, approximately 84.7% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower but may deteriorate in value during the time the credit is extended. If the value of real estate in our core markets were to decline, a portion of our loan portfolio could become under-collateralized.

We offer a variety of loan products with payment terms and rate structures that have been designed to meet the needs of our customers within an established framework of acceptable credit risk. Payment terms range from fully amortizing loans that require periodic principal and interest payments to terms that require periodic payments of interest-only with principal due at maturity. Interest-only loans are a typical characteristic in commercial and home equity lines-of-credit and construction loans (residential and commercial). As of December 31, 2014, we had approximately $260.7 million of interest-only loans, which are primarily revolving lines-of-credit and home equity lines-of-credit and consist of residential real estate loans (35%), commercial real estate loans (38%) and commercial and industrial loans (15%). The loans have an average maturity of approximately fifteen years. The interest-only loans are fully underwritten and within our lending policies.

We do not offer, hold or service option adjustable rate mortgages that may expose the borrowers to future increases in repayments in excess of changes resulting solely from increases in the market rate of interest (loans subject to negative amortization).

Deposits

Our principal source of funds for loans and investing in securities is core deposits. We offer a wide range of deposit services, including checking, savings, money market accounts and certificates of deposit. We obtain most of our deposits from individuals, businesses and municipalities in our market areas. We believe that the rates we offer for core deposits are competitive with those offered by other financial institutions in our market areas. We have also chosen to obtain a portion of our deposits from outside our market through brokered deposits. Our brokered deposits represented 11.6% of total deposits as of December 31, 2014. Other sources of funding include advances from the FHLB, subordinated debt and other borrowings. These other sources enable us to borrow funds at rates and terms, which at times, are more beneficial to us. At December 31, 2014, our cash balance at the Federal Reserve Bank was approximately $29.2 million. This cash is available to fund our contractual obligations and prudent investment opportunities.

Other Banking Services

Given client demand for increased convenience and account access, we offer a range of products and services, including internet banking, ACH transactions, remote deposit capture, mobile banking, including remote deposit, wire transfers, direct deposit, traveler’s checks, safe deposit boxes, and United States savings bonds. We earn fees for most of these services. We also receive ATM transaction fees from transactions performed by our customers participating in a shared network of ATMs and a debit card system that our customers can use nationally. Additionally, we offer wealth management services including private client services, financial planning, trust administration, investment management, brokerage and estate planning services.

Securities

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. Currently, our investments are classified as either available-for-sale or held-to-maturity.  The effective duration for the available-for-sale securities is approximately 18 months and 59 months for the held-to-maturity securities. The securities classified as available-for-sale may be sold and used for liquidity purposes should we deem it to be in our best interest. The decision to sell an available-for-sale security includes many factors, including, but not limited to, current market pricing, liquidity needs, future price risk of the security, our overall asset base and the associated the impact on regulatory capital ratios, as well as the evaluation of the various other liquidity sources.

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Seasonality and Cycles

Although we do not consider our commercial banking business to be seasonal, our mortgage banking business is somewhat seasonal, with the volume of home financings, in particular, being lower during the winter months. Additionally, the Dalton, Georgia economy is seasonal and cyclical as a result of its dependence upon the carpet industry and changes in construction of residential and commercial establishments. While the Dalton, Georgia economy is dominated by the carpet and carpet-related industries, we do not have any one customer from whom more than 10% of our revenues are derived. However, we have multiple customers, commercial and retail, that are directly or indirectly affected by, or are engaged in businesses related to the carpet industry that, in the aggregate, have historically provided greater than 10% of our revenues.

Employees

On December 31, 2014, we had 268 full-time equivalent employees consisting of 253 full-time and 22 part-time employees. We consider our employee relations to be good, and we have no collective bargaining agreements with any employees.

Website Address

Our corporate website address is www.FSGBank.com. From this website, select the “Resources” tab followed by selecting “Investors.” Our filings with the Securities and Exchange Commission (the “SEC”), including but not limited to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, are available free of charge and accessible soon after we file them with the SEC. These materials are also available free of charge on the SEC's website at www.sec.gov.

SUPERVISION AND REGULATION

Both First Security and FSGBank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws are generally intended to protect depositors, not stockholders. Legislation and regulations authorized by legislation influence, among other things:

• how, when and where we may expand geographically;

• which product or service market we may enter;

• how we must manage our assets or liabilities; and

• under what circumstances money may or must flow between the parent bank holding company and the subsidiary bank.

Set forth below is an explanation of the major pieces of legislation affecting our industry and how that legislation affects our actions. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects, and legislative changes and the policies of various regulatory authorities may significantly affect our operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state legislation may have on our business and earnings in the future. As is further described below, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies.

First Security

Because we own all of the capital stock of FSGBank, we are a bank holding company under the Federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve Board.

Written Agreement and Subsequent Termination. Effective September 7, 2010 First Security entered into a Written Agreement (the "Agreement") with the Federal Reserve Bank of Atlanta (the "Federal Reserve"), the Company's primary regulator. The agreement was designed to enhance the Company’s ability to act as a source of strength to the Company's wholly owned subsidiary, FSGBank, including, but not limited to, taking steps to ensure that the Bank complied with all material aspects of a Consent Order ("Consent Order" or the "Order") issued by the Office of the Comptroller of the Currency (the "OCC"). A copy of the Agreement was attached as Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on September 14, 2010.

On October 2, 2014, the Federal Reserve terminated the Company's Agreement that had been in place since September 7, 2010. On October 7, 2014, the Company filed a Current Report on Form 8-K that provides additional details relating to the termination of the Agreement.

While the Agreement has been terminated, the Company expects to continue to seek approval from the Federal Reserve prior to paying any dividends on our capital stock or incurring any additional indebtedness.

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Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the Federal Reserve Board’s prior approval before:

• acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;

• acquiring all or substantially all of the assets of any bank; or

• merging or consolidating with any other bank holding company.

Additionally, the Bank Holding Company Act provides that the Federal Reserve Board may not approve any such transaction if it would result in or tend to create a monopoly, substantially lessen competition or otherwise function as a restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned. The Federal Reserve Board’s consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Under the Bank Holding Company Act, if we are adequately capitalized and adequately managed, we, or any other bank holding company located within Tennessee or Georgia, may purchase a bank located outside of Tennessee or Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Tennessee or Georgia may purchase a bank located inside Tennessee or Georgia. In each case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits a bank holding company from acquiring control of a financial institution until the target financial institution has been incorporated for three years, and Tennessee law prohibits a bank holding company from acquiring control of a financial institution until the target financial institution has been incorporated for five years. Because FSGBank has been chartered for more than five years, this restriction would not limit our ability to be acquired.

Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve Board approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is also presumed to exist, although rebuttable, if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

• the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or

• no other person owns a greater percentage of that class of voting securities immediately after the transaction.

Our common stock is registered under Section 12 of the Securities Exchange Act of 1934. The regulations provide a procedure for challenging rebuttable presumptions of control.

Permitted Activities. The Bank Holding Company Act has generally prohibited a bank holding company from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve Board to be closely related to banking or managing or controlling banks, as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Act have expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the Gramm-Leach-Bliley Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. Those activities include, among other activities, certain insurance and securities activities.

To qualify to become a financial holding company, FSGBank and any other depository institution subsidiary of First Security must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least “satisfactory.” Additionally, we must file an election with the Federal Reserve Board to become a financial holding company and must provide the Federal Reserve Board with 30 days’ written notice prior to engaging in a permitted financial activity. To date, we have not elected to become a financial holding company.

Support of FSGBank. Under Federal Reserve Board policy, we are expected to act as a source of financial strength for FSGBank and to commit resources to support FSGBank. In addition, pursuant to the Dodd-Frank Act, this longstanding policy has been given the force of law and the Federal Reserve Board may promulgate additional regulations to further implement the intent of the new statute. As in the past, such financial support from the Company may be required at times when, without this legal requirement, we might not be inclined to provide. In addition, any capital loans made by us to FSGBank will be repaid only after FSGBank’s deposits and various other obligations are repaid in full. In the unlikely event of our bankruptcy, any commitment that we give to a bank regulatory agency to maintain the capital of FSGBank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Non-Bank Subsidiary Examination and Enforcement. As a result of the Dodd-Frank Act, all non-bank subsidiaries not currently regulated by a state or federal agency will now be subject to examination by the Federal Reserve Board in the same manner and with the same frequency as if its activities were conducted by the lead bank subsidiary. These examinations will

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consider whether the activities engaged in by the non-bank subsidiary pose a material threat to the safety and soundness of its insured depository institution affiliates, are subject to appropriate monitoring and control, and comply with applicable laws. Pursuant to this authority, the Federal Reserve Board may also take enforcement action against non-bank subsidiaries.

FSGBank

Because FSGBank is chartered as a national bank, it is primarily subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the OCC. The OCC regularly examines FSGBank’s operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Because FSGBank’s deposits are insured by the FDIC to the maximum extent provided by law, FSGBank is subject to certain FDIC regulations and the FDIC also has back-up examination and enforcement power over FSGBank. FSGBank is also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.

Consent Order and Subsequent Termination. Effective April 28, 2010, FSGBank reached an agreement with its primary regulator, the OCC, regarding the issuance of a Consent Order. The Order was the result of the OCC’s regular examination of FSGBank in the fall of 2009 and directed FSGBank to take actions intended to strengthen its overall condition. On April 29, 2010, First Security filed a Current Report on Form 8-K describing the Order. The Form 8-K also provides a copy of the fully executed Order.

On March 10, 2014, the OCC terminated the Order, and First Security filed a Current Report on Form 8-K announcing the lifting of the Order.

Branching. National banks are required by the National Bank Act to adhere to branching laws applicable to state banks in the states in which they are located. Under both Tennessee and Georgia law, FSGBank may open branch offices throughout Tennessee or Georgia with the prior approval of the OCC. Prior to the enactment of the Dodd-Frank Act, FSGBank and any other national- or state-chartered bank were generally permitted to branch across state lines by merging with banks in other states if allowed by the applicable states’ laws. However, interstate branching is now permitted for all national- and state-chartered banks as a result of the Dodd-Frank Act, provided that a state bank chartered by the state in which the branch is to be located would also be permitted to establish a branch.

FDIC Insurance Assessments. FSGBank’s deposits are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to the maximum amount permitted by law, which was permanently increased to $250,000 by the Dodd-Frank Act. The FDIC uses the DIF to protect against the loss of insured deposits if an FDIC-insured bank or savings association fails.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking regulators shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on FSGBank. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

Allowance for Loan and Lease Losses. The Allowance for Loan and Lease Losses (“ALLL”) represents one of the most significant estimates in our financial statements and regulatory reports. Because of its significance, we have developed a system by which we develop, maintain and document a comprehensive, systematic and consistently applied process for determining the amounts of the ALLL and the provision for loan and lease losses. The “Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued on December 13, 2006, encourages all banks to ensure controls are in place to consistently determine the ALLL in accordance with GAAP, the bank’s stated policies and procedures, management’s best judgment and relevant supervisory guidance. Consistent with supervisory guidance, we maintain our allowance at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as the estimation for probable incurred credit losses inherent in the remainder of the loan and lease portfolio. The allowance for loan and lease losses, and our methodology for calculating the allowance, are fully described in Note 1 to our consolidated financial statements under “Allowance for Loan and Lease Losses” and in the “Management’s Discussion and Analysis—Statement of Financial Condition—Allowance for Loan and Lease Losses” section.

Commercial Real Estate Lending. Our lending operations may be subject to enhanced scrutiny by federal banking regulators based on our concentration of commercial real estate loans. On December 6, 2006, the federal banking regulators issued final guidance to financial institutions of the risk posed by commercial real estate (“CRE”) lending concentrations. CRE loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property.

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The guidance prescribes the following guidelines for its examiners to help identify institutions that are potentially exposed to significant CRE risk and may warrant greater supervisory scrutiny:

• total reported loans for construction, land development and other land represent 100% or more of the institution’s total capital, or

• total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more.

As of December 31, 2014, our CRE concentrations were within the thresholds of the CRE guidance. Specifically, our ratio of construction, land development and other land loans to total capital was 47.5% and our total CRE concentration was 278.8%. The commercial real estate loan portfolio including loans held-for-sale increased $81.3 million, or 40.8% from December 31, 2013 to 2014.

Enforcement Powers. The Financial Institution Reform Recovery and Enforcement Act (“FIRREA”) expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain “institution-affiliated parties.” Institution-affiliated parties primarily include management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports. Civil penalties may be as high as $1.1 million per day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.

Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ power to issue regulatory orders were expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate. The Dodd-Frank Act increases regulatory oversight, supervision and examination of banks, bank holding companies and their respective subsidiaries by the appropriate regulatory agency.

Other Regulations. Interest and other charges collected or contracted for by FSGBank are subject to state usury laws and federal laws concerning interest rates. Our loan operations are also subject to federal laws applicable to credit transactions, such as the:

• Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

• Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

• Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

• Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

• National Flood Insurance Act and Flood Disaster Protection Act, requiring flood insurance to extend or renew certain loans in flood plains;

• Real Estate Settlement Procedures Act, requiring certain disclosures concerning loan closing costs and escrows, and governing transfers of loan servicing and the amounts of escrows in connection with loans secured by one-to-four family residential properties;

• Soldiers’ and Sailors’ Civil Relief Act of 1940, as amended by the Servicemembers’ Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons currently on active duty with the United States military;

• Talent Amendment in the 2007 Defense Authorization Act, establishing a 36% annual percentage rate ceiling, which includes a variety of charges including late fees, for consumer loans to military service members and their dependents; and

• Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), imposing requirements and limitations on

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specific financial transactions and account relationships, intended to guard against money laundering and terrorism financing;

• sections 22(g) and 22(h) of the Federal Reserve Act which set lending restrictions and limitations regarding loans and other extensions of credit made to executive officers, directors, principal shareholders and other insiders; and

• rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

FSGBank’s deposit operations are subject to federal laws applicable to depository accounts, such as:

• Truth-In-Savings Act, requiring certain disclosures of consumer deposit accounts:

• Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

• Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

• rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.

Capital Adequacy

Banks and bank holding companies, as regulated institutions, are required to maintain minimum levels of capital. The OCC and the Federal Reserve Board, the primary federal regulators for FSGBank and First Security, respectively, have adopted minimum capital regulations as well as guidelines that define components of the calculation of capital 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.  Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our Board of Directors may deem relevant. Our ability to distribute cash dividends in the future may be limited by regulatory restrictions and the need to maintain sufficient consolidated capital.

The following tables show the capital ratios maintained by First Security and FSGBank at December 31, 2014 and 2013:

	December 31, 2014 Actual		December 31, 2013 Actual		Minimum Capital Requirements to be Well Capitalized 1
	Ratio		Amount		Ratio
Total capital to risk-weighted assets
First Security Group, Inc. and subsidiary	13.00	%	14.89	%	10.0	%
FSGBank, N.A.	12.40	%	14.08	%	10.0	%
Tier 1 capital to risk-weighted assets
First Security Group, Inc. and subsidiary	11.91	%	13.64	%	6.0	%
FSGBank, N.A.	11.31	%	12.83	%	6.0	%
Tier 1 capital to average assets
First Security Group, Inc. and subsidiary	9.35	%	9.36	%	N/A
FSGBank, N.A.	8.88	%	8.74	%	5.0	%
1 As noted below the minimum capital requirements to be considered well-capitalized changed on January 1, 2015.

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the Federal Reserve. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.

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The final rules include new or increased risk-based capital requirements that will be phased in from 2015 to 2019. The rules add a new common equity Tier 1 capital to risk-weighted assets ratio minimum of 4.5%, increase the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and decrease the Tier 2 capital that may be included in calculating total risk-based capital from 4.0% to 2.0%. The final rules also introduce a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and total risk-based capital requirements. The required minimum ratio of total capital to risk-weighted assets remains 8.0% and the minimum leverage ratio remains 4.0%. The new risk-based capital requirements (except for the capital conservation buffer) became effective for the Company on January 1, 2015. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. Basel III allows Companies to make a one-time election, effective January 1, 2015, to include or not to include certain unrealized gains and losses in Tier 1 capital. The final rules also set forth certain changes for the calculation of risk-weighted assets that the Company will be required to implement beginning January 1, 2015.

In addition to the updated capital requirements, the final rules also contain revisions to the prompt corrective action framework. Beginning January 1, 2015, the minimum ratios for the Bank to be considered well-capitalized changed as follows:

	Prior to January 1, 2015	Beginning January 1, 2015
Total Capital	10.0%	10.0%
Tier 1 Capital	6.0%	8.0%
Common Equity Tier 1 Capital	not present	6.5%
Leverage Ratio	5.0%	5.0%

Based on the Company's current capital composition and levels, management does not presently anticipate that the final rules present a material risk to the Company's financial condition or results of operations.

Dodd-Frank Act.

The bank regulatory landscape was dramatically changed by the Dodd-Frank Act, which was enacted on July 21, 2010 and which implements far-reaching regulatory reform. Its provisions include significant regulatory and compliance changes that are designed to improve the supervision, oversight, safety and soundness of the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the OCC and the FDIC.

Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole or on the Company’s and the Bank’s business, results of operations, and financial condition. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Company and Bank. Some of the rules that have been adopted to comply with the Dodd-Frank Act's mandates are discussed below.

Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act created a new, independent federal agency, the CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes

The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. Although FSGBank has less than $10 billion in assets, the impact of the formation of the CFPB has caused a ripple effect across all bank regulatory agencies, and placed a renewed focus on consumer protection and compliance efforts. For examples of this new authority, the CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

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The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices. During 2012, the CFPB issued three proposed rulemakings covering loan origination and servicing requirements, which were finalized in January 2013, along with other rules on mortgages. The ability to repay and qualified mortgage standards rules, as well as the mortgage servicing rules, became effective in January 2014. The escrow and loan originator compensation rules became effective in June 2013. A final rule integrating disclosures required by the Truth in Lending Act and the Real Estate Settlement and Procedures Act became effective in January 2014. We continue to analyze the impact that such rules may have on our business model, particularly with respect to our mortgage banking business.

UDAP and UDAAP.Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act-the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

Volcker Rule. On December 10, 2013, the federal regulators adopted final regulations to implement the proprietary trading and private fund prohibitions of the Volcker Rule under the Dodd-Frank Act. Under the final regulations, which were to become effective on April 1, 2014, banking entities are generally prohibited, subject to significant exceptions from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds. The Federal Reserve has granted an extension for compliance with the Volcker Rule until July 21, 2015. In addition, the Federal Reserve has granted an extension to conform with the retention of ownership interests in private equity and hedge funds until July 16, 2016 and has indicated that they will grant an additional one year extension to July 21, 2017. The Company has plans to divest within the conformance period all affected investments and does not believe that the Volcker Rule will have a material impact on its investment portfolio.

Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the adoption of further implementing regulations and, therefore, their impact on the Company’s operations cannot be fully determined at this time.

Restrictions on Transactions with Affiliates

First Security and FSGBank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

• a bank’s loans or extensions of credit to affiliates;

• a bank’s investment in affiliates;

• assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

• loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and

• a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. We must also comply with other provisions designed to avoid the taking of low-quality assets.

First Security and FSGBank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

FSGBank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Effective July 21, 2011, an insured depository institution is prohibited from engaging in asset purchases or sales transactions with its officers, directors or principal shareholders unless

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(1) the transaction is on market terms and (2) if the transaction represents greater than 10% of the capital and surplus of the bank, a majority of disinterested directors has approved the transaction.

Limitations on Senior Executive Compensation

In June of 2010, federal banking regulators issued guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with this guidance, the regulatory agencies announced that they will review incentive compensation arrangements as part of the regular, risk-focused supervisory process.

Regulatory authorities may also take enforcement action against a banking organization if its incentive compensation arrangement or related risk management, control, or governance processes pose a risk to the safety and soundness of the organization and the organization is not taking prompt and effective measures to correct the deficiencies. To ensure that incentive compensation arrangements do not undermine safety and soundness at insured depository institutions, the incentive compensation guidance sets forth the following key principles:

• incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the organization to imprudent risk;

• incentive compensation arrangements should be compatible with effective controls and risk management; and

• incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging potential changes to the structures, regulations and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board, including its ongoing "Quantitative Easing" program, affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

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ITEM 1A. Risk Factors

An investment in our common stock involves risks. If any of the following risks or other risks, which have not been identified or which we may believe are immaterial or unlikely, actually occur, our business, financial condition and results of operations could be harmed. In such a case, the trading price of our common stock could decline, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

RISKS ASSOCIATED WITH OUR BUSINESS

We may experience increased delinquencies and credit losses, which could have a material adverse effect on our capital, financial condition and results of operations.

Like other lenders, we face the risk that our customers will not repay their loans. A customer’s failure to repay us is usually preceded by missed monthly payments. In some instances, however, a customer may declare bankruptcy prior to missing payments, and, following a borrower filing bankruptcy, a lender’s recovery of the credit extended is often limited. Since our loans are secured by collateral, we may attempt to seize the collateral when and if customers default on their loans. However, the value of the collateral may not equal the amount of the unpaid loan, and we may be unsuccessful in recovering the remaining balance from our customers. Elevated levels of delinquencies and bankruptcies in our market area generally and among our customers specifically can be precursors of future charge-offs and may require us to increase our allowance for loan and lease losses. Higher charge-off rates and an increase in our allowance for loan and lease losses may hurt our overall financial performance if we are unable to increase revenue to compensate for these losses and may also increase our cost of funds.

Our allowance for loan and lease losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition and results of operations.

We maintain an allowance for loan and lease losses, which is a reserve established through a provision for loan losses charged to expenses, that represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance for loan and lease losses and our methodology for calculating the allowance are fully described in Note 1 to our consolidated financial statements under “Allowance for Loan and Lease Losses”, and in the “Management’s Discussion and Analysis—Statement of Financial Condition—Allowance for Loan and Lease Losses” section. In general, an increase in the allowance for loan and lease losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our capital, financial condition and results of operations.

The allowance, in the judgment of management, is established to reserve for estimated loan losses and risks inherent in the loan portfolio. The determination of the appropriate level of the allowance for loan and lease losses involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for loan and lease losses. In addition, bank regulatory agencies periodically review our allowance for loan and lease losses and may require an increase in the provision for loan losses or the recognition of additional loan charge offs, based on judgments that are different than those of management. As we are consistently adjusting our loan portfolio and underwriting standards to reflect current market conditions, we can provide no assurance that our methodology will not change, which could result in a charge to earnings.

We continually reassess the creditworthiness of our borrowers and the sufficiency of our allowance for loan and lease losses as part of FSGBank’s credit functions. Any significant amount of additional non-performing assets, loan charge-offs, increases in the provision for loan losses or the continuation of aggressive charge-off policies or any inability by us to realize the full value of underlying collateral in the event of a loan default, will negatively affect our business, financial condition, and results of operations and the price of our securities. Our allowance for loan and lease losses at December 31, 2014 may not be sufficient to cover future credit losses.

We make and hold in our portfolio a number of land acquisition and development and construction loans, which pose more credit risk than other types of loans typically made by financial institutions.

We offer land acquisition and development, and construction loans for builders and developers, and as of December 31, 2014, we had $47.8 million in such loans outstanding, representing 47.5% of FSGBank’s total risk-based capital. These land acquisition and development, and construction loans are more risky than other types of loans. The primary credit risks associated with land acquisition and development and construction lending are underwriting and project risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other

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hazard risks. Market risks are risks associated with the sale of the completed residential units. They include affordability risk, which means the risk that borrowers cannot obtain affordable financing, product design risk, and risks posed by competing projects. Losses in our land acquisition and development and construction loan portfolio could exceed our reserves, which would adversely impact our earnings. Non-performing loans in our land acquisition and development and construction portfolio could increase during 2015, and these non-performing loans could result in a material level of charge-offs, which would negatively impact our capital and earnings.

If the value of real estate in our core markets were to decline, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us.

In addition to considering the financial strength and cash flow characteristics of borrowers, we often secure loans with real estate collateral. At December 31, 2014, approximately 84.7% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower but may deteriorate in value during the time the credit is extended. If the value of real estate in our core markets were to decline further, a significant portion of our loan portfolio could become under-collateralized. As a result, if we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

The amount of our OREO may result in additional losses, and costs and expenses that will negatively affect our operations.

At December 31, 2014, we had a total of $4.5 million of OREO. The costs and expenses to maintain the real estate are proportionate to our level of OREO. The amount of OREO could remain at current levels or elevate in the future. Any additional increase in losses, and maintenance costs and expenses due to OREO may have material adverse effects on our business, financial condition, and results of operations. Such effects may be particularly pronounced in a market of reduced real estate values and excess inventory, which may make the disposition of OREO properties more difficult, increase maintenance costs and expenses, and may reduce our ultimate realization from any OREO sales.

Our use of appraisals in deciding whether to make a loan on or secured by real property or how to value such loan in the future may not accurately describe the net value of the real property collateral that we can realize.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values in our market area have experienced changes in value in relatively short periods of time, this estimate might not accurately describe the net value of the real property collateral after the loan has been closed. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. The valuation of the property may negatively impact the continuing value of such loan and could adversely affect our operating results and financial condition.

We will realize additional future losses if the proceeds we receive upon liquidation of non-performing assets are less than the fair value of such assets.

We have announced a strategy to manage our non-performing assets aggressively, a portion of which may not be currently identified. Non-performing assets are recorded on our financial statements at fair value, as required under GAAP, unless these assets have been specifically identified for liquidation, in which case they are recorded at the lower of cost or estimated net realizable value. In current market conditions, we are likely to realize additional future losses if the proceeds we receive upon dispositions of non-performing assets are less than the recorded fair value of such assets.

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We are subject to risks in the event of certain borrower defaults, which could have an adverse impact on our liquidity position and results of operations.

We may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of certain borrower defaults, which could adversely affect our liquidity position, results of operations, and financial condition. When we sell mortgage loans, we are required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which the loans were originated. In the event of a breach of any of the representations and warranties related to a loan sold, we could be liable for damages to the investor up to and including a “make whole” demand that involves, at the investor’s option, either reimbursing the investor for actual losses incurred on the loan or repurchasing the loan in full. Our maximum exposure to credit loss in the event of make whole loan repurchase claim would be the unpaid principal balance of the loan to be repurchased along with any premium paid by the investor when the loan was purchased and other minor collection cost reimbursements. While we have taken steps to enhance our underwriting policies and procedures, these steps might not be effective and might not lessen the risks associated with loans sold in the past. If repurchase demands increase, our liquidity position, results of operations, and financial condition could be adversely affected.

Negative publicity about financial institutions, generally, or about First Security or FSGBank, specifically, could damage First Security’s reputation and adversely impact its liquidity, business operations or financial results.

Reputation risk, or the risk to our business from negative publicity, is inherent in our business. Negative publicity can result from the actual or alleged conduct of financial institutions, generally, or First Security or FSGBank, specifically, in any number of activities, including leasing and lending practices, corporate governance, and actions taken by government regulators in response to those activities. Negative publicity can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action, any of which could negatively affect our liquidity, business operations or financial results.

Increases in our expenses and other costs could adversely affect our financial results.

Our expenses and other costs, such as operating expenses and hiring new employees directly affect our earnings results. In light of the extremely competitive environment in which we operate, and because the size and scale of many of our competitors provides them with increased operational efficiencies, it is important that we are able to successfully manage such expenses. We are aggressively managing our expenses in the current economic environment, but as our business develops, changes or expands, and as we hire additional personnel, additional expenses can arise. Other factors that can affect the amount of our expenses include legal and administrative cases and proceedings, which can be expensive to pursue or defend. In addition, changes in accounting policies can significantly affect how we calculate expenses and earnings.

Changes in the interest rate environment could reduce our net interest income, which could reduce our profitability.

As a financial institution, our earnings significantly depend on our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes in the Federal Reserve Board’s fiscal and monetary policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and total income. Our assets and liabilities may react differently to changes in overall market rates or conditions because there may be mismatches between the repricing or maturity characteristics of the assets and liabilities. As a result, an increase or decrease in market interest rates could have material adverse effects on our net interest margin and results of operations.

In addition, we cannot predict whether interest rates will continue to remain at present levels. Changes in interest rates may cause significant changes, up or down, in our net interest income. Depending on our portfolio of loans and investments, our results of operations may be adversely affected by changes in interest rates. In addition, any significant increase in prevailing interest rates could adversely affect our mortgage banking business because higher interest rates could cause customers to request fewer re-financings and purchase money mortgage originations.

We face strong competition from larger, more established competitors that may inhibit our ability to compete and expose us to greater lending risks.

The banking business is highly competitive, and we experience strong competition from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other financial institutions, which operate in our primary market areas and elsewhere.

We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our customer base from other existing financial institutions and from new residents. Many of our competitors are well-established and much larger financial institutions. While we believe we can and do successfully compete with these other financial

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institutions in our markets, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification.

Our relatively small geographic footprint limits our ability to diversify macro-economic risk. We lend primarily to individuals and to small to medium-sized businesses, which may expose us to greater lending risks than those of banks lending to larger, better capitalized businesses with longer operating histories. As an example, our market area in northern Georgia is highly dependent on the home furnishings and carpet industry centered near Dalton, Georgia. During the last recession and the accompanying downturn in residential construction, this industry suffered a business decline, which adversely affected the performance of our operations in Dalton and surrounding areas. As a community bank, we are less able to spread the risk of unfavorable local economic conditions than larger or more regional banks. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

The soundness of our financial condition may also affect our competitiveness. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Customers may decide not to do business with us due to our financial condition. In addition, our ability to compete is impacted by the limitations on our activities imposed under the Order and the Agreement. We have faced and continue to face, additional regulatory restrictions that our competitors may not be subject to, including improving the overall risk profile of the Company and restrictions on the amount of interest we can pay on deposit accounts, which could adversely impact our ability to compete and attract and retain customers.

Although we compete by concentrating our marketing efforts in our primary market area with local advertisements, personal contacts and greater flexibility in working with local customers, we can give no assurance that this strategy will be successful.

The costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our business, operating results and financial condition.

We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business. Our insurance may not cover all claims that may be asserted against it and indemnification rights to which we are entitled may not be honored, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed our insurance coverage, they could have a material adverse effect on our business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all.

Changes in tax rates, interpretations of tax laws, the status of examinations by tax authorities and newly enacted statutory, judicial and regulatory guidance could materially affect our business, operating results and financial condition.

We are subject to various taxing jurisdictions where we conduct business. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. This evaluation incorporates assumptions and estimates that involve a high degree of judgment and subjectivity. Changes in the results of these evaluations could have a material impact on our operating results.

Environmental liability associated with lending activities could result in losses.

In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous substances are discovered on any of these properties, we may be liable to governmental entities or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether we knew of, or were responsible for, the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may materially limit the use of properties that we acquire through foreclosure, reduce their value or limit our ability to sell them in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Our loan policies require certain due diligence of high risk industries and properties with the intention of lowering our risk of a non-performing loan and/or foreclosed property.

We may not be able to retain, attract and motivate qualified individuals.

Our success depends on our ability to retain, attract and motivate qualified individuals in key positions throughout the organization. Competition for qualified individuals in most activities in which we are engaged can be intense, and we may not be able to hire or retain the people we want and/or need. Although we maintain employment agreements with certain key employees, and have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or

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more of our key personnel could still occur, and such events may have a material adverse impact on our business because of the loss of the employee's skills, knowledge of our market, and years of industry experience and the difficulty of promptly finding qualified replacement personnel. If we are unable to retain, attract and motivate qualified individuals in key positions, our business and results of operations could be adversely affected.

A failure in or breach of our operational or security systems, or those of our third party service providers, including as a result of cyber-attacks, could disrupt our business, result in unintentional disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and adversely impact our earnings.

As a financial institution, our operations rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks.  Any failure, interruption or breach in security or operational integrity of these systems could result in failures or disruptions in our Internet banking system, treasury management products, check and document imaging, remote deposit capture systems, general ledger, and other systems. The security and integrity of our systems could be threatened by a variety of interruptions or information security breaches, including those caused by computer hacking, cyber-attacks, electronic fraudulent activity or attempted theft of financial assets.  We cannot assure you that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed.  While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve.  We may be required to expend significant additional resources in the future to modify and enhance our protective measures.

Additionally, we face the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries.  Such parties could also be the source of an attack on, or breach of, our operational systems.  Any failures, interruptions or security breaches in our information systems could damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.

We rely on other companies to provide key components of our business infrastructure.

Our business operations rely on third party vendors to provide services such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including but not limited to those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third party vendor could also hurt our operations if those difficulties interfere with the vendor's ability to serve us. Furthermore, our vendors could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.

RISKS RELATED TO RECENT MARKET, LEGISLATIVE AND REGULATORY EVENTS

An economic downturn in the housing market, the homebuilding industry, and / or in our markets generally could adversely affect our financial condition, results of operations or cash flows.

Our long-term success depends upon the growth in population, income levels, deposits and housing starts in our primary market areas. If the communities in which FSGBank operates do not grow, or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. An economic recession over a prolonged period or other economic problems in our market areas could have a material adverse impact on the quality of the loan portfolio and the demand for our products and services. Future adverse changes in the economies in our market areas may have a material adverse effect on our financial condition, results of operations or cash flows. Further, the banking industry in Tennessee and Georgia is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond our control.

The homebuilding and residential mortgage industry has experienced a significant and sustained decline in demand for new homes and a decrease in the absorption of new and existing homes available for sale in various markets. Our customers who are builders and developers face greater difficulty in selling their homes in markets where these trends are more pronounced. Consequently, we are facing increased delinquencies and non-performing assets as these builders and developers are forced to default on their loans with us. We do not know when or to what extent the housing market will improve, and accordingly, additional downgrades, provisions for loan losses and charge-offs related to our loan portfolio may occur. If market conditions continue to deteriorate, our non-performing assets may continue to increase and we may need to take additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned.

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The Dodd-Frank Act and related regulations may adversely affect our business, financial condition, liquidity or results of operations.

The Dodd-Frank Act enacted on July 21, 2010, created a new Consumer Financial Protection Bureau ("CFPB") with power to promulgate and enforce consumer protection laws. Smaller depository institutions, including those with $10 billion or less in assets, will be subject to the CFPB's rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement authority for such institutions. The Dodd-Frank Act also establishes a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk and, among other things, includes provisions affecting (1) corporate governance and executive compensation of all companies whose securities are registered with the SEC, (2) FDIC insurance assessments, (3) interchange fees for debit cards, which would be set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard and (4) minimum capital levels for bank holding companies, subject to a grandfather clause for financial institutions with less than $15 billion in assets.

The CFPB has broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit unfair, deceptive or abusive acts and practices. In addition, the Dodd-Frank Act enhanced the regulation of mortgage banking and gave to the CFPB oversight of many of the core laws which regulate the mortgage industry and the authority to implement mortgage regulations. New regulations adopted and anticipated to be adopted by the CFPB will significantly impact consumer mortgage lending and servicing.

The Dodd-Frank Act and the resulting regulations will likely affect the Company's business and operations in other ways which are difficult to predict at this time. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company's results of operations, financial condition or liquidity, any of which may impact the market price of the Company's common stock.

The CFPB’s "ability-to-repay" and "qualified mortgage" rules could have a negative impact on our loan origination process and foreclosure proceedings.

The CFPB has adopted rules that are likely to impact our residential mortgage lending practices, and the residential mortgage market generally including rules that implement the "ability-to-repay" requirement and provide protection from liability for "qualified mortgages," as required by the Dodd-Frank Act. The ability-to-repay rule, which took effect on January 10, 2014, requires lenders to consider, among other things, income, employment status, assets, payment amounts, and credit history before approving a mortgage, and provides a compliance "safe harbor" for lenders that issue certain "qualified mortgages." The rules define a "qualified mortgage" to have certain specified characteristics, and generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. The rule also establishes general underwriting criteria for qualified mortgages, including that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the borrower have a total debt-to-income ratio that is less than or equal to 43 percent. While "qualified mortgages" will generally be afforded safe harbor status, a rebuttable presumption of compliance will attach to mortgages that also meet the definition of a "higher priced mortgage" (which are generally subprime loans). Although the new "qualified mortgage" rules may provide better definition and more certainty regarding regulatory requirements, the rules may also increase our compliance burden and reduce our lending flexibility and discretion, which could negatively impact our ability to originate new loans and the cost of originating new loans. Any loans that we make outside of the "qualified mortgage" criteria could expose us to an increased risk of liability and reduce or delay our ability to foreclose on the underlying property. Additionally, qualified "higher priced mortgages" only provide a rebuttable presumption of compliance and thus may be more susceptible to challenges from borrowers. It is difficult to predict how the CFPB's "qualified mortgage" rules will impact us, but any decreases in loan origination volume or increases in compliance and foreclosure costs could negatively affect our business, operating results and financial condition.

The CFPB may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive or abusive practices, which may directly impact the business operations of depository institutions offering consumer financial products or services including the Bank.

Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act-the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP. The potential reach of the CFPB's broad new rulemaking powers and UDAAP authority on the operations of financial institutions offering consumer financial products or services including the Bank is currently unknown.

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The Federal Reserve has adopted new capital requirements for financial institutions that may require us to retain or raise additional capital and/or reduce dividends.

On July 2, 2013, the Federal Reserve adopted final rules that, when effective beginning on January 1, 2015, increased regulatory capital requirements, implemented changes required by the Dodd-Frank Act and implemented portions of the Basel III regulatory capital reforms.  In the future, the capital requirements for bank holding companies may require us to retain or raise additional capital, restrict our ability to pay dividends and repurchase shares of our common stock, restrict our ability to provide certain forms of discretionary executive compensation and/or require other changes to our strategic plans. The impact of these rules cannot yet be fully understood.  The rules could restrict our ability to grow and implement our future business strategies, which could have an adverse impact on our results of operations.

RISKS ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK

The trading volume of our common stock is less than that of other larger financial services companies.

Although our common stock is traded on the Nasdaq Capital Market, the trading volume of our common stock is less than that of other larger financial services companies. For the public trading market for our common stock to have the desired characteristics of depth, liquidity and orderliness requires the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall more than would otherwise be expected if the trading volume of our common stock were commensurate with the trading volumes of the common stock of larger financial services companies.

We may undergo an ownership change within the meaning of Section 382 of the Internal Revenue Code, which could affect our ability to fully utilize our deferred tax assets.

The Company has previously experienced substantial net operating losses, which it may carryforward in certain circumstances to offset current and future taxable income and thus reduce its federal income tax liability. However, Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change to utilize its deferred tax assets, including net operating losses, existing as of the date of such ownership change. If we were to undergo an ownership change within the meaning of Section 382, a portion of our deferred tax assets existing as of the date of such ownership change may become unavailable to offset future federal and state tax liabilities.

Provisions in our amended and restated Articles of Incorporation, our amended and restated Bylaws, Tennessee law and our Tax Benefits Preservation Plan limit the ability of others to acquire us and may, therefore, adversely affect our the price of our common stock.

Various anti-takeover protections for Tennessee corporations are set forth in the Tennessee Business Corporation Act, the Business Combination Act, the Control Share Acquisition Act, the Greenmail Act and the Investor Protection Act. Because our common stock is registered with the SEC under the Securities Exchange Act of 1934, the Business Combination Act automatically applies to us unless our stockholders adopt a charter or bylaw amendment which expressly excludes us from the anti-takeover provisions of the Business Combination Act two years prior to a proposed takeover. Our Board of Directors has no present intention of recommending such charter or bylaw amendment.

These statutes have the general effect of discouraging, or rendering more difficult, unfriendly takeover or acquisition attempts. Such provisions could be beneficial to current management in an unfriendly takeover attempt but could have an adverse effect on stockholders who might wish to participate in such a transaction.

On October 24, 2012, our Board of Directors adopted a Tax Benefits Preservation Plan, which is intended to prevent certain transactions that would constitute an ownership change under Section 382 of the Internal Revenue Code in order to protect the ability of the Company to realize the benefits of the Company's net operating losses. The Tax Benefits Preservation Plan is designed to prevent transfers of our common stock that would result in any stockholder owning 4.9% or more of our common stock or to prevent any existing 4.9% stockholder from acquiring additional shares by substantially diluting the ownership interest of any such stockholder, subject to certain exceptions. In addition, on March 20, 2013 the Company adopted an amendment to its Bylaws, applicable to shares issued after that date, that makes such attempted transfers void. Because the Tax Benefit Preservation Plan may restrict a stockholder's ability to acquire our common stock, it could discourage a tender offer or make it more difficult for a third party to acquire a controlling position in our stock without our approval, and the market value of the Company's common stock may be adversely affected while the Tax Benefit Preservation Plan is in effect.

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Our future operating results may be below securities analysts’ or investors’ expectations, which could cause our stock price to decline.

We may be unable to generate significant revenues or grow at the rate expected by securities analysts or investors. In addition, our costs may be higher than we, securities analysts or investors expect. If we fail to generate sufficient revenues or our costs are higher than we expect, our results of operations will suffer, which in turn could cause our stock price to decline.

Our operating results in any particular period may not be a reliable indication of our future performance. In some future quarters, our operating results may be below the expectations of securities analysts or investors. If this occurs, the price of our common stock will likely decline.

ITEM 1B. Unresolved Staff Comments

There are no written comments from the Commission staff regarding our periodic or current reports under the Act which remain unresolved.

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ITEM 2. Properties

During 2014, we conducted our business primarily through our corporate headquarters located at 531 Broad Street, Chattanooga, Hamilton County, Tennessee.

