First Security (FSGI) 10-Q/A 2007 Q1 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from ____________________ to _____________________.

COMMISSION FILE NO. 000-49747

FIRST SECURITY GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

Tennessee	58-2461486
(State of Incorporation)	(I.R.S. Employer Identification No.)
531 Broad Street, Chattanooga, TN	37402
(Address of principal executive offices)	(Zip Code)

(423) 266-2000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year,

if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes           T           No           £

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in  Rule 12b-2 of the Exchange Act.

Large accelerated filer  £ Accelerated filer  T Non-accelerated filer  £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes           £           No           T

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

Common Stock, $0.01 par value:

17,611,182 shares outstanding and issued as of May 8, 2007

EXPLANATORY NOTE

As described in a Current Report on Form 8-K filed December 18, 2007 and as discussed in Note 2 of the consolidated financial statements included herein, First Security Group, Inc. (First Security) is filing this amendment to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (Form 10-Q) to amend and restate its financial statements and other financial information as of and for the quarter ended March 31, 2007 as a result of First Security’s decision to reverse its utilization of Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Liabilities, with respect to certain investment securities.

The Form 10-Q as amended hereby continues to speak as of May 10, 2007, the date of the originally filed Form 10-Q, and the disclosures included in the Form 10-Q as amended hereby have not been updated to speak as of any later date.  Information not affected by the restatement of financial statements or information as of and for the three months ended March 31, 2007 is unchanged and reflects the disclosures made at the time of filing the original Form 10-Q.

For convenience, the entire Quarterly Report of Form 10-Q for the quarterly period ended March 31, 2007 has been re-filed in this Form 10-Q/A.  Pursuant to SEC Rule 12b-15, in connection with this filing, First Security is filing updated exhibits 31.1, 31.2, 32.1 and 32.2.

First Security Group, Inc. and Subsidiary

Form 10-Q/A

INDEX

PART I.	FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements
	Consolidated Balance Sheets - March 31, 2007, December 31, 2006 and March 31, 2006	1
	Consolidated Income Statements - Three months ended March 31, 2007 and 2006	3
	Consolidated Statement of Stockholders’ Equity - Three months ended March 31, 2007	4
	Consolidated Statements of Cash Flows - Three months ended March 31, 2007 and 2006	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	45
SIGNATURES		46

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
	March 31,		December 31,		March 31,
	2007		2006		2006
(in thousands)	(unaudited)				(unaudited)
	(Restated)
ASSETS
Cash and Due from Banks	$	31,472	$	26,512	$	27,824
Federal Funds Sold and Securities Purchased under Agreements to Resell		-		1,600		16,800
Cash and Cash Equivalents		31,472		28,112		44,624
Interest Bearing Deposits in Banks		189		481		1,696
Securities Available-for-Sale		153,649		153,759		157,425
Loans Held for Sale		5,251		7,524		6,177
Loans		858,689		840,069		760,445
Total Loans		863,940		847,593		766,622
Less:  Allowance for Loan Losses		10,154		9,970		10,103
		853,786		837,623		756,519
Premises and Equipment, net		35,830		35,835		31,543
Goodwill		27,156		27,156		26,965
Intangible Assets		3,921		4,185		5,061
Other Assets		41,774		42,652		38,176
TOTAL ASSETS	$	1,147,777	$	1,129,803	$	1,062,009

(See Accompanying Notes to Consolidated Financial Statements)

1

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
	March 31,			December 31,			March 31,
	2007			2006			2006
(in thousands, except share data)	(unaudited)						(unaudited)
	(Restated)
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest Bearing Demand	$	166,492		$	168,654		$	159,441
Interest Bearing Demand		68,649			66,787			79,117
		235,141			235,441			238,558
Savings and Money Market Accounts		135,897			135,784			149,176
Time Deposits:
Certificates of Deposit of $100 thousand or more		212,536			205,428			171,733
Certificates of Deposit less than $100 thousand		263,514			258,456			236,801
Brokered Certificates of Deposit		79,225			86,892			86,224
		555,275			550,776			494,758
Total Deposits		926,313			922,001			882,492
Federal Funds Purchased and Securities Sold under Agreements to Repurchase		26,991			20,851			19,483
Security Deposits		3,704			3,920			4,369
Other Borrowings		31,928			24,838			8,147
Other Liabilities		12,442			13,405			9,377
Total Liabilities		1,001,378			985,015			923,868
STOCKHOLDERS’ EQUITY
Common stock - $.01 par value - 50,000,000 shares authorized; 17,678,082 issued as of March 31, 2007; 17,762,278 issued as of December 31, 2006; 17,573,707 issued as of March 31, 2006		123			123			122
Paid-In Surplus		123,448			124,293			121,832
Unallocated ESOP Shares		(4,876	)		(5,094	)		(1,349	)
Retained Earnings		27,827			26,337			19,425
Accumulated Other Comprehensive Loss		(123	)		(871	)		(1,889	)
Total Stockholders’ Equity		146,399			144,788			138,141
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,147,777		$	1,129,803		$	1,062,009

(See Accompanying Notes to Consolidated Financial Statements)

2

First Security Group, Inc. and Subsidiary
Consolidated Income Statements
(unaudited)
	Three Months Ended
	March 31,
(in thousands, except per share data)	2007			2006
INTEREST INCOME	(Restated)
Loans, including fees	$	18,372		$	15,619
Debt Securities – taxable		1,292			1,277
Debt Securities – non-taxable		410			381
Other		24			145
Total Interest Income		20,098			17,422
INTEREST EXPENSE
Interest Bearing Demand Deposits		125			159
Savings Deposits and Money Market Accounts		771			644
Certificates of Deposit of $100 thousand or more		2,629			1,650
Certificates of Deposit of less than $100 thousand		3,152			2,200
Brokered Certificates of Deposit		982			847
Other		580			157
Total Interest Expense		8,239			5,657
NET INTEREST INCOME		11,859			11,765
Provision for Loan Losses		417			543
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,442			11,222
NONINTEREST INCOME
Service Charges on Deposit Accounts		1,140			1,153
Other-than-Temporary Impairment of Securities		(584	)		-
Other		1,658			1,283
Total Noninterest Income		2,214			2,436
NONINTEREST EXPENSES
Salaries and Employee Benefits		5,822			5,607
Expense on Premises and Fixed Assets, net of rental income		1,627			1,665
Other		2,749			2,767
Total Noninterest Expenses		10,198			10,039
INCOME BEFORE INCOME TAX PROVISION		3,458			3,619
Income Tax Provision		1,104			1,145
NET INCOME	$	2,354		$	2,474
NET INCOME PER SHARE:
Net Income Per Share - Basic	$	0.14		$	0.14
Net Income Per Share - Diluted	$	0.13		$	0.14
Dividends Declared Per Common Share	$	0.05		$	0.03

 (See Accompanying Notes to Consolidated Financial Statements)

3

First Security Group, Inc. and Subsidiary
Consolidated Statement of Stockholders’ Equity
(Restated)												Accumulated
												Other
	Common Stock					Paid-In			Retained			Comprehensive			Unallocated
(in thousands)	Shares			Amount		Surplus			Earnings			Loss			ESOP Shares			Total
Balance - December 31, 2006		17,762		$	123	$	124,293		$	26,337		$	(871	)	$	(5,094	)	$	144,788
Comprehensive income -
Net Income (unaudited)										2,354									2,354
Change in Net Unrealized Loss on Securities Available for Sale, net of tax and reclassification adjustments (unaudited)													748						748
Total Comprehensive income																			3,102
Issuance of Stock (unaudited)		8			-		56												56
Dividends Paid ($0.05 per share) (unaudited)										(864	)								(864	)
Stock-based Compensation  (unaudited)							160												160
ESOP Allocation (unaudited)							29									218			247
Repurchase and Retirement of Common Stock (92,056 shares) (unaudited)		(92	)		-		(1,090	)											(1,090	)
Balance – March 31, 2007 (unaudited)		17,678		$	123	$	123,448		$	27,827		$	(123	)	$	(4,876	)	$	146,399

(See Accompanying Notes to Consolidated Financial Statements)