We believe that our banking offices are in good condition, are suitable to our needs and, for the most part, are relatively new. The following table summarizes pertinent details of our owned or leased branch, loan production and leasing offices.

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Office Address	Date Opened	Owned/Leased	Square Footage	Use of Office
401 South Thornton Avenue Dalton, Whitfield County, Georgia	September 17, 1999	Owned	16,438	Branch
1237 North Glenwood Avenue Dalton, Whitfield County, Georgia	September 17, 1999	Owned	3,300	Branch
761 New Highway 68 Sweetwater, Monroe County, Tennessee	June 26, 2000	Owned	3,000	Branch
1740 Gunbarrel Road Chattanooga, Hamilton County, Tennessee	July 3, 2000	Leased	3,400	Branch
4227 Ringgold Road East Ridge, Hamilton County, Tennessee	July 28, 2000	Leased	3,400	Branch
835 South Congress Parkway Athens, McMinn County, Tennessee	November 6, 2000	Owned	3,400	Branch
820 Ridgeway Avenue Signal Mountain, Hamilton County, Tennessee	May 29, 2001	Owned	2,500	Branch
1301 Cowart Street Chattanooga, Hamilton County, Tennessee	March 28, 2011	Leased	1,000	Branch
9217 Lee Highway Ooltewah, Hamilton County, Tennessee	July 8, 2002	Owned	3,400	Branch
2905 Maynardville Highway Maynardville, Union County, Tennessee	July 20, 2002	Owned	12,197	Branch
2918 East Walnut Avenue Dalton, Whitfield County, Georgia	March 31, 2003	Owned	10,337	Branch
715 South Thornton Avenue Dalton, Whitfield County, Georgia	March 31, 2003	Building Owned Land Leased	4,181	Branch
167 West Broadway Boulevard Jefferson City, Jefferson County, Tennessee	October 14, 2003	Owned	3,743	Branch
705 East Broadway Lenoir City, Loudon County, Tennessee	October 27, 2003	Owned	3,610	Branch
215 Warren Street Madisonville, Monroe County, Tennessee	December 4, 2003	Owned	8,456	Branch
155 North Campbell Station Road Knoxville, Knox County, Tennessee	March 2, 2004	Building Owned Land Leased	3,743	Branch
1013 South Highway 92 Dandridge, Jefferson County, Tennessee	April 5, 2004	Owned	3,500	Branch
1111 Northshore Drive, Suite S600 Knoxville, Knox County, Tennessee	October 1, 2004	Leased	9,867	Loan
1111 Northshore Drive, Suite P-100 Knoxville, Knox County, Tennessee	July 25, 2005	Leased	1,105	Branch
307 Hull Avenue Gainesboro, Jackson County, Tennessee	August 31, 2005	Owned	9,662	Branch
376 West Jackson Street Cookeville, Putnam County, Tennessee	August 31, 2005	Owned	14,780	Branch
301 Keith Street SW Cleveland, Bradley County, Tennessee	October 31, 2005	Leased	3,072	Branch
3895 Cleveland Road Varnell, Whitfield County, Georgia	November 11, 2005	Owned	1,860	Branch
531 Broad Street Chattanooga, Hamilton County, Tennessee	December 11, 2006	Owned	39,700	Branch & Headquarters
614 West Main Street Algood, Putnam County, Tennessee	April 10, 2007	Owned	1,936	Branch
52 Mouse Creek Road Cleveland, Bradley County, Tennessee	May 14, 2007	Owned	1,256	Branch
5188 Highway 153 Knoxville, Knox County, Tennessee	May 22, 2009	Owned	4,194	Branch

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As of December 31, 2014, we owned one additional plot of land. The vacant lot is located at 1020 South Highway 92, Dandridge, Jefferson County, Tennessee (1.0 acres). The lot is currently available for sale and is included in our other real estate owned portfolio. We originally purchased this site for bank purposes. We are also in the process of building a new office located in Bradley County, Tennessee. We expect to complete the new office during 2015.

In May 2014, we closed two offices, one located in Catoosa County, Georgia and one located in Hamilton County, Tennessee. In December of 2013, we closed two offices, one located in Knox County, Tennessee and one located in Putnam County, Tennessee. Currently, one branch remains in our other real estate owned portfolio and is currently available for sale.

We are not aware of any environmental problems with the properties that we own or lease that would be material, either individually, or in the aggregate, to our operations or financial condition.

ITEM 3. Legal Proceedings

In the normal course of business, we are at times subject to pending and threatened legal actions. Although we are not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, we believe that the outcome of any or all such actions will not have a material adverse effect on our business, financial condition and/or operating results.

ITEM 4. Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

From August 10, 2005 to March 26, 2013, our common stock traded on the Nasdaq Global Select Market under the symbol FSGI. From March 26, 2013 to the present, our common stock traded on the NASDAQ Capital Market under the same FSGI symbol. On March 12, 2015, there were 807 registered holders of record of our common stock. The high and low sales prices per share were as follows:

Year and Quarter	High		Low		Dividend
2014
4th Quarter	$	2.32	$	1.91	$	—
3rd Quarter	2.20		1.90		—
2nd Quarter	2.23		1.73		—
1st Quarter	2.40		1.80		—
2013
4th Quarter	$	2.64	$	1.83	$	—
3rd Quarter	2.52		2.00		—
2nd Quarter	7.45		1.84		—
1st Quarter	3.44		1.60		—

The Company’s ability to pay dividends depends on the Company’s available funds and dividends from the Bank. Prior to the termination of the Written Agreement on October 2, 2014, the Company was prohibited, without prior written consent of the Federal Reserve, from declaring or paying dividends to the Company’s shareholders or from taking dividends, or any other form of payment representing a reduction of capital, from the Bank. While the Agreement has been terminated, the Company expects to continue to seek approval from the Federal Reserve prior to paying any dividends on our capital stock or incurring any additional indebtedness, including dividends or management fees paid by FSGBank. We believe that, for a foreseeable period of time, the Company’s principal source of cash will be dividends and management fees paid by FSGBank. There are certain restrictions on these payments imposed by federal banking laws, regulations and authorities.

In addition, it is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of net income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

The declaration and payment of dividends on our common stock will depend upon our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant by our Board of Directors.

On April 11-12, 2013 the Company closed a private placement of 60,735,000 shares of its common stock as part of the Recapitalization at a price of $1.50 per share.  The closing of the private placement was previously described on the Current Report on Form 8-K filed on April 12, 2013.

The issuance of securities pursuant to the transactions described above were private placements to “accredited investors” (as that term is defined under Rule 501 of Regulation D), and were therefore exempt from registration under the Securities Act, in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction by an issuer not involving a public offering.

The 60,735,000 shares of our common stock sold in the Recapitalization were subsequently registered for resale on a registration statement on Form S-1 (File No. 333-188137), which was declared effective by the SEC on June 6, 2013.  The offering commenced on that date and has not been terminated.  All shares of common stock sold under the registration statement have been or will be sold by the selling shareholders; the Company will not receive any proceeds from such sales of common stock. 

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	Period Ending
Index	12/31/09	12/31/10	12/31/11	12/31/12	12/31/13	12/31/14
First Security Group, Inc	100.00	37.82	9.87	9.37	9.66	9.50
NASDAQ Composite	100.00	118.15	117.22	138.02	193.47	222.16
SNL Bank NASDAQ	100.00	117.98	104.68	124.77	179.33	185.73
SNL Southeast Bank	100.00	97.10	56.81	94.37	127.88	144.03
Source: SNL Financial LC, Charlottesville, VA
© 2015
www.snl.com

ITEM 6. Selected Financial Data

Our selected financial data is presented below as of and for the years ended December 31, 2010 through 2014. The selected financial data presented below as of December 31, 2014 and 2013, and for each of the years in the three-year period ended December 31, 2014, are derived from our audited financial statements and related notes included in this Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements and related notes, along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 32. The selected financial data as of December 31, 2012, 2011 and 2010 and for each of the two years ended December 31, 2011 have been derived from our audited financial statements that are not included in this Annual Report on Form 10-K. All per share data and the number of shares outstanding has been retroactively adjusted for the one-for-ten reverse stock split effected on September 19, 2011. Certain of the measures set forth below are non-GAAP financial measures under the rules and regulations

27

promulgated by the SEC. For a discussion of management’s reasons to present such data and a reconciliation to GAAP, please see “GAAP Reconciliation and Management Explanation for Non-GAAP Financial Measures” following the tables.

	As of and for the Years Ended December 31,
	2014			2013			2012			2011			2010
	(in thousands, except per share amounts and full-time equivalent employees)
Earnings:
Net interest income	$	30,901		$	23,370		$	23,580		$	27,779		$	34,681
(Credit) provision for loan and lease losses	$	(1,452	)	$	(2,735	)	$	20,866		$	10,920		$	33,589
Non-interest income	$	12,258		$	8,683		$	8,146		$	8,100		$	9,503
Non-interest expense	$	41,668		$	47,760		$	47,659		$	47,628		$	45,258
Net income (loss)	$	2,417		$	(13,449	)	$	(37,570	)	$	(23,061	)	$	(44,342	)
Income tax provision	$	526		$	477		$	771		$	392		$	9,679
Dividends and accretion on preferred stock	$	—		$	(1,381	)	$	(2,078	)	$	(2,053	)	$	(2,029	)
Effect of exchange on preferred stock to common stock	$	—		$	26,179		$	—		$	—		$	—
Net income (loss) available to common stockholders	$	2,417		$	11,349		$	(39,648	)	$	(25,114	)	$	(46,371	)
Per Share Data:
Net income available (loss allocated) to common shareholders, basic	$	0.04		$	0.24		$	(24.58	)	$	(15.79	)	$	(29.46	)
Net income available (loss allocated) to common shareholders, diluted	$	0.04		$	0.24		$	(24.58	)	$	(15.79	)	$	(29.46	)
Cash dividends declared on common shares	$	—		$	—		$	—		$	—		$	—
Book value per common share	$	1.35		$	1.26		$	(1.94	)	$	21.44		$	37.55
Tangible book value per common share	$	1.34		$	1.25		$	(2.28	)	$	20.86		$	36.66
Performance Ratios:
Return on average assets	0.24		%	1.09		%	(3.57		)%	(2.25		)%	(3.55		)%
Return on average common equity	2.79		%	18.49		%	(170.65		)%	(47.76		)%	(46.81		)%
Return on average tangible common equity	2.79		%	18.63		%	(176.59		)%	(48.91		)%	(47.62		)%
Net interest margin, taxable equivalent	3.36		%	2.50		%	2.35		%	2.77		%	2.92		%
Efficiency ratio	96.55		%	149.00		%	150.20		%	132.75		%	102.43		%
Non-interest income to net interest income and non-interest income	28.40		%	27.09		%	25.68		%	22.58		%	21.51		%

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	As of and for the Years Ended December 31,
	2014			2013			2012			2011			2010
	(in thousands, except per share amounts and full-time equivalent employees)
Capital & Liquidity:
Total equity to total assets	8.41		%	8.56		%	2.74		%	6.12		%	7.99		%
Average equity to average assets	8.62		%	6.76		%	5.00		%	7.55		%	9.99		%
Tangible equity to tangible assets	8.40		%	8.53		%	2.68		%	6.04		%	7.88		%
Tangible common equity to tangible assets	8.40		%	8.53		%	(0.38		)%	3.15		%	5.16		%
Tier 1 risk-based capital ratio	11.91		%	13.64		%	4.23		%	9.70		%	11.20		%
Total risk-based capital ratio	13.00		%	14.89		%	5.49		%	10.96		%	12.47		%
Tier 1 leverage ratio	9.35		%	9.36		%	2.31		%	5.69		%	7.27		%
Dividend payout ratio	nm			nm			nm			nm			nm
Total loans to total deposits	73.28		%	68.02		%	53.68		%	57.12		%	69.33		%
Asset Quality:
Net charge-offs	$	201		$	565		$	26,666		$	15,320		$	36,081
Net loans charged-off to average loans	0.03		%	0.10		%	4.52		%	2.36		%	4.27		%
Non-accrual loans	$	4,348		$	7,203		$	25,071		$	46,907		$	54,082
Other real estate owned	$	4,511		$	8,201		$	13,441		$	25,141		$	24,399
Repossessed assets	$	8		$	12		$	8		$	302		$	763
Non-performing assets (NPA)	$	8,967		$	16,344		$	40,176		$	75,172		$	84,082
NPA to total assets	0.84		%	1.67		%	3.78		%	6.74		%	7.20		%
Loans 90 days past due	$	100		$	928		$	1,656		$	2,822		$	4,838
Non-performing loans (NPL)	$	4,448		$	8,131		$	26,727		$	49,729		$	58,920
NPL to total loans	0.67		%	1.39		%	4.94		%	8.54		%	8.10		%
Allowance for loan and lease losses to total loans	1.29		%	1.80		%	2.55		%	3.37		%	3.30		%
Allowance for loan and lease losses to NPL	192.22		%	129.14		%	51.63		%	39.41		%	40.73		%
Period End Balances:
Loans	$	663,622		$	583,097		$	541,130		$	582,264		$	727,091
Allowance for loan and lease losses	$	8,550		$	10,500		$	13,800		$	19,600		$	24,000
Loans held-for-sale	$	72,242		$	220		$	25,920		$	2,233		$	2,556
Intangible assets	$	134		$	330		$	600		$	982		$	1,461
Assets	$	1,070,244		$	977,574		$	1,063,555		$	1,114,901		$	1,168,548
Deposits	$	905,613		$	857,269		$	1,008,066		$	1,019,422		$	1,048,723
Common stockholders’ equity	$	89,980		$	83,648		$	(3,439	)	$	36,111		$	61,657
Total stockholders’ equity	$	89,980		$	83,648		$	29,110		$	68,232		$	93,374
Common stock market capitalization	$	151,027		$	153,187		$	3,952		$	3,958		$	14,776
Full-time equivalent employees	268			285			329			303			311
Common shares outstanding	66,826			66,603			1,772			1,684			1,642

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	As of and for the Years Ended December 31,
	2014		2013		2012		2011		2010
	(in thousands, except per share amounts and full-time equivalent employees)
Average Balances:
Loans, including held-for-sale	$	675,055	$	545,803	$	590,109	$	647,920	$	845,945
Intangible assets	$	240	$	466	$	781	$	1,239	$	1,691
Earning assets	$	928,976	$	958,453	$	1,024,472	$	1,028,654	$	1,213,145
Assets	$	1,006,392	$	1,039,941	$	1,110,794	$	1,118,646	$	1,306,831
Deposits	$	860,381	$	946,850	$	1,027,520	$	1,007,930	$	1,147,724
Common stockholders’ equity	$	86,720	$	61,382	$	23,233	$	52,584	$	99,067
Total stockholders’ equity	$	86,720	$	70,312	$	55,549	$	84,486	$	130,579
Common shares outstanding, basic—wtd	65,811		46,495		1,613		1,591		1,574
Common shares outstanding, diluted—wtd	65,815		46,504		1,613		1,591		1,574

GAAP Reconciliation and Management Explanation for Non-GAAP Financial Measures

The information set forth above contains certain financial information determined by methods other than in accordance with GAAP. Management uses these “non-GAAP” measures in their analysis of First Security’s performance. Non-GAAP measures typically adjust GAAP performance measures to exclude effects of significant gains, losses or expenses that are unusual in nature and not expected to recur. Since these items and their impact on our performance are difficult to predict, management believes presentations of financial measures excluding the impact of these items provide useful supplemental information that is important for a proper understanding of the operating results of our core business. Additionally, management utilizes measures involving a tangible basis which exclude the impact of intangible assets such as core deposit intangibles. As these assets are normally created through acquisitions and not through normal recurring operations, management believes that the exclusion of these items presents a more comparable assessment of the aforementioned measures on a recurring basis.

Specifically, management uses “return on average common equity,” “return on average tangible assets,” and “return on average tangible common equity.” Our management uses these non-GAAP measures in its analysis of First Security’s performance, as further described below.

• “Return on average common equity” is defined as annualized earnings for the period divided by average equity reduced by average preferred stock. Our management includes this measure in addition to return on average equity, the most comparable GAAP measure, because it believes that it is important when measuring First Security’s performance exclusive of the effects of First Security’s outstanding preferred stock, which had a fixed return, and that this measure is important to many investors in First Security’s common stock.

• "Return on average tangible assets" is defined as annualized earnings for the period divided by average assets reduced by average goodwill and other intangible assets.

• “Return on average tangible common equity” is defined as annualized earnings for the period divided by average equity reduced by average preferred stock and average goodwill and other intangible assets. Our management includes these measures because it believes that they are important when measuring First Security’s performance exclusive of the effects of intangibles recorded in First Security’s historic acquisitions, exclusive of the effects of First Security’s outstanding preferred stock, which had a fixed return, and these measures are used by many investors as part of their analysis of First Security’s performance.

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These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. The following table provides a more detailed analysis of these non-GAAP performance measures.

	As of and for the Years Ended December 31,
	2014			2013			2012			2011			2010
	(in thousands, except per share data)
Return on average common equity	2.79		%	18.49		%	(170.65		)%	(47.76		)%	(46.81		)%
Effect on average intangible assets	—		%	0.14		%	(5.94		)%	(1.15		)%	(0.81		)%
Return on average tangible common equity	2.79		%	18.63		%	(176.59		)%	(48.91		)%	(47.62		)%
Total equity to total assets	8.41		%	8.56		%	2.74		%	6.12		%	7.99		%
Effect of intangible assets	(0.01		)%	(0.03		)%	(0.06		)%	(0.08		)%	(0.11		)%
Tangible equity to tangible assets	8.40		%	8.53		%	2.68		%	6.04		%	7.88		%
Effect of preferred stock	—		%	—		%	(3.06		)%	(2.89		)%	(2.72		)%
Tangible common equity to tangible assets	8.40		%	8.53		%	(0.38		)%	3.15		%	5.16		%
Total stockholders’ equity	$	89,980		$	83,648		$	29,110		$	68,232		$	93,374
Effect of preferred stock	—			—			(32,549		)	(32,121		)	(31,717		)
Common stockholders’ equity	$	89,980		$	83,648		$	(3,439	)	$	36,111		$	61,657

	As of and for the Years Ended December 31,
	2014			2013			2012			2011			2010
	(in thousands, except per share data)
Average total stockholders’ equity	$	86,720		$	70,312		$	55,549		$	84,486		$	130,579
Effect of average preferred stock	—			(8,930		)	(32,316		)	(31,902		)	(31,512		)
Average common stockholders’ equity	86,720			61,382			23,233			52,584			99,067
Effect of average intangible assets	(240		)	(466		)	(781		)	(1,239		)	(1,691		)
Average tangible common stockholders’ equity	$	86,480		$	60,916		$	22,452		$	51,345		$	97,376
Per Share Data
Book value per common share	$	1.35		$	1.26		$	(1.94	)	$	21.44		$	37.55
Effect of intangible assets	(0.01		)	(0.01		)	(0.34		)	(0.58		)	(0.85		)
Tangible book value per common share	$	1.34		$	1.25		$	(2.28	)	$	20.86		$	36.70

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis ("MD&A") which should be read in conjunction with "Risk Factors" and “Selected Financial Data” as well as our consolidated financial statements and notes included in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report. Our actual results could differ materially from those discussed in this Annual Report on Form 10-K.

Year Ended December 31, 2014

The following discussion and analysis sets forth the major factors that affected First Security’s financial condition as of December 31, 2014 and 2013, and results of operations for the three years ended December 31, 2014 as reflected in the audited financial statements.

Strategic Initiatives

Over the past two years, our primary mission has been to transform FSGBank into a premier community bank in East Tennessee. To accomplish this vision, three primary tasks were necessary: raising a significant amount of new capital, disposing of a significant majority of our non-performing assets, and satisfying the Bank's Consent Order with the OCC. The successful execution of these three tasks would enable us to fully implement our business plan, return to profitability and expedite our transformation into a premier institution.

During 2013, we successfully completed a recapitalization by issuing 60,735,000 shares of our common stock for $91.1 million, or $1.50 per share, which included issuing common shares to the U.S. Treasury ("Treasury") for full satisfaction of our Preferred Stock issued as part of the Capital Purchase Program ("CPP") of the Troubled Asset Relief Program ("TARP") (collectively, the "Recapitalization" ). Additionally, we issued 3,329,234 shares of common stock for $1.50 per share for gross proceeds of approximately $5.0 million to shareholders of record of the Company immediately preceding the Recapitalization (the "Rights Offering").

During 2013, we also executed a problem loan sale that was a pre-closing condition of the Recapitalization. During the fourth quarter of 2012, we identified $36.2 million of under- and non-performing loans to sell and recorded a $13.9 million loss to reduce the loan balance to the expected net proceeds. During the first quarter of 2013, we recorded $1.4 million in transaction expenses and another $671 thousand in the third quarter of 2013. The aggregate expense associated with the loan sale was $16.0 million.

On March 10, 2014, the Office of the Comptroller of the Currency (the "OCC") terminated the Order (defined below) with FSGBank. On October 3, 2014, the Federal Reserve Bank of Atlanta (the "Federal Reserve") terminated the Written Agreement with First Security Group, Inc.

With each of these tasks now complete, we are fully implementing our business plan that will position us appropriately for both short-term and long-term success and our mission of becoming a top-tier community bank within our markets. As a result of the progress achieved to date on our business plan, we returned to profitability during the second quarter of 2014 and further expanded our profitability through the second half of 2014.

Strategic Initiative—Balance Sheet Restructuring—Prior to the Recapitalization, we held a significant level of excess liquidity, primarily in cash, and as a result, our mix of earning assets produced an overall earning asset yield that was insufficient to support our cost infrastructure. Additionally, we held an elevated level of brokered deposits and higher rate CDs to maintain the excess liquidity required by our regulatory and financial condition. Subsequent to the Recapitalization, we began to restructure our balance sheet, as further described below.

Loans— While cost reductions and revenue enhancements are being implemented, the return to profitability was largely associated with increasing loans and shifting the mix of earning assets from excess cash and investment securities into loans with a target of loans accounting for approximately 75% of total earning assets. From December 31, 2013 to December 31, 2014, we increased loans, including those held-for-sale, by $152.5 million, or 26.2%. As of December 31, 2014, our ratio of average loans to average earning assets in 2014 was 72.7%, compared to 56.9% in 2013.

Subsequent to the completion of the Recapitalization, various lending opportunities were evaluated to enhance and expedite loan growth while maintaining our commitment to asset quality. During 2013, various niche lending initiatives were implemented. First, TriNet Direct is a division focused on national net lease lending. This unit originates construction of pre-leased "build to suit" projects and provides interim and long-term financing to professional developers and private investors of commercial real estate on long-term leases to tenants that are investment grade or have investment grade attributes. As evidenced during 2014, we may, from time to time, evaluate a portion of the originated loans to sell in order to manage our overall interest rate risk, asset-liability sensitivity and commercial real estate concentrations. Once management make the decision to sell a loan, generally represented by the execution of a letter of intent, the loans are transferred to held-for-sale. Second, we have entered into a partnership with an unaffiliated third-party that originates small balance, unsecured consumer

32

loans, primarily associated with home improvement additions, including financing new or replacement HVAC units, roofs, windows and other improvements. We are purchasing these consumer loans at a discount from the originator. During the third quarter of 2014, we ceased additional purchases based on the loan production levels achieved by our commercial lenders and other lending channels. The last lending initiative was the establishment of a unit focused on government lending, primarily originating and selling the guaranteed portion of SBA and USDA loans. This last initiative provides a greater impact on non-interest income through the premium and servicing revenue for sold loans. Collectively, we believe that our traditional lending officers, supplemented by these lending initiatives, will continue to increase our loan balances and be the primary contributor to steadily improving core profitability.

Deposits—A cornerstone of our business plan is to advance our deposit market share within our footprint through a focus on growth in pure deposits, defined as transaction accounts, and core deposits, defined as pure deposits plus CD's less than $100 thousand. In the preceding twelve months and over the next twelve months, we have and will experience significant maturities of legacy brokered deposits. These maturities provide an opportunity to restructure the deposit mix with a shift towards lower cost funding. To support this initiative, we established clearly defined pure deposit growth objectives for each of our 26 branch locations and aligned our retail and commercial incentive plans accordingly. Leveraging our branches to grow market share with pure deposits will reduce our cost of funds, increase our margin and assist us in increasing profitability as well as reducing interest rate risk.

We have generated positive results in implementing our deposit strategy. From December 31, 2013 to December 31, 2014, $51.9 million of legacy brokered deposits matured and the balance of customer CDs declined by $65.6 million. Legacy brokered deposits refers to brokered deposits issued prior to the Consent Order with the original purpose of providing excess liquidity. The average rate of matured legacy brokered deposits during 2014 was 2.92%. Total brokered deposits have increased during 2014 by a net of $30.2 million. This net increase includes the reduction of legacy brokered deposits as well as $48.4 million in customer deposits placed and reciprocated through products provided by FSG in partnership with the network of banks associated with Promontory Interfinancial Network, LLC. This structured reduction in high cost deposits was funded with our excess liquidity as well as our growth in pure deposits. Pure deposits have increased by approximately $83.7 million, or 18.8% from December 31, 2013 to December 31, 2014. As of December 31, 2014, the ratio of pure deposits to total deposits was approximately 58.5% as compared to only 52.0% as of December 31, 2013. Our goal is to achieve a ratio of pure deposits to total deposits of at least 60.0%.

We expect to continue to grow pure deposits through increases in products per household and by acquiring new customer relationships, including through cross-selling to new loan customers.

Investment Securities and Liquidity—Beginning in 2009, we maintained excess liquidity to reduce our liquidity risk given our credit and financial condition prior to the Recapitalization. During the second quarter of 2013, we began deploying the excess liquidity to purchase approximately $83.6 million in investment securities between March 31, 2013 and September 30, 2013. During the second half of 2013, we transferred certain federal agency, mortgage-based and municipal securities with a fair value of approximately $143 million from the available-for-sale portfolio to the held-to-maturity portfolio. The securities identified primarily consisted of securities with excessive price risk in higher interest rate environments. As of the transfer date, the unrealized holding loss was approximately $8.9 million. This unrealized loss will continue to be reported as a separate component of shareholders' equity and will be amortized over the remaining life of the securities as an adjustment to the yield. The corresponding discount on these securities will offset this adjustment to yield to result in no income statement impact. For the years ended December 31, 2014 and 2013, approximately $1.8 million and $937 thousand, respectively, of the unrealized loss was accreted back into shareholders' equity. Subject to prepayment speeds, we anticipate between $1.2 million and $1.8 million of the unrealized loss to be accreted back into shareholders' equity during 2015. During 2014 and the fourth quarter of 2013, we sold approximately $66.5 million and $22.8 million, respectively, of investment securities to supplement existing liquidity sources to fund loan growth and to assist in maintaining our overall asset size.

Net Interest Margin—As discussed above, solid progress has been achieved in restructuring our earning assets and deposit mix. As a result, our net interest margin has improved by 86 basis points from 2.50% to 3.36% for 2014 compared to 2013, and improved 15 basis points from 2.35% to 2.50% for 2013 compared to 2012. During 2014, we recognized approximately $700 thousand in discount accretion through resolving multiple loans originally purchased at a discount. Adjusting for the discount accretion, the net interest margin was 3.29% for the year ended December 31, 2014. Given the current rate and competitive environment, additional improvements to our net interest margin will be challenging in 2015. This further emphasizes the importance of maintaining and increasing our level of non-interest income and maintaining a disciplined approach to managing our earning asset and deposit mix.

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Strategic Initiative—Non-Interest Expense Management— As a result of the Recapitalization and the associated under- and non-performing loan sale, our financial and regulatory condition improved significantly. Accordingly, our costs associated with non-performing assets, professional fees, FDIC insurance, and corporate insurance materially declined in 2014 as compared to 2013. Additionally, we initiated a process following the Recapitalization to identify operational efficiencies and other cost saving strategies while maintaining a high level of customer service.

During the second quarter of 2013, we engaged a consultant to review and analyze all aspects of non-interest expense. The consultant facilitated a process that involved multiple employee teams. Each team reviewed a department or line of business and provided recommendations where appropriate. The process included the evaluation of the effectiveness and profit contribution of each branch, staffing levels throughout each department or line of business and various process improvements.

During the third quarter of 2013, we began the process of implementing the recommendations. In reviewing the retail branches, various efficiencies were identified that supported a reduction in staffing as well as a shift towards better utilizing part-time employees during peak transaction times as well as a call center to centralize and ensure consistency in customer service resolutions. Reductions in the special assets and certain administrative functions were also identified. Collectively, we reduced our employee base by 6.0% from 285 at December 31, 2013 to 268 at December 31, 2014. Our employee base of 268 at December 31, 2014 represents a 14.4% reduction compared to our employee base of 313 at September 30, 2013, immediately prior to implementation of these recommendations. We closed two branches during December 2013 and consolidated two additional branches during the second quarter of 2014.

Total non-interest expense declined by $6.1 million, or 12.8%, from 2013 to 2014. While significant reductions have been achieved, our overall cost structure remains elevated for our current level of assets. We continue to evaluate various alternatives to right-sizing the overall level of non-interest expense.

Strategic Initiative—Non-Interest Income Enhancement— In the current interest rate environment, a consistent and appropriate level of non-interest income is necessary to provide adequate overall returns on assets and capital. Over the last two years, significant resources have been devoted to enhancing our ability to generate an appropriate level of recurring non-interest income. Our primary components of non-interest income include: deposit fees, including point-of-sale income, trust revenue, mortgage banking income, bank-owned life insurance and gains on sales of loans.

Treasury Management—In 2013, we created a dedicated treasury management department that provides both sales and support for all cash management products and services for our deposit customers with an emphasis on business accounts. The focus of this department is to actively solicit new business deposit relationships as well as to support and assist our current customers. We believe a dedicated treasury management department will assist in generating pure deposit growth and the related fee income from the various cash management products and services. While fee income has remained flat year-over-year, this department has assisted in growing our pure deposits, which is beneficial to our net interest margin.

Trust Fees—Our wealth management and trust department provides a full range of trust and estate services, investment management, including brokerage and insurance products, and private banking. Our revenues from this department are continuing to grow at a steady pace.

Mortgage Income—In the second half of 2013, our mortgage department transitioned to a dedicated underwriter model to increase our profitability and turnaround time. We are actively recruiting and hiring "purchase" originators with strong network connections to local real estate agents within our markets. While the overall mortgage landscape has changed dramatically over the last 2 years, we believe that our mortgage division can continue to generate a net profit as well as provide an important product to our customers. Additionally, we offer various private client mortgage products that we intend to classify as held-for-investment. From time-to-time, we may evaluate certain of these loans to sell on the secondary market based on our overall interest rate risk profile and loan concentrations. During the third quarter of 2014, the Company identified a group of residential 1-4 family loans to be sold to a third party. These loans were transferred from the held-for-investment portfolio at approximately $6.9 million, which was lower of cost or market value. These loans sold during the third quarter of 2014, resulting in a gain of approximately $156 thousand.

Gains on Loan Sales—In addition to the mortgage department, our dedicated SBA ans USDA and our TriNet division may sell certain loans. Our government lending department offers SBA 7(a), SBA 504 and USDA B&I loans and is approved as an SBA Preferred and Express Lender. During 2014, this department has generated $7.1 million in SBA loans with approximately $5.1 million of that amount guaranteed, of which $3.6 million sold during 2014. The guaranteed portion that was sold resulted in a net gain of $288 thousand, including $42 thousand of servicing income, for the year ended December 31, 2014. We believe this department can generate significantly more volume in 2015 with additional resources that we anticipate adding in the next three months. From time-to-time, we may evaluate a portion of the TriNet loans to market for sale. During 2014, we sold approximately $71.4 million of TriNet loans, including $8.6 million in loan participations. The sales resulted in gain of approximately $1.3 million. As of December 31, 2014, we held approximately $69.3 million in TriNet loans held-for-sale that we expect to sell at a gain during the first quarter of 2015. Based on our concentration levels and interest rate risk profile, we may evaluate additional TriNet loans to sell but no such loans have been identified beyond the loans held-for-sale as

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of year-end. Currently, we have additional capacity within our internally established concentration limits to originate and hold additional TriNet loans.

Collectively, we believe that each of these departments can generate new or increased levels of non-interest income in 2015 and beyond.

Strategic Initiative—Resolution of Regulatory Enforcement Actions— On March 10, 2014, the OCC terminated the Bank's Order that had been in place since April 28, 2010, when, 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"). The Order provided the areas of our operations that warranted improvement, including reviewing and revising various policies and procedures, including those associated with credit concentration risk management, the allowance for loan and lease losses, liquidity management, criticized assets, loan review and credit administration. The Order also required elevated minimum regulatory capital ratios, which meant that FSGBank could be deemed no stronger than "adequately capitalized" under the FDIC's prompt corrective action provisions. Effective with the termination of the Order and as of December 31, 2014, FSGBank is deemed to be "well capitalized."

On October 2, 2014, the Federal Reserve Bank of Atlanta (the "Federal Reserve") terminated the Company's Written Agreement (the "Agreement") that had been in place since September 7, 2010. The Agreement was designed to enhance our ability to act as a source of strength to FSGBank, including, but not limited to, taking steps to ensure that FSGBank gain compliance with the Order. While the Agreement has been terminated, we expect to continue to seek approval from the Federal Reserve prior to paying any dividends on our capital stock or incurring any additional indebtedness.

Overview

Market Conditions

Our financial results are impacted by both macro-economic and micro-economic conditions. We monitor key indicators on the national, regional and local levels and incorporate applicable trends into our risk tolerances.

As changes in interest rates have a direct impact on our financial results, we monitor the actions and guidance provided by the Federal Open Market Committee ("FOMC") as well as certain key rates. On October 29, 2014, the FOMC announced the conclusion of the Quantitative Easing 3 ("QE3") asset purchases after a phase-out period of approximately one year and reiterated that the low interest rate environment would likely remain in place for a considerable time after the end of the asset purchases and after FOMC stated thresholds for unemployment and inflation expectations. In the December 2014 meeting, the FOMC stated they expect inflation to rise gradually toward 2% as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. As originally stated in the October meeting, the FOMC continues to believe that, even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run. Over the last year, the yield on the 10-year Treasury decreased from approximately 3.04% as of December 31, 2013 to approximately 2.17% as of December 31, 2014. Most believe that the decrease is due to inflation remaining below expectations during 2014 and concerns over slower global economic growth. We are actively monitoring our interest rate sensitivity, and incorporating appropriate decisions in both the mix and duration of our funding liabilities and earning assets.

As of December 2014, the national unemployment rate improved to 5.6% from 6.7% as of December 2013. As of December 2014, the unemployment rates in Tennessee and Georgia were 6.4% and 6.6%, respectively. Our primary markets of Chattanooga and Knoxville, Tennessee continue to have better unemployment rates than the state average. As of December 2014, the unemployment rates for Chattanooga and Knoxville, Tennessee are 6.1% and 5.3%, respectively. The economy of the Dalton, Georgia MSA is primarily centered on the carpet and floor-covering industries and was the most negatively impacted region in our footprint but has started to demonstrate improvement. The unemployment rate in the Dalton MSA is 8.4% as of December 2014 compared to the December 2013 rate of 9.4% and the Georgia rate of 7.2%. We believe these positive employment trends will continue into 2015.

In addition to key trends, we also monitor specific economic investments in our market area. The following are recent or significant announcements:

• Chattanooga, Tennessee - Volkswagen announced a major expansion to their current automotive production facility for the production of Volkswagen's new SUV vehicle for the North American markets. The total investment is expected to be $600 million and will create approximately 2,000 additional direct jobs with approximately 3,600 additional indirect jobs. The production facility began production of the Passat in May 2011. The original investment totaled $1 billion and created 3,200 direct jobs and an additional 9,500 indirect supplier jobs.

• Chattanooga, Tennessee - DENSO Manufacturing announced an expansion to their current automotive parts production facility. The investment is expected to be approximately $485 million and will create 400 additional jobs. This is the third expansion for DENSO, following investments of $55 million during 2014 and $50 million during 2013.

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• Knoxville, Tennessee - TeamHealth health company announced an investment of $17 million to build a new office center. The new center will add 450 jobs after completion. The new location will perform coding and billing for patients seen at TeamHealth's clients hospitals.

• Dalton, Georgia - Engineered Floors will invest $450 million to build two manufacturing complexes over the next five years that will create approximately 2,400 jobs. The new manufacturing complexes will be in Murray and Whitfield counties in Georgia.

• Knoxville, Tennessee - Alcoa Inc. is planning to expand their current Blount County plants with an investment of $275 million. Alcoa expect to add approximately 200 permanent jobs over the next three years. The new plant will support Tennessee's automotive industry by producing aluminum products.

• Cleveland, Tennessee - Wacker Chemical is building a $1.8 billion polysilicon production plant for the solar power industry near Cleveland, Tennessee. The plant is expected to create an additional 600 direct jobs for our market area, with the current staffing level of approximately 280.

We believe the positive economic impact of the above and other recently announced economic investments will be substantial and provide a competitive economic growth rate for our markets.

Our market area has also benefited from a historically stable housing environment and increases in the median sales prices of existing single-family homes over the last three years. According to the National Association of Realtors, the median sales prices of existing single-family homes increased by 8.78% and 4.22% in the Chattanooga MSA and Knoxville MSA, respectively, in 2014. The increase in the median sales price from 2012 to 2014 was 8.21% for the Chattanooga MSA and 5.94% for the Knoxville MSA compared to 17.95% increase for the nation and a 15.53% increase for the census region identified as the South for the same period. The National Association of Realtors forecasts median home prices to continue increasing in 2015 for both new and existing homes.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Our significant accounting policies are described in Note 1, “Summary of Significant Accounting Policies" in the notes to our consolidated financial statements and are integral to understanding this MD&A. Critical accounting policies include the initial adoption of an accounting policy that has a material impact on our financial presentation as well as accounting estimates reflected in our financial statements that require us to make estimates and assumptions about matters that were highly uncertain at the time. Disclosure about critical estimates is required if different estimates that we reasonably could have used in the current period would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. The following is a description of our critical accounting policies.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is established and maintained at levels management deems adequate to absorb probable incurred credit losses in the portfolio as of the balance sheet date. The allowance is increased through the provision for loan and lease losses and reduced through loan and lease charge-offs, net of recoveries, or credits to loan and lease losses. The level of the allowance is based on known and inherent risks in the portfolio, past loan loss experience, underlying estimated values of collateral securing loans, current economic conditions and other factors as well as the level of specific impairments associated with impaired loans. This process involves our analysis of complex internal and external variables and it requires that we exercise judgment to estimate an appropriate allowance. Changes in the financial condition of individual borrowers, economic conditions or changes to our estimated risks could require us to significantly decrease or increase the level of the allowance. Such a change could materially impact our net income as a result of the change in the provision for loan and lease losses. Refer to the “Provision for Loan and Lease Losses” and “Allowance” sections within MD&A for a discussion of our methodology of establishing the allowance as well as Note 1, "Summary of Significant Accounting Policies" in the notes to our consolidated financial statements.

Estimates of Fair Value

Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Our available-for-sale securities and held for sale loans are measured at fair value on a recurring basis. Additionally, fair value is used to measure certain assets and liabilities on a non-recurring basis. We use fair value on a non-recurring basis for other real estate owned, repossessions and collateral associated with impaired collateral-dependent loans. Fair value is also used in certain impairment valuations, including assessments of goodwill, other intangible assets and long-lived assets.

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Estimating fair value in accordance with applicable accounting guidance requires that we make a number of significant judgments. Accounting guidance provides three levels of fair value. Level 1 fair value refers to observable market

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prices for identical assets or liabilities. Level 2 fair value refers to similar assets or liabilities with observable market data. Level 3 fair value refers to assets and liabilities where market prices are unavailable or impracticable to obtain for similar assets or liabilities. Level 3 valuations require modeling techniques, such as discounted cash flow analysis. These modeling techniques incorporate our assessments regarding assumptions that market participants would use in pricing the asset or the liability.

Changes in fair value could materially impact our financial results. Refer to Note 19, “Fair Value Measurements” in the notes to our consolidated financial statements for a discussion of our methodology of calculating fair value.

Income Taxes

We are subject to various taxing jurisdictions where we conduct business and we estimate income tax expense based on amounts that we expect to owe to these jurisdictions. We evaluate the reasonableness of our effective tax rate based on a current estimate of annual net income, tax credits, non-taxable income, non-deductible expenses and the applicable statutory tax rates. The estimated income tax expense or benefit is reported in the consolidated statements of operations.

The accrued tax liability or receivable represents the net estimated amount due or to be received from tax jurisdictions either currently or in the future and are reported in other liabilities or other assets, respectively, in our consolidated balance sheets. We assess the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other pertinent information and maintain tax accruals consistent with our evaluation. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations by tax authorities and newly enacted statutory, judicial and regulatory guidance that could impact the relative merits of tax positions. These changes, if or when they occur, could impact accrued taxes and future tax expense and could materially affect our financial results.

We periodically evaluate our uncertain tax positions and estimate the appropriate level of tax reserves related to each of these positions. Additionally, we evaluate our deferred tax assets for possible valuation allowances based on the amounts expected to be realized. The evaluation of uncertain tax positions and deferred tax assets involves a high degree of judgment and subjectivity. Changes in the results of these evaluations could have a material impact on our financial results. Refer to Note 14, “Income Taxes,” in the notes to our consolidated financial statements as well as the Income Taxes section of MD&A for more information.

Financial Results

As of December 31, 2014, we had total consolidated assets of $1.1 billion, total loans of $663.6 million, total deposits of $905.6 million and stockholders’ equity of $90.0 million. In 2014, we had net income allocated to common stockholders of $2.4 million, resulting in a net income of $0.04 per share (basic and diluted). During 2014, we recognized a credit to the provision for loan and lease losses of $1.5 million.

As of December 31, 2013, we had total consolidated assets of $977.6 million, total loans of $583.1 million, total deposits of $857.3 million and stockholders’ equity of $83.6 million. In 2013, we had a net loss of $13.5 million and net income allocated to common stockholders of $11.3 million as a result of a gain of $26.2 million in connection with the exchange of our Preferred Stock into common stock during our Recapitalization. This resulted in a net income of $0.24 per share (basic and diluted) for 2013. During 2013, we recognized a credit of $2.7 million to the provision for loan and lease losses.

As of December 31, 2012, we had total consolidated assets of $1.1 billion, total loans of $541.1 million, total deposits of $1.0 billion and stockholders equity of $29.1 million. In 2012, we had a net loss of $37.6 million and net loss allocated to common stockholders was $39.6 million, resulting in a net loss of $24.58 per share (basic and diluted). During 2012, we recognized $20.9 million in provision for loan and lease losses.

Net interest income for 2014 increased by approximately $7.5 million compared to 2013 primarily as a result of the increase in our loan growth as well as reductions in our cost of funds. Due to minimal charge-offs and positive asset quality trends in 2014 and 2013, we recognized credits of $1.5 million and $2.7 million, respectively, to provision for loan and lease losses, respectively. Noninterest income increased by approximately $3.6 million compared to 2013 primarily as a result of the increase in the gain on sales of loans and transfer of loans to held-for-sale and the increase in gains on the sale of available-for-sale securities. Noninterest expense decreased by $6.1 million due to decreases in professional fees, OREO expense, FDIC insurance expense and salary and benefit expense. Full-time equivalent employees were 268 at December 31, 2014 compared to 285 at December 31, 2013.

Net interest income for 2013 declined by $210 thousand compared to 2012 primarily as a result of the reduction in average loans and lower loan yields partially offset by a reduction in our brokered deposits and the associated interest expense. Due to minimal charge-offs and positive asset quality trends in 2013, we recognized a credit of $2.7 million to provision for loan and lease losses as compared to $20.9 million in provision for expense in 2012. Noninterest income increased by approximately $537 thousand compared to 2012 primarily as a result of the increase in mortgage income, trust income and the increase in gains on available for sale securities. Noninterest expense increased by $101 thousand largely due to increases in

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salary and benefit expense, partially offset by reduced non-performing asset expense and a decrease in FDIC insurance expense. Full-time equivalent employees were 285 at December 31, 2013, compared to 329 at December 31, 2012.

Our efficiency ratio improved to 96.5% in 2014 versus 149.0% in 2013 and 150.2% in 2012. The efficiency ratio for 2014 improved as a result of the increase in net interest income combined with a decrease in noninterest expense. We anticipate our efficiency ratio to continue to improve during 2015 as we continue to grow our loan portfolio and focus on enhancing revenue while continuing to reduce certain overhead expenses.

Net interest margin in 2014 was 3.36%, or 86 basis points higher, compared to the prior period of 2.50%. The net interest margin of our peer group (as reported on the December 31, 2014 Uniform Bank Performance Report) was 3.64% and 3.73% for 2014 and 2013, respectively. During 2014, we recognized approximately $700 thousand in discount accretion through resolving multiple loans originally purchased at a discount. Adjusting for the discount accretion, the net interest margin was 3.29% for the year ended December 31, 2014.

For 2015, we expect continued improvements in our overall financial performance. We expect strong loan growth and enhancements to non-interest income while controlling or reducing costs. However, our net interest margin will have a significant impact on the level of improvement. Changes to our net interest margin depends on multiple factors including our ability to raise core deposits, our growth or contraction in loans, our deposit and loan pricing, maturities of brokered deposits, and any possible actions by the Federal Reserve Board to the target federal funds rate.

Results of Operations

We reported net income of $2.4 million for 2014 compared to a net loss of $13.5 million for 2013 and a net loss of $37.6 million in 2012. We reported income available to common shareholders for 2014 and 2013 of $2.4 million and $11.3 million, respectively, versus a net loss allocated to common shareholders of $39.6 million for 2012. In 2014, the net income per share was $0.04 (basic and diluted) on approximately 65.8 million weighted average shares outstanding. In 2013, the net income per share was $0.24 (basic and diluted) on approximately 46.5 million weighted average shares outstanding. In 2012, the net loss per share was $24.58 (basic and diluted) on approximately 1.6 million weighted average shares outstanding.

Our net income increased by $15.9 million from 2013 to 2014. Net interest income expanded by $7.5 million through a combination of loan growth and active management of our earning asset and deposit mixes, which yielded an improved net interest margin. Non-interest income improved by $3.6 million, primarily through gains on loan sales and non-interest expense declined by $6.1 million due to our improved financial condition. During 2013, we recorded a $26.2 million one-time gain associated with the exchange of our Preferred Stock for Common stock during the recapitalization to fully offset the $13.4 million net loss and provide net income available to common shareholders of $11.3 million. In 2012, our net loss allocated to common shareholders was $39.6 million, primarily a result of provision expense of $20.9 million. As of December 31, 2014, we had 26 banking offices, including the headquarters and 268 full time equivalent employees.

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The following table summarizes the components of income and expense and the changes in those components for the past three years.

	Condensed Consolidated Statements of Income For the Years Ended December 31,
	2014			Change From Prior Year			Percent Change		2013			Change From Prior Year			Percent Change		2012			Change From Prior Year			Percent Change
	(in thousands, except percentages)
Interest income	$	35,891		$	3,977		12.5	%	$	31,914		$	(4,396	)	(12.1	)%	$	36,310		$	(6,474	)	(15.1	)%
Interest expense	4,990			(3,554		)	(41.6	)%	8,544			$	(4,186	)	(32.9	)%	12,730			(2,275		)	(15.2	)%
Net interest income	30,901			7,531			32.2	%	23,370			$	(210	)	(0.9	)%	23,580			(4,199		)	(15.1	)%
(Credit) provision for loan and lease losses	(1,452		)	1,283			(46.9	)%	(2,735		)	$	(23,601	)	(113.1	)%	20,866			9,946			91.1	%
Net interest income after provision (credit) for loan and lease losses	32,353			6,248			23.9	%	26,105			$	23,391		861.9	%	2,714			(14,145		)	(83.9	)%
Noninterest income	12,258			3,575			41.2	%	8,683			$	537		6.6	%	8,146			46			0.6	%
Noninterest expense	41,668			(6,092		)	(12.8	)%	47,760			$	101		0.2	%	47,659			31			0.1	%
Net income (loss) before income taxes	2,943			15,915			(122.7	)%	(12,972		)	$	23,827		(64.7	)%	(36,799		)	(14,130		)	62.3	%
Income tax provision	526			49			10.3	%	477			$	(294	)	(38.1	)%	771			379			96.7	%
Net income (loss)	2,417			15,866			(118.0	)%	(13,449		)	$	24,121		(64.2	)%	(37,570		)	(14,509		)	62.9	%
Preferred stock dividends and discount accretion	—			1,381			(100.0	)%	(1,381		)	$	697		(33.5	)%	(2,078		)	(25		)	1.0	%
Effect of exchange of preferred stock to common stock	—			(26,179		)	100.0	%	26,179			$	26,179		—	%	—			—			—	%
Net income (loss) allocated to common stockholders	$	2,417		$	(8,932	)	(78.7	)%	$	11,349		$	50,997		(128.6	)%	$	(39,648	)	$	(14,534	)	57.9	%

Further explanation, with year-to-year comparisons of the income and expense, is provided below.

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. In 2014, net interest income was $30.9 million, or 32.2% more than the 2013 level of $23.4 million, which was 0.9% less than the 2012 level of $23.6 million.

The level of net interest income is determined primarily by the average balances (volume) of interest earning assets and the various rate spreads between our interest earning assets and our funding sources (rate). Changes in net interest income from period to period result from increases or decreases in the volume of interest earning assets and interest bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the

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interest earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as noninterest bearing deposits.

The following table summarizes net interest income on a fully tax-equivalent basis and average yields and rates paid for the years ended December 31, 2014, 2013, and 2012.

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Average Consolidated Balance Sheets and Net Interest Analysis

Fully Tax-Equivalent Basis

	For the Years Ended,
	2014							2013							2012
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
	(in thousands, except percentages) (fully tax-equivalent basis)
ASSETS
Earning assets:
Loans, net of unearned income1,2	$	675,055		$	31,464	4.66	%	$	545,803		$	26,099	4.78	%	$	590,109		$	31,264	5.30	%
Debt securities—taxable	224,189			3,790		1.69	%	269,284			4,402		1.63	%	211,771			3,557		1.68	%
Debt securities—non-taxable 2	19,537			920		4.71	%	32,091			1,632		5.09	%	26,596			1,511		5.68	%
Federal funds sold and other earning assets	10,195			53		0.52	%	111,275			378		0.34	%	195,996			512		0.26	%
Total earning assets	928,976			$	36,227	3.90	%	958,453			$	32,511	3.39	%	1,024,472			$	36,844	3.60	%
Allowance for loan losses	(9,468		)					(12,933		)					(19,941		)
Intangible assets	240							466							781
Cash & due from banks	10,344							11,743							13,416
Premises & equipment	27,856							29,038							29,248
Other assets	48,444							53,174							62,818
Total assets	$	1,006,392						$	1,039,941						$	1,110,794
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
NOW accounts	$	102,029		$	182	0.18	%	$	91,089		$	259	0.28	%	$	63,269		$	191	0.30	%
Money market accounts	186,934			634		0.34	%	162,499			720		0.44	%	135,688			966		0.71	%
Savings deposits	40,970			42		0.10	%	40,044			50		0.12	%	40,078			79		0.20	%
Time deposits less than $100 thousand	164,995			1,067		0.65	%	209,787			1,938		0.92	%	231,648			2,681		1.16	%
Time deposits > $100 thousand	133,908			1,038		0.77	%	187,345			1,953		1.04	%	199,618			2,554		1.28	%
Brokered Deposits	80,820			1,937		2.40	%	114,926			3,554		3.09	%	198,454			5,863		2.95	%
Repurchase agreements	12,983			38		0.29	%	13,508			70		0.52	%	14,083			395		2.80	%
Other borrowings	41,789			52		0.12	%	1,086			—		—	%	13			1		7.69	%
Total interest bearing liabilities	764,428			4,990		0.65	%	820,284			8,544		1.04	%	882,851			12,730		1.44	%
Net interest spread				$	31,237	3.25	%				$	23,967	2.35	%				$	24,114	2.15	%
Noninterest bearing demand deposits	150,725							141,160							158,765
Accrued expenses and other liabilities	4,519							8,185							13,629
Stockholders’ equity	94,920							72,774							52,243
Accumulated other comprehensive gain (loss)	(8,200		)					(2,462		)					3,306
Total liabilities and stockholders’ equity	$	1,006,392						$	1,039,941						$	1,110,794
Impact of noninterest bearing sources and other changes in balance sheet composition						0.11	%						0.15	%						0.20	%
Net interest margin						3.36	%						2.50	%						2.35	%
1 Nonaccrual loans have been included in the average balance. Only the interest collected on such loans has been included as income.
2 Interest income from securities and loans includes the effects of taxable-equivalent adjustments using a federal income tax rate of approximately 34% for all years reported and where applicable, state income taxes, to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable equivalent adjustment amounts included in the above table were $336 thousand, $597 thousand and $534 thousand for the years ended December 31, 2014, 2013 and 2012, respectively.

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The following table shows the relative impact on net interest income to changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

Change in Interest Income and Expense on a Fully-Tax Equivalent Basis

	2014 compared to 2013 increase (decrease) in interest income and expense due to changes in:									2013 compared to 2012 increase (decrease) in interest income and expense due to changes in:
	Volume			Rate			Total			Volume			Rate			Total
	(in thousands)
Earning assets:
Loans, net of unearned income	$	6,029		$	(664	)	$	5,365		$	(2,248	)	$	(2,917	)	$	(5,165	)
Debt Securities—taxable	(770		)	158			(612		)	942			(97		)	845
Debt Securities—non-taxable	(597		)	(115		)	(712		)	290			(169		)	121
Federal funds sold and other earning assets	(459		)	134			(325		)	(260		)	126			(134		)
Total earning assets	4,203			(487		)	3,716			(1,276		)	(3,057		)	(4,333		)
Interest bearing liabilities:
NOW accounts	39			(116		)	(77		)	80			(12		)	68
Money market accounts	139			(225		)	(86		)	166			(412		)	(246		)
Savings deposits	—			(8		)	(8		)	—			(29		)	(29		)
Time deposits less than $100 thousand	(349		)	(522		)	(871		)	(237		)	(506		)	(743		)
Time deposits > $100 thousand	(471		)	(444		)	(915		)	(150		)	(451		)	(601		)
Brokered Deposits	(930		)	(687		)	(1,617		)	(2,572		)	263			(2,309		)
Repurchase agreements	(3		)	(29		)	(32		)	(15		)	(310		)	(325		)
Other borrowings	52			—			52			(1		)	—			(1		)
Total interest bearing liabilities	(1,523		)	(2,031		)	(3,554		)	(2,729		)	(1,457		)	(4,186		)
Increase (decrease) in net interest income	$	5,726		$	1,544		$	7,270		$	1,453		$	(1,600	)	$	(147	)

Net Interest Income—Volume and Rate Changes

Interest income on a fully-tax equivalent basis in 2014 was $36.2 million, an 11.4% increase from the 2013 level of $32.5 million, which was an 11.8% decrease from the 2012 level of $36.8 million. For 2014, average earning assets decreased $29.5 million compared to 2013. The decline in average earning assets is a direct result of our balance sheet restructuring that included utilizing our excess liquidity following the Recapitalization to pay off certain high rate deposits as they matured as well as to fund loan growth. For 2014, average loans increased by $129.3 million, or 23.7% as compared to the 2013. The volume changes within earning assets increased income by $4.2 million while the 12 basis point decline in the loan yield was the primary driver in the changes in rates causing a $487 thousand decrease in interest income. Average interest-bearing liabilities decreased in 2014 by $55.9 million, or 6.8%, with average brokered deposits accounting for a reduction of $34.1 million, or 29.7%, and average time deposits accounting for a decrease of $98.2 million, or 24.7%, partially offset by an increase in average other borrowings by $40.7 million, or 3,748%. The total impact on net interest income from changes in volume and rate was an increase of $5.7 million and $1.5 million, respectively, comparing 2014 to 2013.

For 2013, average loans declined by $44.3 million, or 7.5% from 2012. During 2013, we began deploying excess liquidity into investment securities and reducing high rate deposits, as shown in the increase of $57.6 million in taxable debt securities and reduction of $84.7 million in other earning assets. The net impact for changes in volumes and rates of interest-earning assets in 2013 reduced interest income by $1.3 million and $3.1 million, respectively. Decreased earnings from earning assets were partially offset by the decline in volume and yields on interest-bearing liabilities. Average interest bearing liabilities decreased in 2013 by $62.6 million, or 7.1% as part of our de-leveraging plan. The total impact on net interest income from changes in volume and rate was an increase of $1.5 million and decrease of $1.6 million, respectively, comparing 2013 to 2012.

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The tax equivalent yield on average earning assets increased by 51 basis points to 3.90% in 2014 from 3.39% in 2013, largely driven by the reallocation of cash into loans. Although we experienced an increase in the yield on average earning assets, rate changes reduced our interest income by $487 thousand in 2014, primarily due to the decrease in the tax equivalent yield on average loans by 12 basis points to 4.66% in 2014 compared to 4.78% in 2013. The tax equivalent yield on average earning assets decreased by 21 basis points in 2013 from 3.60% in 2012. The reduction in yield on earning assets was primarily attributable to a decline in yield on average loans to 4.78% in 2013 from 5.30% in 2012. The reduction in yield on average earning assets reduced interest income by $3.1 million in 2013.

Total interest expense was $5.0 million in 2014, compared to $8.5 million in 2013 and $12.7 million in 2012. A decline in time deposits and brokered deposits in 2014 of $98.2 million and $34.1 million, respectively, compared to 2013, reduced interest expense by $1.8 million and $1.6 million, respectively. Average interest bearing liabilities decreased by $55.9 million in 2014 compared to 2013, as a result of our overall balance sheet restructuring initiative as well as our focus on increasing non-interest bearing deposit accounts. For 2014, the net impact on changes in volume of interest bearing liabilities resulted in a $1.5 million reduction in interest expense. Further reducing interest expense $2.0 million in 2014 was the reduction in rates paid on interest bearing liabilities, primarily in the retail and jumbo certificates of deposit and brokered deposits. The decrease in rates was due primarily to term deposits maturing and repricing at lower current market rates. Average interest bearing liabilities decreased by $62.6 million in 2013 compared to 2012. The reduction in average interest bearing liabilities in 2013 was primarily due to the reduction in brokered deposits, partially offset by an increase in our money market accounts. A decline in brokered deposits during 2013 of $90.4 million decreased interest expense by $2.3 million when compared to 2012. For 2013, the net impact on changes in volume of interest bearing liabilities resulted in a $2.7 million reduction to interest expense over 2012 levels.

Prior to the Recapitalization, we maintained above market rates on deposits to ensure we maintained excess liquidity. Following the Recapitalization, we reduced our rates on all deposit products to market competitive rates. The reduction of rates on interest bearing liabilities reduced interest expense $2.0 million in 2014 and $1.5 million in 2013. The average rate paid on interest bearing liabilities for 2014 decreased by 39 basis points to 0.65% after having decreased by 40 basis points from 1.44% to 1.04% in 2013.

We expect average earning assets to grow in 2015 as we anticipate continued strong loan growth. The average yield on loans in 2015 is anticipated to decline compared to 2014 as we continue to operate in a highly competitive rate environment. We expect our deposits and borrowings to increase consistent with the growth in earning assets. Rates paid on deposits are expected to remain consistent or decline slightly compared to 2014 rates.

Net Interest Income—Net Interest Spread and Net Interest Margin

The banking industry uses two key ratios to measure relative profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. The net interest rate spread does not consider the impact of noninterest bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing noninterest bearing deposits in earning assets.

Our net interest rate spread (on a tax equivalent basis) was 3.25% in 2014, 2.35% in 2013 and 2.15% in 2012, while the net interest margin (on a tax equivalent basis) was 3.36% in 2014, 2.50% in 2013 and 2.35% in 2012. The increase in the net interest spread and net interest margin comparing 2014 to 2013 was a direct result of our balance sheet restructuring that included significant loan growth combined with reductions in high cost deposits. The increase in the net interest spread and the net interest margin for 2013 was primarily attributable to lower rates associated with the interest bearing liabilities largely due to the decrease in brokered deposits. During 2014, we recognized approximately $700 thousand in discount accretion through resolving multiple loans originally purchased at a discount. Adjusting for the discount accretion, the net interest margin remained at 3.36% for 2014. Noninterest bearing deposits contributed 11 basis points to the margin during 2014 compared to 15 basis points in 2013 and 20 basis points in 2012.

In prior years, we terminated two sets of interest rate swaps. The combined gains at termination were $7.8 million, which were accreted into income over the remaining life of the originally hedged items. The swaps added $1.3 million in interest income for the years ended December 31, 2012. No accretion was recognized for the years ended December 31, 2014 and 2013.

We anticipate our net interest spread and net interest margin to remain consistent or decline with 2014 levels. This is due to the current rate and competitive environment we are currently operating in. Factors that will impact our net interest spread and net interest margin include our ability to grow loans and raise core deposits, our deposit and loan pricing, maturities of brokered deposits, and any possible further action by the Federal Reserve Board to adjust the target federal funds rate.

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Provision (Credit) for Loan and Lease Losses

The provision (credit) for loan and lease losses charged to operations was a credit of $1.5 million in 2014, compared to a credit of $2.7 million in 2013 and provision of $20.9 million in 2012. Net charge-offs totaled $201 thousand for 2014, $565 thousand for 2013, and $26.7 million for 2012. Net charge-offs as a percentage of average loans were 0.03% in 2014, 0.10% in 2013 and 4.52% in 2012. We estimate the allowance for loan losses quarterly, as described in detail below. The allowance is funded through provision expense or loan recoveries.

The credit to our provision for loan and lease losses in 2014 and 2013 relative to the provision expense in 2012 was primarily due to an improvement in asset quality and a significant decrease in net charge-offs. In connection with the Recapitalization, we sold a significant percentage of our under- and non-performing loans, which resulting in the significant provision expense for 2012 and has also contributed to lower levels of net charge-offs in the subsequent years. The provision for loan and lease losses is based on our analysis of probable incurred losses in the loan portfolio in relation to our portfolio, asset quality trends, the level of impaired, past due, charged-off, classified and non-performing loans, as well as general economic conditions. During 2014, we experienced less charge-offs and improved levels of classified and non-performing loans, and thus, our analysis resulted in the ratio of the allowance to total loans decreasing to 1.29% from 1.80%. In 2013, we decreased our allowance for loan and lease losses from 2.55% of total loans as of December 31, 2012 to 1.80% of total loans as of December 31, 2013 for consistent reasons. As of December 31, 2014, we determined that our allowance of $8.6 million was adequate to provide for credit losses, which we describe more fully below in the Allowance for Loan and Lease Loss section of MD&A.

We will continue to provide provision expense, or credits for loan and lease losses, to maintain an allowance level adequate to absorb known and probable incurred losses inherent in our loan portfolio. As the determination of provision expense, or reversal, is a function of the adequacy of the allowance for loan and lease losses, we cannot reasonably estimate the provision expense for 2015. Furthermore, the provision expense could materially increase or decrease in 2015 depending on a number of factors, including, among others, the level of net charge-offs or recoveries, the amount of classified loans and the value of collateral associated with impaired loans and the level of loan growth realized

Noninterest Income

Total noninterest income for 2014 increased $3.6 million to $12.3 million compared to $8.7 million in 2013. Total noninterest income for 2013 increased $537 thousand when compared to $8.1 million in 2012. The following table presents the components of noninterest income for years ended December 31, 2014, 2013 and 2012.

Noninterest Income

	For the Years Ended
	2014		Percent Change		2013		Percent Change		2012
	(in thousands, except percentages)
Non-sufficient funds (NSF) fees	$	2,232	0.1	%	$	2,229	0.1	%	$	2,227
Service charges on deposit accounts	849		(2.2	)%	868		7.8	%	805
Point-of-sale (POS) fees	1,702		7.0	%	1,590		2.8	%	1,547
Mortgage loan and related fees	1,278		12.6	%	1,135		16.5	%	974
Bank-owned life insurance income	1,055		9.9	%	960		(3.5	)%	995
Trust and wealth management fee income	913		27.7	%	715		36.7	%	523
Gain on sale of securities available-for-sale	628		95.0	%	322		109.1	%	154
Gain on sale of loans transfered to held-for-sale	1,612		100.0	%	—		—	%	—
Interest rate swap gain	1,004		nm		23		100.0	%	—
Other income	985		17.1	%	841		(8.7	)%	921
Total noninterest income	$	12,258	41.2	%	$	8,683	6.6	%	$	8,146

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Our largest sources of noninterest income are service charges and fees on deposit accounts. Total service charges, including non-sufficient funds (NSF) fees, were $3.1 million, or 25.2% of total noninterest income, compared with $3.1 million, or 35.7% of total noninterest income for 2013, and $3.0 million, or 37.2% of total noninterest income for 2012. While service charges and fees on deposit accounts typically correspond to the level and mix of our customer deposits, the continued implementation of the Dodd-Frank financial reform legislation may directly or indirectly impact the fee structure of our deposit products; therefore, we cannot reasonably estimate deposit fees for future periods.

Point-of-sale fees increased 7.0% to $1.7 million in 2014 compared to $1.6 million in 2013 and increased slightly in 2013 when compared to $1.5 million in 2012. POS fees are primarily generated when our customers use their debit cards for retail purchases. We anticipate POS fees to continue to grow as customer trends show increased use of debit cards, although it is unclear if provisions affecting interchange fees for card issuers included in the Dodd-Frank financial reform legislation will have a future material impact on this product and its revenue.

Mortgage loan and related fees increased in 2014 by 12.6% to $1.3 million, when compared to $1.1 million in 2013. Fees increased in 2013 by 16.5% when compared to $974 thousand in 2012. Our process to originate and sell a conforming mortgage in the secondary market typically takes 30 to 60 days from the date of mortgage origination to the date the mortgage is sold to an investor in the secondary market. Due to the normal processing time, we will have a certain amount of held for sale loans at any time. We sell these loans with the right to service the loan being released to the purchaser for a fee. Mortgages originated for sale in the secondary markets totaled $23.9 million for 2014, $39.5 million for 2013 and $45.3 million for 2012. Mortgages sold in the secondary market totaled $23.0 million for 2014, $44.0 million for 2013 and $44.9 million for 2012. We are focused on recruiting and retaining mortgage originators with a focus on purchase originations due to the significant declines in refinancing activities. Mortgage fee income in 2015 will be dependent on market conditions, including the levels of purchase and refinancing activity as well as any movement in long-term interest rates.

Bank-owned life insurance income increased by 9.9% to $1.1 million for 2014 compared to a consistent $1.0 million for 2013 and 2012. The Company is the owner and beneficiary of these contracts. The income generated by the cash value of the insurance policies accumulates on a tax-deferred basis and is tax free to maturity. Additionally, the insurance death benefit will be a tax free payment to the Company. On a fully tax equivalent basis, the weighted average interest rate earned on the policies was 4.9% during 2014. For 2015, we anticipate income levels to return to 2013 levels.

Trust and wealth management fee income improved to $913 thousand, or 27.7%, in 2014 compared to $715 thousand in 2013 and increased by 36.7% in 2013 when compared to $523 thousand in 2012. During 2014, we enhanced our product and service offerings to include brokerage services, which contributed a positive net contribution in 2014. For 2015, we expect similar percentage growth in revenue for this department.

During 2014, 2013 and 2012, we sold approximately $63.5 million, $57.0 million and $21.4 million, respectively, of available-for-sale securities for a net gain of $628 thousand, $322 thousand and $154 thousand, respectively. The security transactions in 2014 were primarily associated with reducing our overall level of liquidity and further improving our earning asset mix. At this time, we do not anticipate any significant sales activity in 2015, although we routinely review our available-for-sale securities and our overall asset-liability sensitivity and may initiate transactions as warranted.

Net gains on sales of loans transferred to held-for-sale for 2014 totaled $1.6 million. These sales were generated from our TriNet division and the government lending department. There were no gains on sales on loans transferred to held-for-sale for 2013 or 2012. During 2014, we sold approximately $71.4 million of TriNet loans, including approximately $8.6 million in loan participations, resulting in income of approximately $1.3 million. We sold approximately $3.6 million SBA loans during 2014 for approximately $400 thousand in gains. As of year-end, we held approximately $69.3 million in TriNet loans held-for-sale that we expect to sell for gains during the first quarter of 2015. Accordingly, we expect overall gains on loan sales to exceed the levels achieved during 2014.

Interest rate swap gains for 2014 were $1.0 million compared to $23 thousand in 2013 and zero in 2012. We have entered into loan level swaps to provide customers with long-term fixed rate loans while entering into associated derivatives to convert the fixed rate cash flows to variable rate cash flows. As shown below, the interest rate swap gains are typically offset by the associated derivatives, which are included in non-interest expense.

Other income for 2014 was $985 thousand, compared to the 2013 level of $841 thousand and the 2012 level of $921 thousand. The components of other income primarily consist of check printing income, underwriting revenue and safe deposit box fee income. We anticipate our 2015 other income to remain consistent with 2014 amounts.

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Noninterest Expense

Total noninterest expense for 2014 was $41.7 million, a decrease of $6.1 million compared to $47.8 million in 2013, primarily due to reductions in professional fees, salary and benefits, and costs associated with non-performing assets. Total noninterest expense increased $101 thousand in 2013 when compared to $47.7 million in 2012. For 2013, increased salaries and benefits and professional fees expenses fully offset the savings from decreased costs associated with nonperforming assets. The following table represents the components of noninterest expense for the years ended December 31, 2014, 2013 and 2012.

Noninterest Expense

	For the Years Ended
	2014			Percent Change		2013			Percent Change		2012
	(in thousands, except percentages)
Salaries and benefits	$	21,228		(6.0	)%	$	22,584		10.5	%	$	20,446
Occupancy	3,142			(4.8	)%	3,301			(3.0	)%	3,403
Furniture and equipment	2,222			(5.2	)%	2,343			13.4	%	2,066
Professional fees	2,835			(42.1	)%	4,893			29.7	%	3,772
FDIC insurance	1,319			(42.7	)%	2,300			(31.4	)%	3,352
Data processing	2,289			3.4	%	2,214			(16.9	)%	2,664
Write-downs on other real estate owned and repossessions	733			(69.1	)%	2,373			(53.0	)%	5,051
(Gains) Losses on other real estate owned, repossessions and fixed assets	(487		)	35.7	%	(359		)	91.0	%	(188		)
Non-performing asset expenses	802			(39.2	)%	1,320			(6.4	)%	1,411
ATM/debit card fees	1,041			29.2	%	806			19.4	%	675
Insurance	1,219			(42.6	)%	2,125			58.5	%	1,341
OCC assessments	363			(22.8	)%	470			(6.7	)%	504
Interest rate swap loss	1,010			nm		18			—	%	—
Intangible asset amortization	196			(27.4	)%	270			(29.3	)%	382
Communications	546			(6.3	)%	583			(12.3	)%	665
Printing and supplies	648			(0.2	)%	649			54.9	%	419
Advertising	556			78.8	%	311			4.7	%	297
Other expense	2,006			28.7	%	1,559			11.4	%	1,399
Total noninterest expense	$	41,668		(12.8	)%	$	47,760		0.2	%	$	47,659

Total salaries and benefits decreased $1.4 million, or 6.0% in 2014 compared to $22.6 million in 2013, compared to an increase in 2013 of $2.1 million, or 10.5% compared to $20.4 million in 2012. The decrease in salaries and benefits during 2014 is primarily related to a reduction in the number of employees. The total savings provided by the reduction in the total number of employees was partially offset by the hiring of certain highly experienced in-market banking officers to assist in providing loan growth within our primary markets. As of December 31, 2014, we had 26 full service banking offices with 268 full-time equivalent employees. As of December 31, 2013, we had 28 full service banking offices with 285 full-time equivalent employees. As of December 31, 2012, we had 30 full service banking offices and one leasing/loan production facility with 329 full-time equivalent employees. We expect our overall salary and benefit costs to be consistent with or decline in 2015 as compared to the 2014 levels.

Total occupancy expense for 2014 decreased by $159 thousand, or 4.8% compared with 2013, which was $102 thousand, or 3.0% lower than total occupancy expense in 2012. Furniture and equipment expense decreased during 2014 by $121 thousand, or 5.2% when compared to $2.3 million for 2013. The decrease in both categories is primarily attributable to the reduced number of banking offices in 2014 and 2013. As of December 31, 2014, we leased six facilities and the land for two branches. As a result, occupancy expense is higher than if we owned these facilities, including the real estate, but conversely, we have been able to deploy the capital into earning assets rather than capital expenditures for facilities. For 2015, we expect occupancy and furniture and equipment expenses to be consistent or decline as compared to 2014 levels.

Communication expense decreased by $37 thousand, or 6.3% in 2014 compared to $583 thousand in 2013, compared to a decrease of $82 thousand, or 12.3% in 2013 when compared to $665 thousand for 2012, due primarily to converting to a VoIP communication systems. We expect 2015 communications expense to be consistent with 2014.

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Printing and supplies expense remained consistent in 2014 at $648 thousand compared with $649 thousand in 2013, compared with an increase of $230 thousand, or 54.9% in 2013 compared to $419 thousand in 2012, primarily due to increased costs in statement production. We expect 2015 printing and supplies expense to be consistent with 2014.

Advertising expenses have increased by $245 thousand, or 78.8% in 2014 compared to $311 thousand in 2013, due to the implementation of our new branding and associated logo as well as an increase in various marketing campaigns. During 2014, we entered into a three-year partnership to be the official bank of the University of Tennessee-Chattanooga Athletics. In addition to providing specific co-branded products and services, we receive prominent advertising space and promotion activities during all major sporting events. Advertising cost remained relatively consistent during 2013 and 2012 at $311 thousand and $297 thousand, respectively. For 2015, we expense advertising expense to be consistent with 2014 levels.

Professional fees decreased by $2.1 million, or 42.1% from 2013 to 2014 , and increased $1.1 million, or 29.7%, from 2012 to 2013. Professional fees includes legal fees, outsourcing compliance and information technology audits and a portion of internal audit, as well as external audit, tax services and legal and accounting advice related to, among other things, foreclosures, lending activities, employee benefit programs, prospective mergers and acquisitions and regulatory matters. The significant increase in 2013 was primarily related to the Recapitalization. The decline in 2014 was associated with our overall improvement in financial performance and reductions in legal and fees associated with non-performing assets. We anticipate professional fees to be consistent or decline slightly in 2015.

The FDIC deposit premium insurance decreased $981 thousand, or 42.7% to $1.3 million in 2014 compared to 2013, compared to a decrease of $1.1 million, or 31.4% to $2.3 million in 2013 compared to 2012 . The decrease for 2014 and 2013 is a direct result of the bank's improved capital condition. We anticipate 2015 premiums paid for FDIC deposit insurance to decline further as a result of our improving financial condition.

Data processing expense remained consistent in 2014 and 2013, and decreased by $450 thousand, or 16.9% in 2013 compared with 2012. In 2013, we recognized certain one-time charges as a result of our core conversion. The monthly fees associated with data processing are typically based on transaction volume, and as such, we anticipate 2015 expense to be consistent or slightly higher due to our increasing customer base.

At foreclosure or repossession, the fair value of the OREO property or repossession is determined and a charge-off to the allowance is recorded, if applicable. Any decreases in value subsequent to the initial determination of fair value are recorded as a write-down and recorded in non-interest expense. As a general policy, we re-assess the fair value of OREO and repossessions on at least an annual basis or sooner if there are indicators that deterioration in value has occurred. Write-downs are based on property-specific appraisals or valuations. Additionally, we evaluate on an ongoing basis our realization rate compared to the appraised values. Write-downs declined in 2014 due to fewer properties currently in OREO and increasing real estate values within our markets. Write-downs on OREO and repossessions decreased $1.6 million, or 69.1%, from 2013 to 2014, and decreased $2.7 million, or 53.0%, from 2012 to 2013. Write-downs for 2015 are dependent on multiple factors, including, but not limited to, the assumptions used by the independent appraisers, real estate market conditions and our ability to liquidate properties.

We had net gains on OREO, repossessions and fixed assets of $487 thousand, $359 thousand and $188 thousand for 2014, 2013 and 2012, respectively. As discussed above, we continue to monitor our fair value assumptions and recognize additional write-downs when appropriate. Generally, gains and losses on the sale of OREO should be minimized by our initial and recurring fair value assumptions applied to OREO, as discussed above.

Non-performing asset expenses include, among other items, maintenance, repairs, utilities, taxes and storage costs. These costs decreased $518 thousand, or 39.2%, in 2014 compared to 2013 of $1.3 million, compared to a decrease of $91 thousand, or 6.4% for 2013 when compared to 2012. Historically, our holding costs have been commensurate with the level of nonperforming assets. We anticipate continued reductions in this category during 2015.

Insurance expense decreased $906 thousand, or 42.6% in 2014 compared to $2.1 million in 2013, compared to an increase in 2013 of $784 thousand, or 58.5% when compared to $1.3 million in 2012. In connection with the Recapitalization in 2013, we converted certain insurance policies into long-term tail policies with the payment of additional premiums. Our ongoing insurance expense has declined as a result of our improved financial and regulatory condition and we expect further declines in 2015.

Interest rate swap losses for 2014 increased $1.0 million compared to $18 thousand in 2013. There were no losses in 2012. We have entered into loan level swaps to provide our customers with long-term fixed rate loans while entering into associated derivatives to convert the fixed rate cash flows to variable rate cash flows. As shown in the non-interest income section above, the losses are typically offset in full.

Intangible asset amortization decreased by $74 thousand, or 27.4%, in 2014 compared to 2013 and decreased by $112 thousand, or 29.3%, in 2013 as compared to 2012. Our core deposit intangible assets amortize on an accelerated basis over an estimated useful life of ten years. The following table represents our anticipated intangible asset amortization over the next five years, excluding new acquisitions, if any.

47

	2015		2016		2017		2018		2019
	(in thousands)
Core deposit intangible amortization expense	$	134	$	—	$	—	$	—	$	—

Other expense increased by $447 thousand, or 28.7%, for 2014 compared to 2013, and increased by $160 thousand, or 11.4%, for 2013 compared to 2012. The increase in 2014 and 2013 is associated with several sub-components and was part of the normal course of conducting business.

Income Taxes

We recorded income tax expense of $526 thousand in 2014, compared to income tax expense of $477 thousand in 2013 and income tax expense of $771 thousand in 2012. We recorded a deferred tax valuation allowance of $98 thousand, $7.0 million and $16.0 million for the years 2014, 2013 and 2012, respectively. The recorded deferred tax valuation allowance offsets the tax benefits generated during the year, including changes in other comprehensive income and reduces our net deferred tax assets to an amount that we consider realizable. A valuation allowance is required when it is “more likely than not” that the deferred tax assets will not be realized. As of December 31, 2014, we maintained a full valuation allowance of our net deferred tax assets.

The evaluation to release a portion or all of the valuation allowance requires significant judgment and extensive analysis of all available positive and negative evidence, the forecasts of future income, applicable tax planning strategies and assessments of the current and future economic and business conditions. As of year-end, we identified as positive evidence the improvement in current business trends and the quarterly improvement in our net income during 2014. Negative evidence included the level of cumulative loss in recent years. We evaluate the valuation allowance on a quarterly basis. Currently, we anticipate increasing the valuation allowance to offset any future recorded tax benefit to result in minimal, if any, income tax expense or benefit. During 2014, we achieved taxable income with the return to core profitability. Our ability to maintain and steadily improve our level of profitability, combined with forecasts of future income, will provide positive evidence in our evaluation and analysis of our valuation allowance. As positive evidence builds over multiple quarters, the valuation allowance may be reduced in part or in full during 2015 based on our current expected level of budgeted profitability in 2015. At December 31, 2014, the net deferred tax asset was written down to zero through the valuation allowance.

At December 31, 2014, we evaluated our significant uncertain tax positions. Under the “more-likely-than-not” threshold guidelines, we believe we have identified all significant uncertain tax benefits. We evaluate, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant. In the event a significant uncertain tax position is determined to exist, penalties and interest will be accrued in accordance with Internal Revenue Service guidelines, and recorded as a component of income tax expense in our consolidated financial statements.

NOL Rights Plan

On October 30, 2012, the Company adopted a Tax Benefits Preservation Plan (the "NOL Rights Plan") and declared a dividend of one preferred stock purchase right (each a “Right” and collectively, the “Rights”) for each outstanding share of the Company's common stock, par value $0.01 per share (the “Common Stock”), payable to holders of record as of the close of business on November 12, 2012 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of one share of Series B Participating Preferred Stock, no par value, of the Company (the “Series B Preferred Stock”), at a purchase price equal to $20.00 per one one-thousandth of a share, subject to adjustment (the “Rights or Series B Purchase Price”). The description and terms of the Rights are set forth in the Plan, dated October 30, 2012, as the same may be amended from time to time, between the Company and Registrar and Transfer Company, as Rights Agent.

The Company has previously experienced substantial net operating losses, which it may carryforward in certain circumstances to offset current and future taxable income and thus reduce its federal income tax liability, subject to certain requirements and restrictions. The purpose of the NOL Rights Plan is to help preserve the value of the Company's deferred tax assets, such as its net operating losses (“Tax Benefits”), for U.S. federal income tax purposes.

These Tax Benefits can be valuable to the Company. However, if the Company experiences an “ownership change,” as defined in Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, its ability to use the Tax Benefits could be significantly limited and/or delayed, which would significantly impair the value of the Tax Benefits. Generally, the Company would experience an “ownership change” under Section 382 if one or more “5 percent shareholders” increase their aggregate percentage ownership by more than 50 percentage points over the lowest percentage of stock owned by such shareholders over the preceding three-year period. As a result, the Company has utilized a 5% “trigger” threshold in the Plan that is intended to act as a deterrent to any person or entity seeking to acquire 5% or more of the outstanding Common Stock without the prior approval of the Board.

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On October 30, 2012, in connection with the adoption of the NOL Rights Plan, the Company filed Articles of Amendment to the Charter of Incorporation (the “Articles Amendment”) with the Secretary of State of the State of Tennessee. Further details about the Plan and the Articles Amendment can be found in Exhibits 3.1 and 4.1 to the Current Report on Form 8-K filed with the SEC on October 30, 2012.

Statement of Financial Condition

Our total consolidated assets were approximately $1.1 billion at December 31, 2014, an increase of $92.7 million, or 9.5%, over 2013. The increase in assets was a result of our efforts to restructure our balance sheet, shifting the mix of earning assets from excess cash and investment securities into loans. As of December 31, 2014, we had loans held-for-investment of $663.6 million, loans held-for-sale of $72.2 million, total deposits of $905.6 million and total shareholders' equity of $90.0 million. As of December 31, 2013, we had total consolidated assets of $977.6 million, total loans held-for-investment of $583.1 million, total deposits of $857.3 million and shareholders' equity of $83.6 million. During 2015, we anticipate that our total assets will continue to increase based on our expected loan growth. We anticipate funding prudent loan opportunities primarily through growth in core deposits.