4

First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
	Three Months Ended
	March 31,
(in thousands)	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES	(Restated)
Net Income	$	2,354		$	2,474
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities -
Provision for Loan Losses		417			543
Amortization, net		301			415
Stock-Based Compensation		160			154
Depreciation		658			589
Gain on Sale of Premises and Equipment		(55	)		(18	)
Gain on Sale of Other Real Estate and Repossessions, net		(54	)		(71	)
Write-down of Other Real Estate and Repossessions		199			200
Other-than-Temporary Impairment of Securities		584			-
Accretion of Fair Value Adjustment, net		(135	)		(243	)
Changes in Operating Assets and Liabilities -
Loans Held for Sale		2,273			1,933
Interest Receivable		261			(201	)
Other Assets		934			1,228
Interest Payable		665			836
Other Liabilities		(1,982	)		(682	)
Net Cash Provided by Operating Activities		6,580			7,157
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Interest Bearing Deposits in Banks		292			(543	)
Activity in Available-for-Sale Securities
Maturities, Prepayments, and Calls		3,622			4,292
Purchases		(3,000	)		(6,268	)
Loan Originations and Principal Collections, net		(20,098	)		(20,933	)
Proceeds from Sale of Premises and Equipment		318			313
Proceeds from Sales of Other Real Estate and Repossessions		913			819
Additions to Premises and Equipment		(914	)		(823	)
Capital Improvements to Repossessions		(1	)		(165	)
Net Cash Used in Investing Activities		(18,868	)		(23,308	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposits		4,316			21,003
Net Increase in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		6,140			2,589
Net Increase (Decrease) of Other Borrowings		7,090			(2,003	)
Proceeds from Exercise of Stock Options		56			50
Repurchase and Retirement of Common Stock		(1,090	)		(917	)
Purchase of ESOP Shares		-			(1,258	)
Dividends Paid on Common Stock		(864	)		(441	)
Net Cash Provided by Financing Activities		15,648			19,023
NET CHANGE IN CASH AND CASH EQUIVALENTS		3,360			2,872
CASH AND CASH EQUIVALENTS - beginning of period		28,112			41,752
CASH AND CASH EQUIVALENTS - end of period	$	31,472		$	44,624

 (See Accompanying Notes to Consolidated Financial Statements)

5

	Three Months Ended
	March 31,
(in thousands)	2007		2006
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES	(Restated)
Foreclosed Properties and Repossessions	$	1,674	$	758
Purchase Accounting Adjustment to Goodwill	$	-	$	67
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest Paid	$	7,574	$	4,821
Income Taxes Paid	$	360	$	162

(See Accompanying Notes to Consolidated Financial Statements)

6

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of financial condition and the results of operations have been included. All such adjustments were of a normal recurring nature.

The consolidated financial statements include the accounts of First Security Group, Inc. and its subsidiary, which is wholly-owned.  All significant intercompany balances and transactions have been eliminated.

Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or any other period. These interim financial statements should be read in conjunction with the Company’s latest annual consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

NOTE 2 – RESTATEMENT AND FAIR VALUE MEASUREMENTS

In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, Fair Value Measurements (SFAS 157), to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements.  The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability.  The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions.  Expanded disclosures are also required about the use of fair value to measure assets and liabilities.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to FASB Statement No. 115 (SFAS 159).  SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value.  Most of the provisions of this statement apply only to entities that elect the fair value option.  However, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities.  SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.

Effective January 1, 2007, the Company elected to early adopt SFAS 157 and SFAS 159.  The Company selected the fair value option on approximately $27.1 million of investment securities previously classified as available-for-sale securities as of January 1, 2007.  The Company’s selection matched the average balance of the Company's overnight borrowings from the Federal Home Loan Bank (FHLB) for the month of March 2007.

The adoption resulted in a one-time cumulative after-tax reclassification of $481 thousand from other comprehensive loss to retained earnings.  This reclassification had no effect on total capital since both accounts are included in stockholders’ equity section of the consolidated balance sheets.

After consultation with the Office of the Comptroller of the Currency (OCC), FSGBank’s primary federal banking regulator, the Company has decided to reverse its decision to utilize the fair value option under SFAS 159 for the valuation of the previously selected securities.  The decision was recommended by management and approved by the Board of Directors, in consultation with the Company's independent registered public accounting firm.  Based on discussions with the OCC, it was determined that the lack of on-going use of the fair value option, as evidenced by the subsequent sales in April 2007, did not meet the intent and spirit of the standard, and thus the election was deemed non-substantive for the Call Report, the required regulatory financial filing used by the OCC.

7

The securities previously reported as trading are reported as available-for-sale and an other-than-temporary impairment charge was recognized for the quarterly period ended March 31, 2007.  This is consistent with the Company’s understanding of the views of the Securities and Exchange Commission (SEC), based on filings of other registrants, and with the views of the OCC based on discussions with the Chief Accountant’s Office of the OCC.

Accordingly, the Company recognized a charge to earnings for other-than-temporary impairment of securities of $584 thousand as of March 31, 2007.  The subsequent sales in April 2007 resulted in an additional loss of $168 thousand that will be recognized in the second quarter of 2007.  The other-than-temporary impairment charge represents the loss position of the securities as of March 31, 2007.  The factors considered for the securities impairment test included 1) the continuing unrealized loss positions, 2) the change in the intent of the holding period and 3) the sale of the securities after the balance sheet date but prior to the filing of the March 31, 2007 Form 10-Q on May 10, 2007.  As the Company had not decided to sell the securities as of the balance sheet date, the impairment includes only the loss through the balance sheet date.  Also as part of the restatement, the Company recognized additional premium amortization on the restated available-for-sale securities of approximately $5 thousand as a reduction of interest income and reversed reported trading securities gains of $139 thousand for the first quarter of 2007.  The effect of these adjustments reduced income before income taxes by $728 thousand, reduced income tax expense by $247 thousand and reduced net income by $481 thousand or $0.02 and $0.03 per basic and dilutive share, respectively, for the period ended March 31, 2007.

Excluding the securities previously selected for the fair value option under SFAS 159 as described above, the Company currently has the ability and intent to hold the remaining securities portfolio until maturity.  However, should conditions change, unpledged securities may be sold.

8

The following table provides the previously reported and the restated amounts as of and for the three months ended March 31, 2007:

	As of and for the Three Months Ended March 31, 2007
(in thousands, except per share data)	Previously Reported			Restated
Consolidated Balance Sheets:
Assets:
Trading Assets	$	27,213		$	-
Securities Available-for-Sale		126,436			153,649
Other Assets		41,526			41,774
Total Assets		1,147,529			1,147,777
Liabilities:
Other Liabilities		12,194			12,442
Total Liabilities		1,001,130			1,001,378
Total Liabilities and Stockholders’ Equity		1,147,529			1,147,777
Consolidated Income Statements:
Interest Income:
Debt Securities – taxable	$	1,013		$	1,292
Trading Assets		284			-
Total Interest Income		20,103			20,098
Net Interest Income		11,864			11,859
Net Interest Income after Provision for Loan Losses		11,447			11,442
Noninterest Income:
Gain on Trading Assets, net		139			-
Other-than-Temporary Impairment of Securities		-			(584	)
Total Noninterest Income		2,937			2,214
Income before Income Tax Provision		4,186			3,458
Income Tax Provision		1,351			1,104
Net Income		2,835			2,354
Net Income Per Share:
Net Income Per Share – Basic	$	0.16		$	0.14
Net Income Per Share – Diluted		0.16			0.13
Consolidated Statement of Stockholders’ Equity:
Net Income	$	2,835		$	2,354
Cumulative adjustment for adoption of SFAS 159 - Retained Earnings		481			-
Cumulative adjustment for adoption of SFAS 159 - Accumulated Other Comprehensive Loss		(481	)		-
Change in Net Unrealized Loss on Securities Available-for-Sale, net of tax and reclassification adjustments		267			748
Consolidated Statements of Cash Flows:
Cash Flows from Operating Activities:
Net Income	$	2,835		$	2,354
Amortization, net		296			301
Gains on Trading Assets, net		(139	)		-
Other-than-Temporary Impairment of Securities		-			584
Changes in Operating Assets and Liabilities - Other Assets		1,182			934
Changes in Operating Assets and Liabilities - Other Liabilities		(1,983	)		(1,982	)

9

NOTE 3 – COMPREHENSIVE INCOME

In accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income, the Company is required to report “comprehensive income,” a measure of all changes in equity, not only reflecting net income but certain other changes as well. Comprehensive income for the three-month period ended March 31, 2007 and 2006, respectively, was as follows:

	Three Months Ended March 31,
	2007			2006
	(in thousands)
	(Restated)
Net income	$	2,354		$	2,474
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized net gain (loss) on securities arising during the period		550			(470	)
Tax benefit (expense) related to unrealized net gain (loss)		(187	)		160
Reclassification adjustments for realized loss included in net income		584			-
Tax benefit related to net loss realized in net income		(199	)		-
Unrealized gain (loss) on securities, net of tax		748			(310	)
Comprehensive income, net of tax	$	3,102		$	2,164

NOTE 4 – EARNINGS PER SHARE

The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding options using the treasury stock method.  The computation of basic and diluted earnings per share is as follows:

	Three Months Ended March 31,
	2007		2006
	(in thousands, except per share data)
	(Restated)
Net income	$	2,354	$	2,474
Denominator:
Weighted average common shares outstanding		17,241		17,489
Equivalent shares issuable upon exercise of stock options		400		363
Diluted shares		17,641		17,852
Net income per share:
Basic	$	0.14	$	0.14
Diluted	$	0.13	$	0.14

NOTE 5 – STOCK-BASED COMPENSATION

As of March 31, 2007, the Company has two stock-based compensation plans, the 2002 Long-Term Incentive Plan (2002 LTIP) and the 1999 Long-Term Incentive Plan (1999 LTIP).  The plans are administered by the Compensation Committee of the Board of Directors (the Committee), which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the award.  The plans are described in further detail below.

The 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 annual meeting to increase the number of shares available for issuance under the 2002 LTIP by 480 thousand shares.  Eligible participants include eligible employees, officers, consultants and directors of the Company or any affiliate.  Pursuant to the 2002 LTIP, the total number of shares of stock authorized for awards was 768 thousand, of which not more than 20% may be granted as awards of restricted stock.  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 grant date, are 10% owners of the Company’s voting stock (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.

10

Participation in the 1999 LTIP is limited to eligible employees.  The total number of shares of stock authorized for awards was 936 thousand, 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 were granted at a price not less than the fair market value of the stock as of the date of the grant.  Options were to 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.  Each award vests in approximately equal percentages each year over a period of not less than three years (with the exception of five grants for a total of 168 thousand shares which vest in approximately equal percentages at 6 months, 18 months and 30 months) and vest from the date of grant as determined by the Committee subject to accelerated vesting under terms of the 1999 LTIP or as provided in any award agreement.

Stock Options

The following table illustrates the effect on operating results and per share information for stock-based compensation in accordance with SFAS 123 (R) for the three months ended March 31, 2007 and 2006.

	Three Months Ended March 31,
	2007			2006
	(in thousands, expect per share data)
Stock option compensation expense	$	113		$	84
Stock option compensation expense, net of tax	$	70		$	52
Impact of stock option expense on basic income per share	$	(0.01	)	$	-
Impact of stock option expense on diluted income per share	$	-		$	-

The stock options granted to employees under the Company’s long-term incentive plans qualify as incentive stock options as defined by the Internal Revenue Code (IRC) Section 422 (b) and have not resulted in tax deductions to the Company.  Stock options granted to directors of the Company under the long-term incentive plans qualify as nonqualified stock options under IRC 422 (b).  As of March 31, 2007, the Company has not received tax deductions related to these nonqualified options.

Net cash proceeds received from the exercise of options were $56 thousand and $50 thousand for the three months ended March 31, 2007 and 2006, respectively.

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The Company uses the Black-Scholes option pricing model to estimate fair value of stock-based awards, which uses the assumptions indicated in the table below.  Expected volatility is based on the implied volatility of the Company’s stock price.  The Company uses historical data to estimate option exercises and employee terminations used in the model.  The expected term of options granted is derived using the “simplified” method as permitted under the provisions of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 and represents the period of time options granted are expected to be outstanding.  The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.  The table below provides the assumptions used to determine the fair value of stock option grants during the three months ended March 31, 2007 and 2006, respectively

	Three Months Ended March 31,
	2007			2006
Expected dividend yield		1.69	%		0.93	%
Expected volatility		18.96	%		14.70	%
Risk-free interest rate		4.66	%		4.60	%
Expected life of options	6.5 years			6.5 years
Weighted average grant date fair value	$	2.92		$	2.68

The weighted average fair value of options granted during the three months ended March 31, 2007 and 2006 was $2.92 and $2.68, respectively.  The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $35 thousand and $28 thousand, respectively.  At March 31, 2007, there was $1,003 thousand of unrecognized compensation expense related to share-based payments, which is expected to be recognized over a weighted average period of 2.30 years.

The following table represents stock option activity for the period ended March 31, 2007:

	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)					(in years)		(in thousands)
Outstanding, January 1, 2007		1,363		$	8.12
Granted		10			11.84
Exercised		(8	)		7.16
Forfeited		(1	)		10.00
Outstanding, March 31, 2007		1,364		$	8.15		6.88	$	4,416
Exercisable, March 31, 2007		913		$	6.94		5.74	$	4,053

As of March 31, 2007, shares available for future option grants to employees and directors under existing plans were zero shares and five thousand shares for the 1999 LTIP and 2002 LTIP, respectively.  Proposal two of the 2007 Proxy Statement recommends increasing the 2002 LTIP by an additional 750 thousand shares.  The proposal will be voted during the June 14, 2007 annual meeting.

Restricted Stock

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

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As of March 31, 2007, unearned stock-based compensation associated with these awards totaled $282 thousand.  The Company recognized $47 thousand of compensation expense in the first quarter of 2007 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 2.05 years.

As of March 31, 2007, the Company had non-vested restricted stock awards outstanding of 43,045 shares at a weighted average grant date fair value of $10.40.  Of the total awards outstanding, 25,045 shares allow for the recipients to vest and receive shares of common stock in equal installments on each of the first three anniversaries of the date of grant.  The remaining 18,000 shares awarded cliff vest 26 months from the date of grant as provided for in the award agreement.  The Company did not grant any restricted stock during the first quarter of 2007.

NOTE 6 – GUARANTEES

The Company, as part of its ongoing business operations, issues financial guarantees in the form of financial and performance standby letters of credit.  Standby letters of credit are contingent commitments issued by the Company to guarantee the performance of a customer to a third-party.  A financial standby letter of credit is a commitment to guarantee a customer’s repayment of an outstanding loan or debt instrument.  In a performance standby letter of credit, the Company guarantees a customer’s performance under a contractual nonfinancial obligation for which it receives a fee.  The maximum potential amount of future payments the Company could be required to make under its stand-by letters of credit at March 31, 2007, December 31, 2006, and March 31, 2006 was $15,941 thousand, $15,998 thousand, and $13,659 thousand, respectively.  The Company’s outstanding standby letters of credit generally have a term of one year and some may have renewal options.   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.

NOTE 7 – STOCKHOLDERS' EQUITY

On March 16, 2007, the Company paid its first quarter cash dividend of $0.05 per share or $864 thousand to shareholders of record on March 1, 2007.  On April 25, 2007, the Board of Directors approved the second quarter cash dividend of $0.05 per share payable on June 18, 2007 to shareholders of record on June 1, 2007.

On November 29, 2006, the Board of Directors authorized the Company to repurchase up to 500 thousand shares in open market transactions.  The Company began the program during the first quarter.  As of March 31, 2007, the Company had repurchased 92,056 shares at a weighted average price of $11.85.

On March 31, 2007, the Company released shares from the Employee Stock Ownership Plan (ESOP) for the matching contribution of 100% of the employee’s contribution up to 6% of the employee’s compensation for the Plan year.  The number of unallocated, committed to be released, and allocated shares for the ESOP are as follows:

	Unallocated Shares			Committed to be Released Shares		Allocated Shares
Shares as of December 31, 2006		452,453			-		47,547
Shares allocated for first quarter 2007 match		(21,687	)		-		21,687
Shares as of March 31, 2007		430,766			-		69,234

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NOTE 8 – TAXES

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48).  The Interpretation provides guidance for recognition and measurement of uncertain tax positions that are “more likely than not” of being sustained upon audit, based on the technical merits of the position.  FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, and disclosure requirements.  The Company adopted FIN 48 as of January 1, 2007 as FIN 48 is effective for the year ended December 31, 2007.

The Company evaluated its material tax positions as of March 31, 2007, and does not expect the adoption to have an immediate effect on its consolidated financial statements.  Under the “more-likely-than-not” threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit.  The Company will 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 adverse 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 other expenses in the Company’s consolidated income statements.