Loans

As we continue to implement our strategic initiatives and restructure the mix of earning assets, we expect to realize continued growth in our loan portfolio.

During 2014, total loans increased $80.5 million, or 13.8%, compared to year-end 2013. In 2014, as compared to 2013, our commercial real estate loans increased by $52.9 million, or 20.2%, and commercial and industrial loans increased by $18.6 million, or 33.7%. Changes in the other loan categories are shown below.

As we develop and implement lending initiatives, we will focus on extending prudent loans to creditworthy consumers and businesses. We anticipate solid loan growth to continue during 2015. Funding of future loans may be restricted by our ability to raise core deposits, although we may use current cash reserves and wholesale funding, as necessary and appropriate. Loan growth may also be restricted by the necessity to maintain appropriate capital levels.

The following table presents a summary of the loan portfolio by category for the last five years.

Loans Outstanding

	As of December 31,
	2014			Percent Change		2013			Percent Change		2012			Percent Change		2011			Percent Change		2010
	(in thousands, except percentages)
Loans secured by real estate-
Residential 1-4 family	$	181,655		(0.2	)%	$	181,988		(3.3	)%	$	188,191		(12.6	)%	$	215,364		(14.5	)%	$	252,026
Commercial	314,843			20.2	%	261,935			18.2	%	221,655			13.6	%	195,062			(13.8	)%	226,357
Construction	47,840			19.8	%	39,936			19.5	%	33,407			(37.9	)%	53,807			(36.1	)%	84,232
Multi-family and farmland	18,108			2.5	%	17,663			3.6	%	17,051			(46.2	)%	31,668			(13.0	)%	36,393
	562,446			12.1	%	501,522			9.0	%	460,304			(7.2	)%	495,901			(17.2	)%	599,008
Commercial loans	73,985			33.7	%	55,337			(9.9	)%	61,398			3.0	%	59,623			(28.0	)%	82,807
Consumer loans	22,539			6.8	%	21,103			57.6	%	13,387			(33.1	)%	20,011			(40.9	)%	33,860
Leases, net of unearned income	—			—	%	—			(100.0	)%	568			(80.5	)%	2,920			(63.1	)%	7,916
Other	4,652			(9.4	)%	5,135			(6.2	)%	5,473			43.7	%	3,809			8.8	%	3,500
Total loans	663,622			13.8	%	583,097			7.8	%	541,130			(7.1	)%	582,264			(19.9	)%	727,091
Allowance for loan and lease losses	(8,550		)	(18.6	)%	(10,500		)	(23.9	)%	(13,800		)	(29.6	)%	(19,600		)	(18.3	)%	(24,000		)
Net loans	$	655,072		14.4	%	$	572,597		8.6	%	$	527,330		(6.3	)%	$	562,664		(20.0	)%	$	703,091

Other than loans originated by our TriNet division, substantially all of our loans are to customers located in Georgia and Tennessee, in our immediate markets. We believe that we are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

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We also believe that the loan portfolio is diversified among loan collateral types, as noted by the following table.

Loans by Collateral Type

	As of December 31,
	2014		% of Loans		2013		% of Loans		2012		% of Loans		2011		% of Loans		2010		% of Loans
	(in thousands, expect percentages)
Secured by real estate:
Construction and land development	$	47,840	7.2	%	$	39,936	6.8	%	$	33,407	6.2	%	$	53,807	9.2	%	$	84,232	11.6	%
Farmland	3,131		0.5	%	5,945		1.0	%	8,373		1.5	%	9,729		1.7	%	11,793		1.6	%
Home equity lines of credit	62,541		9.4	%	63,810		10.9	%	63,370		11.7	%	71,783		12.3	%	81,742		11.0	%
Residential first liens	111,420		16.8	%	111,217		19.1	%	119,094		22.0	%	136,306		23.4	%	161,622		22.2	%
Residential junior liens	7,694		1.2	%	6,961		1.2	%	5,727		1.1	%	7,275		1.2	%	8,662		1.2	%
Multi-family residential	14,977		2.3	%	11,718		2.0	%	8,678		1.6	%	21,939		3.8	%	24,600		3.4	%
Non-farm and non-residential	314,843		47.4	%	261,935		44.9	%	221,655		41.0	%	195,062		33.6	%	226,357		31.0	%
Total Real Estate	562,446		84.8	%	501,522		86.0	%	460,304		85.1	%	495,901		85.2	%	599,008		82.3	%
Other loans:
Commercial—leases, net of unearned	—		—	%	—		—	%	568		0.1	%	2,920		0.5	%	7,916		1.1	%
Commercial and industrial	73,985		11.1	%	55,337		9.5	%	61,398		11.3	%	59,623		10.2	%	82,807		11.4	%
Agricultural production	505		0.1	%	588		0.1	%	458		0.1	%	564		0.1	%	1,165		0.2	%
Consumer installment loans	22,539		3.4	%	21,103		3.6	%	13,387		2.5	%	20,011		3.4	%	33,860		4.7	%
Other	4,147		0.6	%	4,547		0.8	%	5,015		0.9	%	3,245		0.6	%	2,335		0.3	%
Total other loans	101,176		15.2	%	81,575		14.0	%	80,826		14.9	%	86,363		14.8	%	128,083		17.7	%
Total loans	$	663,622	100.0	%	$	583,097	100.0	%	$	541,130	100.0	%	$	582,264	100.0	%	$	727,091	100.0	%

The following schedule illustrates the contractual maturity of portions of our loan portfolio at December 31, 2014.  Loans that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due.  Demand loans, or loans with no stated maturity date, are shown as maturing in less than one year. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Our loan policy does not permit automatic roll-over of matured loans.

	Construction and land development loans						Commercial and industrial loans						All loans
Maturity	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
	(in thousands)
Less than three months	$	321	$	8,542	$	8,863	$	921	$	7,015	$	7,936	$	9,619	$	40,610	$	50,229
Over three to twelve months	9,883		8,000		17,883		4,697		18,922		23,619		28,847		44,225		73,072
One year to five years	12,032		4,645		16,677		19,118		13,465		32,583		200,242		70,228		270,470
Over five years	1,636		2,781		4,417		8,983		864		9,847		141,180		128,671		269,851
Total	$	23,872	$	23,968	$	47,840	$	33,719	$	40,266	$	73,985	$	379,888	$	283,734	$	663,622

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Allowance for Loan and Lease Losses

Allowance—Overview

The allowance for loan and lease losses reflects our assessment and estimate of the risks associated with extending credit and our evaluation of the quality of the loan portfolio. We regularly analyze our loan portfolio in an effort to establish an allowance 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:

• our loan loss experience;

• specific known risks;

• the status and amount of past due and non-performing assets;

• underlying estimated values of collateral securing loans;

• current and anticipated economic conditions; and

• other factors which we believe affect the allowance for potential credit losses.

The allowance 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 general allocations for the remaining pools of loans. We accumulate 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 following loan portfolio segments have been identified: (1) Real estate: Residential 1-4 family, (2) Real estate: Commercial, (3) Real estate: Construction, (4) Real estate: Multi-family and farmland, (5) Commercial, (6) Consumer, (7) Leases and (8) Other. We evaluate the risks associated with these segments based upon specific characteristics associated with the loan segments. The risk associated with the real estate-construction portfolio is most directly tied to the probability of declines in value of the residential and commercial real estate in our market area and secondarily to the financial capacity of the borrower. The risk associated with the real estate-commercial portfolio is most directly tied to the lease rates and occupancy rates for commercial real estate in our market area and secondarily to the financial capacity of the borrower. The other portfolio segments have various risk characteristics, including, but not limited to: the borrower’s cash flow, the value of the underlying collateral, and the capacity of guarantors.

An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan and lease losses is prepared jointly by our accounting and credit administration departments and presented to our Board of Directors on a quarterly basis. Based on our analysis, we may determine that our future provision expense needs to increase or decrease in order for us to remain adequately reserved for probable, incurred loan losses. As stated earlier, we make this determination after considering both quantitative and qualitative factors under appropriate regulatory and accounting guidelines.

Our allowance for loan and lease 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 and the size of the allowance compared to a group of peer banks. 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 methodology differ materially from the bank’s methodology. We believe our allowance methodology is in compliance with regulatory inter-agency guidance as well as applicable GAAP guidance.

While it is our policy to charge-off all or a portion of certain loans in the current period when a loss is considered probable, there are additional risks of future losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because the assessment of these risks includes assumptions regarding local and national economic conditions, our judgment as to the adequacy of the allowance may change from our original estimates as more information becomes available and events change.

Allowance—Loan Pools

As indicated in the Allowance—Overview above, we analyze our allowance by segregating our portfolio into two primary categories: impaired loans and non-impaired loans. Impaired loans are individually evaluated, as further discussed below. Non-impaired loans are segregated first by loan risk rating and then into homogeneous pools based on loan type, collateral or purpose of proceeds. We believe our loan pools conform to regulatory and accounting guidelines.

Impaired loans generally include those loan relationships in excess of $500 thousand with a risk rating of substandard/nonaccrual or doubtful. For these loans, we determine the impairment based upon one of the following methods: (1) discounted cash flows, (2) observable market pricing or (3) the fair value of the collateral. The amount of the estimated loss, if any, is then specifically reserved in a separate component of the allowance unless the relationship is considered collateral dependent, in which the estimated loss is charged-off in the current period.

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For non-impaired loans, we first segregate special mention and non-impaired substandard loans into two distinct pools. All remaining loans are further segregated into homogeneous pools based on loan type, collateral or purpose of proceeds. Each of these pools is evaluated individually and is assigned a loss factor based on our best estimate of the loss that potentially could be realized in that pool of loans. The loss factor is the sum of an objectively calculated historical loss percentage and a subjectively calculated risk percentage. The actual annual historical loss factor is typically a weighted average of each period’s loss. For the historical loss factor, we utilize a migration loss analysis. Each period may be assigned a different weight depending on certain trends and circumstances. The subjectively calculated risk percentage is the sum of eight qualitative and environmental risk categories. These categories are evaluated separately for each pool. The eight risk categories are: (1) underlying collateral value, (2) lending practices and policies, (3) local and national economies, (4) portfolio volume and nature, (5) staff experience, (6) credit quality, (7) loan review and (8) competition, regulatory and legal issues.

From time to time, we may include an unallocated component to the allowance.  Generally, an unallocated allowance assists in mitigating inherent risks that cannot be quantitatively or qualitatively determined, including, but not limited to, new loan products for which insufficient history exists for a robust analysis.

Allowance—Loan Risk Ratings

A consistent and appropriate loan risk rating methodology is a critical component of the allowance. We classify loans as: pass, special mention, substandard/impaired, substandard/non-impaired, doubtful or loss. The following describes our loan classifications and the various risk indicators associated with each risk rating.

A pass rating is assigned to those loans that are performing as contractually agreed and do not exhibit the characteristics of the criticized and classified risk ratings as defined below. Pass loan pools do not include the unfunded portions of binding commitments to lend, standby letters of credit, deposit secured loans or mortgage loans originated with commitments to sell in the secondary market. Loans secured by segregated deposits held by FSGBank are not required to have an allowance reserve, nor are originated held-for-sale mortgage loans pending sale in the secondary market.

A special mention loan risk rating is considered criticized but is not considered as severe as a classified loan risk rating. Special mention loans contain one or more potential weakness(es), which if not corrected, could result in an unacceptable increase in credit risk at some future date. These loans may be characterized by the following risks and/or trends:

Loans to Businesses:

• Downward trend in sales, profit levels and margins

• Impaired working capital position compared to industry

• Cash flow strained in order to meet debt repayment schedule

• Technical defaults due to noncompliance with financial covenants

• Recurring trade payable slowness

• High leverage compared to industry average with shrinking equity cushion

• Questionable abilities of management

• Weak industry conditions

• Inadequate or outdated financial statements

Loans to Businesses or Individuals:

• Loan delinquencies and overdrafts may occur

• Original source of repayment questionable

• Documentation deficiencies may not be easily correctable

• Loan may need to be restructured

• Collateral or guarantor offers adequate protection

• Unsecured debt to tangible net worth is excessive

A substandard loan risk rating is characterized as having specifically identified weaknesses and deficiencies typically resulting from severe adverse trends of a financial, economic, or managerial nature, and may warrant non-accrual status. Substandard loans have a greater likelihood of loss and may require a protracted work-out plan. Substandard/impaired loans are relationships in excess of $500 thousand and are individually reviewed. In addition to the factors listed for special mention loans, substandard loans may be characterized by the following risks and/or trends:

Loans to Businesses:

• Sustained losses that have severely eroded equity and cash flows

• Concentration in illiquid assets

• Serious management problems or internal fraud

• Chronic trade payable slowness; may be placed on COD or collection by trade creditor

• Inability to access other funding sources

• Financial statements with adverse opinion or disclaimer; may be received late

• Insufficient documented cash flows to meet contractual debt service requirements

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Loans to Businesses or Individuals:

• Chronic or severe delinquency or has met the retail classification standards which is generally past dues greater than 90 days

• Frequent overdrafts

• Likelihood of bankruptcy exists

• Serious documentation deficiencies

• Reliance on secondary sources of repayment which are presently considered adequate

• Demand letter sent

• Litigation may have been filed against the borrower

Loans with a risk rating of doubtful are individually analyzed to determine our best estimate of the loss based on the most recent assessment of all available sources of repayment. Doubtful loans are considered impaired and placed on nonaccrual. For doubtful loans, the collection or liquidation in full of principal and/or interest is highly questionable or improbable. We estimate the specific potential loss based upon an individual analysis of the relationship risks, the borrower’s cash flow, the borrower’s management and any underlying secondary sources of repayment. The amount of the estimated loss, if any, is then either specifically reserved in a separate component of the allowance or charged-off. In addition to the characteristics listed for substandard loans, the following characteristics apply to doubtful loans:

Loans to Businesses:

• Normal operations are severely diminished or have ceased

• Seriously impaired cash flow

• Numerous exceptions to loan agreement

• Outside accountant questions entity’s survivability as a “going concern”

• Financial statements may be received late, if at all

• Material legal judgments filed

• Collection of principal and interest is impaired

• Collateral/Guarantor may offer inadequate protection

Loans to Businesses or Individuals:

• Original repayment terms materially altered

• Secondary source of repayment is inadequate

• Asset liquidation may be in process with all efforts directed at debt retirement

• Documentation deficiencies not correctable

The consistent application of the above loan risk rating methodology ensures we have the ability to track historical losses and appropriately estimate potential future losses in our allowance. Additionally, appropriate loan risk ratings assist us in allocating credit and special asset personnel in the most effective manner. Significant changes in loan risk ratings can have a material impact on the allowance and thus a material impact on our financial results by requiring significant increases or decreases in provision expense.

Allowance—Analysis and Discussion

The following table presents an analysis of the changes in the allowance for loan and lease losses for the past five years. The provision for loan and lease losses in the table below does not include our provision accrual for unfunded commitments of $24 thousand for each of 2014, 2013, 2012, 2011 and 2010. The reserve for unfunded commitments is included in other liabilities in our consolidated balance sheets and totaled $306 thousand and $282 thousand as of December 31, 2014 and 2013, respectively.

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Analysis of Changes in Allowance for Loan and Lease Losses

	For the Years Ending December 31,
	2014			2013			2012			2011			2010
	(in thousands, except percentages)
Allowance for loan and lease losses—
Beginning of period	$	10,500		$	13,800		$	19,600		$	24,000		$	26,492
Provision for loan and lease losses	(1,452		)	(2,735		)	20,866			10,920			33,589
Sub-total	9,048			11,065			40,466			34,920			60,081
Charged-off loans:
Real estate—residential 1-4 family	504			1,458			8,153			2,180			2,572
Real estate—commercial	749			545			8,316			6,928			2,955
Real estate—construction	228			503			6,897			5,581			10,514
Real estate—multi-family and farmland	—			36			2,511			207			1,150
Commercial loans	32			37			3,095			3,235			16,420
Consumer installment loans and other	597			585			476			334			1,110
Leases, net of unearned income	29			29			894			929			2,050
Total charged-off	2,139			3,193			30,342			19,394			36,771
Recoveries of charged-off loans:
Real estate—residential 1-4 family	240			312			229			404			56
Real estate—commercial	577			820			366			222			160
Real estate—construction	136			496			1,013			744			7
Real estate—multi-family and farmland	16			19			12			384			—
Commercial loans	516			470			406			894			326
Consumer installment loans and other	347			359			662			954			141
Leases, net of unearned income	106			152			988			472			—
Total recoveries	1,938			2,628			3,676			4,074			690
Net charged-off loans	201			565			26,666			15,320			36,081
Decrease from transfer of loans held-for-investment to loans held-for-sale	297			—			—			—			—
Allowance for loan and lease losses—end of period	$	8,550		$	10,500		$	13,800		$	19,600		$	24,000
Total loans—end of period	$	663,622		$	583,097		$	541,130		$	582,264		$	727,091
Average loans	$	675,055		$	545,803		$	590,109		$	647,920		$	845,945
Net loans charged-off to average loans	0.03		%	0.10		%	4.52		%	2.36		%	4.27		%
Provision (credit) for loan and lease losses to average loans	(0.22		)%	(0.50		)%	3.54		%	1.69		%	3.97		%
Allowance for loan and lease losses as a percentage of:
Period end loans	1.29		%	1.80		%	2.55		%	3.37		%	3.30		%
Non-performing loans	192.22		%	129.14		%	51.63		%	39.41		%	40.73		%

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The following table presents the allocation of the allowance for loan and lease losses for each respective loan category with the corresponding percent of loans in each category to total loans. The comprehensive allowance analysis jointly developed by our credit administration and accounting groups enable us to allocate the allowance based on risk elements within the portfolio. The unallocated reserve is available as a general reserve against the entire loan portfolio and is related to factors such as current economic conditions which are not directly associated with a specific loan category.

Allocation of the Allowance for Loan and Lease Losses

	As of December 31,
	2014				2013				2012				2011				2010
	Amount		Percent of Portfolio1		Amount		Percent of Portfolio1		Amount		Percent of Portfolio1		Amount		Percent of Portfolio1		Amount		Percent of Portfolio1
	(in thousands, except percentages)
Real estate—residential 1-4 family	$	2,617	27.4	%	$	4,063	31.2	%	$	6,207	34.8	%	$	6,368	37.0	%	$	7,346	34.7	%
Real estate—commercial	2,865		47.4	%	3,299		44.9	%	3,736		41.0	%	6,227		33.6	%	5,550		31.1	%
Real estate—construction	716		7.2	%	899		6.8	%	667		6.2	%	1,485		9.2	%	2,905		11.6	%
Real estate—multi-family and farmland	714		3.1	%	916		3.1	%	741		3.1	%	728		5.4	%	761		5.0	%
Commercial loans	795		11.1	%	970		9.5	%	2,103		11.3	%	3,649		10.2	%	5,692		11.4	%
Consumer loans	688		3.4	%	342		3.6	%	272		2.5	%	405		3.4	%	813		4.7	%
Leases, net of unearned income	—		—	%	—		—	%	47		0.1	%	718		0.5	%	917		1.1	%
Other and unallocated	155		0.4	%	11		0.9	%	27		1.0	%	20		0.7	%	16		0.4	%
Total	$	8,550	100.0	%	$	10,500	100.0	%	$	13,800	100.0	%	$	19,600	100.0	%	$	24,000	100.0	%
1 Represents the percentage of loans in each category to total loans.

As of December 31, 2014, the largest components of the allowance were associated with 1-4 family residential real estate loans and commercial real estate loans. These allocations are roughly commensurate with their respective percentage of the overall portfolio. These loans are subject to general allowance allocations based on historical loss and qualitative and environmental factors. The allowance allocation associated with residential 1-4 family real estate loans decreased by $1.4 million during 2014. The allowance allocated to commercial real estate loans decreased by $434 thousand during 2014. A major factor in the decrease was improved asset quality. The total allowance decreased in total by $2.0 million, primarily as a result of lower amounts of non-performing loans.

Throughout the economic downturn, the ratio of the allowance to total loans increased significantly due to the level of non-performing loans, the associated decline in real estate values, and the excessive levels of charge-offs. These factors contributed to elevated levels of classified loans, which is a driving component of the allowance. Since 2012 we have experienced a significant decline in the level of non-performing loans. Non-performing loans were $4.4 million at December 31, 2014, compared to $8.1 million at December 31, 2013, a decrease of $3.7 million, or 45.3%. During the fourth quarter of 2012, we identified approximately $36.2 million of under- and non-performing loans to sell and recorded a $13.9 million charge-off to reduce the balance to the estimated net proceeds. These loans were sold in the first quarter of 2013. See Note 6 to our consolidated financial statements for additional information. A large portion of the reduction in non-performing loans is directly related to this loan sale. Our ratio of non-performing loans to total loans was 0.67% as of December 31, 2014 as compared to 1.39% at December 31, 2013. Additionally, our minimal level of net charge-offs during 2014 have further supported our improving asset quality. Specifically, net charge-offs for the year-ended 2014 were $201 thousand compared to $565 thousand for the year ended December 31, 2013.

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The combination of positive asset quality trends as well as lower loss rates during 2014 resulted in a reduction in our allowance assessment which is reflected in our allowance to loans ratio of 1.29% as of December 31, 2014, compared to 1.80% as of December 31, 2013 and 2.55% as of December 31, 2012. We anticipate that our allowance model may support a lower allowance-to-loans ratio with continuation of the current asset quality and charge-off trends; however, we may need to provide additional provision expense in the future due to the expected loan growth.

We utilize a risk rating system to evaluate the credit risk of our loan portfolio. We classify loans as: pass, special mention, substandard, doubtful or loss. We assign a credit risk rating based on the previously discussed factors. We segregate substandard loans into two classifications based on our allowance methodology for impaired loans. An impaired loan is defined as a substandard loan relationship in excess of $500 thousand that is also on nonaccrual status. These relationships are individually reviewed on a quarterly basis to determine the required allowance or loss, as applicable.

For the allowance analysis, the primary categories are: pass, special mention, substandard – non-impaired, and substandard – impaired. Loans in the substandard and doubtful loan categories are combined and impaired loans are segregated from non-impaired loans.

The following table provides the Company’s internal risk rating by loan classification as utilized in the allowance analysis as of December 31, 2014 and 2013:

As ofDecember 31, 2014

Loans by Classification	Pass		Special Mention		Substandard – Non-impaired		Substandard – Impaired		Total
	(in thousands)
Real estate: Residential 1-4 family	$	170,044	$	5,700	$	5,804	$	107	$	181,655
Real estate: Commercial	308,677		2,993		2,217		956		314,843
Real estate: Construction	43,453		3,688		699		—		47,840
Real estate: Multi-family and farmland	17,930		98		80		—		18,108
Commercial	68,780		1,834		3,153		218		73,985
Consumer	22,218		57		264		—		22,539
Leases, net of unearned income	—		—		—		—		—
Other	4,621		1		30		—		4,652
Total Loans	$	635,723	$	14,371	$	12,247	$	1,281	$	663,622

As of December 31, 2013

Loans by Classification	Pass		Special Mention		Substandard – Non-impaired		Substandard – Impaired		Total
	(in thousands)
Real estate: Residential 1-4 family	$	162,444	$	9,490	$	8,726	$	1,328	$	181,988
Real estate: Commercial	247,096		3,873		9,054		1,912		261,935
Real estate: Construction	37,565		1,596		775		—		39,936
Real estate: Multi-family and farmland	17,236		173		254		—		17,663
Commercial	49,799		2,798		2,420		320		55,337
Consumer	20,741		71		291		—		21,103
Leases	—		—		—		—		—
Other	5,088		1		46		—		5,135
Total Loans	$	539,969	$	18,002	$	21,566	$	3,560	$	583,097

We classify a loan as impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were $1.3 million at December 31, 2014 and $3.6 million at December 31, 2013. For impaired loans, any payments made by the borrower are generally applied directly to principal.

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As of December 31, 2014, the entire allowance was associated with general reserves as there were no loans with specific reserves. As of December 31, 2013, approximately $10.0 million of the allowance was associated with general reserves and $450 thousand was associated with specific reserves. Specific reserves are based on our evaluation of each impaired relationship. The general reserve is determined by applying the historical loss factor and qualitative and environmental factors to the applicable pools. Our allowance as a percentage of total loans has decreased mostly due to a credit to our provision for loan and lease loses and a decrease in non-performing loans. The ratio of the general reserves to the applicable loan pools has declined from 1.71% as of December 31, 2013 to 1.29% as of December 31, 2014.

We believe that the allowance for loan and lease losses at December 31, 2014 is sufficient to absorb probable, incurred losses inherent in the loan portfolio based on our assessment of the information available, including the results of extensive internal and independent reviews of our loan portfolio, as discussed in the Asset Quality and Non-Performing Assets section below. Our assessment involves uncertainty and judgment; therefore, the level of the allowance as compared to total loans may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examinations, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant.

Asset Quality and Non-Performing Assets

Across the board, asset quality ratios improved in 2014 compared to 2013. Net charge-offs were 0.03% of average loans for 2014 compared to 0.10% for 2013. Non-performing loans to total loans improved to 0.67% as of year-end 2014 from 1.39% as of year-end 2013, and non-performing assets as a percentage of total assets improved from 1.67% at year-end 2013 to 0.84% at year-end 2014. As of December 31, 2014, our allowance for loan and lease losses as a percentage of total loans was 1.29% compared to 1.80% as of December 31, 2013, while the allowance to total loans declined, our allowance as a percentage of total non-performing loans expanded to 192.22% as of year-end 2014 compared to 129.14% for 2013.

Nonperforming assets include: non-accrual loans, loans past due over ninety days and still accruing, restructured loans, OREO and repossessed assets. We place loans on non-accrual status when we have concerns related to our ability to collect the loan principal and interest, and generally when such loans are 90 days or more past due. The following table, which includes both loans held-for-sale and loans held-for-investment, presents our non-performing assets and related ratios.

Nonperforming Assets By Type

	As of December 31,
	2014			2013			2012			2011			2010
	(in thousands, except percentages)
Nonaccrual loans	$	4,348		$	7,203		$	25,071		$	46,907		$	54,082
Loans past due 90 days and still accruing	100			928			1,656			2,822			4,838
Total nonperforming loans, including loans 90 days and still accruing	$	4,448		$	8,131		$	26,727		$	49,729		$	58,920
Other real estate owned	$	4,511		$	8,201		$	13,441		$	25,141		$	24,399
Repossessed assets	8			12			8			302			763
Total nonperforming assets	$	8,967		$	16,344		$	40,176		$	75,172		$	84,082
Nonperforming loans as a percentage of total loans	0.67		%	1.39		%	4.94		%	8.54		%	8.10		%
Nonperforming assets as a percentage of total assets	0.84		%	1.67		%	3.78		%	6.74		%	7.20		%

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The following table provides further information, including classification, for nonaccrual loans and other real estate owned for the past three years.

Non-Performing Assets—Classification and Number of Units

	December 31, 2014			December 31, 2013			December 31, 2012
	Amount		Units	Amount		Units	Amount		Units
	(in thousands, except units)
Nonaccrual loans
Construction/development loans	$	162	2	$	365	3	$	4,516	41
Residential real estate loans	1,529		39	2,727		45	9,217		217
Commercial real estate loans	1,019		9	2,653		13	6,150		69
Commercial and industrial loans	1,382		17	1,137		17	3,104		56
Commercial leases	—		—	—		—	436		42
Consumer and other loans	256		8	321		11	1,648		34
Total	$	4,348	75	$	7,203	89	$	25,071	459
Other real estate owned
Construction/development loans	$	1,882	111	$	3,806	242	$	6,163	351
Residential real estate loans	650		12	1,905		50	1,921		86
Commercial real estate loans	1,673		12	2,490		30	4,211		39
Multi-family and farmland loans	—		—	—		—	873		3
Commercial and industrial loans	306		1	—		—	273		2
Total	$	4,511	136	$	8,201	322	$	13,441	481

Nonaccrual loans totaled $4.3 million, $7.2 million and $25.1 million as of December 31, 2014, 2013 and 2012, respectively. We place loans on nonaccrual when we have concerns relating to our ability to collect the loan principal and interest, and generally when loans are 90 or more days past due. As of December 31, 2014, we are not aware of any additional material loans for which we have doubts as to the collectability of principal and interest that are not classified as nonaccrual. As previously described, we have individually reviewed each nonaccrual relationship in excess of $500 thousand for possible impairment. We measure impairment by adjusting the loans to either the present value of expected cash flows, the fair value of the collateral or observable market prices.

As of December 31, 2014, the book value of impaired loans totaled $1.3 million, or 64.0% less than impaired loans as of December 31, 2013. The associated unpaid principal balances of the impaired loans totaled $2.2 million as of December 31, 2014. This represents an approximately 41.1% discount through previously recorded partial charge-offs and specific reserves currently in the allowance. As of December 31, 2013, the book value of impaired loans totaled $3.6 million with the unpaid principal balances totaling $5.4 million. This represented an approximately 42.8% discount through previously recorded partial charge-offs and specific reserves currently in the allowance.

From year-end 2013 to year-end 2014, nonaccrual loans decreased by $2.9 million, or 39.6%. As shown above, residential real estate nonaccrual loans decreased by $1.2 million to $1.5 million and commercial real estate nonaccrual loans decreased by $1.6 million to $1.0 million comparing year-end 2013 to year-end 2014. These decreases were primarily due to successful workouts with minimal, if any, losses. We continue to actively pursue the appropriate strategies to maintain or reduce the current level of nonaccrual loans.

Other real estate owned decreased by 45.0% to $4.5 million as of December 31, 2014 compared to $8.2 million as of December 31, 2013. During 2014, we sold 52 properties for $4.8 million, compared to 79 sold properties for $8.7 million in 2013. We expect continued OREO resolutions during 2015 due to marketing strategies and general stabilization in the real estate markets in our footprint.

As of December 31, 2014, we owned repossessed assets, which are carried at fair value less anticipated selling costs, in the amount of $8 thousand compared to $12 thousand as of December 31, 2013. The majority of our repossessions are related to our leasing portfolio that primarily includes trucking and construction equipment leases.

Loans 90 days past due and still accruing decreased 89.2% to $100 thousand as of December 31, 2014 compared to $928 thousand at December 31, 2013. Of these past due loans as of December 31, 2014, commercial real estate totaled $68 thousand, 1-4 family residential real estate loans was $11 thousand and consumer loans was $21 thousand. Of the loans past

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due at December 31, 2013, residential real estate loans totaled $773 thousand, $68 thousand in commercial and industrial loans, $76 thousand in consumer loans and the remainder in other categories.

Total non-performing assets as of December 31, 2014 were $9.0 million compared to $16.3 million at December 31, 2013.

As of December 31, 2014, our asset quality ratios are consistent with or more favorable than our peer group. As previously stated, we monitor our asset quality against our peer group, as defined by all commercial banks with $1 billion to $3 billion in total assets as presented in the UBPR. The following table provides our asset quality ratios and our UBPR peer group ratios as of December 31, 2014, which is the latest available information.

Asset Quality Ratios

	First Security		UBPR Peer Group
Allowance for loan and lease losses to total loans	1.29	%	1.38	%
Non-performing loans1 as a percentage of gross loans	0.67	%	0.79	%
Non-performing loans1 as a percentage of the allowance	52.02	%	72.10	%
Non-performing loans1 as a percentage of equity capital	4.94	%	5.69	%
Non-performing loans1 plus OREO as a percentage of gross loans plus OREO	1.34	%	1.40	%
1 Non-performing loans consist of nonaccrual loans and loans 90 days past due that are still accruing.

Investment Securities and Other Earning Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of our consolidated balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. Currently, our investments are classified as either available-for-sale or held-to-maturity. During the year ended December 31, 2014 and the fourth quarter of 2013, we sold approximately $63.5 million and $57.0 million, respectively, of investments, primarily to redeploy the funds into loans.

Available-for-sale securities totaled $95.6 million at December 31, 2014, compared to $172.8 million at December 31, 2013. Held-to-maturity securities totaled $124.5 million at December 31, 2014, compared to $132.6 million at December 31, 2013. Held-to-maturity securities were transferred from the available-for-sale securities in the third and fourth quarter of 2013. The transfer to the held-to-maturity classification was to minimize any further unrealized losses due to increases in interest rates, which does not impact regulatory capital, but does impact total shareholders' equity and book value. We maintain a level of securities to provide an appropriate level of liquidity and to provide a proper balance to our interest rate and credit risk in our loan portfolio. The decrease in available-for-sale securities of $77.2 at December 31, 2014 from December 31, 2013, reflects the sale of securities noted above as well as the redeployment of a majority of ongoing cash flows into loans. As of December 31, 2014 and 2013, the available-for-sale securities portfolio had gross unrealized gains of approximately $849 thousand and $2.0 million, and gross unrealized losses of $367 thousand and $2.6 million, respectively. At December 31, 2014 and 2013, the held-to maturity securities portfolio had gross unrecognized gains of $3.9 million and $656 thousand, respectively, and gross unrecognized losses of $305 thousand and $1.1 million, respectively. Our securities portfolio at December 31, 2014 consisted of tax-exempt municipal securities, federal agency bonds, federal agency issued Real Estate Mortgage Investment Conduits (REMICs), federal agency issued pools, collateralized loan obligations and corporate bonds.

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The following table provides the amortized cost of our securities, as of December 31, 2014, by their stated maturities (this maturity schedule excludes security prepayment and call features), as well as the tax equivalent yields for each maturity range.

Maturity of AFS Investment Securities—Amortized Cost

	Less than One Year			One Year to Five Years			Five Years to Ten Years			More than Ten Years			Totals
	(in thousands, except percentages)
Municipal—tax exempt	$	950		$	1,833		$	—		$	—		$	2,783
Municipal—taxable	191			636			216			529			1,572
Agency issued REMICs	818			29,573			—			—			30,391
Agency issued mortgage pools	—			22,877			14,634			445			37,956
Other	—			4,437			14,827			3,123			22,387
Total	$	1,959		$	59,356		$	29,677		$	4,097		$	95,089
Tax equivalent yield	4.71		%	1.63		%	1.66		%	2.74		%	1.75		%

Maturity of HTM Investment Securities—Amortized Cost

	Less than One Year			One Year to Five Years			Five Years to Ten Years			More than Ten Years			Totals
	(in thousands, except percentages)
Municipal—tax exempt	$	—		$	—		$	543		$	7,742		$	8,285
Municipal—taxable	—			93			16,180			2,592			18,865
Agency bonds	—			19,037			33,355			8,145			60,537
Agency issued REMICs	—			24,227			—			—			24,227
Agency issued mortgage pools	—			2,445			7,050			3,076			12,571
Total	$	—		$	45,802		$	57,128		$	21,555		$	124,485
Tax equivalent yield	—		%	1.57		%	1.97		%	2.72		%	1.95		%

The following table details our investment portfolio by type of investment.

Investment Securities by Type—Amortized Cost

	As of December 31,
	2014		2013		2012
	(in thousands)
Securities available-for-sale
Debt securities—
Federal agencies	$	—	$	4,078	$	57,393
Mortgage-backed	82,686		116,314		157,191
Municipals	4,355		31,748		35,088
Other	8,048		21,350		61
Total	$	95,089	$	173,490	$	249,733
Securities held-to-maturity
Debt securities—
Federal agencies	$	60,537	$	63,684	$	—
Mortgage-backed	36,798		41,801		—
Municipals	27,150		27,083		—
Total	$	124,485	$	132,568	$	—

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The following table shows the gross unrealized losses and fair value of our 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 December 31, 2014 and 2013.

	Less than 12 months				12 months or greater				Totals
Securities available-for-sale	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
December 31, 2014
Mortgage-backed	$	4,553	$	29	$	34,715	$	321	$	39,268	$	350
Municipals	—		—		625		12		625		12
Other	—		—		2,995		5		2,995		5
Totals	$	4,553	$	29	$	38,335	$	338	$	42,888	$	367
December 31, 2013
Mortgage-backed	$	77,451	$	1,763	$	—	$	—	$	77,451	$	1,763
Municipals	11,652		500		—		—		11,652		500
Other	20,918		371		56		5		20,974		376
Totals	$	110,021	$	2,634	$	56	$	5	$	110,077	$	2,639

	Less than 12 months				12 months or greater				Totals
Held-To-Maturity	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses
	(in thousands)
December 31, 2014
Federal agencies	$	—	$	—	$	15,102	$	278	$	15,102	$	278
Mortgage-backed—residential	—		—		8,022		13		8,022		13
Municipals	565		14		—		—		565		14
Totals	$	565	$	14	$	23,124	$	291	$	23,689	$	305
December 31, 2013
Federal agencies	$	40,149	$	791	$	—	$	—	$	40,149	$	791
Mortgage-backed—residential	30,793		302		—		—		30,793		302
Municipals	1,739		27		—		—		1,739		27
Totals	$	72,681	$	1,120	$	—	$	—	$	72,681	$	1,120

We currently have the ability and intent to hold our available-for-sale investment securities to maturity. However, if deemed appropriate, there may be additional sales of available-for-sale securities. We consider the overall quality of the securities portfolio to be high. All securities held are traded in liquid markets, except for one bond, which is valued utilizing Level 3 inputs. The Level 3 security was a pooled trust preferred security with a book value of $63 thousand.

As of December 31, 2014, we performed an impairment assessment of the available-for-sale securities in the portfolio and the held-to-maturity portfolio that had unrealized losses 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) we intend to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery of its amortized costs basis or (3) we do not expect to recover the security’s entire amortized cost basis, even if we do not intend to sell. Additionally, accounting guidance requires that for impaired available-for-sale securities that we do not intend to sell and/or that it is not more-likely-than-not that we 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. Losses related to held-to-maturity securities are not

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recorded, as these securities are carried at their amortized cost. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual available-for-sale or held-to-maturity 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.

In evaluating the recovery of the entire amortized cost basis, we consider 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 December 31, 2014, gross unrealized losses in our available-for-sale portfolio totaled $367 thousand, compared to $2.6 million as of December 31, 2013. As of December 31, 2014, gross unrecognized losses in our held-to-maturity portfolio totaled $305 thousand, compared to $1.1 million as of December 31, 2013. As of December 31, 2014, the available-for-sale securities unrealized losses in mortgage-backed securities (consisting of sixteen securities), municipals (consisting of one security) and the held-to-maturity unrecognized losses in mortgage-backed securities (consisting of fourteen securities), municipals (consisting of sixty-two securities) and federal agencies (consisting of thirty-four securities) are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. Between December 31, 2013 and December 31, 2014, the rate on the 10-year U.S. Treasury decreased from approximately 3.04% to 2.17%. As this represented a substantive decrease in interest rates, the market valuation of the Company's securities adjusted accordingly. The unrealized loss in other available-for-sale securities relates to one corporate note. The unrealized loss in the corporate note is primarily due to the changes in interest rates subsequent to purchase. The Company does not intend to sell the available-for-sale investments with unrealized losses and it is not more-likely-than-not that the Company will be required to sell the available-for-sale investments before recovery of their amortized cost basis, which may be maturity. Based on results of the Company’s impairment assessment, the unrealized losses related to the available-for-sale securities and the unrecognized losses related to the held-to-maturity securities at December 31, 2014 are considered temporary.

We continue to monitor and review applicable regulatory guidance on the implementation of the Volcker Rule. As of December 31, 2014, we identified approximately $11.2 million of collateralized loan obligations ("CLOs") within our investment security portfolio that may be impacted by the Volcker Rule. If these securities are deemed to be prohibited bank investments, we would have to sell the securities prior to the compliance date of July 21, 2017. At this time, we continue to evaluate the additional regulatory guidance on the subject as well as the specific terms of our CLOs to determine whether such CLOs will remain permitted investments. The unrealized loss as of December 31, 2014 for our CLOs totaled $59.0 thousand.

As of December 31, 2014, we owned securities from issuers in which the aggregate book value from such issuers exceeded 5% of our stockholders’ equity. The following table presents the amortized cost and market value of the securities from each such issuer as of December 31, 2014.

	Book Value		Market Value
	(in thousands)
Fannie Mae	$	53,997	$	53,876
Federal Home Loan Mortgage Corporation	$	23,562	$	23,665
Ginnie Mae	$	29,080	$	28,807

We held no federal funds sold as of December 31, 2014 and 2013. As of December 31, 2014, we held $29.6 million in interest bearing deposits, primarily at the Federal Reserve Bank of Atlanta, compared to $10.1 million at December 31, 2013. The yield on our account at the Federal Reserve Bank is approximately 25 basis points.

At December 31, 2014, we held $29.2 million in bank-owned life insurance, compared to $28.3 million at December 31, 2013.

Deposits and Other Borrowings

Deposits increased by $48.3 million, or 5.6%, from year-end 2013 to year-end 2014, The increase from December 31, 2013, was primarily due to an increase in savings and money market accounts as well as an increase in our brokered deposits partially offset by reductions in our retail and jumbo certificates of deposit. Excluding brokered deposits, our deposits increased $18.1 million, or 2.3%, from year-end 2013 to year-end 2014. We define core deposits to include interest bearing and noninterest bearing demand deposits, savings and money market accounts, as well as retail certificates of deposit with denominations less than $100 thousand. Core deposits increased $52.3 million, or 8.3%, from year-end 2013 to year-end 2014. We consider our retail certificates of deposit to be a stable source of funding because they are in-market, relationship-oriented deposits. Core deposit growth is an important tenet of our business strategy.