As of March 31, 2007, there were no penalties and interest recognized in the consolidated income statement as a result of FIN 48, nor does the Company anticipate a change in its material tax positions that would give rise to the non-recognition of an existing tax benefit during the remainder of 2007.  However, changes in state and federal tax regulations could create a material uncertain tax position.

NOTE 9 – FAIR VALUE MEASUREMENTS

Effective January 1, 2007, the Company early adopted SFAS 157 and SFAS 159. The statements require disclosures about the Company’s assets and liabilities, if applicable, that are measured at fair value.  Further information about such assets is presented below.

In September 2006, the FASB issued SFAS 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2007, 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 includes 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2007
	Balance as of March 31, 2007		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(in thousands)	(Restated)				(Restated)
Financial Assets
Securities Available-for-Sale	$	153,649	$	-	$	153,399	$	250
Financial Liabilities
FHLB overnight borrowings		26,460		-		26,460		-

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The following table presents additional information about assets and liabilities measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
	Beginning Balance		Total Realized and Unrealized Gains or Losses		Purchases, Sales, Other Settlements and Issuances, net		Net Transfers In and/or Out of Level 3		Ending Balance
(in thousands)
Financial Assets
Securities Available-for-Sale	$	250	$	-	$	-	$	-	$	250

The Company did not recognize any unrealized gains or losses on Level 3 fair value assets or liabilities.

At March 31, 2007, 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 relate to assets and liabilities acquired in prior business combinations, including loans, goodwill, core deposit intangible assets, and time deposits.  Such measurements were determined utilizing Level 3 inputs.

NOTE 10 – FAIR VALUE OPTION

In February 2007, the FASB issued SFAS 159, which provides a fair value option election 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.  SFAS 159 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.  Effective January 1, 2007, the Company elected early adoption of SFAS 159.

The Company has not elected to apply the fair value option to financial assets or liabilities as of March 31, 2007.  Note 2 provides further information.

NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).  The Statement allows an irrevocable election to measure certain financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with unrealized gains and losses recognized currently in earnings.  Under SFAS 159, the fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events.  Additionally, SFAS 159 provides that application of the fair value option must be based on the fair value of an entire financial asset or financial liability and not selected risks inherent in those assets or liabilities.  SFAS 159 requires that assets and liabilities which are measured at fair value pursuant to the fair value option be reported in the financial statements in a manner that separates those fair values from the carrying amounts of similar assets and liabilities which are measured using another measurement attribute.  SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS No. 159 is effective prospectively for fiscal years beginning after November 15, 2007, with early adoption permitted for fiscal years in which interim financial statements have not been issued, provided that all of the provisions of SFAS 157 are early adopted as well.  The Company early adopted SFAS 159 effective January 1, 2007.  Notes 2 and 10 provide further information.

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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) to clarify how to measure fair value and to expand disclosures about fair value measurements.  The expanded disclosures include the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value on earnings and is applicable whenever other standards require (or permit) assets and liabilities to be measured at fair value.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years with early adoption permitted.  The Company adopted SFAS 157 on April 5, 2007 with the effective date of January 1, 2007.  Note 9 provides further information.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48).  The Interpretation provides guidance for recognition and measurement of uncertain tax positions that are “more likely than not” of being sustained upon audit, based on the technical merits of the position.   FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The effective date is for fiscal years beginning after December 15, 2006.  The Company adopted FIN 48 as of January 1, 2007.  The adoption did not have a material impact on the Company’s consolidated financial statements.  Note 8 provides further information.

In December 2005, the FASB issued FASB Staff Position (FSP) SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk.This FSP was issued in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions to address the circumstances in which the terms of loan products give rise to a concentration of credit risk as that term is used in SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and what disclosures apply to entities who deal with loan products whose terms may give rise to a concentration of credit risk.  An entity shall provide the disclosures required by SFAS No. 107 for either an individual loan product type or a group of loan products with similar features that are determined to represent a concentration of credit risk in accordance with the guidance of SOP 94-6-1 for all periods presented in financial statements. This SOP is effective for interim and annual periods ending after December 19, 2005. The adoption of FSP SOP 94-6-1 did not have a material impact on the Company’s consolidated financial statements.

In November 2005, the FASB issued a FSP on SFAS No. 115-1 and SFAS No. 124-1 (“the FSP”), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption did not have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3, which eliminates the requirement to reflect changes in accounting principles as cumulative adjustments to net income in the period of the change and requires retrospective application to prior periods’ financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. If it is impracticable to determine the cumulative effect of the change to all prior periods, SFAS No. 154 requires that the new accounting principle be adopted prospectively. For new accounting pronouncements, the transition guidance in the pronouncement should be followed. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used.  SFAS 154 did not change the guidance for reporting corrections of errors, changes in estimates or for justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 did not have a material impact on the Company’s consolidated financial statements.

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NOTE 12 – RECLASSIFICATIONS

Certain reclassifications have been made to the financial statements presented for prior periods to conform to the 2007 presentation.

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

In this Form 10-Q, “First Security,” “we,” “us,” “the Company” and “our” refer to First Security Group, Inc.

As discussed in Note 2 of the consolidated financial statements, our unaudited consolidated financial statements as of and for the three months ended March 31, 2007 have been restated to reflect our decision to reverse the utilization of SFAS 159 for the valuation of certain investment securities.  The accompanying Management’s Discussion and Analysis incorporates the effects of that restatement.  Revised tables are marked as “Restated”.  The following discussion and analysis continues to speak as of the date we originally filed the Form 10-Q.  Information not affected by the restatement of the financial statements is unchanged.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

FIRST QUARTER 2007 AND RECENT EVENTS

The following discussion and analysis sets forth the major factors that affected results of operations and financial condition reflected in the unaudited financial statements for the three-month periods ended March 31, 2007 and 2006. Such discussion and analysis should be read in conjunction with First Security's Consolidated Financial Statements and the notes attached thereto.

Restatement and Other-than-Temporary Impairment of Investment Securities

Effective January 1, 2007, First Security early adopted SFAS 157 and SFAS 159.  We selected the fair value option for approximately $27.1 million of investment securities previously classified as available-for-sale securities as of January 1, 2007.  Our selection matched the average balance of our overnight borrowings from the Federal Home Loan Bank (FHLB) for the month of March 2007.  The intent of our election was to match short-term assets with short-term liabilities.

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Subsequent to March 31, 2007, we decided to sell the portfolio of trading securities and utilize the proceeds to pay down the overnight borrowings.  The net effect of these transactions de-leveraged a portion of our balance sheet.  Management believes this de-leveraging will have a positive impact on our balance sheet management position through selective growth in the current challenging interest rate environment.  Additionally, the market risk of the trading assets introduced a risk of significant volatility in our earnings.  Specifically, the market risk exposed us to a $168 thousand decrease in the value of the securities during the month of April 2007.  Management determined that selling the trading portfolio to eliminate this risk and using the proceeds to reduce the overnight FHLB borrowings was in the best interest of First Security and its stockholders.  At the time, both the Board of Directors and management, in consultation with our independent registered public accounting firm, concluded that our subsequent actions were consistent with our application of SFAS 159 and that First Security’s election of SFAS 159 was an appropriate application of the accounting standard.

After consultation with the Office of the Comptroller of the Currency (OCC), FSGBank’s primary federal banking regulators, we decided to reverse our decision to utilize the fair value option under SFAS 159 for the valuation of the previously selected securities.  The decision was recommended by management and approved by the Board of Directors, in consultation with First Security’s independent registered public accounting firm.  Based on discussions with the OCC, it was determined that the lack of on-going use of the fair value option did not meet the intent and spirit of the standard, and thus the adoption was deemed non-substantive for the Call Report, the required regulatory financial filing used by the OCC.

In connection with the restated financial statements, as described in Note 2 of the consolidated financial statements, we recorded a $584 thousand impairment of securities.  We periodically evaluate the securities portfolio to determine whether a decline in value is other-than-temporary.  The analysis includes evaluating the magnitude and duration of the decline in value, the reasons for the decline and the evidence to support realizable value equal to or greater than the carrying value of the securities.  As of March 31, 2007, we did not have the intent to hold the securities selected as part of the initial SFAS 159 fair value option election until maturity and the subsequent sales in April at a loss indicate that the unrealized loss as of March 31, 2007 is other-than-temporary.  As such, an impairment charge for the unrealized loss as of March 31, 2007 was recorded into earnings.  Additionally, approximately $5 thousand of premium amortization was recorded as part of the restatement.  The additional amortization reduced interest income.   Refer to the table in Note 2 for a complete list of financial statement line-items that changed as a result of the restatement.

The transactions eliminated securities yielding approximately 4.32 percent and overnight borrowings at a cost of approximately 5.25 percent.  This elimination of negative interest rate spread will increase net interest income by an estimated $170 thousand for 2007 and approximately $250 thousand in 2008 based on certain reinvestment, prepayment and interest rate assumptions.

OVERVIEW

As of March 31, 2007, we had total consolidated assets of $1.1 billion, total loans of $863.9 million, total deposits of $926.3 million and stockholders’ equity of $146.4 million.

Net income for the three months ended March 31, 2007, was $2.4 million, or $0.14 and $0.13 per basic and diluted share, respectively, compared to net income of $2.5 million, or $0.14 per share (basic and diluted) for the comparative period in 2006.  Net interest income increased by $94 thousand and noninterest income decreased by $222 thousand, while noninterest expense, including provision for loan losses, increased by $33 thousand as compared to the same period in 2006.  Excluding the impairment of securities charge of $584 thousand, income increases continue to outpace expense increases as a result of the change in the mix of earning assets towards loans, as well as the growing diversified stream of non-interest income from trust and mortgage banking activity.  The increase in expenses is mainly due to the addition of eight full-time equivalent employees as compared to 2006.

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Our efficiency ratio increased in the first quarter of 2007 to 72.5% as compared to 70.7% in the same period of 2006 primarily due to the impairment on securities charge.  Excluding the impairment charge, the efficiency ratio improved to 69.6% in the first quarter of 2007.  We expect to continue achieving further efficiencies by growing our operating revenue faster than our expenses, as well as evaluating staff levels with particular emphasis on our branches.  In December 2006, we opened our new corporate headquarters, including a de novo branch at that location.  In April 2007, we opened a de novo branch in Algood, Tennessee and anticipate opening a de novo branch in Cleveland, Tennessee in May 2007.  For the remainder of 2007 and into 2008, we plan to identify additional locations in Knoxville, Chattanooga, and Cleveland, Tennessee, as well as the north metro Atlanta, Georgia and metro Nashville, Tennessee markets.  At this time, the locations have not been determined, and therefore no timetable is provided.  While we will be opportunistic, we are mindful of the additional expense associated with the de novo growth model.

Net interest margin in the first quarter of 2007 was 4.86% or 41 basis points lower as compared to the prior year period of 5.27%.  We believe that our net interest margin will increase in the second quarter before stabilizing for the remainder of 2007 in the 4.9% to 5.0% range.  This is dependant on competitive pricing and our ability to raise core deposits.

On April 25, 2007, our Board of Directors approved a second quarter cash dividend of $0.05 per share payable on June 18, 2007 to shareholders of record on June 1, 2007.

RESULTS OF OPERATIONS

We reported net income for the first quarter of 2007 of $2.4 million versus net income for the same period in 2006 of $2.5 million.  In 2007, basic and diluted net income per share were $0.14 and $0.13, respectively, on approximately 17,241 thousand basic and 17,641 thousand diluted weighted average shares outstanding, respectively.

Net income in the first quarter of 2007 was below the 2006 level as a result of the impairment of securities charged to earnings as part of our decision to rescind our fair value option on selected securities.  Excluding this charge, earnings were above the 2006 levels as a result of our organic growth, and growing fee income, partially offset by a shrinking net interest margin.  Our overhead also increased in 2007 because of our new corporate headquarters, which opened in December 2006 and additional full-time equivalent employees.  As of March 31, 2007 we had 38 banking offices, including the headquarters, four loan/lease production offices and 369 full time equivalent employees.  Although, we expect to continue to expand our branch network and our employee force in 2007, we are mindful of the fact that growth and increasing the number of branches adds expenses (such as administrative costs, occupancy, and salaries and benefits expenses) before earnings.

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The following table summarizes the components of income and expense and the changes in those components for the period ended March 31, 2007 as compared to the same period in 2006.

Condensed Consolidated Income Statement
			Change from Prior Year
	2007		Amount			Percentage
	(in thousands, except percentages)
	(Restated)		(Restated)			(Restated)
Interest income	$	20,098	$	2,676			15.4	%
Interest expense		8,239		2,582			45.6	%
Net interest income		11,859		94			0.8	%
Provision for loan losses		417		(126	)		(23.2	)%
Net interest income after provision for loan losses		11,442		220			2.0	%
Noninterest income		2,214		(222	)		-9.1	%
Noninterest expense		10,198		159			1.6	%
Income before income taxes		3,458		(161	)		-4.4	%
Income tax provision		1,104		(41	)		-3.6	%
Net income	$	2,354	$	(120	)		-4.9	%

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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.  For the three months ended March 31, 2007, net interest income increased by $94 thousand, or 0.8%, to $11.9 million for the first quarter of 2007 compared to $11.8 million for the same period in 2006.

We monitor and evaluate the effects of certain risks on our earnings and seek balance between the risks assumed and returns sought.  Some of these risks include interest rate risk, credit risk and liquidity risk.

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

Interest income for the first quarter of 2007 was $20.1 million, a 15.4% increase as compared to the same period in 2006.  The increase in interest income is due to an increase in average earning assets of $85.6 million, or 9.3%, to $1.0 billion compared to average earning assets of $924.8 million for the same period in 2006.  Additionally, our mix of earning assets shifted towards loans from investment securities and other earning assets.  Average loans increased $101.7 million, while all other earning assets decreased $16.1 million.  The decrease in other earning assets is a result of reinvesting federal funds sold into loans.  We decreased our securities portfolio by electing to shift a portion of the recurring cash from interest and maturities from the investment portfolio into the loan portfolio.  We anticipate our loan-to-deposit ratio to continue to rise due to this initiative.  Our loans increased in the first quarter of 2007 on a comparative basis due to the deposit gathering activities of FSGBank, the sale and the use of alternative funding through overnight advances from the Federal Home Loan Bank (FHLB), and to the shifting mix in earning assets.  These additional earning assets have enabled us to earn more interest income.

Supplementing the additional earnings from increased volumes was the increase in yield on earning assets.  The tax equivalent yield on earning assets increased 42 basis points for the period ended March 31, 2007 to 8.17% from 7.75% for the same period in 2006.  The changes in the yield relate to (1) our changing the mix of earning assets, (2) the Federal Reserve Board changing the target federal funds rate and discount rate, and (3) the fourth quarter 2006 sale of approximately $9.8 million of investment securities with an average yield of 3.65%.  The proceeds were used to reduce our overnight borrowing, which eliminated negative spread.

Total interest expense was $8.2 million in the first quarter of 2007, or 45.6% higher, as compared to the same period in 2006.  Interest expense increased due to the additional volume of interest bearing liabilities combined with rising interest rates.  Average interest bearing liabilities increased $72.7 million, or 9.8%, for the three months ended March 31, 2007 compared to the same period in 2006.  The significant increase in interest bearing liabilities was due to our market penetration and the use of other borrowings, including FHLB overnight borrowings.  Average total deposits grew $60.2 million, or 7.0% to $920.7 million in the first quarter of 2007 compared to the same period in 2006.  The average rate paid on interest bearing liabilities increased 102 basis points to 4.12% from 3.10% for the period ended March 31, 2007 and 2006, respectively.  The increase is primarily due to (1) competitive pricing pressure, (2) the pricing lag related to certificates of deposit issued prior to the Federal Reserve rate increase initiative and (3) a shift in consumer behavior to higher rate time deposits.

The banking industry uses two key ratios to measure 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.

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The Company’s net interest rate spread (on a tax equivalent basis) was 4.05% for the period ended March 31, 2007 compared to 4.65% for the same period in 2006.  Net interest margin (on a tax equivalent basis) was 4.86% for the period ended March 31, 2007 compared to 5.27% for the same period in 2006.  The decreased net interest spread and margin are the result of our rates on our interest bearing liabilities rising faster than the yields on earning assets.  Average interest bearing liabilities as a percentage of average earning assets was 80.4% for the period ended March 31, 2007 compared to 79.9% for the same period in 2006.  Noninterest bearing funding sources contributed 81 basis points to the spread for the three months ended March 31, 2007, as compared to 62 basis points in the comparable period in 2006.  Average noninterest bearing demand deposits were 16.1% and 16.3% of average earning assets for the period ended March 31, 2007 and 2006, respectively.