62

Summary of Deposits

	As of December 31,
(in thousands)	2014		Percent Change		2013		Percent Change		2012		Percent Change		2011		Percent Change		2010
Noninterest Bearing Demand	$	159,996	10.8	%	$	144,365	2.1	%	$	141,400	(11.5	)%	$	159,735	7.0	%	$	149,323
Interest Bearing Demand	111,021		16.2	%	95,559		10.4	%	86,575		53.0	%	56,573		(11.4	)%	63,838
Savings and Money Market	258,694		25.5	%	206,125		11.7	%	184,597		18.0	%	156,402		(3.4	)%	161,873
Certificates of Deposit less than $100 thousand	151,089		(17.2	)%	182,408		(20.0	)%	228,144		2.6	%	222,371		8.1	%	205,675
Total Core Deposits	680,800		8.3	%	628,457		(1.9	)%	640,716		7.7	%	595,081		2.5	%	580,709
Certificates of Deposit of $100 thousand or more	119,514		(22.3	)%	153,750		(23.8	)%	201,873		8.6	%	185,904		21.4	%	153,138
Brokered Deposits	105,299		40.3	%	75,062		(54.6	)%	165,477		(30.6	)%	238,437		(24.3	)%	314,876
Total Deposits	$	905,613	5.6	%	$	857,269	(15.0	)%	$	1,008,066	(1.1	)%	$	1,019,422	(2.8	)%	$	1,048,723

Brokered deposits, not including CDARS^® and ICS^®, decreased $32.0 million, or 42.9%, from year-end 2013 to year-end 2014. The decrease is due to scheduled and called maturities. In addition to brokered certificates of deposits, FSGBank, in partnership with the network of banks associated with Promontory Interfinancial Network, LLC, is a member bank of the Certificate of Deposit Account Registry Service^® ("CDARS") and the Insured Cash Sweep^® ("ICS") networks. CDARS is a network of banks that allows customers’ CDs to receive full FDIC insurance of up to $50 million. Additionally, members have the opportunity to purchase or sell one-way time deposits. ICS is a network of banks that allow customer transaction accounts to receive multi-million-dollar FDIC insurance coverage. At year-end 2014, our CDARS^® balance consisted of $14.3 million in reciprocal customer accounts. At year-end 2014, our ICS balance was $48.4 million in customer accounts.

Brokered deposits at December 31, 2014 and 2013, were as follows:

	2014		2013
	(in thousands)
Brokered certificates of deposits	$	42,684	$	74,688
CDARS® - Customer deposits	14,256		374
ICS® - Customer deposits	48,359		—
	$	105,299	$	75,062

Prior to the termination of the Bank's Order on March 10, 2014, the presence of a capital requirement in our Order previously restricted our ability to accept, renew, or roll over brokered deposits without prior approval of the FDIC. While our desire is to fund loan growth with customer deposits, we anticipate supplementing with a certain level of brokered deposits or other wholesale funding. The table below is a maturity schedule for our certificates of deposit, including brokered CDs, in amounts of $100 thousand or more as of December 31, 2014.

	Less than 3 months		Three months to six months		Six months to twelve months		Greater than twelve months
	(in thousands)
Certificates of deposit of $100 thousand or more	$	17,113	$	10,016	$	31,612	$	60,773
Brokered certificates of deposit	10,046		—		11,294		21,344
CDARS® - Customer deposits	100		—		4,134		10,022
	$	27,259	$	10,016	$	47,040	$	92,139

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At December 31, 2014 and 2013 we had securities sold under repurchase agreements with commercial checking customers of $12.8 million and $12.5 million, respectively. At December 31, 2014 and 2013, we had no Federal funds purchased.

As a member of the Federal Home Loan Bank of Cincinnati ("FHLB"), we have the ability to acquire short and long-term advances through a blanket agreement secured by our unencumbered qualifying 1-4 family first mortgage loans and by pledging investment securities or individual, qualified loans, subject to approval of the FHLB. At December 31, 2014 and 2013, we had FHLB advances of $56 million and $20 million, respectively.

The terms of the FHLB advance as of December 31, 2014 are as follows:

Maturity Year	Origination Date	Type	Principal	Rate	Maturity
			(in thousands)
2015	12/31/2014	FHLB variable rate advance	$56,000	0.14%	1/2/2015

The terms of the FHLB advance as of December 31, 2013 are as follows:

Maturity Year	Origination Date	Type	Principal	Rate	Maturity
			(in thousands)
2014	12/19/2013	FHLB fixed rate advance	$20,000	0.15%	1/17/2014

Interest Rate Sensitivity

Financial institutions are subject to interest rate risk to the degree that their interest bearing liabilities (consisting principally of customer deposits) mature or reprice more or less frequently, or on a different basis, than their interest earning assets (generally consisting of intermediate or long-term loans, investment securities and federal funds sold). The match between the scheduled repricing and maturities of our earning assets and liabilities within defined time periods is referred to as “gap” analysis. At December 31, 2014, our cumulative one-year gap was a negative (or liability sensitive) $10.9 million, or 1.1% of total earning assets.

Following the Recapitalization, we actively deployed our excess liquidity, which generated more liability sensitivity within our balance sheet. During 2014, we extended our liabilities and continued to grow core deposits to minimize interest rate mismatches.

The following “gap” analysis provides information based the next repricing date or the maturity date. The “Interest Rate Risk Income Sensitivity Summary” table located in Item 7A incorporates additional assumptions, including prepayments on loans and securities and reinvestments of paydowns and maturities of loans, investments, and deposits. We believe the Income Sensitivity Summary table located in Item 7A provides a more accurate analysis related to interest rate risk.

The following table reflects our rate sensitive assets and liabilities by maturity or the next repricing date as of December 31, 2014. Variable rate loans are shown in the category of due “Within Three Months” because they reprice with changes in the prime lending rate. Fixed rate loans are presented assuming all payments are made according to the loan’s contractual terms. Additionally, demand deposits and savings accounts have no stated maturity; however, it has been our experience that these accounts are not entirely rate sensitive, and accordingly the following analysis assumes 11% of interest bearing demand deposit accounts, 33% of money market deposit accounts, and 20% of savings accounts reprice within one year and the remaining accounts reprice within one to five years.

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Interest Rate Gap Sensitivity

	As of December 31, 2014
	Within Three Months		After Three Months but Within One Year			After One Year but Within Five Years			After Five Years and Non-Rate Sensitive		Total
	(in thousands)
Interest earning assets:
Interest bearing deposits	$	29,482	$	100		$	—		$	—	$	29,582
Securities	107		1,868			105,679			112,402		220,056
Loans originated for held for sale	72,242		—			—			—		72,242
Loans	147,956		119,596			220,375			175,695		663,622
Total interest earning assets	249,787		121,564			326,054			288,097		985,502
Interest bearing liabilities:
Demand deposits	8,800		8,800			142,396			—		159,996
MMDA deposits	35,806		35,806			145,394			—		217,006
Savings deposits	4,169		4,169			33,350			—		41,688
Time deposits	32,215		109,757			128,631			—		270,603
Brokered certificates of deposits	10,046		11,294			21,344			—		42,684
CDARS®	132		4,102			10,022			—		14,256
ICS®	48,359		—			—			—		48,359
Fed funds purchased/repos	12,750		—			—			—		12,750
Other borrowings	56,000		—			—			—		56,000
Total interest bearing liabilities	208,277		173,928			481,137			—		863,342
Noninterest bearing sources of funds	—		—			—			122,160		122,160
Interest sensitivity gap	$	41,510	$	(52,364	)	$	(155,083	)	$	165,937	$	—
Cumulative sensitivity gap	$	41,510	$	(10,854	)	$	(165,937	)	$	—	$	—

Liquidity

Liquidity refers to our ability to adjust future cash flows to meet the needs of our daily operations. We rely primarily on the operations and cash balance of FSGBank to fund the liquidity needs of our daily operations. Our cash balance on deposit with FSGBank, which totaled approximately $225 thousand as of December 31, 2014, is available for funding activities for which FSGBank will not receive direct benefit, such as shareholder relations and holding company operations. These funds should adequately meet our cash flow needs. As discussed in Note 2 to our consolidated financial statements, the Agreement with the Federal Reserve was terminated on October 2, 2014. Although the Agreement has been terminated, we expect to continue to seek approval from the Federal Reserve prior to paying any dividends on our capital stock or incurring any additional indebtedness. If we determine that our cash flow needs will be satisfactorily met, we may deploy a portion of the funds into FSGBank.

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 available-for-sale securities.

As of December 31, 2014, our interest bearing account at the Federal Reserve Bank of Atlanta totaled approximately $29.2 million. This liquidity is available to fund our contractual obligations and prudent investment opportunities.

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As of December 31, 2014, FSGBank had $165.7 million of total borrowing capacity at FHLB with all 1-4 family residential mortgages and investment securities pledged as collateral as well as the amount of FHLB stock we own. The available borrowing capacity at December 31, 2013 totaled $125.2 million.

Another source of funding is loan participations sold to other commercial banks (in which we retain the service rights). As of year-end, we had $35.6 million in loan participations sold. FSGBank may elect to sell loan participations as a source of liquidity. An additional source of short-term funding would be to pledge investment securities against a line of credit at a commercial bank. As of December 31, 2014, FSGBank had $153.0 million in borrowings against investment securities pledged for repurchase agreements, treasury tax and loan deposits, and public-fund deposits attained in the ordinary course of business. As of December 31, 2014, our unpledged available-for-sale and held-to-maturity securities totaled $32.0 million and $35.1 million, respectively.

Additionally, we had $92.5 million in unsecured fed lines of credit as of December 31, 2014, that were fully available.

We utilize brokered deposits to provide an additional source of funding. As of December 31, 2014, we had $42.7 million in brokered CDs outstanding with a weighted average remaining life of approximately 17.0 months, a weighted average coupon rate of 2.10% and a weighted average all-in cost (which includes fees paid to deposit brokers) of 2.14%. Our CDARS^® product had $14.3 million at December 31, 2014, with a weighted average coupon rate of 0.63% and a weighted average remaining life of approximately 19 months. Our certificates of deposit greater than $100 thousand were generated in our communities and are considered relatively stable.

Management believes that our liquidity sources are adequate to meet our current operating needs. We continue to study our contingency funding plans and update them as needed paying particular attention to the sensitivity of our liquidity and deposit base to positive and negative changes in our asset quality.

The following table illustrates our significant contractual obligations at December 31, 2014 by future payment period.

Contractual Obligations

	Total		Less than One Year		One to Three Years		Three to Five Years		More than Five Years
	(in thousands)
Certificates of deposit1	$	270,603	$	141,923	$	89,835	$	38,845	$	—
Brokered certificates of deposit1	42,684		21,340		13,615		7,729		—
CDARS®1	14,256		4,234		10,022		—		—
Federal funds purchased and securities sold under agreements to repurchase2	12,750		12,750		—		—		—
FHLB Borrowings	56,000		56,000		—		—		—
Operating lease obligations3	6,136		823		1,438		1,075		2,800
Total	$	402,429	$	237,070	$	114,910	$	47,649	$	2,800
1 Time deposits give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. For more information regarding certificates of deposits, see “Deposits and Other Borrowings.”
2 We expect securities repurchase agreements to be re-issued and, as such, they do not necessarily represent an immediate need for cash.
3 Operating lease obligations include existing and future property and equipment non-cancelable lease commitments.

Net cash provided by operations in 2014 totaled $2.7 million, compared to net cash used in operations of $12.4 million in 2013 and $4.9 million in 2012. Cash flows from operations in 2014 increased primarily due to the year over year change in our other assets and liabilities. Net cash used by investing activities totaled $60.1 million in 2014 compared to net cash used by investing activities of $83.6 million in 2013 and net cash used by investing activities of $67.3 million in 2012. For 2014, loan principal collections, including proceeds from sale of loans, net of loan originations, totaled ($150.4) million, compared to ($25.2) million in 2013 and ($13.7) million in 2012. Also for 2014, purchases of available-for-sale securities were $3.1 million, compared to $179.7 million in 2013 and $161.1 million in 2012. Decreases in the security portfolio as well as additions to the loan portfolios were the primary reasons for the year-over-year change in investing activities. Net cash provided by financing activities totaled $84.6 million in 2014, compared to net cash used in financing activities of $55.6 million in 2013 and $13.5 million in 2012. The year-over-year change in financing activities is primarily related to the increase in savings and money market accounts and brokered deposits, a combined increase of $82.8 million, as well as a $36.0 million increase in other borrowings.

66

Off-Balance Sheet Arrangements

We are party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Our exposure to credit loss is represented by the contractual amount of these commitments. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

The following table discloses our maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at the dates indicated.

	December 31, 2014		December 31, 2013
	(in thousands)
Commitments to extend credit - fixed rate	$	37,819	$	36,273
Commitments to extend credit - variable rate	94,568		94,857
Total commitments to extend credit	$	132,387	$	131,130
Standby letters of credit	$	3,272	$	3,208

Commitments to extend credit are agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, we obtain on an extension of credit is based on our credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.

Derivative Financial Instruments

We record all derivative financial instruments at fair value in our financial statements. It is our policy to enter into various derivatives both as a risk management tool and in a dealer capacity, as necessary, to facilitate client transactions. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks. As of December 31, 2014, we had not entered into any transactions in a dealer capacity.

When a derivative is intended to be a qualifying hedged instrument, we prepare written documentation that designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge) or (2) a hedge of a forecasted transaction, such as the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective. Methodologies related to hedge effectiveness and ineffectiveness include (1) statistical regression analysis of changes in the cash flows of the actual derivative and a perfectly effective hypothetical derivative, (2) statistical regression analysis of changes in fair values of the actual derivative and the hedged item and (3) comparison of the critical terms of the hedged item and the hedging derivative. Changes in fair value of a derivative that is highly effective and that has been designated and qualifies as a fair value hedge are recorded in current period earnings, along with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Changes in the fair value of a derivative that is highly effective and that has been designed to qualify as a cash flow hedge are initially recorded in other comprehensive income and reclassified to earnings in conjunction with the recognition of the earnings impacts of the hedged item; any ineffective portion is recorded in current period earnings. Designated hedge transactions are reviewed at least quarterly for ongoing effectiveness. Transactions that are no longer deemed to be effective are removed from hedge accounting classification and the recorded impacts of the hedge are recognized in current period income or expense in conjunction with the recognition of the income or expense on the originally hedged item.

Our derivatives are based on underlying risks, primarily interest rates. We have utilized swaps to reduce the risks associated with interest rates. Swaps are contracts in which a series of net cash flows, based on a specific notional amount that is related to an underlying risk, are exchanged over a prescribed period. We also utilize forward contracts on the residential held-for-sale loan portfolio. Our practice is to enter into a best efforts contract with the investor concurrently with providing an

67

interest rate lock to a customer. The use of the fair value option on the closed residential held-for-sale loans and the forward contracts minimize the volatility in earnings from changes in interest rates.

Derivatives expose us to credit risk. If the counterparty fails to perform, the credit risk is equal to the fair value gain of the derivative. The credit exposure for swaps is the replacement cost of contracts that have become favorable. Credit risk is minimized by entering into transactions with high quality counterparties that are initially approved by the Board of Directors and reviewed periodically by the Asset/Liability Committee ("ALCO"). It is our policy to require all derivatives be governed by an International Swap and Derivatives Associations Master Agreement ("ISDA"). Bilateral collateral agreements are also generally required.

During the year ended December 31, 2014, we entered into an interest rate swap with a gross notional value of $40.0 million. The interest rate swap is being utilized to minimize interest rate risk by converting variable rate cash flows from our liabilities into fixed rate cash flows to extend the duration of our liabilities. During the year ended December 31, 2014, we also entered into various derivative contracts with a gross notional value of $17.6 million. These derivatives were utilized in lending transactions to minimize interest rate risk by converting fixed rate cash flows into variable rate cash flows. We believe the use of derivatives will reduce our interest rate risk and potential earnings volatility caused by changes in interest rates.

The following table presents information on the cash flow and fair value hedges as of December 31, 2014.

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income		Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Interest rate swap	$	40,000	$	—	$	45	$	45	April 1, 2020
Forward loan sales contracts	2,298		—		63		90		Various
	$	42,298	$	—	$	108	$	135
Fair value hedges:
Zero premium collar	$	17,604	$	1,028	$	—	$	—	June 10, 2023
Cash flow swap	17,604		—		1,028		—		June 10, 2023
	$	35,208	$	1,028	$	1,028	$	—

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The following table presents additional information on the active derivative positions as of December 31, 2014.

Consolidated Balance Sheet Presentation

Consolidated Income Statement Presentation

Assets

Liabilities

Gains

Notional

Classification

Amount

Classification

Amount

Classification

Amount Recognized

(in thousands)

Hedging Instrument:

Forward contracts

$

2,298

Other assets

$

—

Other liabilities

$

63

Noninterest income – other

$

(53

)

Zero premium collar

$

17,604

Other assets

$

1,028

Other liabilities

N/A

Noninterest income – other

$

1,028

Cash flow swap

$

17,604

Other assets

N/A

Other liabilities

$

1,028

Noninterest expense – other

$

1,028

Interest rate swap

$

40,000

Other assets

N/A

Other liabilities

$

45

Noninterest income – other

N/A

Hedged Items:

Loans held for sale

N/A

Loans held for sale

$

2,298

N/A

N/A

Noninterest income – other

N/A

Loans

N/A

Loans

$

17,604

N/A

N/A

Noninterest income - other

N/A

Short-term FHLB Advance

N/A

N/A

N/A

Short-term FHLB Advance

$

45

Noninterest income - other

N/A

Derivatives expose us to credit risk from the counterparty when the derivatives are in an unrealized gain position. All counterparties must be approved by the Board of Directors and are monitored by ALCO on an ongoing basis. We minimize the credit risk exposure by requiring collateral when certain conditions are met. When the derivatives are at an unrealized loss position, our counterparty may require us to pledge collateral.

Capital Resources

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The OCC and the Federal Reserve, the primary federal regulators for FSGBank and First Security, 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. Following termination of the Consent Order, we believe our current capital levels are sufficient and appropriate for our risk profile and asset level. Currently, our capital ratios exceed the minimum capital requirements to be considered "well-capitalized."

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The following table compares the required capital ratios maintained by First Security and FSGBank.

Regulatory Capital Ratios

	Minimum Capital Requirements to be "Well Capitalized" 1		Minimum Capital Requirements		First Security		FSGBank
As of December 31, 2014
Tier 1 capital to risk weighted assets	6.0	%	4.0	%	11.9	%	11.3	%
Total capital to risk weighted assets	10.0	%	8.0	%	13.0	%	12.4	%
Leverage ratio	5.0	%	4.0	%	9.4	%	8.9	%
As of December 31, 2013
Tier 1 capital to risk weighted assets	6.0	%	4.0	%	13.6	%	12.8	%
Total capital to risk weighted assets	10.0	%	8.0	%	14.9	%	14.1	%
Leverage ratio	5.0	%	4.0	%	9.4	%	8.7	%
(1) Prior to the termination of the Consent Order on March 10, 2014, FSGBank was required to achieve and maintain capital ratios of 13.0% for Total Capital to risk weighted assets and 9.0% leverage ratio. Effective March 10, 2014 with the termination of the COnsent Order, FSGBank was considered well capitalized.

On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the Federal Reserve. The final rules implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act").

The final rules include new or increased risk-based capital requirements that will be phased in from 2015 to 2019. The rules add a new common equity Tier 1 capital to risk-weighted assets ratio minimum of 4.5%, increase the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and decrease the Tier 2 capital that may be included in calculating total risk-based capital from 4.0% to 2.0%. The final rules also introduce a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and total risk-based capital requirements. The required minimum ratio of total capital to risk-weighted assets remains 8.0% and the minimum leverage ratio remains 4.0%. The new risk-based capital requirements (except for the capital conservation buffer) became effective for the Company on January 1, 2015. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The final rules also set forth certain changes for the calculation of risk-weighted assets that the Company will be required to implement beginning January 1, 2015.

In addition to the updated capital requirements, the final rules also contain revisions to the prompt corrective action framework. Beginning January 1, 2015, the minimum ratios for the Bank to be considered well-capitalized changed as follows:

	Prior to January 1, 2015	Beginning January 1, 2015
Total Capital	10.0%	10.0%
Tier 1 Capital	6.0%	8.0%
Common Equity Tier 1 Capital	not present	6.5%
Leverage Ratio	5.0%	5.0%

Management is currently evaluating the provisions of the final rules and their expected impact on the Company. Based on the Company's current capital composition and levels, management does not presently anticipate that the final rules present a material risk to the Company's financial condition or results of operations.

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Effect of Governmental Policies

We are affected by the policies of regulatory authorities, including the Federal Reserve Board and the OCC. An important function of the Federal Reserve Board is to regulate the national money supply.

Among the instruments of monetary policy used by the Federal Reserve Board are: purchases and sales of U.S. Government securities in the marketplace; changes in the discount rate, which is the rate any depository institution must pay to borrow from the Federal Reserve Board; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing economic and monetary growth, interest rate levels and inflation.

The monetary policies of the Federal Reserve Board and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money market, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty future changes in interest rates, deposit levels or loan demand or whether the changing economic conditions will have a positive or negative effect on operations and earnings.

Legislation from time to time is introduced in the United States Congress and the Tennessee General Assembly and other state legislatures, and regulations are proposed by the regulatory agencies that could affect our business. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which our business may be affected thereby.

Dodd-Frank Act.

The bank regulatory landscape was dramatically changed by the Dodd-Frank Act, which was enacted on July 21, 2010 and which implements far-reaching regulatory reform. Its provisions include significant regulatory and compliance changes that are designed to improve the supervision, oversight, safety and soundness of the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the OCC and the FDIC.

Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact on the financial services industry as a whole or on the Company’s and the Bank’s business, results of operations, and financial condition. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Company and Bank. Some of the rules that have been adopted to comply with the Dodd-Frank Act's mandates are discussed below.

Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act created a new, independent federal agency, the CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes

The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. Although FSGBank has less than $10 billion in assets, the impact of the formation of the CFPB has caused a ripple effect across all bank regulatory agencies, and placed a renewed focus on consumer protection and compliance efforts. For examples of this new authority, the CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices. During 2012, the CFPB issued three proposed rulemakings covering loan origination and servicing requirements, which were finalized in January 2013, along with other rules on mortgages. The ability to repay and qualified mortgage standards rules, as well as the mortgage servicing rules, became effective in January 2014. The escrow and loan originator compensation rules became effective in June 2013. A final rule integrating disclosures required by the Truth in Lending Act and the Real Estate Settlement and Procedures Act became effective in January 2014. We continue to analyze the impact that such rules have on our business model, particularly with respect to our mortgage banking business.

71

UDAP and UDAAP.Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act-the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce ("UDAP" or "FTC Act"). "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices" ("UDAAP"), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

Interchange Fees. The Federal Reserve has issued final rules limiting the amount of any debit card interchange fee that an issuer may receive or charge with respect to electronic debit card transactions to be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.

Volcker Rule. On December 10, 2013, the federal regulators adopted final regulations to implement the proprietary trading and private fund prohibitions of the Volcker Rule under the Dodd-Frank Act. Under the final regulations, which will become effective on April 1, 2014, banking entities are generally prohibited, subject to significant exceptions from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds. The Federal Reserve has granted an extension for compliance with the Volcker Rule until July 21, 2015. In addition, the Federal Reserve has granted an extension to conform with the retention of ownership interests in private equity and hedge funds until July 16, 2016 and has indicated that they will grant an additional one year extension to July 21, 2017. The Company has plans to divest within the conformance period all affected investments and does not believe that the Volcker Rule will have a material impact on its investment portfolio. The Company is reviewing the impact of the Volcker Rule on its investment portfolio.

Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the adoption of further implementing regulations and, therefore, their impact on the Company’s operations cannot be fully determined at this time.

Restrictions on Transactions with Affiliates

First Security and FSGBank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:

• a bank’s loans or extensions of credit to affiliates;

• a bank’s investment in affiliates;

• assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

• loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and

• a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. We must also comply with other provisions designed to avoid the taking of low-quality assets.

First Security and FSGBank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B, including an expansion of the definition of “covered transactions” and increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.

FSGBank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Effective July 21, 2011, an insured depository institution is prohibited from engaging in asset purchases or sales transactions with its officers, directors or principal shareholders unless (1) the transaction is on market terms and (2) if the transaction represents greater than 10% of the capital and surplus of the bank, a majority of disinterested directors has approved the transaction.

72

Limitations on Senior Executive Compensation

In June of 2010, federal banking regulators issued guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking or undermine the safety and soundness of the organization. In connection with this guidance, the regulatory agencies announced that they will review incentive compensation arrangements as part of the regular, risk-focused supervisory process.

Regulatory authorities may also take enforcement action against a banking organization if its incentive compensation arrangement or related risk management, control, or governance processes pose a risk to the safety and soundness of the organization and the organization is not taking prompt and effective measures to correct the deficiencies. To ensure that incentive compensation arrangements do not undermine safety and soundness at insured depository institutions, the incentive compensation guidance sets forth the following key principles:

• incentive compensation arrangements should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose the organization to imprudent risk;

• incentive compensation arrangements should be compatible with effective controls and risk management; and

• incentive compensation arrangements should be supported by strong corporate governance, including active and effective oversight by the board of directors.

Proposed Legislation and Regulatory Action

New regulations and statutes are regularly proposed that contain wide-ranging potential changes to the structures, regulations and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board, including its ongoing "Quantitative Easing" program, affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

Recent Accounting Developments

In July 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This update amends existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from dis-allowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition

In January 2014, the FASB issued ASU No. 2014-04, "Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This update clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The update is effective for annual and interim periods within those annual periods, beginning after December 15, 2014. We do not believe this update will have a significant impact to our consolidated financial statements.

73

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This update is a joint project with the International Accounting Standards Board initiated to clarify the principles for recognizing revenue and to develop a common revenue standard that is meant to remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, provide more useful information to users of financial statements and simplify the preparation of financial statements. The guidance in this update supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition" and most industry-specific guidance throughout the Industry Topics of Codification. This update is effective for annual and interim periods beginning after December 15, 2016. We are currently evaluating the impact, if any, to the consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, "Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure." This update amends guidance related to the classification of certain government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA, upon foreclosure. It requires that a mortgage loan be derecognized and a separate other receivable recognized upon foreclosure if certain conditions are met. This update is effective for annual and interim periods beginning after December 15, 2014. We are currently evaluating the impact, if any, to the consolidated financial statements.

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk, with respect to us, 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. We do not deal in international instruments, and therefore are not exposed to risks inherent to foreign currency. Additionally, as of December 31, 2014, we had no trading assets that exposed us to the risks in market changes.

Oversight of our interest rate risk management is the responsibility of the Asset/Liability Committee ("ALCO"). ALCO has established policies and limits to monitor, measure and coordinate our 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 our interest sensitive assets and liabilities also change, thereby impacting net interest income, the primary component of our earnings. ALCO utilizes the results of both static gap and income simulation reports to quantify the estimated exposure of net interest income to a sustained change in interest rates.

Our income simulation analysis projected net interest income based on a decline in interest rates of 100 basis points (i.e. 1.00%) and an increase of 100 basis points, 200 basis points and 300 basis points (1.00%, 2.00% and 3.00%, respectively) over a twelve-month period. Given this scenario, as of December 31, 2014, we had an exposure to falling rates and a benefit from rising rates. More specifically, our model forecasts a decline in net interest income of $1.9 million, or 6.0%, as a result of a 100 basis point decline in rates at December 31, 2014. The model predicts a $1.3 million increase in net interest income, or 4.3%, resulting from a 100 basis point increase in rates, a $2.8 million increase in net interest income, or 8.6%, as a result of a 200 basis point increase in rates and a $4.0 million increase in net interest income, or 12.9%, as a result of a 300 basis point increase in rates.

The following chart reflects our sensitivity to changes in interest rates as indicated as of December 31, 2014. 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.

INTEREST RATE RISK

INCOME SENSITIVITY SUMMARY

	Down 100 BP			Current			Up 100 BP			Up 200 BP			Up 300 BP
	(in thousands, except percentages)
Net interest income	$	29,041		$	30,901		$	32,227		$	35,011		$	34,941
Dollar change net interest income	$	(1,860	)	$	—		$	1,326		$	2,784		$	3,998
Percentage change net interest income	(6.02		)%	—		%	4.29		%	8.64		%	12.92		%

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, reinvestments of paydowns and maturities of loans, investments and deposits, and other assumptions. In addition, there is no input for growth or a change in asset mix. While assumptions are developed based on the current economic and market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

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

We use the Fiserv Asset Liability Manager, which is a comprehensive interest rate risk measurement tool that is widely used in the banking industry. Generally, it provides the user with the ability to more accurately model both static and dynamic gap, economic value of equity, duration and income simulations using a wide range of scenarios including interest rate shocks and rate ramps. The system also models derivative instruments.

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ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms	76
Consolidated Balance Sheets as of December 31, 2014 and 2013	78
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 and 2012	79
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013 and 2012	80
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012	81
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012	82
Notes to Consolidated Financial Statements	84

76

Report of Independent Registered Public Accounting Firm

Audit Committee

First Security Group, Inc.

Chattanooga, Tennessee

We have audited the accompanying consolidated balance sheets of First Security Group, Inc. (“Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. We also have audited the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Security Group, Inc. as of December 31, 2014 and 2013 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Crowe Horwath LLP

/s/ Crowe Horwath LLP

Franklin, Tennessee

March 12, 2015

77

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

December 31, 2014 and 2013

(in thousands, except share and per share data)	2014		2013
ASSETS
Cash and Due from Banks	$	18,447	$	10,742
Interest Bearing Deposits in Banks	29,582		10,126
Cash and Cash Equivalents	48,029		20,868
Securities Available-for-Sale	95,571		172,830
Securities Held-to-Maturity, at amortized cost (fair value - $128,058 at December 31, 2014 and $132,104 at December 31, 2013)	124,485		132,568
Loans Held for Sale	72,242		220
Loans	663,622		583,097
Less: Allowance for Loan and Lease Losses	8,550		10,500
Net Loans	655,072		572,597
Premises and Equipment, net	28,347		27,888
Bank Owned Life Insurance	29,204		28,346
Intangible Assets, Net	134		330
Other Real Estate Owned	4,511		8,201
Other Assets	12,649		13,726
TOTAL ASSETS	$	1,070,244	$	977,574

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest Bearing Demand	$	159,996		$	144,365
Interest Bearing Demand	111,021			95,559
Savings and Money Market Accounts	258,694			206,125
Certificates of Deposit less than $250 thousand	248,140			303,210
Certificates of Deposit of $250 thousand or more	22,463			32,948
Brokered Deposits	105,299			75,062
Total Deposits	905,613			857,269
Federal Funds Purchased and Securities Sold under Agreements to Repurchase	12,750			12,520
Other Borrowings	56,000			20,000
Other Liabilities	5,901			4,137
Total Liabilities	980,264			893,926
SHAREHOLDERS’ EQUITY
Common Stock – $.01 par value – 150,000,000 shares authorized; 66,826,134 shares issued as of December 31, 2014, 66,602,601 issued as of December 31, 2013	766			764
Paid-In Surplus	197,614			196,536
Accumulated Deficit	(101,625		)	(104,042		)
Accumulated Other Comprehensive Loss	(6,775		)	(9,610		)
Total Shareholders’ Equity	89,980			83,648
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,070,244		$	977,574

(See Accompanying Notes to Consolidated Financial Statements)

78

First Security Group, Inc. and Subsidiary

Consolidated Statements of Operations

Years Ended December 31, 2014, 2013 and 2012

(in thousands, except per share data)	2014			2013			2012
INTEREST INCOME
Loans, including fees	$	31,464		$	26,099		$	31,264
Investment Securities – taxable	3,769			4,366			3,528
Investment Securities – non-taxable	605			1,071			1,006
Other	53			378			512
Total Interest Income	35,891			31,914			36,310
INTEREST EXPENSE
Interest Bearing Demand Deposits	182			259			191
Savings Deposits and Money Market Accounts	676			770			1,045
Certificates of Deposit	2,105			3,891			5,235
Brokered Deposits	1,937			3,554			5,863
Other	90			70			396
Total Interest Expense	4,990			8,544			12,730
NET INTEREST INCOME	30,901			23,370			23,580
(Credit) Provision for Loan and Lease Losses	(1,452		)	(2,735		)	20,866
NET INTEREST INCOME AFTER CREDIT FOR LOAN AND LEASE LOSSES	32,353			26,105			2,714
NONINTEREST INCOME
Service Charges on Deposit Accounts	3,081			3,097			3,032
Mortgage Banking Income	1,278			1,135			974
Gain on Sales of Securities Available-for-Sale	628			322			154
Gain on Sale of Loans Transferred to Held-for-Sale	1,612			—			—
Other	5,659			4,129			3,986
Total Noninterest Income	12,258			8,683			8,146
NONINTEREST EXPENSES
Salaries and Employee Benefits	21,228			22,584			20,446
Expense on Premises and Fixed Assets, net of rental income	5,364			5,644			5,469
Other	15,076			19,532			21,744
Total Noninterest Expenses	41,668			47,760			47,659
INCOME (LOSS) BEFORE INCOME TAX PROVISION	2,943			(12,972		)	(36,799		)
Income Tax Provision	526			477			771
NET INCOME (LOSS)	2,417			(13,449		)	(37,570		)
Preferred Stock Dividends	—			(929		)	(1,650		)
Accretion on Preferred Stock Discount	—			(452		)	(428		)
Effect of Exchange of Preferred Stock to Common Stock	—			26,179			—
NET INCOME AVAILABLE (LOSS ALLOCATED) TO COMMON SHAREHOLDERS	$	2,417		$	11,349		$	(39,648	)
NET INCOME (LOSS) PER COMMON SHARE:
Net Income (Loss) Per Share – Basic	$	0.04		$	0.24		$	(24.58	)
Net Income (Loss) Per Share – Diluted	$	0.04		$	0.24		$	(24.58	)

(See Accompanying Notes to Consolidated Financial Statements)

79

First Security Group, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31, 2014, 2013 and 2012

(in thousands)	2014			2013			2012
Net income (loss)	$	2,417		$	(13,449	)	$	(37,570	)
Other comprehensive income (loss)
Change in securities available-for-sale:
Unrealized holding gains (losses) for the period	1,766			(13,542		)	212
Reclassifications for securities transferred to held-to-maturity	—			8,880			—
Reclassification adjustment for securities gains realized in income	(628		)	(322		)	(154		)
Unrealized gains (losses) on available-for-sale securities	1,138			(4,984		)	58
Change in securities held-to-maturity:
Fair value adjustment for securities transferred from available-for-sale	—			(8,880		)	—
Amortization of fair value for securities held-to-maturity recognized into accumulated other comprehensive income	1,795			937			—
Changes from securities held-for-maturity	1,795			(7,943		)	—
Cash flow hedges:
Net unrealized derivative (losses) gains on cash flow hedges	(98		)	17			(1,255		)
Reclassification adjustment on cash flow hedges	—			—			(67		)
Income tax effect	—			—			1,065
Changes from cash flow hedges	(98		)	17			(257		)
Other comprehensive income (loss), net of tax	2,835			(12,910		)	(199		)
Comprehensive income (loss)	$	5,252		$	(26,359	)	$	(37,769	)

(See Accompanying Notes to Consolidated Financial Statements)

80

First Security Group, Inc. and Subsidiary

Consolidated Statement of Shareholders’ Equity

Years Ended December 31, 2014, 2013 and 2012

				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	—			88	1		(1		)	—			—			—			—			—
Net Loss	—			—	—		—			—			(37,570		)	—			—			(37,570		)
Other Comprehensive Loss	—			—	—		—			—			—			(199		)	—			(199		)
Accretion of Discount Associated with Preferred Stock	428			—	—		—			—			(428		)	—			—			—
Preferred Stock Dividends	—			—	—		—			—			(1,650		)	—			—			(1,650		)
Stock-based Compensation	—			—	—		215			—			—			—			—			215
ESOP Allocation	—			—	—		(3,208		)	—			—			—			3,290			82
Balance - December 31, 2012	$	32,549		1,772	$	115	$	106,531		$	2,006		$	(115,391	)	$	3,300		$	—		$	29,110
Net Loss	—			—	—		—			—			(13,449		)	—			—			(13,449		)
Other Comprehensive Loss	—			—	—		—			—			—			(12,910		)	—			(12,910		)
Accretion of Discount Associated with Preferred Stock	452			—	—		—			—			(452		)	—			—			—
Preferred Stock Dividends	—			—	—		—			—			(929		)	—			—			(929		)
Conversion of Preferred Stock to Common Stock in TARP Exchange	(33,001		)	9,942	99		14,814			(2,006		)	26,179			—			—			6,085
Common Stock Issuance, net of Offering Costs of $5.3 million	—			50,793	508		70,388			—			—			—			—			70,896
Common Stock Issuance associated with the Exercise of Stock Options	—			5	—		14			—			—			—			—			14
Common Stock Issuance associated with the Rights Offering, net of Offering Costs of $764 thousand	—			3,329	33		4,197			—			—			—			—			4,230
Issuance of Restricted Stock and Related Expense, net of forfeitures	—			762	9		(9		)	—			—			—			—			—
Share-based Compensation, net of forfeitures	—			—	—		601			—			—			—			—			601
Balance - December 31, 2013	$	—		66,603	$	764	$	196,536		$	—		$	(104,042	)	$	(9,610	)	$	—		$	83,648
Net Income	—			—	—		—			—			2,417			—			—			2,417
Other Comprehensive Income	—			—	—		—			—			—			2,835			—			2,835
Issuance of Restricted Stock, net of forfeitures	—			223	2		(2		)	—			—			—			—			—
Share-based Compensation, net of forfeitures	—			—	—		1,080			—			—			—			—			1,080
Balance - December 31, 2014	$	—		66,826	$	766	$	197,614		$	—		$	(101,625	)	$	(6,775	)	$	—		$	89,980

(See Accompanying Notes to Consolidated Financial Statements)

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First Security Group, Inc. and Subsidiary

Consolidated Statements of Cash Flow

Years Ended December 31, 2014, 2013 and 2012

(in thousands)	2014			2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	2,417		$	(13,449	)	$	(37,570	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities
(Credit) Provision for Loan and Lease Losses	(1,452		)	(2,735		)	20,866
Amortization, net	1,311			2,605			3,807
Share-Based Compensation	1,080			601			215
ESOP Compensation	—			—			82
Depreciation	1,553			1,746			1,496
Gain on Sales of Loans Originated to be Held-for-Sale	(1,278		)	(1,135		)	(974		)
Gain on Sale of Loans Transferred to Held-for-Sale	(1,612		)	—			—
Gain on Sales of Available-for-Sale Securities	(628		)	(322		)	(154		)
Loss on Sales of Premises and Equipment, net	(38		)	18			16
Gain on Sales of Other Real Estate Owned and Repossessions, net	(449		)	(359		)	(148		)
Write-down of Other Real Estate Owned and Repossessions	733			2,375			5,288
Accretion of Fair Value Adjustment, net	—			(38		)	(40		)
Accretion of Terminated Cash Flow Swaps	—			—			(881		)
Loans Originated to be Held-for-Sale	(23,899		)	(39,489		)	(45,296		)
Sale of Loans Originated to be Held-for-Sale	23,046			44,045			44,875
Changes in Operating Assets and Liabilities
Interest Receivable	295			(118		)	(175		)
Other Assets	(80		)	(1,519		)	4,067
Interest Payable	(219		)	(731		)	(341		)
Other Liabilities	1,938			(3,874		)	(80		)
Net Cash Provided by (Used in) Operating Activities	2,718			(12,379		)	(4,947		)
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in Securities Available-for-Sale
Maturities, Prepayments, and Calls	14,547			54,300			75,449
Sales	66,485			56,971			21,395
Purchases	(3,122		)	(179,709		)	(161,074		)
Activity in Securities Held-to-Maturity
Maturities, Prepayments, and Calls	9,878			2,157
Loan Originations and Principal Collections, net	(227,081		)	(47,457		)	(17,692		)
Proceeds from sale of loans	76,677			22,296			3,954
Proceeds from Sales of Premises and Equipment	665			1,070			—
Proceeds from Sales of Other Real Estate and Repossessions	6,017			8,184			12,968
Additions to Premises and Equipment	(4,140		)	(1,418		)	(2,145		)
Capital Improvements to Other Real Estate and Repossessions	(57		)	—			(165		)
Net Cash Used in Investing Activities	(60,131		)	(83,606		)	(67,310		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits	48,344			(150,797		)	(11,356		)
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase	230			39			(2,039		)
Net Increase (Decrease) of Other Borrowings	36,000			20,000			(58		)
Net Proceeds from Issuance of Common Stock, net of offering costs	—			75,126			—
Proceeds from Exercise of Stock Options	—			14			—
Net Cash Provided by (Used in) Financing Activities	84,574			(55,618		)	(13,453		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	27,161			(151,603		)	(85,710		)
CASH AND CASH EQUIVALENTS – beginning of period	20,868			172,471			258,181
CASH AND CASH EQUIVALENTS – end of period	$	48,029		$	20,868		$	172,471

(See Accompanying Notes to Consolidated Financial Statements)

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(in thousands)	2014		2013		2012
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Loans and leases transferred to OREO and repossessions	$	2,551	$	5,472	$	8,008
Transfers of loans to loans held for sale at fair value	$	140,913	$	—	$	22,296
Financed sales of OREO and repossessions	$	118	$	509	$	2,058
Effect of accrued and unpaid dividends on preferred stock redemption	$	—	$	6,085	$	—
Securities transferred from available-for-sale to held-to-maturity	$	—	$	142,975	$	—
Accrued and deferred cash dividends on preferred stock	$	—	$	929	$	1,650
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest paid	$	5,209	$	9,275	$	13,071
Income taxes paid	$	203	$	—	$	70

(See Accompanying Notes to Consolidated Financial Statements)

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FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

First Security Group, Inc. is a bank holding company organized for the principal purpose of acquiring, developing and managing banks. The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry.