Through May 8, 2007, the Federal Reserve has kept the target federal funds rate at 5.25%.  We anticipate our net interest margin will increase in the second quarter before stabilizing for the remainder of 2007.  The increase is anticipated due to the decision to sell approximately $27.0 million of our available-for-sale securities portfolio in April 2007 and subsequently use the proceeds to pay down overnight borrowings.  This transaction eliminates the negative spread between the 4.32% yield for the trading assets and the 5.25% rate on overnight borrowings.  It also de-leverages the balance sheet, which provides opportunities for selected growth in the challenging interest rate environment.  However, our net interest margin could decline due to increasing competitive deposit pricing pressure or from Federal Reserve target rate decreases, if any.

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The following table summarizes net interest income and average yields and rates paid for the quarters ended March 31, 2007 and 2006.

Average Consolidated Balance Sheets and Net Interest Analysis
Fully Tax-Equivalent Basis
	For the Three Months Ended March 31,
	2007								2006
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
	(in thousands, except percentages)
Assets	(Restated)			(Restated)		(Restated)
Earning assets:
Loans, net of unearned income	$	855,569		$	18,377		8.71	%	$	753,872		$	15,649		8.42	%
Investment securities – taxable		108,445			1,313		4.91	%		114,973			1,300		4.59	%
Investment securities – non-taxable		44,292			628		5.75	%		41,500			585		5.72	%
Other earning assets		2,009			24		4.84	%		14,407			145		4.08	%
Total earning assets		1,010,315			20,342		8.17	%		924,752			17,679		7.75	%
Allowance for loan losses		(10,272	)							(10,321	)
Intangible assets		31,220								31,784
Cash & due from banks		27,131								25,661
Premises & equipment		36,151								31,705
Other assets		43,370								39,699
TOTAL ASSETS	$	1,137,915							$	1,043,280
Liabilities and Stockholders’ Equity
Interest bearing liabilities:
NOW accounts	$	65,736			125		0.77	%	$	74,488			159		0.87	%
Money market accounts		99,345			695		2.84	%		110,523			578		2.12	%
Savings deposits		36,049			76		0.86	%		38,999			66		0.69	%
Time deposits> $100		209,044			2,629		5.10	%		163,252			1,650		4.10	%
Time deposits < $100		263,371			3,152		4.85	%		235,977			2,200		3.78	%
Brokered CDs		84,172			982		4.73	%		86,583			847		3.97	%
Federal funds purchased		3,105			44		5.75	%		3,195			23		2.92	%
Repurchase agreements		22,392			143		2.59	%		17,771			58		1.32	%
Other borrowings		28,757			394		5.56	%		8,442			76		3.65	%
Total interest bearing liabilities		811,971			8,240		4.12	%		739,230			5,657		3.10	%
Net interest spread				$	12,102		4.05	%				$	12,022		4.65	%
Noninterest bearing demand deposits		163,001								150,677
Accrued expenses and other liabilities		17,165								14,092
Stockholders’ equity		146,034								140,781
Accumulated other comprehensive loss		(256	)							(1,500	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,137,915							$	1,043,280
Impact of noninterest bearing sources and other changes in balance sheet composition							0.81	%							0.62	%
Net interest margin							4.86	%							5.27	%

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The following table presents 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 amount of the change in each category.

Change in Interest Income and Expense on a Tax Equivalent Basis
For the Three Months Ended March 31, 2007 Compared to 2006
	Increase (Decrease)
	in Interest Income and Expense
	Due to Changes in:
	Volume			Rate			Total
	(in thousands)
	(Restated)			(Restated)			(Restated)
Interest earning assets:
Loans, net of unearned income	$	2,111		$	617		$	2,728
Investment securities – taxable		(74	)		87			13
Investment securities – non-taxable		39			4			43
Other earning assets		(125	)		4			(121	)
Total earning assets		1,951			712			2,663
Interest bearing liabilities:
NOW accounts		(19	)		(15	)		(34	)
Money market accounts		(58	)		175			117
Savings deposits		(5	)		15			10
Time deposits < $100		463			516			979
Time deposits> $100		255			697			952
Brokered CDs		(24	)		159			135
Federal funds purchased		(1	)		22			21
Repurchase agreements		15			70			85
Other borrowings		183			135			318
Total interest bearing liabilities		809			1,774			2,583
Increase (decrease) in net interest income	$	1,142		$	(1,062	)	$	80

Provision for Loan Losses

The provision for loan losses charged to operations during the three months ended March 31, 2007 was $417 thousand compared to $543 thousand in the same period of 2006. Net charge-offs for the first quarter of 2007 were $211 thousand compared to net charge-offs of $531 thousand for the same period in 2006.  Annualized net charge-offs as a percentage of average loans were 0.10% for the three months ended March 31, 2007 compared to 0.28% for the same period in 2006.  Our peer group’s average (as reported in the December 31, 2006 Uniform Bank Performance Report) was 0.13%.

The decrease in our provision for loan losses for the first quarter of 2007 compared to the same period in 2006 resulted from our analysis of inherent risks in the loan portfolio in relation to the portfolio’s growth, the level of past due, charged-off, classified and nonperforming loans, as well as general economic conditions.  We determined that our credit quality was improving and reduced the provision expense accordingly.  We will reanalyze the allowance for loan losses on at least a quarterly basis, and the next review will be at June 30, 2007, or sooner if needed, and the provision expense will be adjusted accordingly, if necessary.

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For the three months ended March 31, 2007, our loan portfolio increased by $16.3 million compared to $18.0 million in the same period in 2006.  Year-over-year, the loan portfolio increased by $97.3 million from March 31, 2006 to March 31, 2007.  The growth in our loan portfolio on a quarterly and year-over-year basis is organic and is a result of our marketing efforts of our loan officers.

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

°           our loan loss experience;

°           specific known risks;

°           the status and amount of past due and nonperforming 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.

An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan losses is prepared by our credit administration department and presented to our Board of Directors or the Directors’ Loan Committee on at least a quarterly basis. In addition, our loan review department performs a regular review of the quality of the loan portfolio and adequacy of the allowance.  Based on our analysis, which includes risk factors such as charge-off rates, past dues, and loan growth, we may determine that our future provision expense may need to increase or decrease in order for us to remain adequately reserved for probable loan losses.

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

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

Noninterest Income

Noninterest income totaled $2.2 million for the first quarter of this year, a decrease of $222 thousand, or 9.1%, from the same period in 2006.  The decrease is a result of the $584 thousand impairment of securities charge recorded in the first quarter of 2007.  Excluding this charge, noninterest income increased $362 thousand, or 14.9%.

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The following table presents the components of noninterest income for the periods ended March 31, 2007 and 2006.

NONINTEREST INCOME
	Three Months Ended March 31,
				Percent
	2007			Change			2006
	(in thousands, except percentages)
	(Restated)			(Restated)
NSF fees	$	883			(4.2	)%	$	922
Service charges on deposit accounts		257			10.8	%		232
Mortgage loan and related fees		458			77.5	%		258
Bank-owned life insurance income		222			(1.3	)%		225
Other-than-temporary impairment of securities		(584	)		(100	)%		-
Other income		978			22.4	%		799
Total noninterest income	$	2,214			(9.1	)%	$	2,436

Our largest sources of noninterest income are service charges and fees on deposit accounts.  Total service charges, including non-sufficient funds (NSF) fees, were $1.1 million for the first quarter of 2007, a decrease of $14 thousand, or (1.2)%, from the same period in 2006.  Our transaction and savings accounts increased to 33,392 in the first quarter of 2007 compared to 32,932 in the same period of 2006.   Despite the increase in our deposit base, service charges on deposit accounts remained relatively consistent for the period ending March 31, 2007.  This is primarily due to (1) an increase in “free checking” due to competitive pressures and (2) a reduction in commercial account analysis charges due to increases in the crediting rate which often occur in a rising interest rate environment.

Mortgage loan and related fees for the first quarter of 2007 increased $200 thousand, or 77.5% to $458 thousand compared to $258 thousand in the first quarter of 2006.  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.  Mortgages originated for sale in the secondary markets totaled $21.1 million for the first three months of 2007.  Mortgages sold in the secondary market totaled $23.4 million for the first three months of 2007.  Mortgages originated and sold in the secondary market totaled $18.3 million for the first three months of 2006.

In addition to the non-interest income generated by our mortgage department, it has also begun to have a positive impact on our net interest income.  During 2006, our mortgage department began originating adjustable rate mortgages (ARMs) to be held for investment.  Interest income from these ARM loans totaled $305 thousand and $19 thousand for the three months ended March 31, 2007 and 2006, respectively.  The rising interest rate market has slowed the growth of mortgages originated and sold in the secondary market, but the addition of the ARM products has resulted in the continual increase of interest income from the mortgage department.  We are optimistic that the mortgage fee income, as well as ARM loan volumes, will continue to increase with the addition of the new mortgage origination office in Marietta, Georgia, but the impact of higher interest rates and the softening in the housing market could negatively impact the earnings for the mortgage originations and sales.

Bank-owned life insurance income remained consistent at $222 thousand for the three months ended March 31, 2007 as compared to the same period in 2006.  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.  In addition, the insurance death benefit will be a tax-free payment to the Company.  This tax-advantaged asset enables us to provide benefits to our employees.  On a fully tax-equivalent basis, the weighted average interest rate earned on the policies was 7.78% at March 31, 2007.

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As described in Note 2 of the consolidated financial statements and under the “Restatement and Other-than-Temporary Impairment of Securities” caption at the beginning of Management’s Discussion and Analysis, the decision to reverse the utilization of SFAS 159 resulted in an impairment of securities charge of $584 thousand.

Other income for the first quarter of 2007 was $978 thousand, compared to $799 thousand for the same period in 2006.  The components of other income primarily consist of point-of-sale fees on debit cards, credit card fee income, ATM fee income, gains on sales of other real estate and repossessions, underwriting revenue, safe deposit box fee income, and trust fee income.  The major contributors to increasing other noninterest income were the trust department with an increase of $52 thousand or 66.7% and gains on sales of assets increasing $88 thousand or 88.0% from the comparable period in 2006.

Noninterest Expense

Noninterest expense for the first quarter of 2007 increased $159 thousand, or 1.6%, to $10.2 million compared to $10.0 million for the same period in 2006.  The increase in noninterest expense primarily reflects additional investment to support corporate growth.  Unless indicated otherwise in the discussion below, we anticipate continued increases in noninterest expense throughout 2007 as a result of our branching activities.

The following table represents the components of noninterest expense for the three month periods ended March 31, 2007 and 2006.

NONINTEREST EXPENSE
	Three Months Ended March 31,
			Percent
	2007		Change			2006
	(in thousands, except percentages)
Salaries & benefits	$	5,822		3.8	%	$	5,607
Occupancy		830		4.5	%		794
Furniture and equipment		797		(8.5	)%		871
Professional fees		479		9.6	%		437
Data processing		363		5.8	%		343
Printing & supplies		124		(8.8	)%		136
Communications		197		2.1	%		193
Advertising		117		19.4	%		98
Intangible asset amortization		265		(22.3	)%		341
Other expense		1,204		(1.2	)%		1,219
Total noninterest expense	$	10,198		1.6	%	$	10,039

Salaries and benefits for the first quarter of 2007 increased 3.8% as compared to the same period in 2006.  The increase in salaries and benefits is primarily related to increases in our benefit expenses, including but not limited to incentive compensation accruals.  As of March 31, 2007, we had 369 full time equivalent employees and operated 38 full service banking offices and four loan/lease production offices.  In April 2007, we opened a de novo branch in Algood, Tennessee and anticipate opening a de novo branch in Cleveland, Tennessee in May 2007.  For the remainder of 2007 and into 2008, we plan to identify additional locations in Knoxville, Chattanooga, and Cleveland, Tennessee, as well as the north metro Atlanta, Georgia and metro Nashville, Tennessee markets.  At this time, the locations have not been determined, and therefore no timetable is provided.  While we will be opportunistic, we are mindful of the additional expense associated with the de novo growth model.

Occupancy expense for the first quarter of 2007 increased by 4.5% as compared to the same period in 2006.  The increase in the first quarter of 2007 was due to the completion of our new corporate headquarters in December 2006.  As of March 31, 2007, First Security leased nine branches, two office facilities and the land for four branches.  As a result, current period occupancy expense is higher than if we owned these facilities, including the real estate, but due to market conditions, property availability and favorable lease terms, we leased these locations to execute our growth strategy.  Furthermore, we have been able to deploy the capital into earning assets rather than capital expenditures for facilities.

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Furniture and equipment expense decreased $74 thousand or 8.5%, primarily due to reductions in maintenance and software expenses.

Professional fees increased 9.6% for the first quarter of 2007 as compared to the same period in 2006.  Professional fees include fees related to investor relations, outsourcing internal audit, compliance and information technology audits to Professional Bank Services, as well as external audit (including testing under Section 404 of the Sarbanes Oxley Act of 2002), tax services and legal and accounting advice related to, among other things, potential acquisitions, investment securities, trademarks and intangible properties.  The increase in 2007 includes, but is not limited to, consulting expenses related to the new proxy rules, as well as increases in tax and accounting expenses.

Data processing fees increased 5.8% for the first quarter of 2007.  Our external data processor is Fidelity Integrated Financial Solutions (formerly Intercept) located in Lenexa, Kansas.  The monthly fees associated with data processing are based primarily on transaction volume.  Therefore, as we grow, we believe that data processing costs will increase correspondingly.

Intangible asset amortization expense decreased $76 thousand or 22.3% in the first quarter of 2007 as compared to the same period in 2006.  Our core deposit intangible assets amortize on an accelerated basis in which the expense recognized declines over the estimated useful life of ten years.  We anticipate further decreases in amortization expense throughout the remainder of 2007.

Income Taxes

We recorded income tax expense of $1.1 million for the first quarter of 2007 compared to $1.1 million for the same period in 2006.  Our effective tax rate for the period ended March 31, 2007 and 2006, was 31.9% and 31.6%, respectively.

STATEMENT OF FINANCIAL CONDITION

Our total assets were $1.15 billion at March 31, 2007, $1.13 billion at December 31, 2006, and $1.06 billion at March 31, 2006.  Our first quarter 2007 and year-over-year asset growth is directly related to deposit growth and the funds available to us for investment.

Throughout 2007, we expect our assets to continue to grow as we plan to further leverage our existing banking branches, open de novo branches in Cookeville, Tennessee and Cleveland, Tennessee and actively pursue additional acquisitions of existing banks and bank branches.

Loans

Our loan demand continues to be strong.  Total loans increased 1.9% (7.7% annualized) in the first quarter of 2007 as compared to December 31, 2006 and 12.7% as compared to March 31, 2006.  The increase in loans in the first quarter of 2007 can be attributed to an increase in our construction and land development loans of $13.1 million, or 7.5%, an increase in commercial real estate of $7.6 million, or 4.4%, and an increase in our commercial and industrial loans of $3.5 million, or 2.9%.  Loan growth was $97.3 million, or 12.7%, over the twelve-month period ended March 31, 2007.  The loan categories with the largest increases over the past twelve months were (1) construction/land development, up $58.4 million or 45.6%, to $186.8 million, (2) commercial real estate loans, up $20.2 million or 12.5%, to $181.2 million, (3) residential mortgage loans, up $20.0 million or 9.0%, to $243.1 million, and (4) commercial and industrial loans, up $16.6 million, or 15.3% to $124.8 million.

29

We believe that our general loan growth will remain strong.  Funding of future loan growth may be restricted by our ability to raise core deposits, although we will use alternative funding sources if necessary and cost effective.  Loan growth may also be restricted by the necessity for us to maintain appropriate capital levels, as well as adequate liquidity.

Asset Quality

We consider our asset quality to be of primary importance.  At March 31, 2007, our loan portfolio was 75.3% of total assets.  Over the past few years, we have improved our commercial and retail underwriting standards, developed a detailed loan policy, established better warning and early detection procedures, additional credit-related management and director reporting and developed a more comprehensive analysis of our allowance for loan losses.  We believe our implementation of the Baker Hill software will continue to enhance our ability to produce credit risk and production management information for both the commercial and retail portfolios.

The allowance for loan losses represents our estimate of an amount adequate in relation to the risk of losses inherent in the loan portfolio.  We analyze the loan portfolio regularly to identify potential problems.  We undertake this analysis in conjunction with the establishment of our allowance for loan losses to provide a basis for determining the adequacy of our loan loss reserves to absorb losses that we estimate might be experienced.  Furthermore, our policy requires regularly scheduled problem-asset meetings in which past due and classified loans are thoroughly analyzed.  These analyses are thoroughly reviewed by our credit administration group.  In addition to these analyses of existing loans, we consider our loan growth, historical loan losses, past due and non-performing loans, current economic conditions, underlying loan collateral values and other factors which may affect probable loan losses.