The significant accounting policies and practices followed by the Company are as follows:

BASIS OF CONSOLIDATION—The consolidated financial statements include the accounts of First Security Group, Inc. and its wholly-owned subsidiary, FSGBank, National Association (the Bank) (collectively referred to as the Company in the accompanying notes to the consolidated financial statements). All significant intercompany balances and transactions have been eliminated in consolidation.

NATURE OF OPERATIONS—The Company is headquartered in Chattanooga, Tennessee, and provides banking services through the Bank to the various communities in eastern and middle Tennessee and northern Georgia. The Bank’s commercial banking operations are primarily retail-oriented and aimed at individuals and small to medium-sized local businesses. The Bank provides traditional banking services, which include obtaining demand and time deposits and the making of secured and unsecured consumer and commercial loans, as well as trust and investment management, mortgage banking, financial planning and Internet banking (www.FSGBank.com) services.

CASH AND CASH EQUIVALENTS—For the purpose of presentation in the statements of cash flows, the Company considers all cash and amounts due from depository institutions as well as interest bearing deposits in banks that mature within one year and are carried at cost to be cash equivalents. The Bank is required to maintain average reserve balances with the Federal Reserve Bank of Atlanta.

INTEREST BEARING DEPOSITS IN BANKS—Interest bearing deposits in banks mature within one year and are carried at cost.

SECURITIES—Securities that management does not have the intent or ability to hold to maturity are classified as available-for-sale and recorded at fair value. Unrealized gains and losses are excluded from earnings and reported in other comprehensive income, net of tax. Purchase premiums and discounts are recognized in interest income using methods approximating the interest method over the terms of the securities. Gains and losses on sale of securities are recorded on the trade date and determined using the specific identification method. Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.

The Company reviews securities for impairment on a quarterly basis or more frequently when economic conditions warrant such an evaluation. A security is reviewed for impairment if the fair value is less than its amortized cost basis at the measurement date. The Company determines whether a decline in fair value below the amortized cost is other-than-temporary. The Company determines whether it has the intent to sell the security or whether it is more likely than not that it will not be required to sell the security before the recovery of its amortized cost. If either condition is met, the Company will recognize a full impairment and write the available-for-sale security down to fair value though the Consolidated Income Statement. For securities that the Company does not expect to recover the entire amortized cost and do not meet either of the above conditions, the Company records an other-than-temporary loss for the credit loss portion of the impairment through earnings and the temporary impairment related to all other factors through other comprehensive income.

NONMARKETABLE EQUITY SECURITIES—Nonmarketable equity securities include the Company's investment in the stock of the Federal Home Loan Bank of $3.3 million and $2.3 million at December 31, 2014 and 2013, respectively, and Federal Reserve Bank of $2.4 million and $2.4 million at December 31, 2014 and 2013, respectively. This stock is carried at cost because they have no quoted market value and no ready market exists. The Company also had low income housing tax credits of approximately $1.0 million and $1.5 million at December 31, 2014 and 2013, respectively. These tax credits are amortized using the effective yield method. Also included as of December 31, 2014 and 2013 is approximately an $81 thousand investment in a private financial institution. Dividends received are included in income. The Company also has two joint ventures totaling approximately $94 thousand and $101 thousand at December 31, 2014 and 2013, respectively. All of the nonmarketable equity securities are included in other assets on the Consolidated Balance Sheets.

LOANS—Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.

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The Company also engages in direct lease financing through two wholly owned subsidiaries of the Bank. The net investment in direct financing leases is the sum of all minimum lease payments and estimated residual values, less unearned income. Unearned income is added to interest income over the term of the leases to produce a level yield.

All loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well collateralized and in the process of renewal or collection. If a loan or a portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. At management’s discretion, loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt.

When a loan is placed on nonaccrual status, unpaid interest and fees are reversed against interest income. Interest income on nonaccrual loans, if recognized, is either recorded using the cash basis method of accounting or recognized after the loan is returned to accrual status.

LOANS HELD FOR SALE—The Company maintains loans held-for-sale in connection with three distinct departments: the mortgage department, the government lending department and the TriNet division. The Company's mortgage department primarily originates long-term loans held-for-sale and uses various correspondent relationships to sell the loans on the secondary market. Loans held-for-sale are carried at fair value. Fair value is determined from observable current market prices. Held-for-investment loans that have been transferred to held-for-sale are carried at lower of cost or fair value. The credit component of any write down upon transfer to held-for-sale is reflected in the allowance for loan losses. The mortgage department also originates certain mortgage loans to be retained, which are classified as loans held-for-investment. From time to time, certain of these loans may be marketed and sold in order to manage the Company's interest rate risk position and concentration limits. The government lending department originates SBA and USDA government guaranteed loans with the primary purpose of selling the guaranteed portion in the secondary market. The Company's TriNet division originates construction loans for pre-leased "build to suit" projects and provides interim and long-term financing to professional developers and private investors of commercial real estate with or subject to long-term leases to tenants that are investment grade or have investment grade attributes. The Company classifies all TriNet originations as held-for-investment. From time to time, the Company may evaluate a portion of the originated loans to sell in order to manage the Company's overall interest rate risk and asset-liability sensitivity. The Company transfers the loans to held-for-sale once specific loans are identified and the decision to sell the loan has been made. This is generally represented by the Company's execution of a letter of intent.

LOAN ORIGINATION FEES—Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the lives of the related loans.

INTEREST INCOME ON LOANS—Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.

ALLOWANCE FOR LOAN AND LEASE LOSSES—The allowance for loan and lease losses is the amount the Company considers adequate to absorb probable, incurred losses within the portfolio based on management’s evaluation of the size and risk characteristics of the loan portfolio. The Company’s methodology is based on authoritative accounting guidance and applicable guidance from regulatory agencies.

The allowance is increased by charges to income (provision for loan and lease losses) and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the allowance is based on the Company’s historical 5-year loan loss experience, known and inherent risks in the portfolio, strength of credit risk management systems, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and current economic conditions. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

The allowance for loan and lease losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Company periodically analyzes the commercial loan and lease portfolios in an effort to establish an allowance that it believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, the Company reviews the size, quality and risk of loans and leases in the portfolio. The Company also, on at least a quarterly basis, considers such factors as:

• the Company’s loan loss experience;

• the amount of past due and nonperforming loans;

• specific known risks;

• the status of nonperforming assets;

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• underlying estimated values of collateral securing loans;

• current economic conditions; and

• 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 is prepared by the Company and is presented to the board of directors on a regular basis.

The Company may include an unallocated component to the allowance for inherent risks within the loan portfolio that cannot be quantified through the loss factors or the qualitative factors.

In addition to the allowance, the Company also estimates probable losses related to unfunded commitments, such as letters of credit and binding unfunded loan commitments. The reserve for unfunded commitments is reported on the Consolidated Balance Sheet in other liabilities and the provision associated with changes in the unfunded commitment reserve is reported as a component of the provision for loan and lease losses in the Consolidated Statements of Operations.

The following loan portfolio segments have been identified: (1) Real estate: Residential 1-4 family, (2) Real estate: Commercial, (3) Real estate: Construction, (4) Real estate: Multi-family and farmland, (5) Commercial, (6) Consumer, (7) Leases and (8) Other. We evaluate the risks associated with these segments based upon specific characteristics associated with the loan segments. The risk associated with the Real estate: Construction portfolio is most directly tied to the probability of declines in value of the residential and commercial real estate in our market area and secondarily to the financial capacity of the borrower. The risk associated with the Real estate: Commercial portfolio is most directly tied to the lease rates and occupancy rates for commercial real estate in our market area and secondarily to the financial capacity of the borrower. The other portfolio segments have various risk characteristics, including, but not limited to: the borrower’s cash flow, the value of the underlying collateral, and the capacity of guarantors.

A loan or lease is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate, (2) the loan’s observable market price or (3) the fair value of the collateral if the loan is collateral-dependent. When the fair value of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a specific reserve allocation which is a component of the allowance for loan losses unless the loan is collateral-dependent, in which case the impairment is recorded through a charge-off.

Troubled-debt restructurings (TDRs) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date and/or reductions in the original contractual interest rate. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower. Interest income recognition on impaired loans is dependent upon nonaccrual status, TDR designation, and loan type as discussed above.

The Company monitors concentrations of credit risk as defined by applicable accounting and regulatory guidelines.

SERVICING RIGHTS—When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights at December 31, 2014 totaled approximately $493 thousand and were included with other assets.

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to their carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction in the allowance may be recorded as an increase to income.

Servicing fee income, which is reported on the statement of operations as gain on sale of loans, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

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PREMISES AND EQUIPMENT—Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Expenditures for repairs, maintenance and minor improvements are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and related accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations.

Depreciation is provided using the straight-line method over the estimated lives of the depreciable assets. Buildings are depreciated over a period of forty years. Land and building improvements are depreciated over a ten years period. Leasehold improvements are depreciated over the lesser of the term of the related lease or the estimated useful life of the improvement. Furniture, fixtures and equipment and autos are depreciated over an estimated life of three to seven years. Deferred income taxes are provided for differences in the computation of depreciation for book and tax purposes.

OTHER INTANGIBLE ASSETS—Other intangible assets represent identified intangible assets including premiums paid for acquisitions of core deposits (core deposit intangibles), which are amortized over a 10 year period.

Management evaluates whether events or circumstances have occurred that indicate the remaining useful life or carrying value of amortizing intangibles should be revised. The Company tests intangible assets for impairment at year-end or earlier if events and circumstances warrant. For additional information, refer to Note 9, “Other Intangible Assets,” to the consolidated financial statements.

OTHER REAL ESTATE OWNED AND REPOSSESSIONS—Foreclosed properties are comprised principally of residential and commercial real estate properties obtained in partial or total satisfaction of nonperforming loans. Repossessions are primarily comprised of heavy equipment and other machinery, obtained in partial or total satisfaction of loans or leases. Foreclosed properties and repossessions are recorded at their estimated fair value less anticipated selling costs based upon the property’s or item’s appraised value at the date of transfer, with any difference between the fair value of the property and the carrying value of the loan charged to the allowance for loan and lease losses. Subsequent changes in values are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Gains or losses not previously recognized resulting from the sale of foreclosed properties or other repossessed items are recognized on the date of sale. Ongoing operational expenses after acquisition are expensed as incurred and included in other expenses. At December 31, 2014 and 2013, the Company had $4.5 million and $8.2 million of other real estate owned, respectively, and $8 thousand and $12 thousand of other repossessed items, respectively. Repossessed items are included in other assets in the consolidated balance sheet. Loans and fixed assets transferred to other real estate owned at December 31, 2014 and 2013 were $2.6 million and $5.2 million, respectively. At December 31, 2014, 2013 and 2012, the Company had zero, zero and $165 thousand of capitalized expenditures, respectively, and direct write-downs of $3.6 million, $4.8 million and $5.3 million, respectively. For the years ended December 31, 2014, 2013 and 2012 the Company had sales of $4.8 million, $8.7 million and $15.0 million, respectively.

INCOME TAXES—The consolidated financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes and for purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes in the period in which the change was enacted. Additionally, the Company does not recognize an income tax expense or benefit on permanent differences, such as tax-exempt income and tax credits. Tax years 2011 through 2014 remain open and subject to examination by taxing authorities for the Company’s federal tax returns. Tax years 2011 through 2014 remain open and subject to examination by taxing authorities for the Company’s Tennessee tax returns.

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In determining whether a valuation allowance is necessary, the Company considers the level of taxable income in prior years to the extent that carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable income and tax planning strategies that may be utilized.

In computing the income tax provision, the Company evaluates the technical merits of its income tax positions based on current legislative, judicial and regulatory guidance. The Company classifies interest and penalties related to its tax positions as a component of income tax expense. For additional information, refer to Note 14 “Income Taxes.”

FINANCIAL INSTRUMENTS—In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

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ADVERTISING COSTS—Advertising costs are charged to expense when incurred. The Company expensed $556 thousand, $311 thousand and $297 thousand in 2014, 2013 and 2012, respectively.

SHARE-BASED COMPENSATION—The Company accounts for stock-based compensation under the fair value recognition provision whereby fair value of the award at the date of grant is expensed over the vesting period of the award. The required disclosures related to the Company’s stock-based employee compensation plans are included in Note 16 “Share-Based Compensation,” to the consolidated financial statements.

RETIREMENT PLANS—Benefit expense associated with retirement plans includes the net periodic costs associated with supplemental retirement plans as well as contributions under the 401(k) and Employee Stock Ownership Plan (“ESOP”).

ESTIMATES AND UNCERTAINTIES—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

PER SHARE DATA—Basic income (loss) per common share is computed by dividing net income available (loss allocated) to common shareholders by the weighted average number of common shares outstanding during each period. Diluted income (loss) per common share is computed by dividing net income available (loss allocated) to common shareholders by the weighted average number of common shares outstanding during each period, plus common share equivalents calculated for stock options and restricted stock outstanding using the treasury stock method. In periods of a net loss, diluted EPS is calculated in the same manner as basic EPS.

The Company has issued certain restricted stock awards, which are unvested share-based payment awards that contain non-forfeitable rights to dividends. These restricted shares are considered participating securities. Accordingly, the Company calculates 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.

Net income available (loss allocated) to common shareholders represents net income (loss) after preferred stock dividends, accretion of the discount on preferred stock issuances, and dividends and allocation of undistributed earnings to the participating securities.

COMPREHENSIVE INCOME (LOSS)—Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and cash flow derivatives, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. For additional information, refer to Note 3 “Other Comprehensive Income (Loss)”.

SEGMENT REPORTING—The Company identifies reportable segments based on the authoritative accounting guidance. Reportable segments are determined on the basis of discrete business units and their financial information to the extent such units are reviewed by an entity’s chief decision maker (which can be an individual or group of management persons). The statement permits aggregation or combination of segments that have similar characteristics. The operations of First Security Group, Inc. and the Bank have similar economic characteristics and are similar in each of the following areas: the nature of products and services, the nature of production processes, the type of customers, the methods of distribution, and the nature of their regulatory environment. Accordingly, the Company’s consolidated financial statements reflect the presentation of segment information on an aggregated basis in one reportable segment.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES—The Company records all derivative financial instruments at fair value in the financial statements. It is the policy of the Company to enter into various derivatives both as a risk management tool and in a dealer capacity to facilitate client transactions. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks. As of December 31, 2014, the Company has not entered into transactions in a dealer capacity.

When any derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge) or (2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective. Methodologies related to hedge effectiveness and ineffectiveness include (1) statistical regression analysis of changes in the cash flows of the actual derivative and a perfectly

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effective hypothetical derivative, (2) statistical regression analysis of changes in fair values of the actual derivative and the hedged item and (3) comparison of the critical terms of the hedged item and the hedging derivative. Changes in fair value of a derivative that is highly effective and that has been designated and qualifies as a fair value hedge are recorded in current period earnings, along with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Changes in the fair value of a derivative that is highly effective and that has been designed and qualifies as a cash flow hedge are initially recorded in other comprehensive income and reclassified to earnings in conjunction with the recognition of the earnings impacts of the hedged item; any ineffective portion is recorded in current period earnings. Designated hedge transactions are reviewed at least quarterly for ongoing effectiveness. Transactions that are no longer deemed to be effective are removed from hedge accounting classification and the recorded impacts of the hedge are recognized in current period income or expense in conjunction with the recognition of the income or expense on the originally hedged item.

The Company’s derivatives are based on underlying risks, primarily interest rates. The Company has previously utilized cash flow swaps to reduce the risks associated with interest rates. Swaps are contracts in which a series of net cash flows, based on a specific notional amount that is related to an underlying risk, are exchanged over a prescribed period.

When a cash flow swap is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Derivatives expose the Company to credit risk. If the counterparty fails to perform, the credit risk is equal to the fair value gain of the derivative. The credit exposure for swaps is the replacement cost of contracts that have become favorable. Credit risk is minimized by entering into transactions with high quality counterparties that are initially approved by the Board of Directors and reviewed periodically by the Asset Liability Committee. It is the Company’s policy to require that all derivatives be governed by an International Swap and Derivatives Associations Master Agreement (ISDA). Bilateral collateral agreements may also be required.

FAIR VALUE—The Company determines fair value based on applicable accounting guidance. The guidance establishes a fair value hierarchy, which requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure the fair value, which are provided in Note 19.

RECLASSIFICATIONS—Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. Reclassifications had no effect on prior year net income or shareholders' equity.

ACCOUNTING POLICIES RECENTLY ADOPTED—In July 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This update amends existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from dis-allowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This update is a joint project with the International Accounting Standards Board initiated to clarify the principles for recognizing revenue and to develop a common revenue standard that is meant to remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, provide more useful information to users of financial statements and simplify the preparation of financial statements. The guidance in this update supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition" and most industry-specific guidance throughout the Industry Topics of Codification. This update is effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact, if any, to the consolidated financial statements.

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NOTE 2 – REGULATORY MATTERS

FSGBank, N.A

On March 10, 2014, the Office of the Comptroller of the Currency (the "OCC") lifted the Order (defined below) and issued non-objections on the Bank's capital and strategic plans. On March 11, 2014, the Company filed a Current Report on Form 8-K that provides additional details relating to the lifting of the Order and the Bank's improved condition. The order had been in place since April 28, 2010, when, 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 ("Consent Order" or the "Order"). 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. As of December 31, 2014, the Bank is considered well-capitalized for regulatory capital purposes.

First Security Group, Inc.

On October 2, 2014, the Federal Reserve Bank of Atlanta (the "Federal Reserve"), the Company's primary regulator, terminated the Company's Written Agreement (the "Agreement") that had been in place since September 7, 2010. On October 7, 2014, the Company filed a Current Report on Form 8-K that provides additional details relating to the termination of the Agreement. The Agreement was designed to enhance the Company’s ability to act as a source of strength to the Company's wholly owned subsidiary, FSGBank, including, but not limited to, taking steps to ensure that the Bank complied with all material aspects of the Order issued by the OCC. A copy of the Agreement was attached as Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on September 14, 2010.

While the Agreement has been terminated, the Company expects to continue to seek approval from the Federal Reserve prior to paying any dividends on our capital stock or incurring any additional indebtedness.

NOTE 3 – OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) for the Company consists of changes in net unrealized gains and losses on investment securities available-for-sale, securities held-to-maturity and derivatives.  The following tables present a summary of the changes in accumulated other comprehensive income balances for the applicable periods.

Changes in Other Comprehensive Income from December 31, 2013 to December 31, 2014
	Unrealized Loss on Derivatives			Unrealized Loss on Available-for-Sale Securities			Unrealized Loss on Held-to-Maturity Securities			Accumulated Other Comprehensive Loss
	(in thousands)
Beginning balance, December 31, 2013	$	(37	)	$	(1,630	)	$	(7,943	)	$	(9,610	)
Other comprehensive (loss) gain before reclassifications	(98		)	1,766			—			1,668
Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income	—			—			1,795			1,795
Reclassification adjustment for securities gain realized in income	—			(628		)	—			(628		)
Net current period other comprehensive (loss) income	(98		)	1,138			1,795			2,835
Ending balance, December 31, 2014	$	(135	)	$	(492	)	$	(6,148	)	$	(6,775	)

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Changes in Other Comprehensive Income from December 31, 2012 to December 31, 2013
	Unrealized Gain (Loss) on Derivatives			Unrealized Gain (Loss) on Available-for-Sale Securities			Unrealized Gain (Loss) on Held-to-Maturity Securities			Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Beginning balance, December 31, 2012	$	(54	)	$	3,354		$	—		$	3,300
Other comprehensive gain (loss) before reclassifications	17			(13,542		)	—			(13,525		)
Reclassifications for securities transferred to held-to-maturity	—			8,880			(8,880		)	—
Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income	—			—			937			937
Reclassification adjustment for securities gain realized in income	—			(322		)	—			(322		)
Net current period other comprehensive income (loss)	17			(4,984		)	(7,943		)	(12,910		)
Ending balance, December 31, 2013	$	(37	)	$	(1,630	)	$	(7,943	)	$	(9,610	)

Changes in Other Comprehensive Income from December 31, 2011 to December 31, 2012
	Unrealized Gain (Loss) on Derivatives			Unrealized Gain (Loss) on Available-for-Sale Securities			Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Beginning balance, December 31, 2011	$	203		$	3,296		$	3,499
Other comprehensive (loss) income before reclassification	(190		)	212			22
Amounts reclassified from accumulated other comprehensive income	(67		)	(154		)	(221		)
Net current period other comprehensive (loss) income	(257		)	58			(199		)
Ending balance, December 31, 2012	$	(54	)	$	3,354		$	3,300

For the years ended December 31, 2014 and 2013, no amounts were reclassified from unrealized gain (loss) on derivatives into interest income due to gains on derivatives. For the year ended December 31, 2012, $67 thousand was reclassified into interest income due to gains on derivatives. For the years ended December 31, 2014, 2013 and 2012, there were $628 thousand, $322 thousand and $154 thousand, respectively, of gains reclassified from unrealized gains or losses on available-for-sale securities to earnings as a result of sales during the period.

During the year ended December 31, 2013, approximately $143 million of available-for-sale securities were transferred to the held-to-maturity classification. As of the transfer date, the securities held an unrealized loss of approximately $8.9 million. The fair value as of the transfer date became the new amortized cost basis with the unrealized loss, along with any remaining purchase discount or premium, being reclassified into accumulated other comprehensive income are amortized over the remaining life of the security. No gain or loss was recognized at the time of transfer. For the years ended December 31, 2014 and 2013, approximately $1.8 million and $937 thousand, respectively, of the unrealized loss was reclassified from other comprehensive income.

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NOTE 4 – EARNINGS (LOSS) PER COMMON 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 non-forfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities. Accordingly, the Company calculated net income available (loss allocated) 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 common share is as follows:

	2014			2013			2012
	(in thousands, except per share amounts)
Numerator:
Net income (loss)	$	2,417		$	(13,449	)	$	(37,570	)
Preferred stock dividends	—			(929		)	(1,650		)
Accretion of preferred stock discount	—			(452		)	(428		)
Dividends and undistributed earnings allocated on participating securities	(40		)	(221		)	—
Effect of exchange of preferred stock to common stock	—			26,179			—
Net income available (loss allocated) to common shareholders	$	2,377		$	11,128		$	(39,648	)
Denominator:
Weighted average common shares outstanding including participating securities	66,950			47,418			1,730
Less: Participating securities	1,139			923			117
Weighted average basic common shares outstanding	65,811			46,495			1,613
Effect of diluted securities:
Equivalent shares issuable upon exercise of stock options and restricted stock awards	4			9			—
Weighted average diluted common shares outstanding	65,815			46,504			1,613
Net income (loss) per common share:
Basic	$	0.04		$	0.24		$	(24.58	)
Diluted	$	0.04		$	0.24		$	(24.58	)

As of December 31, 2014 and 2013, 4 thousand and 9 thousand shares, respectively, were included in the computation of diluted earnings per share. Due to the net loss allocated to common shareholders for the year ended December 31, 2012, all stock options, stock warrants, and restricted stock grants were considered anti-dilutive and are not included in the computation of diluted earnings per common share. As of December 31, 2014 and December 31, 2013 a total of 3.5 million and 3.2 million stock options and restricted stock grants were considered anti-dilutive, respectively.

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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.

Available-for-Sale	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
December 31, 2014
Debt securities—
Mortgage-backed—residential	$	82,686	$	790	$	350	$	83,126
Municipals	4,355		20		12		4,363
Other	8,048		39		5		8,082
Total	$	95,089	849		$	367	$	95,571
December 31, 2013
Debt securities—
Federal agencies	$	4,078	$	78	$	—	$	4,156
Mortgage-backed—residential	116,314		1,428		1,763		115,979
Municipals	31,748		473		500		31,721
Other	21,350		—		376		20,974
Total	$	173,490	$	1,979	$	2,639	$	172,830

The following table presents the amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses.

Held-to-maturity	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(in thousands)
December 31, 2014
Debt securities—
Federal agencies	$	60,537	$	1,191	$	278	$	61,450
Mortgage-backed—residential	36,798		809		13		37,594
Municipals	27,150		1,878		14		29,014
Total	$	124,485	$	3,878	$	305	$	128,058
December 31, 2013
Debt securities—
Federal agencies	$	63,684	$	206	$	791	$	63,099
Mortgage-backed—residential	41,801		60		302		41,559
Municipals	27,083		390		27		27,446
Total	$	132,568	$	656	$	1,120	$	132,104

During the year ended December 31, 2014, the Company sold three federal agency securities resulting in proceeds of $4.0 million, gross gains of $38 thousand and no gross losses; twenty-three mortgage backed securities resulting in proceeds of $34.4 million, gross gains of $618 thousand and gross losses of $269 thousand; fifty-eight tax-exempt municipal securities resulting in proceeds of $23.1 million, gross gains of $484 thousand and gross losses of $253 thousand; and one corporate bond resulting in proceeds of $2.0 million, gross gains of $10 thousand and no gross losses. The Company also sold $2.9 million in certificates of deposit resulting in gross gains of $1 thousand and gross losses of $1 thousand.

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During the year ended December 31, 2013, the Company sold one federal agency security resulting in proceeds of $1.0 million and gross gains of less than $1 thousand; sixty-five mortgage-backed securities resulting in proceeds of $54.8 million, gross gains of $618 thousand and gross losses of $286 thousand; and two municipal securities resulting in proceeds of $1.1 million, generating a gross gain of zero and gross losses of $11 thousand.

During the year ended December 31, 2012, the Company sold eight mortgage backed securities and twenty-two municipal securities resulting in proceeds of $21.4 million, generating gross gains of $256 thousand and gross losses of $102 thousand.

At December 31, 2014 and December 31, 2013, securities with a carrying value of $35.5 million and $34.6 million, respectively, were pledged to secure public deposits. At December 31, 2014 and December 31, 2013, the carrying amount of securities pledged to secure repurchase agreements were $16.5 million and $13.8 million, respectively. At December 31, 2014 and December 31, 2013, securities of $5.0 million and $6.8 million, respectively, were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions. At December 31, 2014 and December 31, 2013, the carrying amount of securities pledged to secure lines of credit with the FHLB totaled $96.0 million and $52.3 million, respectively. At December 31, 2014, pledged and unpledged available-for-sale securities totaled $63.6 million and $32.0 million, respectively, and pledged and unpledged held-to-maturity securities totaled $89.4 million and $35.1 million, respectively.

Maturity of Securities

The following table presents the amortized cost and fair value of debt securities by contractual maturity at December 31, 2014.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Within 1 year	$	1,141	$	1,144	$	—	$	—
Over 1 year through 5 years	2,469		2,464		19,130		19,497
5 years to 10 years	8,264		8,299		50,078		51,549
Over 10 years	529		538		18,479		19,418
	12,403		12,445		87,687		90,464
Mortgage-backed residential securities	82,686		83,126		36,798		37,594
Total	$	95,089	$	95,571	$	124,485	$	128,058

Impairment Analysis

The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses and the gross unrecognized losses and fair value of the Company's held-to-maturity investments 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 December 31, 2014 and December 31, 2013.

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	Less than 12 months				12 months or greater				Totals
Available-for-Sale	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
December 31, 2014
Mortgage-backed—residential	$	4,553	$	29	$	34,715	$	321	$	39,268	$	350
Municipals	—		—		625		12		625		12
Other	—		—		2,995		5		2,995		5
Totals	$	4,553	$	29	$	38,335	$	338	$	42,888	$	367
December 31, 2013
Mortgage-backed—residential	$	77,451	$	1,763	$	—	$	—	$	77,451	$	1,763
Municipals	11,652		500		—		—		11,652		500
Other	20,918		371		56		5		20,974		376
Totals	$	110,021	$	2,634	$	56	$	5	$	110,077	$	2,639

	Less than 12 months				12 months or greater				Totals
Held-To-Maturity	Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses		Fair Value		Unrecognized Losses
	(in thousands)
December 31, 2014
Federal agencies	$	—	$	—	$	15,102	$	278	$	15,102	$	278
Mortgage-backed—residential	—		—		8,022		13		8,022		13
Municipals	565		14		—		—		565		14
Totals	$	565	$	14	$	23,124	$	291	$	23,689	$	305
December 31, 2013
Federal agencies	$	40,149	$	791	$	—	$	—	$	40,149	$	791
Mortgage-backed—residential	30,793		302		—		—		30,793		302
Municipals	1,739		27		—		—		1,739		27
Totals	$	72,681	$	1,120	$	—	$	—	$	72,681	$	1,120

As of December 31, 2014, the Company performed an impairment assessment of the available-for-sale securities and the held-to-maturity portfolio that had unrecognized losses 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 available-for-sale 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. Losses related to held-to-maturity securities are not recorded, as these securities are carried at their amortized cost. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual available-for-sale or held-to-maturity 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.

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.

95

As of December 31, 2014, gross unrealized losses in the Company’s available-for-sale portfolio totaled $367 thousand, compared to $2.6 million as of December 31, 2013. As of December 31, 2014, gross unrecognized losses in the Company's held-to-maturity portfolio totaled $305 thousand compared to $1.1 million as of December 31, 2013. As of December 31, 2014, available-for-sale securities with unrealized losses consisted of mortgage-backed securities (sixteen securities) and municipals (one security) and held-to-maturity securities with unrecognized losses consisted of mortgage-backed securities (fourteen securities), municipals (sixty-two securities) and federal agencies (thirty-four securities). These unrealized losses are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. Between December 31, 2013 and December 31, 2014, the rate on the 10-year U.S. Treasury decreased from approximately 3.04% to 2.17%. As this represented a substantive decrease in interest rates, the market valuation of the Company's securities adjusted accordingly. The unrealized loss in other available-for-sale securities relates to one corporate note. The unrealized loss in the corporate note is primarily due to the changes in interest rates subsequent to purchase. The Company does not intend to sell the available-for-sale investments with unrealized losses and it is not more-likely-than-not that the Company will be required to sell the available-for-sale investments before recovery of their amortized cost basis, which may be maturity. Based on results of the Company’s impairment assessment, the unrealized losses related to the available-for-sale securities and the unrecognized losses related to the held-to-maturity securities at December 31, 2014 are considered temporary.

On December 10, 2013, the Federal Reserve and other regulators jointly issued rules implementing requirements of a new Section 13 to the Bank Holding Company Act, commonly referred to as the "Volcker Rule." The Company continues to monitor and review applicable regulatory guidance on the implementation of the Volcker Rule. The Federal Reserve Board granted an extension for conformance until July 21, 2017 and announced that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interest in and sponsorship of certain collateralized loan obligations ("CLOs") covered by the Volcker Rule.

As of December 31, 2014, the Company has identified approximately $11.2 million of CLOs within its investment security portfolio that may be impacted by the Volcker Rule. If these securities are deemed to be prohibited bank investments, the Company would have to sell the securities prior to the expected compliance date of July 21, 2017. At this time, the Company continues to evaluate the additional regulatory guidance on the subject as well as the specific terms of the CLOs in the Company's portfolio to determine whether such CLOs will remain permitted investments. The unrealized loss as of December 31, 2014 for the Company's CLOs totaled $59 thousand.

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NOTE 6 – LOANS HELD FOR SALE

The Company maintains loans held-for-sale in connection with three distinct departments: the mortgage department, the government lending department and the TriNet division. The Company's mortgage department primarily originates long-term loans held-for-sale and uses various correspondent relationships to sell the loans on the secondary market. The mortgage department also originates certain mortgage loans to be retained, which are classified as loans held-for-investment. From time to time, certain of these loans may be marketed and sold in order to manage the Company's interest rate risk position and concentration limits. The government lending department originates SBA and USDA government guaranteed loans with the primary purpose of selling the guaranteed portion in the secondary market. The Company's TriNet division originates construction loans for pre-leased "build to suit" projects and provides interim and long-term financing to professional developers and private investors of commercial real estate with or subject to long-term leases to tenants that are investment grade or have investment grade attributes. The Company classifies all TriNet originations as held-for-investment. From time to time, the Company may evaluate a portion of the originated loans to sell in order to manage the Company's overall interest rate risk and asset-liability sensitivity. The Company transfers the loans to held-for-sale once specific loans are identified and the decision to sell the loan has been made. This is generally represented by the Company's execution of a letter of intent.

During the first quarter of 2014, the Company identified a group of commercial real estate loans to be sold to third parties from the TriNet division. This group of loans was initially recorded in the held-for-investment loan portfolio with a balance of $33.7 million. These loans were transferred to loans held-for-sale at the lower of cost or market value at a value of $33.6 million, which was net of an allowance of approximately $100 thousand. During the third quarter of 2014, the Company identified additional commercial real estate loans from the TriNet division to sell. This group of loans was initially recorded in the held-for-investment loan portfolio with a balance of $45.7 million. These loans were transferred to loans held-for-sale at the lower of cost or market value at a value of $45.6 million, which was net of an allowance of approximately $148 thousand. All of the TriNet commercial real estate loans identified in the first quarter of 2014 and a portion of the loans identified in the third quarter of 2014 have sold to third parties. This generated a gain on the sale of loans held-for-sale of approximately $848 thousand. The remaining balance of TriNet commercial real estate loans classified as held-for-sale at December 31, 2014 was $69.3 million and they are expected to sell at a gain in the first quarter of 2015.

During the fourth quarter, the Company participated a group of TriNet commercial real estate loans in the amount of $28 million to another financial institution. As part of the agreement, the Company retains the servicing of the loans. The Company recognized approximately $320 thousand in servicing income for the year ended December 31, 2014.

Loans held-for-sale as of December 31, 2014 included $603 thousand of loans originated by the Company's government lending department. This amount represents the portion of SBA loans the Company intends to sell to third parties. Sales of SBA loans have generated gains on the sale of loans held-for-sale of $246 thousand for the year ended December 31, 2014. The SBA loans held-for-sale are expected to sell in the first quarter of 2015. The government lending department also generates income through the servicing of SBA and USDA government loans. Servicing income for the year ended December 31, 2014 was approximately $42 thousand.

Residential loans held-for-sale by the Company's mortgage department totaled $2.3 million and $220 thousand at December 31, 2014 and 2013, respectively. During the third quarter of 2014, the Company identified a group of residential 1-4 family loans to be sold to a third party. These loans were transferred from the held-for-investment portfolio at approximately $6.9 million, which was lower of cost or market value. These loans sold during the third quarter of 2014, resulting in a gain of approximately $156 thousand.

Loans held-for-sale by type are summarized as follows:

	As of December 31,
	2014		2013
Loans secured by real estate—	(in thousands)
Residential 1-4 family originated to be held-for-sale	$	2,298	$	220
Commercial	69,662		—
Total Real Estate	71,960		220
Commercial loans	282		—
Total loans held for sale	$	72,242	$	220

All loans held-for-sale at December 31, 2014 and 2013 were rated as pass and no loans were past-due or classified as non-accrual.

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NOTE 7 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans by type are summarized in the following table.

	As of December 31,
	2014			2013
Loans secured by real estate—	(in thousands)
Residential 1-4 family	$	181,655		$	181,988
Commercial	314,843			261,935
Construction	47,840			39,936
Multi-family and farmland	18,108			17,663
	562,446			501,522
Commercial loans	73,985			55,337
Consumer installment loans	22,539			21,103
Other	4,652			5,135
Total loans	663,622			583,097
Allowance for loan and lease losses	(8,550		)	(10,500		)
Net loans	$	655,072		$	572,597

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 years ended December 31, 2014, December 31, 2013 and December 31, 2012. The provisions for loan and lease losses in the table below do not include the Company’s provision accrual for unfunded commitments of $24 thousand as of December 31, 2014, 2013 and 2012. The reserve for unfunded commitments is included in other liabilities in the consolidated balance sheets and totaled $306 thousand and $282 thousand at December 31, 2014 and December 31, 2013, respectively.

Allowance for Loan and Lease Losses

For the Year Ended December 31, 2014

	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)
Beginning balance, December 31, 2013	$	4,063		$	3,299		$	899		$	916		$	970		$	342		$	—		$	11		$	—	$	10,500
Charge-offs	(504		)	(749		)	(228		)	—			(32		)	(597		)	(29		)	—			—		(2,139		)
Recoveries	240			577			136			16			516			345			106			2			—		1,938
(Credit) Provision	(1,182		)	35			(91		)	(218		)	(659		)	598			(77		)	(7		)	149		(1,452		)
Allowance for loans transfered to held-for-sale	—			(297		)	—			—			—			—			—			—			—		(297		)
Ending balance, December 31, 2014	$	2,617		$	2,865		$	716		$	714		$	795		$	688		$	—		$	6		$	149	$	8,550

98

Allowance for Loan and Lease Losses

For the Year EndedDecember 31, 2013

	Real estate: Residential 1-4 family			Real estate: Commercial			Real estate: Construction			Real estate: Multi-family and farmland			Commercial			Consumer			Leases			Other			Total
	(in thousands)
Beginning balance, December 31, 2012	$	6,207		$	3,736		$	667		$	741		$	2,103		$	272		$	47		$	27		$	13,800
Charge-offs	(1,458		)	(545		)	(503		)	(36		)	(37		)	(585		)	(29		)	—			(3,193		)
Recoveries	312			820			496			19			470			355			152			4			2,628
(Credit) Provision	(998		)	(712		)	239			192			(1,566		)	300			(170		)	(20		)	(2,735		)
Ending balance, December 31, 2013	$	4,063		$	3,299		$	899		$	916		$	970		$	342		$	—		$	11		$	10,500

Allowance for Loan and Lease Losses

For the Year EndedDecember 31, 2012

	Real estate: Residential 1-4 family			Real estate: Commercial			Real estate: Construction			Real estate: Multi-family and farmland			Commercial			Consumer			Leases			Other			Total
	(in thousands)
Beginning balance, December 31, 2011	$	6,368		$	6,227		$	1,485		$	728		$	3,649		$	405		$	718		$	20		$	19,600
Charge-offs	(8,153		)	(8,316		)	(6,897		)	(2,511		)	(3,095		)	(473		)	(894		)	(3		)	(30,342		)
Recoveries	229			366			1,013			12			406			654			988			8			3,676
Provision (Credit)	7,763			5,459			5,066			2,512			1,143			(314		)	(765		)	2			20,866
Ending balance, December 31, 2012	$	6,207		$	3,736		$	667		$	741		$	2,103		$	272		$	47		$	27		$	13,800

The following table presents an analysis of the end of period balance of the allowance for loan and lease losses as of December 31, 2014.

As of December 31, 2014

	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		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(in thousands)
Individually evaluated	$	107	$	—	$	956	$	—	$	—	$	—	$	—	$	—	$	1,063	$	—
Collectively evaluated	181,548		2,617		313,887		2,865		47,840		716		18,108		714		561,383		6,912
Total evaluated	$	181,655	$	2,617	$	314,843	$	2,865	$	47,840	$	716	$	18,108	$	714	$	562,446	$	6,912

99

	Commercial				Consumer				Other				Unallocated				Grand Total
(continued from above)	Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(in thousands)
Individually evaluated	$	218	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1,281	$	—
Collectively evaluated	73,767		795		22,539		688		4,652		6		—		149		662,341		8,550
Total evaluated	$	73,985	$	795	$	22,539	$	688	$	4,652	$	6	$	—	$	149	$	663,622	$	8,550

The following table presents an analysis of the end of period balance of the allowance for loan and lease losses as of December 31, 2013.

As of December 31, 2013

	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		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(in thousands)
Individually evaluated	$	1,328	$	—	$	1,912	$	450	$	—	$	—	$	—	$	—	$	3,240	$	450
Collectively evaluated	180,660		4,063		260,023		2,849		39,936		899		17,663		916		498,282		8,727
Total evaluated	$	181,988	$	4,063	$	261,935	$	3,299	$	39,936	$	899	$	17,663	$	916	$	501,522	$	9,177

	Commercial				Consumer				Leases				Other				Grand Total
(continued from above)	Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(in thousands)
Individually evaluated	$	320	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	3,560	$	450
Collectively evaluated	55,017		970		21,103		342		—		—		5,135		11		579,537		10,050
Total evaluated	$	55,337	$	970	$	21,103	$	342	$	—	$	—	$	5,135	$	11	$	583,097	$	10,500

As of December 31, 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		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(in thousands)
Individually evaluated	$	457	$	—	$	727	$	—	$	1,783	$	—	$	—	$	—	$	2,967	$	—
Collectively evaluated	187,734		6,207		220,928		3,736		31,624		667		17,051		741		457,337		11,351
Total evaluated	$	188,191	$	6,207	$	221,655	$	3,736	$	33,407	$	667	$	17,051	$	741	$	460,304	$	11,351

100

	Commercial				Consumer				Leases				Other				Grand Total
(continued from above)	Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance		Carrying Value		Associated Allowance
	(in thousands)
Individually evaluated	$	2,077	$	50	$	—	$	—	$	392	$	—	$	—	$	—	$	5,436	$	50
Collectively evaluated	59,321		2,053		13,387		272		176		47		5,473		27		535,694		13,750
Total evaluated	$	61,398	$	2,103	$	13,387	$	272	$	568	$	47	$	5,473	$	27	$	541,130	$	13,800

The Company utilizes a risk rating system to evaluate the credit risk of its loan portfolio. The Company classifies loans as: pass, special mention, substandard/non-impaired, substandard/impaired, doubtful or loss. The following describes the Company's classifications and the various risk indicators associated with each rating.

A pass rating is assigned to those loans that are performing as contractually agreed and do not exhibit the characteristics of the criticized and classified risk ratings as defined below. Pass loan pools do not include the unfunded portions of binding commitments to lend, standby letters of credit, deposit secured loans or mortgage loans originated with commitments to sell in the secondary market. Loans secured by segregated deposits held by FSGBank are not required to have an allowance reserve, nor are originated held-for-sale mortgage loans pending sale in the secondary market.

A special mention loan risk rating is considered criticized but is not considered as severe as a classified loan risk rating. Special mention loans contain one or more potential weakness(es), which if not corrected, could result in an unacceptable increase in credit risk at some future date. These loans may be characterized by the following risks and/or trends:

Loans to Businesses:

• Downward trend in sales, profit levels and margins

• Impaired working capital position compared to industry

• Cash flow strained in order to meet debt repayment schedule

• Technical defaults due to noncompliance with financial covenants

• Recurring trade payable slowness

• High leverage compared to industry average with shrinking equity cushion

• Questionable abilities of management

• Weak industry conditions

• Inadequate or outdated financial statements

Loans to Businesses or Individuals:

• Loan delinquencies and overdrafts may occur

• Original source of repayment questionable

• Documentation deficiencies may not be easily correctable

• Loan may need to be restructured

• Collateral or guarantor offers adequate protection

• Unsecured debt to tangible net worth is excessive

A substandard loan risk rating is characterized as having specifically identified weaknesses and deficiencies typically resulting from severe adverse trends of a financial, economic, or managerial nature, and may warrant non-accrual status.

The Company segregates substandard loans into two classifications based on the Company’s allowance methodology for impaired loans. The Company defines a substandard/impaired loan as a substandard loan relationship in excess of $500 thousand that is individually reviewed. Substandard loans have a greater likelihood of loss and may require a protracted work-out plan. In addition to the factors listed for special mention loans, substandard loans may be characterized by the following risks and/or trends:

Loans to Businesses:

• Sustained losses that have severely eroded equity and cash flows

• Concentration in illiquid assets

• Serious management problems or internal fraud

• Chronic trade payable slowness; may be placed on COD or collection by trade creditor

• Inability to access other funding sources

• Financial statements with adverse opinion or disclaimer; may be received late

• Insufficient documented cash flows to meet contractual debt service requirements

101

Loans to Businesses or Individuals:

• Chronic or severe delinquency or has met the retail classification standards which is generally past dues greater than 90 days

• Frequent overdrafts

• Likelihood of bankruptcy exists

• Serious documentation deficiencies

• Reliance on secondary sources of repayment which are presently considered adequate

• Demand letter sent

• Litigation may have been filed against the borrower

Loans with a risk rating of doubtful are individually analyzed to determine the Company's best estimate of the loss based on the most recent assessment of all available sources of repayment. Doubtful loans are considered impaired and placed on nonaccrual. For doubtful loans, the collection or liquidation in full of principal and/or interest is highly questionable or improbable. The Company estimates the specific potential loss based upon an individual analysis of the relationship risks, the borrower’s cash flow, the borrower’s management and any underlying secondary sources of repayment. The amount of the estimated loss, if any, is then either specifically reserved in a separate component of the allowance or charged-off. In addition to the characteristics listed for substandard loans, the following characteristics apply to doubtful loans:

Loans to Businesses:

• Normal operations are severely diminished or have ceased

• Seriously impaired cash flow

• Numerous exceptions to loan agreement

• Outside accountant questions entity’s survivability as a “going concern”

• Financial statements may be received late, if at all

• Material legal judgments filed

• Collection of principal and interest is impaired

• Collateral/Guarantor may offer inadequate protection

Loans to Businesses or Individuals:

• Original repayment terms materially altered

• Secondary source of repayment is inadequate

• Asset liquidation may be in process with all efforts directed at debt retirement

• Documentation deficiencies not correctable

The consistent application of the above loan risk rating methodology ensures that the Company has the ability to track historical losses and appropriately estimate potential future losses in our allowance. Additionally, appropriate loan risk ratings assist the Company in allocating credit and special asset personnel in the most effective manner. Significant changes in loan risk ratings can have a material impact on the allowance and thus a material impact on the Company's financial results by requiring significant increases or decreases in provision expense. The Company individually reviews these relationships on a quarterly basis to determine the required allowance or loss, as applicable.

The following table presents the Company’s internal risk rating by loan classification as utilized in the allowance analysis as of December 31, 2014:

As of December 31, 2014

	Pass		Special Mention		Substandard – Non-impaired		Substandard – Impaired		Total
	(in thousands)
Loans by Classification
Real estate: Residential 1-4 family	$	170,044	$	5,700	$	5,804	$	107	$	181,655
Real estate: Commercial	308,677		2,993		2,217		956		314,843
Real estate: Construction	43,453		3,688		699		—		47,840
Real estate: Multi-family and farmland	17,930		98		80		—		18,108
Commercial	68,780		1,834		3,153		218		73,985
Consumer	22,218		57		264		—		22,539
Other	4,621		1		30		—		4,652
Total Loans	$	635,723	$	14,371	$	12,247	$	1,281	$	663,622

102

The following table presents the Company’s internal risk rating by loan classification as utilized in the allowance analysis as of December 31, 2013:

As of December 31, 2013

	Pass		Special Mention		Substandard – Non-impaired		Substandard – Impaired		Total
	(in thousands)
Loans by Classification
Real estate: Residential 1-4 family	$	162,444	$	9,490	$	8,726	$	1,328	$	181,988
Real estate: Commercial	247,096		3,873		9,054		1,912		261,935
Real estate: Construction	37,565		1,596		775		—		39,936
Real estate: Multi-family and farmland	17,236		173		254		—		17,663
Commercial	49,799		2,798		2,420		320		55,337
Consumer	20,741		71		291		—		21,103
Other	5,088		1		46		—		5,135
Total Loans	$	539,969	$	18,002	$	21,566	$	3,560	$	583,097

The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were $1.3 million and $3.6 million at December 31, 2014 and December 31, 2013, respectively. For impaired loans, the Company generally applies all payments directly to principal. Accordingly, the Company did not recognize any significant amount of interest income for impaired loans during the years ended December 31, 2014, 2013 and 2012.

103

The following tables presents additional information on the Company’s impaired loans as of December 31, 2014, December 31, 2013 and December 31, 2012:

	As of December 31, 2014								As of December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Balance of Recorded Investment		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Balance of Recorded Investment
	(in thousands)
Impaired loans with no related allowance recorded:
Real estate: Residential 1-4 family	$	107	$	277	$	—	$	260	$	1,328	$	1,328	$	—	2,603
Real estate: Commercial	956		1,342		—		727		718		718		—		6,503
Real estate: Construction	—		—		—		—		—		—		—		5,528
Real estate: Multi-family and farmland	—		—		—		—		—		—		—		694
Commercial	218		556		—		244		320		320		—		1,725
Consumer	—		—		—		—		—		—		—		109
Leases	—		—		—		—		—		—		—		409
Total	$	1,281	$	2,175	$	—	$	1,231	$	2,366	$	2,366	$	—	17,571
Impaired loans with an allowance recorded:
Real estate: Residential 1-4 family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	512
Real estate: Commercial	—		—		—		—		1,194		1,194		450		329
Real estate: Construction	—		—		—		—		—		—		—		1,190
Real estate: Multi-family and farmland	—		—		—		—		—		—		—		60
Commercial	—		—		—		—		—		—		—		572
Consumer	—		—		—		—		—		—		—		19
Leases	—		—		—		—		—		—		—		48
Total	—		—		—		—		1,194		1,194		450		2,730
Total impaired loans	$	1,281	$	2,175	$	—	$	1,231	$	3,560	$	3,560	$	450	20,301

104

	As of December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Balance of Recorded Investment
	(in thousands)
Impaired loans with no related allowance recorded:
Real estate: Residential 1-4 family	$	457	$	529	$	—	3,474
Real estate: Commercial	727		4,438		—		10,099
Real estate: Construction	1,783		2,512		—		9,875
Real estate: Multi-family and farmland	—		—		—		1,071
Commercial	2,027		3,062		—		2,214
Consumer	—		—		—		385
Leases	392		392		—		684
Total	$	5,386	$	10,933	$	—	27,802
Impaired loans with an allowance recorded:
Real estate: Residential 1-4 family	$	—	$	—	$	—	425
Real estate: Commercial	—		—		—		445
Real estate: Construction	—		—		—		2,214
Real estate: Multi-family and farmland	—		—		—		71
Commercial	50		95		50		1,074
Consumer	—		—		—		96
Leases	—		—		—		108
Total	50		95		50		4,433
Total impaired loans	$	5,436	$	11,028	$	50	32,235

105

Nonaccrual loans were $4.3 million and $7.2 million at December 31, 2014 and December 31, 2013, respectively. The following table provides nonaccrual loans by type:

	As of December 31, 2014		As of December 31, 2013
	(in thousands)
Nonaccrual Loans by Classification
Real estate: Residential 1-4 family	$	1,529	$	2,727
Real estate: Commercial	955		2,653
Real estate: Construction	162		365
Real estate: Multi-family and farmland	64		57
Commercial	1,382		1,137
Consumer and other	256		264
Total Loans	$	4,348	$	7,203

The Company monitors loans by past due status. The following table provides the past due status for all loans. Nonaccrual loans are included in the applicable classification.

As of December 31, 2014

	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total		Greater than 90 Days Past Due and Accruing
	(in thousands)
Loans by Classification
Real estate: Residential 1-4 family	$	1,546	$	746	$	2,292	$	179,363	$	181,655	$	11
Real estate: Commercial	192		955		1,147		313,696		314,843		—
Real estate: Construction	—		230		230		47,610		47,840		68
Real estate: Multi-family and farmland	—		64		64		18,044		18,108		—
Subtotal of real estate secured loans	1,738		1,995		3,733		558,713		562,446		79
Commercial	435		592		1,027		72,958		73,985		—
Consumer	110		271		381		22,158		22,539		21
Other	—		—		—		4,652		4,652		—
Total Loans	$	2,283	$	2,858	$	5,141	$	658,481	$	663,622	$	100

106

As of December 31, 2013

	30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total		Greater than 90 Days Past Due and Accruing
	(in thousands)
Loans by Classification
Real estate: Residential 1-4 family	$	2,509	$	1,967	$	4,476	$	177,512	$	181,988	$	773
Real estate: Commercial	1,626		365		1,991		259,944		261,935		—
Real estate: Construction	878		705		1,583		38,353		39,936		11
Real estate: Multi-family and farmland	245		53		298		17,365		17,663		—
Subtotal of real estate secured loans	5,258		3,090		8,348		493,174		501,522		784
Commercial	403		583		986		54,351		55,337		68
Consumer	95		329		424		20,679		21,103		76
Other	—		—		—		5,135		5,135		—
Total Loans	$	5,756	$	4,002	$	9,758	$	573,339	$	583,097	$	928

As of December 31, 2014, the Company had four loans, not on non-accrual, that were considered troubled debt restructurings. Two 1-4 family real estate loans, one commercial real estate loans and one consumer loan of $80 thousand, $45 thousand and $16 thousand, respectively, were restructured to an extended term to assist the borrower by reducing the monthly payments. As of December 31, 2014, these loans are performing under the modified terms. As of December 31, 2013, the Company had four loans, not on non-accrual, that were considered troubled debt restructurings. Three real estate loans and one consumer loan of $322 thousand and $22 thousand, respectively, were restructured to an extended term to assist the borrower by reducing the monthly payments. As of December 31, 2013, these loans are performing under the modified terms. As of December 31, 2012, the Company had three loans, not on non-accrual, that were considered troubled debt restructurings. One residential real estate loan and two commercial and industrial loans of $224 thousand and $771 thousand, respectively, were restructured to increase the amortization period and lower interest rates and payments. As of December 31, 2012, these loans were performing under the modified terms.

The Company had $177 thousand and $1.1 million in troubled debt restructurings outstanding as of December 31, 2014 and 2013, respectively. The Company has allocated no specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2014 and 2013. The Company has not committed to lend additional amounts as of December 31, 2014 and 2013 to customers with outstanding loans that are classified as troubled debt restructurings.

The Company completed two modifications totaling $81 thousand, five modifications totaling $797 thousand and six modifications totaling $1.7 million that qualified as troubled debt restructurings during the years ended December 31, 2014, 2013 and 2012, respectively.

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2014, 2013 and 2012:

107

	Year Ended December 31, 2014					Year Ended December 31, 2013
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollar amounts in thousands)
Troubled Debt Restructurings:
Residential real estate	1	$	36	$	36	4	$	775	$	775
Commercial real estate	1	45		45		—	—		—
Consumer loan	—	—		—		1	22		22
Total	2	$	81	$	81	5	$	797	$	797

	Year Ended December 31, 2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollar amounts in thousands)
Troubled Debt Restructurings:
Residential real estate	1	$	224	$	224
Commercial real estate	1	557		557
Commercial loan	3	907		907
Consumer loan	1	3		3
Total	6	$	1,691	$	1,691

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ended December 31, 2014, 2013 and 2012:

	Year Ended December 31, 2014					Year Ended December 31, 2013
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollar amounts in thousands)
Troubled Debt Restructurings That Subsequently Defaulted:
Residential real estate	—	$	—	$	—	$	1	$	38	$	38
Consumer loan	—	—		—		1		22		22
Total	—	$	—	$	—	$	2	$	60	$	60

108

	Year Ended December 31, 2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted:
Residential real estate	1	$	3,300	$	3,300
Commercial real estate	1	254		254
Construction & land development	2	1,370		1,370
Consumer loan	2	769		698
Commercial loan	1	3		3
Total	7	$	5,696	$	5,625

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses and resulted in zero charge offs during the years ended December 31, 2014 and 2013, and $964 thousand in charge offs during the year ended December 31, 2012.

At December 31, 2014 and 2013, the Company had $65.3 million and $70.6 million, respectively, of loans pledged to secure borrowings from the Federal Home Loan Bank of Cincinnati. All of the loans pledged were residential first mortgage loans.

The Company had no loan transactions with certain directors, executive officers and significant stockholders and their affiliates. The aggregate amounts of loans to such related parties at December 31, 2014 and 2013 was zero. There were no new loans made to such related parties and no principal payments for 2014 and 2013.

NOTE 8—PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

	As of December 31,
	2014			2013
	(in thousands)
Land and improvements	$	8,400		$	9,288
Buildings and improvements	22,886			23,888
Equipment	19,999			16,828
Premises and equipment-gross	51,285			50,004
Accumulated depreciation	(22,938		)	(22,116		)
Premises and equipment-net	$	28,347		$	27,888

The amount charged to operating expenses for depreciation was $1.6 million for 2014, $1.7 million for 2013 and $1.5 million for 2012.

109

NOTE 9—OTHER INTANGIBLE ASSETS

Other Intangible Assets

The Company has other intangible assets in the form of core deposit intangibles. The core deposit intangibles are amortized on an accelerated basis over their estimated useful lives of 10 years. A summary of other intangible assets is as follows:

	2014		2013
	(in thousands)
Gross carrying amount	$	7,041	$	7,041
Less: Accumulated amortization and impairment	6,907		6,711
Intangible assets - net	$	134	$	330

Amortization expense on other intangible assets was $196 thousand for 2014, $270 thousand for 2013 and $382 thousand for 2012. Amortization expense for the Company’s core deposit intangibles for the next year, after which the core deposit intangible will be fully amortized, is as follows:

Year	(in thousands)
2015	$	134
	$	134

NOTE 10—DEPOSITS

The aggregate amounts of time deposits of $250 thousand or more were $22.5 million and $32.9 million at December 31, 2014 and 2013, respectively.

Brokered deposits were as follows:

	2014		2013
	(in thousands)
Brokered certificates of deposits	$	42,684	$	74,688
CDARS®	14,256		374
ICS®	48,359		—
	$	105,299	$	75,062

Brokered certificates of deposits issued in denominations of $100 thousand or more are participated out by the deposit brokers in shares of $100 thousand or less. CDARS^® includes $14.3 million First Security customers’ reciprocal accounts as of December 31, 2014. ICS^® includes $48.4 million in customer accounts.

Scheduled maturities of time deposits as of December 31, 2014, are as follows:

	Time Deposits		Brokered CDs		CDARS®		ICS®	Totals
	(in thousands)
2015	$	141,923	$	21,340	$	4,234	48,359	$	215,856
2016	59,475		7,954		6,011		—	73,440
2017	30,360		5,661		4,011		—	40,032
2018	8,210		7,729		—		—	15,939
2019 and thereafter	30,635		—		—		—	30,635
	$	270,603	$	42,684	$	14,256	48,359	$	375,902

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NOTE 11—FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

At December 31, 2014, the Company had $92.5 million in fully-available lines of credit to purchase federal funds with correspondent banks. As of December 31, 2013, the Company had a fully-available $15.0 million line of credit to purchase federal funds with a correspondent bank.

Securities sold under agreements to repurchase represent the purchase of interests in securities by commercial checking customers. The Company may also enter into structured repurchase agreements with other financial institutions. Repurchase agreements with commercial checking customers are settled the following business day, while structured repurchase agreements with other financial institutions have varying terms.

At December 31, 2014 and 2013, the Company had securities sold under agreements to repurchase of $12.8 million and $12.5 million, respectively, by commercial checking customers. Securities sold under agreements to repurchase are held in safekeeping for the Company and had a carrying value of approximately $16.6 million and $13.8 million at December 31, 2014 and 2013, respectively. These agreements averaged $13.0 million and $13.5 million during 2014 and 2013, respectively. The maximum amounts outstanding at any month end during 2014 and 2013 were $15.9 million and $15.2 million, respectively. Interest expense on repurchase agreements totaled $41 thousand, $53 thousand and $396 thousand for the years ended 2014, 2013 and 2012, respectively.

NOTE 12—OTHER BORROWINGS

Other borrowings at December 31, 2014 and 2013 consist of short-term variable rate advances from the Federal Home Loan Bank of Cincinnati ("FHLB") totaling $56.0 million and $20.0 million, respectively. There were no other borrowings at December 31, 2014 and 2013.

Pursuant to the blanket agreement for advances and security agreements with the FHLB, advances as of December 31, 2014 and 2013 were secured by the Company’s unencumbered qualifying 1-4 family first mortgage loans subject to varying limitations determined by the FHLB, investment securities and by the FHLB stock owned by the Company. As of December 31, 2014 and 2013, for additional borrowing capacity, the FHLB required the Company to pledge investment securities or individual, qualifying loans, subject to approval of the FHLB. As of December 31, 2014 and 2013, the Company had loans totaling $65.3 million and $70.6 million, respectively, and investment securities totaling $96.0 million and $52.3 million, respectively, pledged as collateral at the FHLB.

As a member of FHLB, the Company must own FHLB stock. The amount of FHLB stock required to be held is subject the Company’s asset size and outstanding FHLB advances. At December 31, 2014 and 2013, the Company owned FHLB stock totaling $3.3 million and $2.3 million, respectively. The FHLB stock is recorded in other assets on the Company’s consolidated balance sheet. Based on the collateral and the Company's holdings of FHLB stock, the Company is eligible to borrow up to a total of $164.5 million at December 31, 2014.

The terms of the FHLB advance as of December 31, 2014 and 2013 are as follows:

Balance as ofDecember 31, 2014

Maturity Year	Origination Date	Type	Principal (in thousands)		Rate		Maturity
2015	12/31/2014	FHLB variable rate advance	$	56,000	0.14	%	1/2/2015

Balance as ofDecember 31, 2013

Maturity Year	Origination Date	Type	Principal (in thousands)	Rate		Maturity
2014	12/19/2013	FHLB fixed rate advance	20,000	0.15	%	1/17/2014

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NOTE 13—LEASES

The Company leases bank branches, the loan and lending office and equipment under operating lease agreements. Minimum lease commitments with remaining noncancelable lease terms in excess of one year as of December 31, 2014 are as follows:

	Amount
	(in thousands)
2015	$	823
2016	804
2017	634
2018	534
2019	541
Thereafter	2,800
Total minimum lease commitments	$	6,136

Rent expense totaled $869 thousand, $862 thousand and $989 thousand for the years ended 2014, 2013 and 2012, respectively.

NOTE 14 – INCOME TAXES

The income tax provision consists of the following:

	For the Years Ended
	2014		2013		2012
	(in thousands)
Current provision	$	526	$	477	$	771
Deferred provision	—		—		—
Income tax provision	$	526	$	477	$	771

For the years ended December 31, 2014, 2013 and 2012, the Company recognized income tax expense of $526 thousand, $477 thousand and $771 thousand, respectively. The following reconciles the income tax provision to statutory rates:

	For the Years Ended
	2014			2013			2012
	(in thousands)
Federal taxes at statutory tax rate	$	1,001		$	(4,410	)	$	(12,512	)
Tax exempt earnings on loans and securities	(206		)	(341		)	(342		)
Tax exempt earnings on bank owned life insurance	(359		)	(325		)	(338		)
Low-income housing tax credits	(301		)	(333		)	(363		)
Other, net	232			(551		)	(418		)
State tax provision, net of federal effect	61			(597		)	(1,595		)
Change in reserve for uncertain tax positions	—			—			(727		)
Reversal of disproportionate tax effect relative to cash flow swap termination	—			—			1,065
Changes in the deferred tax asset valuation allowance	98			7,034			16,001
Income tax provision	$	526		$	477		$	771

The decreases in the deferred tax valuation allowance offset the income tax benefits recognized for the year ended December 31, 2014. The benefit recognized before the valuation allowance primarily related to the year-to-date operating income. There was a $1.1 million decrease in the valuation allowance during 2014 related to items of other comprehensive income which is not a component of income tax expense.

The increases in the deferred tax valuation allowance offset the income tax benefits recognized for the year ended December 31, 2013. The benefit recognized before the valuation allowance primarily related to the year-to-date operating loss. There was a $4.4 million increase in the valuation allowance during 2013 related to items of other comprehensive income which is not a component of income tax expense.

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The components of the net deferred tax asset and liability included in other assets and liabilities consist of the following:

	As of December 31,
	2014			2013
	(in thousands)
Deferred Tax Assets
Net operating loss carryforward	$	50,237		$	48,920
Allowance for loan and lease losses	3,449			4,425
Federal tax credits	4,778			4,208
Other real estate owned	1,184			2,125
Goodwill and other intangible assets	260			442
Salary continuation plan	107			116
Acquisition fair value adjustments	—			247
Deferred loan fees	261			168
Core deposit intangibles	153			64
Securities available-for-sale	1,798			2,923
Other assets	482			103
Total deferred tax assets	62,709			63,741
Deferred Tax Liabilities
Premises and equipment	1,022			1,113
Core deposit intangibles	51			—
Leasing activities	—			7
FHLB stock	307			305
Other	264			224
Total deferred tax liabilities	1,644			1,649
Net deferred tax asset before valuation allowance	61,065			62,092
Deferred tax asset valuation allowance	(61,065		)	(62,092		)
Net deferred tax asset after valuation allowance	$	—		$	—

The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect on deferred income taxes of a change in tax rates is recognized in income in the period when the change is enacted.

In accordance with ASC 740, the Company is required to establish a valuation allowance for deferred tax assets when it is “more likely than not” that a portion or all of the deferred tax assets will not be realized. The evaluation requires significant judgment and extensive analysis of all available positive and negative evidence, the forecasts of future income, applicable tax planning strategies and assessments of the current and future economic and business conditions.

At December 31, 2014, the Company had federal and state net operating loss carryforwards of $129.9 million and $144.0 million, respectively, which are available to offset future taxable income.  The federal loss carryforward will begin to expire in 2030. The state loss carryforward will begin to expire in 2024.  The Company also had federal and state tax credit carryforwards of $4.8 million and $122 thousand, respectively, which are available to offset future tax liability.  The federal tax credit carryforward will begin to expire in 2030. The state tax credit carryforward will begin to expire in 2015. 

During 2010, the Company established a deferred tax asset valuation allowance after evaluating all available positive and negative evidence. A valuation allowance is required when it is "more likely than not" that the deferred tax assets will not be fully realized. The evaluation requires significant judgment and extensive analysis of all available positive and negative evidence, the forecast of future income, applicable tax planning strategies and assessments of the current and future economic and business conditions. For the years ended December 31, 2014 and 2013, the Company reported net income, which is positive evidence. Currently, the Company has determined that there is not sufficient positive evidence to reach a "more likely than not" conclusion that the deferred tax assets will be realized and as such, a full valuation allowance exist as of December 31, 2014. The Company evaluates the valuation allowance quarterly. As of December 31, 2014, the valuation allowance totals $61.1 million resulting in a net deferred tax asset of zero.

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On October 24, 2012, the Board of Directors of the Company authorized the adoption by the Company of a Tax Benefits Preservation Plan and declared a dividend of one preferred stock purchase right for each outstanding share of the Company's common stock, payable to holders of record as of the close of business on November 12, 2012. The purpose of the Tax Benefits Preservation Plan is to assist preserving the value of the Company's deferred tax assets, such as its net operating losses, for U.S. federal income tax purposes. On July 24, 2013, the shareholders of the Company approved an amendment to the Company's articles of incorporation to further assist in preserving the value of the Company's deferred tax assets.

The Company evaluated its material tax positions as of December 31, 2014. Under the “more-likely-than-not” threshold guidelines, the Company believes it has identified all significant uncertain tax benefits. The Company evaluates, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant. In the event a significant uncertain tax position is determined to exist, penalty and interest will be accrued, in accordance with Internal Revenue Service guidelines, and recorded as a component of income tax expense in the Company’s consolidated financial statements.

On April 30, 2012, the Company entered into a compromise and settlement of its uncertain tax position for tax years through December 31, 2011. The settlement provided for payment by the Company of approximately $273 thousand on its $1.0 million uncertain tax position. The settlement resulted in a recovery of approximately $727 thousand, recorded as a tax benefit during the second quarter of 2012.

The total amount of interest and penalties recorded in the income statement for the years ended December 31, 2014, 2013 and 2012 was a benefit of zero, zero and an expense of $190 thousand, respectively. The Company accrued no interest and penalties at December 31, 2014 and 2013.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Tennessee and Georgia. The Company is no longer subject to examination by taxing authorities for years before 2011.

NOTE 15—RETIREMENT PLANS

401(k) and ESOP Plan

The Company has a 401(k) and employee stock ownership plan (the "Plan") covering employees meeting certain age and service requirements. Employees may contribute up to 75% of their compensation subject to certain limits based on federal tax laws. From January 1, 2008 to June 30, 2010, the Company made matching contributions equal to 100% of the employee’s contribution up to 6% of the employee’s compensation. Effective July 1, 2010, the Company’s matching contribution was reduced to 1% of the employee’s compensation. Through December 31, 2012, the employer contribution was made in the form of Company common stock on a quarterly basis. Currently the Company's matching contribution is cash on a quarterly basis. The employee and employer contributions and earnings thereon are vested immediately. In its sole discretion at the end of the Plan year, the Company may make supplemental matching contributions or profit sharing contributions.

The Company recognized $108 thousand, $110 thousand and $92 thousand in expense under the Plan for 2014, 2013 and 2012, respectively, which has been included in salaries and employee benefits in the accompanying Consolidated Statements of Operations.

The employee stock ownership ("ESOP") portion of the Plan purchased shares of common stock with proceeds from advances of a loan from the Company. The loan between the Company and the Plan, as amended on January 28, 2009, enabled the Plan to borrow up to $12.7 million until December 31, 2009. The loan had a term of 30 years, interest rate of 6.25% and required annual payments. The loan was secured by the stock purchased by the Plan that had not been allocated to participant accounts. The Company may make discretionary profit sharing contributions to the ESOP. The ESOP contribution will first be used to repay the loan. As the loan was repaid, shares were released from collateral based on the proportion of the payment in relation to total payments required to be made on the loan, and those shares were allocated to the ESOP accounts of participants on a quarterly or annual basis. Cash dividends on financed shares will first be used to repay the acquisition loan. As of December 31, 2012, the loan was repaid to the Company in full. Cash dividends on allocated shares are payable to the participants in cash or reinvested in Company stock no later than 90 days from the end of the Plan year.

Compensation expense is determined by multiplying the per share market price of the common stock by the number of shares to be released. The number of unallocated, committed to be released and allocated shares are as follows:

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	Unallocated shares		Committed to be released shares	Allocated shares	Compensation Expense
	(dollar amounts in thousands)
Shares as of December 31, 2011	30,725		—	89,349
Shares allocated for match during 2012	(30,725	)	—	30,725	$	92
Shares as of December 31, 2012	—		—	120,074

The cost of the shares not yet committed to be released from collateral is shown as a reduction of stockholders’ equity. Unallocated shares are not considered outstanding for earnings per share purposes. At December 31, 2014 and 2013 there were no unallocated shares outstanding.

NOTE 16 –SHARE-BASED COMPENSATION

As of December 31, 2014, the Company has three share-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" and, together with the 2012 LTIP and 2002 LTIP, the "Plans"). 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.

Due to the Company's participation in TARP CPP, the terms of the awards were also subject to compliance with applicable TARP compensation regulations prior to the exchange of the TARP Preferred Stock on April 11, 2013.

The 2012 LTIP was approved by the shareholders of the Company at the Company's 2012 annual meeting as previously reported on a Current Report on Form 8-K filed June 26, 2012 and subsequently amended at the Company's 2013 annual meeting as reported on a Current Report on Form 8-K filed on July 26, 2013. The amendment increased the shares reserved for issuance from 175,000 shares to 6,250,000 shares and was effective on July 24, 2013. The 2012 LTIP 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 share-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. As of December 31, 2014, the number of shares available under the 2012 LTIP for future grants was 2,650,625.

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 1-for-10 reverse stock split was 1.5 million. As a result of the 1-for-10 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 of December 31, 2014, there were no shares available for future grants under the 2002 LTIP.

Participation in the 1999 LTIP is limited to eligible employees. The total number of shares of stock authorized for awards prior to the 1-for-10 reverse stock split was 936 thousand. As a result of the 1-for-10 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

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vesting under terms of the 1999 LTIP or as provided in any award agreement. As of December 31, 2014, there were no shares available for future grants under the 1999 LTIP.

Stock Options

The following table illustrates the effect on operating results for share-based compensation for the years ended December 31, 2014, 2013 and 2012.

	2014		2013		2012
	(in thousands)
Stock option compensation expense	$	620	$	396	$	63
Stock option compensation expense, net of tax 1	$	409	$	261	$	42

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

During the years ended December 31, 2014 and 2013, zero and 5,000 options, respectively, were exercised for gross proceeds of zero and $14 thousand, respectively. No options were exercised during the year ended December 31, 2012.

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. During 2014, the Company utilized a regional bank index to determine expected volatilities. 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.

	As of
	December 31,
	2014	2013	2012
Risk‑free interest rate	2.02%	2.00%	1.29%
Expected term, in years	6.5	6.5	6.5
Expected stock price volatility	40.51%	44.09%	67.89%
Dividend yield	—%	—%	—%
Fair value per option granted	$1.94	$1.08	$1.51

The following table represents stock option activity for the year ended December 31, 2014:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2014	2,274,165		$	3.35
Granted	363,750		$	2.04
Exercised	—
Forfeited	(76,870	)
Outstanding, December 31, 2014	2,561,045		$	2.72	8.61	$	—	1
Exercisable, December 31, 2014	517,020		$	4.47	8.35	—		1

_______________

¹ As of December 31, 2014, the exercise price of all exercisable options exceeded the closing price of the Company's common stock of $2.26, resulting in no intrinsic value.

As reported on a Current Report on Form 8-K filed on March 4, 2014, certain awards previously granted under the 2012 LTIP were modified effective February 28, 2014. The modification changed the vesting period from three years to five years. In addition, 96,250 supplemental stock options were authorized and will vest over a five-year period in accordance with the modification. The supplemental stock options are exercisable at $2.33 per share, are otherwise identical to the original stock options and are subject to other terms and conditions of the 2012 LTIP and to the specific stock option awards.

As of December 31, 2014, shares available for future option grants to employees and directors under existing plans were zero, zero, and 2,650,625 for the 1999 LTIP, 2002 LTIP, and 2012 LTIP, respectively.

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As of December 31, 2014, there was $1.9 million 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 3.34 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 share-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.

On April 11, 2013, approximately 107,175 restricted stock shares, or 75% of all unvested restricted stock awards to employees, were forfeited in connection with the application of TARP CPP regulations to the Recapitalization. As none of these shares had vested, the reversal of previously recognized expense was recorded during the quarter of the forfeitures.

As of December 31, 2014, unearned share-based compensation associated with these awards totaled $1.7 million. The Company recognized compensation expense, net of forfeitures, of $460 thousand, $205 thousand and $152 thousand for the years ended December 31, 2014, 2013 and 2012, respectively, related to the 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 3.36 years. The total value of shares vested during 2014 was $480 thousand, $10 thousand in 2013 and immaterial in 2012.

The following table represents restricted stock activity for the period ended December 31, 2014:

	Shares			Weighted Average Grant-Date Fair Value
Nonvested shares at January 1, 2014	884,991			$	2.35
Granted	229,500			1.67
Vested	(200,414	)		—
Forfeited	(5,850	)		—
Nonvested, December 31, 2014	908,227		1	$	2.25

_______________

¹ Includes 23,250 shares issued as an inducement grant from available and unissued shares and not from the Plans.

NOTE 17 – SHAREHOLDERS’ EQUITY

Preferred Stock Restructuring

On April 11, 2013, the Company completed a restructuring of the Company's Preferred Stock with the Treasury by issuing 9.9 million shares, or $14.9 million of new common stock, for $1.50 per share in full satisfaction of the Treasury's 2009 investment in the Company. Pursuant to the Exchange Agreement, as previously included in a Current Report on Form 8-K filed on February 26, 2013, the Company restructured the Company's Preferred Stock issued under the Capital Purchase Program by issuing new shares of common stock equal to 26.75% of the $33.0 million value of the Preferred Stock plus 100% of the accrued but unpaid dividends in exchange for the Preferred Stock, all accrued but unpaid dividends thereon, and the cancellation of stock warrants granted in connection with the CPP investment ("CPP Restructuring"). Immediately after the issuance of the common stock to the Treasury, the Treasury sold all of the Company's common stock to investors previously identified by the Company at the same $1.50 per share price.

The Company recognized a $26.2 million credit to retained earnings for the year ended December 31, 2013, for the difference between the carrying amount of preferred stock and the amount paid to redeem the shares. The net increase to shareholders' equity as a result of the CPP Restructuring was $6.1 million.

Recapitalization

On April 12, 2013, the Company completed the issuance of an additional 50.8 million shares of new common stock, or $76.2 million, in a private placement to accredited investors. The private placement was previously announced on a Current Report on Form 8-K filed on February 26, 2013, in which the Company announced the execution of definitive stock purchase agreements with institutional investors as part of an approximately $90 million recapitalization ("Recapitalization"). In total, the Company issued 60,735,000 shares of common stock at $1.50 per share for gross proceeds of $91.1 million.

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Common Stock Rights Offering

As part of the Recapitalization, the Company initiated a rights offering during the third quarter of 2013 for shareholders of record as of April 10, 2013, the business day immediately preceding the Recapitalization. The Rights Offering was previously announced on a Current Report on Form 8-K filed on February 26, 2013. Under the Rights Offering each Legacy Shareholder received one non-transferable subscription right to purchase two shares of the Company's common stock at the subscription price of $1.50 per share for every one share of common stock owned by such Legacy Shareholder as of the record date of April 10, 2013. Additionally, each Legacy Shareholder that fully exercised such Legacy Shareholder's subscription rights had the ability to submit an over-subscription request to purchase additional shares of common stock, subject to certain limitations and subject to allotment under the Rights Offering. On September 27, 2013, the Company completed the Rights Offering, issuing 3,329,234 shares of common stock for $1.50 per share for gross proceeds of approximately $5.0 million. The Company downstreamed the net proceeds to supplement the capital of FSGBank.

Common Stock Dividends

On September 7, 2010, the Company entered into the Written Agreement with the Federal Reserve which prohibited the Company from declaring or paying dividends without the prior written consent of the Federal Reserve. While the Agreement has been terminated, the Company expects to continue to seek approval from the Federal Reserve prior to paying any dividends on our capital stock or incurring any additional indebtedness.

Preferred Stock

Prior to the CPP Restructuring, the Company's Preferred Stock qualified as Tier 1 capital and paid cumulative dividends at a rate of 5% per annum. Dividends were payable quarterly on February 15, May 15, August 15 and November 15 of each year. The Company recognized no dividends for the Preferred Stock for the year ended December 31, 2014, $929 thousand in dividends for the year ended December 31, 2013 and recognized $1.65 million in dividends for the year ended December 31, 2012. As of December 31, 2012, aggregate unpaid, accrued dividends on the Preferred Stock were $5.2 million which is included in other liabilities in the Company’s consolidated balance sheet. For the years ended December 31, 2014, 2013 and 2012, the Company recognized zero, $452 thousand and $428 thousand, respectively, in discount accretion on the Preferred Stock.

NOTE 18—MINIMUM REGULATORY CAPITAL REQUIREMENTS

Banks and bank holding companies, as regulated institutions, are subject to various regulatory capital requirements administered by the OCC and 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. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the following table) of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of tier 1 capital (as defined) to the average assets (as defined).

Prior to the termination of the Consent Order on March 10, 2014, and as described in Note 2, FSGBank was required to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least 9%. On April 23, 2013, FSGBank filed a cash contribution to capital notice with the OCC certifying a $65 million capital contribution by First Security Group into FSGBank. On September 27, 2013, First Security Group provided an additional $6.4 million cash contribution to FSGBank, consisting of the net proceeds from the Rights Offering as well as additional available cash. Despite meeting the capital thresholds required to be considered "well capitalized" for regulatory purposes, because of the capital requirements of the Order, the Bank was classified as "adequately capitalized." Following the termination of the Order on March 10, 2014, the Bank is currently considered "well capitalized."

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The following table provides the regulatory capital ratios as of December 31, 2014 and 2013:

	Actual				Minimum Capital Requirements to be "Adequately Capitalized"				Minimum Capital Requirements to be "Well Capitalized"
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2014
Total capital to risk-weighted assets
First Security Group, Inc. and subsidiary	$	105,477	13.00	%	64,922		8.0	%	$	81,152	10.0	%
FSGBank, N.A.	$	100,628	12.40	%	$	64,925	8.0	%	$	81,156	10.0	%
Tier 1 capital to risk-weighted assets
First Security Group, Inc. and subsidiary	$	96,621	11.91	%	32,461		4.0	%	$	48,691	6.0	%
FSGBank, N.A.	$	91,772	11.31	%	32,462		4.0	%	$	48,694	6.0	%
Tier 1 capital to average assets
First Security Group, Inc. and subsidiary	$	96,621	9.35	%	41,322		4.0	%	N/A		N/A
FSGBank, N.A.	$	91,772	8.88	%	$	41,322	4.0	%	$	51,653	5.0	%

	Actual				FSGBank Consent Order1				Minimum Capital Requirements to be "Well Capitalized"
	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2013
Total capital to risk-weighted assets
First Security Group, Inc. and subsidiary	$	101,475	14.89	%	N/A		N/A		$	68,153	10.0	%
FSGBank, N.A.	$	95,264	14.08	%	$	87,952	13.0	%	$	67,656	10.0	%
Tier 1 capital to risk-weighted assets
First Security Group, Inc. and subsidiary	$	92,928	13.64	%	N/A		N/A		$	40,892	6.0	%
FSGBank, N.A.	$	86,781	12.83	%	N/A		N/A		$	40,593	6.0	%
Tier 1 capital to average assets
First Security Group, Inc. and subsidiary	$	92,928	9.36	%	N/A		N/A		N/A		N/A
FSGBank, N.A.	$	86,781	8.74	%	$	89,329	9.0	%	$	49,627	5.0	%

_______________

¹ The Order was terminated on March 10, 2014 and accordingly, FSGBank is no longer subject to the elevated capital requirements and is considered "well capitalized"

NOTE 19 – FAIR VALUE MEASUREMENTS

The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

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There are three levels of inputs that may be used to measure fair values

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy. In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company used the following methods and significant assumptions to estimate fair value:

Cash and cash equivalents: The carrying value of cash and cash equivalents approximates fair value.

Interest bearing deposits in banks: The carrying amounts of interest bearing deposits in banks approximate fair value.

Federal Home Loan Bank Stock and Federal Reserve Bank Stock: It is not practical to determine the fair value of FHLB stock or FRB Stock due to restrictions placed on their transferability. As such, these instruments are carried at cost.

Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Loans: For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans and other consumer loans are estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans and leases is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers of similar credit ratings quality. Fair value for impaired loans and leases are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value may not approximate the exit price.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a

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single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed annually by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of approximately 17% should be applied.

Loans Held For Sale: Fair value for loans originated to be held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2). Fair value of loans transferred to held for sale is determined using the sales price of the loans which has no observable market, resulting in a Level 3 fair value classification.

Accrued interest receivable: The carrying value of accrued interest receivable approximates fair value.

Deposit liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected maturities on time deposits.

Federal funds purchased and securities sold under agreements to repurchase: These borrowings generally mature in 90 days or less and, accordingly, the carrying amount reported in the consolidated balance sheets approximates fair value.

Accrued interest payable: The carrying value of accrued interest payable approximates fair value.

Other borrowings: Other borrowings carrying amounts reported in the consolidated balance sheets approximate fair value.

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

	Fair Value Measurements at
	December 31, 2014 Using:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Securities available-for-sale—
Mortgage-backed—residential	$	—	$	83,126	$	—	$	83,126
Municipals	—		4,363		—		4,363
Other	—		8,019		63		8,082
Total securities available-for-sale	$	—	$	95,508	$	63	$	95,571
Loans held for sale	$	—	$	2,298	$	—	$	2,298
Zero premium collar	—		1,028		—		1,028
Financial liabilities
Forward loan sales contracts	$	—	$	63	$	—	$	63
Cash flow swap	$	—	$	1,028	$	—	$	1,028
BMO cash flow swap	—		45		—		45

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	Fair Value Measurements at
	December 31, 2013 Using:
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Securities available-for-sale—
Federal agencies	$	—	$	4,156	$	—	$	4,156
Mortgage-backed—residential	—		115,979		—		115,979
Municipals	—		31,721		—		31,721
Other	—		20,918		56		20,974
Total securities available-for-sale	$	—	$	172,774	$	56	$	172,830
Loans held for sale	$	—	$	220	$	—	$	220
Financial liabilities
Forward loan sales contracts	$	—	$	9	$	—	$	9
Cash flow swap	—		15		—		$	15

The following table presents additional information about changes in assets and liabilities measured at fair value on a recurring basis and for which the Company utilized Level 3 inputs to determine fair value as of December 31, 2014 and 2013.

December 31, 2014

	December 31, 2013		Total Realized and Unrealized Gains or Losses		Sales		Net Transfers In and/or Out of Level 3		December 31, 2014
	(in thousands)
Financial assets
Securities available-for-sale—
Other	$	56	$	7	$	—	$	—	$	63

December 31, 2013

	Balance as of December 31, 2012		Total Realized and Unrealized Gains or Losses		Sales		Net Transfers In and/or Out of Level 3		Balance as of December 31, 2013
	(in thousands)
Financial assets
Securities available-for-sale—
Other	$	41	$	15	$	—	$	—	$	56

At December 31, 2014, the Company also had assets and liabilities measured at fair value on a non-recurring basis. Items measured at fair value on a non-recurring basis include OREO, and collateral-dependent impaired loans. Such measurements were determined utilizing Level 3 inputs.

Upon initial recognition, OREO and repossessions are measured at fair value less cost of sale, which becomes the cost basis. The cost basis is subsequently re-measured at fair value when events or circumstances occur that indicate the initial fair value has declined. The fair value is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. Fair value adjustments for OREO and repossessions have generally been classified as Level 3.

The Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of these loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for loan and lease losses. If the recorded investment in

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the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan and lease losses or the expense is recognized as a partial charge-off. The fair value of collateral-dependent loans is generally determined using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally available in the marketplace. These measurements have generally been classified as Level 3.

The following table presents the carrying value and associated valuation allowance of those assets measured at fair value on a non-recurring basis for which impairment was recognized during the twelve months ended December 31, 2014.

	Carrying Value as of December 31, 2014		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Valuation Allowance as of December 31, 2014
	(in thousands)
Other real estate owned –
Construction/development loans	$	1,846	$	—	$	—	$	1,846	$	(1,982	)
Residential real estate loans	172		—		—		172		(77		)
Commercial real estate loans	1,592		—		—		1,592		(701		)
Multi-family and farmland loans	—		—		—		—		—
Consumer Loans	306		—		—		306		(41		)
Other real estate owned	3,916		—		—		3,916		(2,801		)
Collateral-dependent loans –
Real Estate: Residential 1-4 family	107		—		—		107		—
Real Estate: Commercial	778		—		—		778		—
Real Estate: Construction	—		—		—		—		—
Real Estate: Multi-family and farmland	—		—		—		—		—
Commercial	218		—		—		218		—
Collateral-dependent loans	1,103		—		—		1,103		—
Totals	$	5,019	$	—	$	—	$	5,019	$	(2,801	)

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The following table presents the carrying value and associated valuation allowance of those assets measured at fair value on a non-recurring basis for which impairment was recognized during the twelve months ended December 31, 2013.

	Carrying Value as of December 31, 2013		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Valuation Allowance as of December 31, 2013
	(in thousands)
Other real estate owned –
Construction/development loans	$	3,127	$	—	$	—	$	3,127	$	(2,851	)
Residential real estate loans	905		—		—		905		(255		)
Commercial real estate loans	1,983		—		—		1,983		(1,054		)
Multi-family and farmland loans	—		—		—		—		—
Commercial and industrial loans	—		—		—		—		—
Other real estate owned	6,015		—		—		6,015		(4,160		)
Collateral-dependent loans –
Real Estate: Residential 1-4 family	1,061		—		—		1,061		—
Real Estate: Commercial	316		—		—		316		—
Real Estate: Construction	—		—		—		—		—
Real Estate: Multi-family and farmland	—		—		—		—		—
Commercial	65		—		—		65		—
Collateral-dependent loans	1,442		—		—		1,442		—
Totals	$	7,457	$	—	$	—	$	7,457	$	(4,160	)

For the year ended December 31, 2014, the Company decreased its valuation allowance on $3.9 million of other real estate owned. The Company recorded write-downs on other real estate of $59 thousand and $2.4 million during the years ended December 31, 2014 and 2013, respectively. For collateral-dependent loans, no provision for loan loss was recorded to establish or increase its valuation allowance during the years ended December 31, 2014 and 2013. Any changes in the valuation allowance for a collateral-dependent loans are included in the allowance analysis and may result in additional provision expense.

There have been no transfers into or out of Level 3 during 2014 or 2013. There were no transfers between Level 1 and Level 2 during 2014 or 2013.

For impaired loans and OREO properties, the Company utilizes independent, third-party appraisals to determine fair value. Independent appraisals are ordered at least annually. As part of the normal appraisal process, the appraisers generally provide the appraised value using one of following techniques: the sales comparison approach, the income approach or a combination thereof.  Under the sales comparison approach, the appraiser may make certain adjustments from the sold property to the appraised property, including, but not limited to, differences in square footage, lot size, absorption rates or location. The adjustments between the appraised property and the comparison property range from (72.4)% to 175.2% with a weighted average adjustment of (10.9)%. Under the income approach, the appraiser may make certain adjustments including, but not limited to, capitalization rates and differences in operating income expectations.  The Company's current third-party appraisals provided capitalization rates up to 11.0% with a weighted average of 9.2%. The Company's current third-party appraisals do not provide a range of adjustments to net operating income expectations. The Company monitors the realization rate between proceeds received and appraised value for all sold OREO properties.  This discount, defined as the weighted average percentage difference between appraised values and proceeds, is then applied to all remaining appraisals associated with impaired loans and OREO properties.  The Company monitors and applies this adjustment to the Company's Level 3 properties. The weighted average discount is approximately 17% as of December 31, 2014.

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The following table presents quantitative information about Level 3 fair value measurements for significant items measured at fair value on a non-recurring basis at December 31, 2014.

	Fair value (in thousands)		Valuation technique(s)	Unobservable input(s)	Range				Weighted average
Impaired Loans - CRE	$	778	Sales comparison approach	Adjustment for differences between the comparable sales	(30.0	)%	10.0	%	(10.0	)%
			Income Approach	Capitalization rate	—	%	11.0	%	11.0	%
Impaired Loans - Residential	107		Sales comparison Approach	Adjustment for differences between the comparable sales	(0.2	)%	25.0	%	12.4	%
Impaired Loans - Commercial	218		Sales comparison approach	Adjustment for differences between the comparable sales	—	%	—	%	—	%
OREO-Residential	172		Sales comparison approach	Adjustment for differences between the comparable sales	(36.6	)%	29.7	%	(20.8	)%
OREO-Commercial	1,592		Sales comparison approach	Adjustment for differences between the comparable sales	(45.0	)%	113.7	%	(0.9	)%
			Income Approach	Capitalization rate	9.0	%	10.0	%	9.2	%
OREO-Construction	1,846		Sales comparison approach	Adjustment for differences between the comparable sales	(72.4	)%	175.2	%	(18.5	)%
OREO- Consumer	306		Sales comparison approach	Adjustment for differences between the comparable sales	(9.6	)%	13.0	%	1.7	%

For impaired loans and OREO properties at December 31, 2013, the Company utilizes independent, third-party appraisals to determine fair value. Independent appraisals are ordered at least annually. As part of the normal appraisal process, the appraisers generally provide the appraised value using one of following techniques: the sales comparison approach, the income approach or a combination thereof.  Under the sales comparison approach, the appraiser may make certain adjustments from the sold property to the appraised property, including, but not limited to, differences in square footage, lot size, absorption rates or location. The adjustments between the appraised property and the comparison property range from (80.0)% to 112.0% with a weighted average adjustment of 0.75%. Under the income approach, the appraiser may make certain adjustments including, but not limited to, capitalization rates and differences in operating income expectations.  The Company's current third-party appraisals provide capitalization rates up to 10.5% with a weighted average of 7.97%. The Company's current third-party appraisals do not provide a range of adjustments to net operating income expectations. The Company monitors the realization rate between proceeds received and appraised value for all sold OREO properties.  This discount, defined as the weighted average percentage difference between appraised values and proceeds, is then applied to all remaining appraisals associated with impaired loans and OREO properties.  The Company monitors and applies this adjustment to the Company's Level 3 properties. The weighted average discount is approximately 17.0% as of December 31, 2013.

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The following table presents quantitative information about Level 3 fair value measurements for significant items measured at fair value on a non-recurring basis at December 31, 2013.

	Fair value (in thousands)		Valuation technique(s)	Unobservable input(s)	Range				Weighted average
Impaired Loans - CRE	$	316	Sales comparison approach	Adjustment for differences between the comparable sales	(35.1	)%	5.8	%	(14.6	)%
			Income Approach	Capitalization rate	10.5	%	10.5	%	10.5	%
Impaired Loans - Residential	1,061		Sales comparison approach	Adjustment for differences between the comparable sales	(6.7	)%	74.5	%	29.7	%
Impaired Loans - Commercial	65		Sales comparison approach	Adjustment for differences between the comparable sales	9.4	%	39.5	%	24.5	%
OREO-Residential	905		Sales comparison approach	Adjustment for differences between the comparable sales	(80.0	)%	112.0	%	(0.5	)%
OREO-Commercial	1,983		Sales comparison approach	Adjustment for differences between the comparable sales	(75.8	)%	100.0	%	(1.5	)%
			Income Approach	Capitalization rate	8.0	%	10.5	%	9.5	%
OREO-Construction	3,127		Sales comparison approach	Adjustment for differences between the comparable sales	(63.4	)%	90.0	%	2.5	%

The following table presents the estimated fair values of the Company’s financial instruments at December 31, 2014 and 2013.

			Fair Value Measurements at
			December 31, 2014 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and due from banks	$	18,447	$	18,447	$	—	$	—	$	18,447
Interest bearing deposits in banks	29,582		29,582		—		—		29,582
Securities available-for-sale	95,571		—		95,508		63		95,571
Securities held-to-maturity	124,485		—		128,058		—		$	128,058
Federal Home Loan Bank stock	3,253		N/A		N/A		N/A		N/A
Federal Reserve Bank stock	2,432		N/A		N/A		N/A		N/A
Loans held for sale	72,242		—		2,298		71,144		73,442
Loans, net	655,072		—		—		659,089		659,089
Accrued interest receivable	2,796		—		798		1,998		2,796
Financial liabilities
Deposits	905,613		529,711		375,073		—		904,784
Federal funds purchased and securities sold under agreements to repurchase	12,750		12,750		—		—		12,750
Other borrowings	56,000		56,000		—		—		56,000
Accrued interest payable	615		9		606		—		615

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			Fair Value Measurements at
			December 31, 2013 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and due from banks	$	10,742	$	10,742	$	—	$	—	$	10,742
Interest bearing deposits in banks	10,126		10,126		—		—		10,126
Securities available-for-sale	172,830		—		172,774		56		172,830
Securities held-to-maturity	132,568		—		132,104		—		132,104
Federal Home Loan Bank stock	2,276		N/A		N/A		N/A		N/A
Federal Reserve Bank stock	2,336		N/A		N/A		N/A		N/A
Loans held for sale	220		—		220		—		220
Loans, net	572,597		—		—		579,122		579,122
Accrued interest receivable	3,091		—		1,216		1,875		3,091
Financial liabilities
Deposits	857,269		446,048		413,477		—		859,525
Federal funds purchased and securities sold under agreements to repurchase	12,520		12,520		—		—		12,520
Other borrowings	20,000		20,000		—		—		20,000
Accrued interest payable	834		10		824		—		834

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NOTE 20 – FAIR VALUE OPTION

Authoritative accounting guidance provides a fair value option election (FVO) that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. The guidance permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

The Company records all newly-originated mortgage loans held-for-sale under the fair value option. Origination fees and costs are recognized in earnings at the time of origination. The servicing value is included in the fair value of the loan and recognized at origination of the loan. The Company uses derivatives to hedge changes in servicing value as a result of including the servicing value in the fair value of the loan. The estimated impact from recognizing servicing value, net of related hedging costs, as part of the fair value of the loan is captured in mortgage banking income.

As of December 31, 2014 and 2013, there were $2.3 million and $220 thousand in loans held-for-sale recorded at fair value, respectively. These amounts do not include loans moved from loans held-for-investment to the loans held-for-sale category during 2013. As of December 31, 2014 and 2013, there were no loans ninety days or more past due for which the fair value option had been elected. For the years ended December 31, 2014, 2013 and 2012, approximately $1.3 million, $1.1 million and $974 thousand, respectively, in mortgage banking income was recognized.

For the year ended December 31, 2014, the Company recognized a gain of $66 thousand due to changes in fair value for loans held-for-sale in which the fair value option was elected. For the year ended December 31, 2013, the Company recognized a loss of $345 thousand and for the year ended December 31, 2012, the Company recognized a gain of $249 thousand due to changes in fair value for loans held-for-sale in which the fair value option was elected. This amount does not reflect the change in fair value attributable to the related hedges the Company used to mitigate the interest rate risk associated with loans held for sale. The changes in the fair value of the hedges were also recorded in mortgage banking income, and decreased income by $7 thousand for the year ended December 31, 2014. The changes in the fair value of the hedges increased income by $328 thousand and reduced income by $245 thousand for the years ended December 31, 2013 and 2012, respectively.

The following tables provides the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held-for-sale for which the fair value option has been elected.

	As of December 31, 2014						As of December 31, 2013
	Aggregate fair value		Aggregate unpaid principal balance under FVO		Fair value carrying amount over (under) unpaid principal		Aggregate fair value	Aggregate unpaid principal balance under FVO	Fair value carrying amount over (under) unpaid principal
	(in thousands)
Loans held-for-sale	$	2,298	$	2,235	$	63	220	211	9

NOTE 21 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company records all derivative financial instruments at fair value in the financial statements. It is the policy of the Company to enter into various derivatives both as a risk management tool and in a dealer capacity, as necessary, to facilitate client transactions. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks. As of December 31, 2014, the Company has not entered into a transaction in a dealer capacity.

When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge) or (2) a hedge of a forecasted transaction, such as the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge).

The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective. Methodologies related to hedge effectiveness and ineffectiveness include (1) statistical regression analysis of changes in the cash flows of the actual derivative and a perfectly effective hypothetical derivative, (2) statistical regression analysis of changes in fair values of the actual derivative and the hedged item and (3) comparison of the critical terms of the hedged item and the hedging derivative. Changes in fair value of a derivative that is highly effective and that has been designated and qualifies as a fair value hedge are recorded in current period earnings, along with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Changes in the fair value of a derivative that is highly effective and that has been designed and qualifies as a cash flow hedge are initially recorded in other comprehensive income and reclassified to earnings in conjunction with the recognition of the earnings impacts of the hedged item; any ineffective portion is recorded in current period earnings. Designated hedge

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transactions are reviewed at least quarterly for ongoing effectiveness. Transactions that are no longer deemed to be effective are removed from hedge accounting classification and the recorded impacts of the hedge are recognized in current period income or expense in conjunction with the recognition of the income or expense on the originally hedged item.

The Company’s derivatives are based on underlying risks, primarily interest rates. The Company has utilized swaps to reduce the risks associated with interest rates. Swaps are contracts in which a series of net cash flows, based on a specific notional amount that is related to an underlying risk, are exchanged over a prescribed period. The Company also utilizes forward contracts on the held for sale loan portfolio. The forward contracts hedge against changes in fair value of the held for sale loans.

Derivatives expose the Company to credit risk. If the counterparty fails to perform, the credit risk is equal to the fair value gain of the derivative. The credit exposure for swaps is the replacement cost of contracts that have become favorable. Credit risk is minimized by entering into transactions with high quality counterparties that are initially approved by the Board of Directors and reviewed periodically by the Asset/Liability Committee. It is the Company’s policy of requiring that all derivatives be governed by an International Swap and Derivatives Associations Master Agreement (ISDA). Bilateral collateral agreements may also be required.

During the year ended December 31, 2014, the Company entered into an interest rate swap with a gross notional value of $40.0 million. The interest rate swap is being utilized to minimize interest rate risk by converting variable rate cash flows into fixed rate cash flows. During the year ended December 31, 2013, the Company entered into various derivative contracts with a gross notional value of $11.0 million. The derivatives were utilized in lending transactions to minimize interest rate risk by converting fixed rate cash flows into variable rate cash flows.

On August 28, 2007 and March 26, 2009, the Company elected to terminate a series of interest rate swaps with a total notional value of $150 million and $50 million, respectively. At termination, the swaps had market values of $2.0 million and $5.8 million, respectively. These gains are being accreted into interest income over the remaining lives of the originally hedged items. The Company did not recognize any income for the years ended December 31, 2014 and 2013 and recognized $1.3 million for the year ended December 31, 2012.

The following table presents the cash flow and fair value hedges as of December 31, 2014.

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income		Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Interest rate swap	$	40,000	$	—	$	45	$	45	April 1, 2020
Forward loan sales contracts	2,298		—		63		90		Various
	$	42,298	$	—	$	108	$	135
Fair Value hedges:
Zero premium collar	$	17,604	$	1,028	$	—	$	—	June 10, 2023
Cash flow swap	17,604		—		1,028		—		June 10, 2023
	$	35,208	$	1,028	$	1,028	$	—

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The following table presents additional information on the active derivative position at December 31, 2014.

Consolidated Balance Sheet Presentation

Consolidated Income Statement Presentation

Assets

Liabilities

Gains

Notional

Classification

Amount

Classification

Amount

Classification

Amount Recognized

(in thousands)

Hedging Instrument:

Forward contracts

$

2,298

Other assets

$

—

Other liabilities

$

63

Noninterest income – other

$

(53

)

Zero premium collar

$

17,604

Other assets

$

1,028

Other liabilities

N/A

Noninterest income – other

$

1,028

Cash flow swap

$

17,604

Other assets

N/A

Other liabilities

$

1,028

Noninterest expense – other

$

1,028

Interest rate swap

$

40,000

Other assets

N/A

Other liabilities

$

45

Noninterest income – other

$

—

Hedged Items:

Loans held for sale

N/A

Loans held for sale

$

2,298

N/A

N/A

Noninterest income – other

N/A

Loans

N/A

Loans

$

17,604

N/A

N/A

Noninterest income – other

N/A

Short-term FHLB advance

N/A

N/A

N/A

Short-term FHLB advance

$

45

Noninterest income – other

N/A

For the year ended December 31, 2014, no significant amounts were recognized for hedge ineffectiveness.

The following table presents the cash flow hedges as of December 31, 2013:

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income		Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Forward contracts	$	220	$	—	$	9	$	37	various
Total	$	220	$	—	$	9	$	37
Fair value hedges:
Zero premium collar	$	5,495	$	15	$	—	$	—	June 10, 2023
Cash flow swap	5,495		—		15		—		June 10, 2023
Total	$	10,990	$	15	$	—	$	—

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The following table presents additional information on the active derivative positions as of December 31, 2013.

			Consolidated Balance Sheet Presentation						Consolidated Income Statement Presentation
			Assets			Liabilities			Gains
	Notional		Classification	Amount		Classification	Amount		Classification	Amount Recognized
	(in thousands)
Hedging Instrument:
Forward contracts	$	220	Other assets	$	—	Other liabilities	$	9	Noninterest income – other	$	17
Zero premium collar	$	5,495	Other assets	$	15	Other liabilities	N/A		Noninterest income – other	$	15
Cash flow swap	$	5,495	Other assets	N/A		Other liabilities	$	15	Noninterest expense – other	$	15
Hedged Items:
Loans held for sale	N/A		Loans held for sale	$	220	N/A	N/A		Noninterest income – other	N/A
Loans	N/A		Loans	$	5,495	N/A	N/A		Noninterest income – other	N/A

For the year ended December 31, 2013, no significant amounts were recognized for hedge ineffectiveness.

NOTE 22 – COMMITMENTS AND CONTINGENCIES

The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and the issuance of financial guarantees in the form of financial and performance standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as they do for on-balance-sheet instruments.

The Company’s maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at December 31, 2014 and December 31, 2013 was as follows:

	December 31, 2014		December 31, 2013
	(in thousands)
Commitments to extend credit - fixed rate	$	37,819	$	36,273
Commitments to extend credit - variable rate	94,568		94,857
Total commitments to extend credit	$	132,387	$	131,130
Standby letters of credit	$	3,272	$	3,208

Commitments to extend credit are agreements to lend to customers. Standby letters of credit are contingent commitments issued by the Company to guarantee performance of a customer to a third party under a contractual non-financial obligation for which it receives a fee. Financial standby letters of credit represent a commitment to guarantee customer repayment of an outstanding loan or debt instrument. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company on extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Additionally, in the ordinary course of business, the Company is subject to regulatory examinations, information gathering requests, inquiries, and investigations. The Company establishes accruals for litigation and regulatory matters when those matters present loss contingencies that the Company determines to be both probable and reasonably estimable. Based on current knowledge, advice of counsel and available insurance coverage, management does not believe that liabilities arising from legal

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claims, if any, will have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows. However, in light of the significant uncertainties involved in these matters, the early stage of various legal proceedings, and the indeterminate amount of damages sought in some of these matters, it is possible that the ultimate resolution of these matters, if unfavorable, could be material to the Company’s results of operations for any particular period.

The Company intends to vigorously pursue all available defenses to these claims. There are significant uncertainties involved in any litigation. Although the ultimate outcome of these lawsuits cannot be ascertained at this time, based upon information that presently is available to it, management is unable to predict the outcome of these cases and cannot determine the probability of an adverse result or reasonably estimate a range of potential loss, if any. In addition, management is unable to estimate a range of reasonably possible losses with respect to these claims.

NOTE 23—OTHER ASSETS AND OTHER LIABILITIES

Other assets and other liabilities consist of the following:

	December 31,
	2014		2013
	(in thousands)
Other assets:
Equity securities	$	6,878	$	6,338
Interest receivable	2,796		3,091
Prepaid expenses	1,516		1,938
Security deposits	—		2,000
Interest rate swap	1,028		23
Other	431		336
Total other assets	$	12,649	$	13,726
Other liabilities:
Accrued interest payable	$	615	$	834
Accrued expenses	2,290		1,565
Supplemental executive retirement plan accrual	104		100
Reserve for unfunded commitments	306		282
Interest rate swap	1,028		18
Other	1,558		1,338
Total other liabilities	$	5,901	$	4,137

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NOTE 24 – SUPPLEMENTAL FINANCIAL DATA

Components of other noninterest income or other noninterest expense in excess of 1% of the aggregate of total interest income and noninterest income are shown in the following table.

	2014			2013			2012
	(in thousands)
Other noninterest income—
Point-of-service fees	$	1,702		$	1,590		$	1,547
Bank-owned life insurance income	1,055			960			995
Trust fees	913			715			523
Interest rate swap gain	1,004			23			—
All other items	985			841			921
Total other noninterest income	$	5,659		$	4,129		$	3,986
Other noninterest expense—
Professional fees	$	2,835		$	4,893		$	3,772
FDIC insurance	1,319			2,300			3,352
Data processing	2,289			2,214			2,664
Printing and supplies	648			649			419
Write-downs on other real estate owned and repossessions	733			2,373			5,051
Gains on other real estate owned, repossessions and fixed assets	(487		)	(359		)	(188		)
OREO and repossession holding costs	802			1,320			1,411
Communications	546			583			665
Advertising	556			311			297
ATM/debit card fees	1,041			806			675
Insurance	1,219			2,125			1,341
OCC Assessments	363			470			504
Interest rate swap loss	1,010			18			—
All other items	2,202			1,829			1,781
Total other noninterest expense	$	15,076		$	19,532		$	21,744

Amounts less than 1% of the aggregate of total interest income plus noninterest income for each year shown are included in "All other items" for the applicable year.

NOTE 25—CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Financial information pertaining only to First Security Group, Inc. is as follows:

CONDENSED BALANCE SHEET

	2014		2013
	(in thousands)
ASSETS
Cash and due from bank subsidiary	$	225	$	1,411
Investment in common stock of subsidiary	85,131		77,501
Other assets	4,760		4,908
TOTAL ASSETS	$	90,116	$	83,820
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES	$	136	$	172
SHAREHOLDERS’ EQUITY	89,980		83,648
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	90,116	$	83,820

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CONDENSED STATEMENT OF OPERATIONS

	2014			2013			2012
	(in thousands)
INCOME
Management fees	$	—		$	—		$	—
Other	—			344			—
Total income	—			344			—
EXPENSES
Salaries and employee benefits	1,818			1,728			987
Other	561			530			848
Total expenses	2,379			2,258			1,835
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED EARNINGS IN SUBSIDIARY	(2,379		)	(1,914		)	(1,835		)
Income tax benefit	—			(412		)	(690		)
LOSS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS IN SUBSIDIARY	(2,379		)	(1,502		)	(1,145		)
Equity in undistributed income (loss) in subsidiary	4,796			(11,947		)	(36,425		)
NET INCOME (LOSS)	2,417			(13,449		)	(37,570		)
Preferred stock dividends	—			(929		)	(1,650		)
Accretion on preferred stock discount	—			(452		)	(428		)
Effect of exchange of preferred stock to common stock	—			26,179			—
NET INCOME (LOSS) ALLOCATED TO COMMON STOCKHOLDERS	$	2,417		$	11,349		$	(39,648	)

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CONDENSED STATEMENT OF CASH FLOWS

	2014			2013			2012
	(in thousands)
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income (loss)	$	2,417		$	(13,449	)	$	(37,570	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities—
Equity in undistributed (loss) income of subsidiary	(4,796		)	11,947			36,425
Share-based compensation	1,080			601			215
ESOP compensation	—			—			82
(Increase) decrease in other assets	149			(1,928		)	340
(Decrease) increase in other liabilities	(36		)	(341		)	188
Net cash used in operating activities	(1,186		)	(3,170		)	(320		)
CASH FLOWS USED IN INVESTING ACTIVITIES
Equity investment in subsidiary	—			(71,400		)	—
Net cash used in investing activities	—			(71,400		)	—
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock	—			75,126			—
Proceeds from exercise of stock options	—			14			—
Net cash from financing activities	—			75,140			—
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(1,186		)	570			(320		)
CASH AND CASH EQUIVALENTS—beginning of year	1,411			841			1,161
CASH AND CASH EQUIVALENTS—end of year	$	225		$	1,411		$	841
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Income taxes paid	$	—		$	—		$	70

NOTE 26—RELATED PARTY TRANSACTIONS

From January 1, 2010 to June 30, 2010 and for the years ended December 31, 2009 and 2008, the Company was party to an agreement with Alpha Antiques, whose sole proprietor, Judy Holley, is the spouse of Rodger Holley, the Company’s former Chairman and Chief Executive Officer. Under the agreement, Alpha Antiques provided design and procurement services relating to the design and construction of the Bank’s branches and the management of OREO properties, for which it paid $23 thousand in 2012. In addition, during the first half of 2012, the use of a Company car was provided to assist in managing the increased OREO properties.

During 2012 and 2009, the Company entered into certain sale transactions with Ray Marler, a former director of the Company. The Company sold repossessed assets to companies owned by Mr. Marler. Gross proceeds to the Company during 2012 totaled $67 thousand. The Company also utilized Mr. Marler’s companies for certain services associated with other real estate owned. Payments for these services totaled $6 thousand for the year ended December 31, 2012.

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NOTE 27—QUARTERLY SUMMARIZED FINANCIAL INFORMATION (UNAUDITED)

	First Quarter 2014			Second Quarter 2014			Third Quarter 2014		Fourth Quarter 2014
	(in thousands, except per share amounts)
Interest income	$	8,329		$	8,843		$	9,780	$	8,939
Interest expense	1,404			1,298			1,293		995
Net interest income	6,925			7,545			8,487		7,944
Provision for loan and lease losses	(972		)	(270		)	11		(221		)
Net interest income after provision for loan and lease losses	7,897			7,815			8,476		8,165
Noninterest income	2,635			3,030			2,805		3,788
Noninterest expense	10,445			10,101			10,222		10,900
Income loss before income taxes	87			744			1,059		1,053
Income tax provision (benefit)	132			131			132		131
Net (loss) income	(45		)	613			927		922
Net (loss) income allocated to common stockholders	$	(45	)	$	613		$	927	$	922
Net (loss) income per share
Net (loss) income per share—basic	$	—		$	0.01		$	0.01	$	0.01
Net (loss) income per share—diluted	$	—		$	0.01		$	0.01	$	0.01
Shares outstanding
Basic1	65,726			65,731			65,869		65,915
Diluted1	65,726			65,737			65,874		65,950

	First Quarter 2013			Second Quarter 2013			Third Quarter 2013			Fourth Quarter 2013
	(in thousands, except per share amounts)
Interest income	$	7,809		$	7,785		$	8,171		$	8,149
Interest expense	2,568			2,299			2,006			1,671
Net interest income	5,241			5,486			6,165			6,478
Provision (credit) for loan and lease losses	678			(826		)	(1,632		)	(955		)
Net interest income after provision (credit) for loan and lease losses	4,563			6,312			7,797			7,433
Noninterest income	2,013			2,190			2,292			2,188
Noninterest expense	13,835			12,578			11,197			10,150
Loss before income taxes	(7,259		)	(4,076		)	(1,108		)	(529		)
Income tax provision (benefit)	119			(83		)	322			119
Net loss	(7,378		)	(3,993		)	(1,430		)	(648		)
Dividends and accretion on preferred stock	(524		)	(857		)	—			—
Effect of exchange of preferred stock to common stock	$	—		$	26,179		$	—		$	—
Net (loss) income allocated to common stockholders	$	(7,902	)	$	21,329		$	(1,430	)	$	(648	)
Net (loss) income per share
Net (loss) income per share—basic	$	(4.90	)	$	0.39		$	(0.02	)	$	(0.01	)
Net (loss) income per share—diluted	$	(4.90	)	$	0.39		$	(0.02	)	$	(0.01	)
Shares outstanding
Basic	1,613			55,174			62,600			66,603
Diluted	1,613			55,176			62,600			66,603

_______________

¹ The sum of the quarterly net income (loss) per share (basic and diluted) differs from the annual net income (loss) per share(basic and diluted) because of the differences in the weighted average number of common shares outstanding and the common shares used in the quarterly and annual computations as well as differences in rounding.

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NOTE 28—BANK-OWNED LIFE INSURANCE

The Company’s Board of Directors approved the purchase of bank-owned life insurance ("BOLI") on January 26, 2005. The Company is the owner and beneficiary of these life insurance contracts. The Company invested a total of $17.3 million in nine bank-owned life insurance policies during the first half of 2005. In conjunction with the acquisitions of First State Bank and Jackson Bank, the Company assumed $362 thousand and $3.3 million, respectively, in bank-owned life insurance. The Company’s investment in bank-owned life insurance is as follows:

	2014		2013
	(in thousands)
Cash surrender value—beginning of year	$	28,346	$	27,576
Increase in cash surrender value, net of expenses	858		770
Cash surrender value—end of year	$	29,204	$	28,346

The Company reports income and expenses from the policies as other income and other expense, respectively, in the consolidated statements of operations and expenses. The income is not subject to tax and the expenses are not deductible for tax.

NOTE 29—CONCENTRATIONS OF CREDIT RISK

The Company offers a variety of loan products with payment terms and rate structures that have been designed to meet the needs of its customers within an established framework of acceptable credit risk. Payment terms range from fully amortizing loans that require periodic principal and interest payments to terms that require periodic payments of interest-only with principal due at maturity. Interest-only loans are a typical characteristic in commercial and home equity lines-of-credit and construction loans (residential and commercial). At December 31, 2014, the Company had approximately $260.7 million of interest-only loans, which primarily consist of residential real estate loans (35%), commercial real estate (38%) and commercial and industrial loans (15%). The loans have an average maturity of approximately fifteen years or less. The interest only loans are properly underwritten loans and are within the Company’s lending policies.

At December 31, 2014 and 2013, the Company did not offer, hold or service option adjustable rate mortgages that may expose the borrowers to future increases in repayments in excess of changes resulting solely from increases in the market rate of interest (loans subject to negative amortization).

The Company has branch locations in Dalton, Georgia where the local economy is generally dependent upon the carpet industry. The Company’s loan portfolio within the Dalton market totals $49.1 million.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

ITEM 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Our CEO and CFO have concluded that our Disclosure Controls were effective at a reasonable assurance level as of December 31, 2014.

137

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. Management based this assessment on criteria for effective internal control over financial reporting described in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014.

Crowe Horwath LLP, an independent registered public accounting firm, has audited the effectiveness of the Company’s internal controls over financial reporting as stated in their report which is included herein.

Changes in Internal Controls

There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

138

ITEM 9B. Other Information

Not applicable

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of our directors, officers and employees. We believe the Code is reasonably designed to deter wrongdoing and to promote honest and ethical conduct, including: the ethical handling of conflicts of interest; full, fair and accurate disclosure in filings and other public communications made by us; compliance with applicable laws; prompt internal reporting of violations of the Code; and accountability for adherence to the Code. We have posted a copy of our Code on our website at www.FSGBank.com.

The information required in Part III, Item 10 is incorporated by reference to the registrant’s definitive proxy statement for the 2015 annual meeting of the shareholders.

ITEM 11. Executive Compensation

The information required in Part III, Item 11 is incorporated by reference to the registrant’s definitive proxy statement for the 2015 annual meeting of the shareholders.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information regarding our equity compensation plans under which shares of our common stock are authorized for issuance. The equity compensation plans maintained by us are the First Security Group, Inc. Second Amended and Restated 1999 Long-Term Incentive Plan, the First Security Group, Inc. 2002 Long-Term Incentive Plan, as amended, and the First Security Group, Inc. 2012 Long-Term Incentive Plan, as amended. All data is presented as of December 31, 2014.

	Number of securities to be issued upon exercise of outstanding options and vesting of restricted awards	Weighted-average exercise price of outstanding options		Number of shares remaining available for future issuance under the Plans (excludes outstanding options)
Equity compensation plans approved by security holders	3,469,272	$	2.72	2,650,625
Equity compensation plans not approved by security holders	—	—		—
Total	3,469,272	$	2.72	2,650,625

The remaining information for this Item is incorporated by reference to the registrant’s definitive proxy statement for the 2015 annual meeting of the shareholders.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

Related Party Transactions Policy

The information required in Part III, Item 13 is incorporated by reference to the registrant’s definitive proxy statement for the 2015 annual meeting of the shareholders.

ITEM 14. Principal Accounting Fees and Services

The information required in Part III, Item 14 is incorporated by reference to the registrant’s definitive proxy statement for the 2015 annual meeting of the shareholders.

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PART IV

ITEM 15. Exhibits, Financial Statement Schedules

(a)(1) The list of all financial statements is included at Item 8.

(a)(2) The financial statement schedules are either included in the financial statements or are not applicable.

(a)(3) Exhibits Required by Item 601. The following exhibits are attached hereto or incorporated by reference herein

(numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the Securities and Exchange

Commission):

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation. 1
3.4	Amended and Restated Bylaws.2
4.1	Form of Common Stock Certificate.3
4.2	Tax Benefit Preservation Plan, dated October 30, 2012.4
10.1*	First Security’s Second Amended and Restated 1999 Long-Term Incentive Plan.3
10.2*	First Security’s Amended and Restated 2002 Long-Term Incentive Plan.5
10.3*	Form of Incentive Stock Option Award under the Second Amended and Restated 1999 Long-Term Incentive Plan.6
10.4*	Form of Incentive Stock Option Award under the 2002 Long-Term Incentive Plan.6
10.5*	Form of Non-qualified Stock Option Award under the 2002 Long-Term Incentive Plan.6
10.6*	Form of Restricted Stock Award under the 2002 Long-Term Incentive Plan.6
10.7*	First Security Group, Inc., 2012 Long-Term Incentive Plan. 7
10.8*	Form of Incentive Stock Option Award under the 2012 Long-Term Incentive Plan.8
10.9*	Form of Non-qualified Stock Option Award under the 2012 Long-Term Incentive Plan.8
10.10*	Form of Restricted Stock Award for a Director under the 2012 Long-Term Incentive Plan.9
10.11*	Form of Restricted Stock Award for an Employee under the 2012 Long-Term Incentive Plan.9
10.12*	Form of Modification to Award under the 2012 Long-Term Incentive Plan.10
10.13*	First Security Group, Inc. Non-Employee Director Compensation Policy.11
10.14*	Employment Agreement by and between D. Michael Kramer, First Security Group, Inc. and FSGBank, N.A., dated December 28, 2011.12
10.15*	Employment Agreement by and among D. Michael Kramer, First Security Group, Inc. and FSGBank, N.A., dated April 15, 2014. 13
10.16*	Employment Agreement by and among Denise M. Cobb, First Security Group, Inc. and FSGBank, N.A., dated April 15, 2014. 13
10.17*	Employment Agreement by and among John R. Haddock, First Security Group, Inc. and FSGBank, N.A., dated April 15, 2014. 13

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Exhibit Number	Description
10.18*	Employment Agreement by and between Christopher G. Tietz and FSGBank, N.A., dated April 15, 2014. 13
12.1	Ratio of Earnings to Fixed Charges.
21.1	Subsidiaries of the Registrant.2
23.1	Consent of Crowe Horwath LLP.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.
101	Interactive Data Files providing financial information from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 in XBRL (eXtensible Business Reporting Language).

1 Incorporated by reference to First Security’s Annual Report on Form 10-K for the year ended December 31, 2013.

2 Incorporated by reference to First Security’s Registration Statement on Form S-1 dated April 25, 2013, File No. 333-188137.

3 Incorporated by reference to First Security’s Registration Statement on Form S-1 dated April 20, 2001, File No. 333-59338.

4 Incorporated by reference to First Security's Current Report on Form 8-K filed October 30, 2012.

5 Incorporated by reference from Appendix A to First Security’s Proxy Statement filed April 30, 2007.

6 Incorporated by reference to First Security’s Annual Report on Form 10-K for the year ended December 31, 2004.

7 Incorporated by reference from Appendix A to First Security’s Proxy Statement filed June 18, 2013.

8 Incorporated by reference to First Security’s Annual Report on Form 10-K for the year ended December 31, 2012.

9 Incorporated by reference to the Current Report on Form 8-K filed July 26, 2013.

10 Incorporated by reference to the Current Report on Form 8-K filed March 4, 2014.

11 Incorporated by reference to First Security’s Annual Report on Form 10-K for the year ended December 31, 2008.

12 Incorporated by reference to the Current Report on Form 8-K filed December 29, 2011.

13 Incorporated by reference to First Security's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

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* The indicated exhibit is a compensatory plan required to be filed as an exhibit to this Form 10-K.

(b) The Exhibits not incorporated by reference herein are submitted as a separate part of this report.

(c) The financial statement schedules are either included in the financial statements or are not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST SECURITY GROUP, INC.
BY:	/S/    D. MICHAEL KRAMER
	D. Michael Kramer
	Chief Executive Officer

DATE: March 12, 2015

Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2015.

Signature	Title
/S/    D. MICHAEL KRAMER	Chief Executive Officer, President and Director
D. Michael Kramer
(Principal Executive Officer)
/S/    JOHN R. HADDOCK	Chief Financial Officer, Executive Vice President and Secretary
John R. Haddock
(Principal Financial and Accounting Officer)
/S/ Larry D. Mauldin	Chairman of the Board and Director
Larry D. Mauldin
/S/    Henchy R. Enden	Director
Henchy R. Enden
/s/ William F. Grant, III	Director
William F. Grant, III
/S/    WILLIAM C. HALL	Director
William C. Hall
/S/    Adam G. Hurwich	Director
Adam G. Hurwich
/S/    CAROL H. JACKSON	Director
Carol H. Jackson
/S/    KELLY P. KIRKLAND	Director
Kelly P. Kirkland
/S/    ROBERT R. LANE	Director
Robert R. Lane

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