Our asset quality ratios generally improved in the first quarter of 2007 as compared to the same period in 2006.  As of March 31, 2007, our allowance for loan losses as a percentage of total loans was 1.18%, which is consistent with the December 31, 2006 ratio and lower than the 1.32% as of March 31, 2006.  Net charge-offs as a percentage of average loans improved to 10 basis points from 28 basis points for the three month periods ended March 31, 2007 and 2006, respectively.  The improvement is primarily a result of stronger recoveries in 2007.  Non-performing assets as a percentage of total assets were 55 basis points compared to 42 basis points in 2006.  Non-performing assets, including 90 days past due, improved to $7.9 million or 69 basis points of total assets from $8.2 million or 72 basis points as of December 31, 2006, and increased from the $5.4 million or 51 basis points as of March 31, 2006.

In April 2006, we hired an experienced special assets officer to manage our special assets, collections, recoveries, other real estate and repossessions.  The focus of this position is to initiate and manage a formal recovery program and improve overall past due management by centralizing our loan collection process.   We also began implementing a collection and recovery management software system in 2006 to strengthen our management of other real estate owned, repossessed assets, past dues loans and classified loans. We believe that charge-offs for 2007, as a percent of average loans, will remain below 2006 levels as a result of our special assets officer and our continuing efforts to improve our loan underwriting, approval process, servicing, problem identification and problem resolution.

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The following table presents an analysis of the changes in the allowance for loan losses for the three months ended March 31, 2007 and 2006.  The provision for loan losses of $395 thousand in the table below does not include our provision accrual for unfunded commitments of $22 thousand as of March 31, 2007.  The reserve for unfunded commitments is included in other liabilities in the accompanying consolidated balance sheets.

ANALYSIS OF CHANGES IN ALLOWANCE FOR LOAN LOSSES

	For the three months ended March 31,
	2007			2006
Allowance for loan losses -	(in thousands, except percentages)
Beginning of period	$	9,970		$	10,121
Provision for loan losses		395			513
Sub-total		10,365			10,634
Charged off loans:
Commercial – leases		144			57
Commercial – loans		91			30
Real estate – construction		-			5
Real estate – residential mortgage		-			438
Consumer and other		334			118
Total charged off		569			648
Recoveries of charged-off loans:
Commercial – leases		-			-
Commercial – loans		213			24
Real estate – construction		-			-
Real estate – residential mortgage		70			2
Consumer and other		75			91
Total recoveries		358			117
Net charged-off loans		211			531
Allowance for loan losses - end of period	$	10,154		$	10,103
Total loans-end of period	$	863,940		$	766,622
Average loans	$	855,569		$	753,872
Net loans charged-off to average loans, annualized		0.10	%		0.28	%
Provision for loan losses to average loans, annualized		0.18	%		0.29	%
Allowance for loan losses as a percentage of:
Period end loans		1.18	%		1.32	%
Non-performing assets		161.56	%		225.51	%

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The following table presents the allocation of the allowance for loan losses for each respective loan category with the corresponding percent of loans in each category to total loans.   The comprehensive allowance analysis developed by our credit administration group enables us to allocate the allowance based on risk elements within the portfolio.

Allocation of the Allowance for Loan Losses
	As of March 31, 2007					As of March 31, 2006
			Percent of loans in each					Percent of loans in each
	Amount		category to total loans			Amount		category to total loans
	(in thousands, except percentages)
Commercial-leases	$	1,847		5.9	%	$	1,516		8.2	%
Commercial-loans		1,468		14.5	%		2,622		14.1	%
Real estate-construction		1,599		21.6	%		564		18.2	%
Real estate-mortgage		4,025		50.1	%		4,002		50.9	%
Consumer		953		7.9	%		838		8.6	%
Unallocated		262		-			561		-
Total	$	10,154		100.0	%	$	10,103		100.0	%

 We believe that the allowance for loan losses at March 31, 2007 is sufficient to absorb losses inherent in the loan portfolio based on our assessment of the information available. Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods.  In addition, bank regulatory authorities, as part of their periodic examinations of FSGBank, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant.  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 pool.  See “Provision for Loan Losses” for a description of our methodology for determining the adequacy of the allowance for loan losses.

Nonperforming Assets

Nonperforming assets include nonaccrual loans, restructured loans, other real estate under contract for sale and repossessed assets.  We place loans on non-accrual status when we have concerns relating to our ability to collect the loan principal and interest, and generally when such loans are 90 days or more past due.

	March 31, 2007			December 31, 2006			March 31, 2006
	(in thousands, except percentages)
Nonaccrual loans	$	1,755		$	2,653		$	1,119
Loans past due 90 days and still accruing		1,640			1,325			904
Total nonperforming loans	$	3,395		$	3,978		$	2,023
Other real estate owned	$	2,796		$	1,982		$	2,110
Repossessed assets		1,734			2,231			1,251
Nonaccrual loans		1,755			2,653			1,119
Total nonperforming assets	$	6,285		$	6,866		$	4,480
Nonperforming loans as a percentage of total loans		0.39	%		0.47	%		0.26	%
Nonperforming assets as a percentage of total assets		0.55	%		0.61	%		0.42	%
Nonperforming assets + loans 90 days past due to total assets		0.69	%		0.72	%		0.51	%

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Nonaccrual loans totaled $1.8 million at March 31, 2007, $2.7 million at December 31, 2006, and $1.1 million at March 31, 2006. The nonaccrual loans at March 31, 2007 included $1.7 million of real-estate secured loans, $50 thousand of consumer loans and $37 thousand of commercial loans.  There are no commitments to lend additional funds to customers with loans on non-accrual status at March 31, 2007.

Loans 90 days past due and still accruing were $1.6 million at March 31, 2007, compared to $1.3 million at December 31, 2006 and $904 thousand at March 31, 2006. Of these past due loans at March 31, 2007, $1.3 million were leases, $287 thousand were secured by real estate, $18 thousand were consumer loans, and $13 thousand were commercial loans.

At March 31, 2007, we owned other real estate in the amount of $2.8 million, which consisted of  $1.1 million in construction/land development property, $783 thousand in non-farm/nonresidential property, $497 thousand in residential real estate, and $382 thousand in multifamily residential real estate.  All of these properties have been written down to their respective fair values.

At March 31, 2007, we owned repossessed assets, which have been written down to their fair values, in the amount of $1.7 million, compared to $2.2 million at December 31, 2006 and $1.3 million at March 31, 2006.

Nonperforming assets for the first quarter of 2007 were $6.3 million compared to $6.9 million at December 31, 2006 and $4.5 million at March 31, 2006.

While nonperforming assets have increased over prior years primarily due to our acquisition of the leasing companies, our nonperforming asset ratios generally remain below our peer group.  Our peer group, as defined by the December 31, 2006 Uniform Bank Performance Report is all commercial banks between $1 billion and $3 billion in total assets.  The ratio of nonaccrual loans and loans 90 days past due to gross loans was 0.39% and 0.59% for us and our peer group, respectively.  The ratio of nonaccrual loans and loans 90 days past due to the allowance for loan losses was 33.44% and 49.28% for us and our peer group.  The ratio of nonaccrual loans and loans 90 days past due to equity capital was 2.44% and 4.08% for FSGBank and our peer group, respectively.  The ratio of nonaccrual loans, loans 90 days past due, and other real estate owned to gross loans and other real estate owned was 0.71% and 0.67% for us and our peer group, respectively.

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 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.  We use three categories to classify our securities: “held-to-maturity”, “available-for-sale” and “trading.”  Currently, none of our investments are classified as trading or held-to-maturity.  Excluding the securities described in Note 2 of the consolidated financial statements, we have no plans to liquidate a significant amount of any available-for-sale securities.  However, the securities classified as available-for-sale may be used for liquidity purposes should we deem it to be in our best interest.

Available-for-sale securities totaled $153.6 million at March 31, 2007, $153.8 million at December 31, 2006 and $157.4 million at March 31, 2006. The reduction in the securities portfolio year-over-year occurred as a result of our efforts to utilize a portion of the liquidity to fund loan growth instead of reinvesting in securities.  While our level of liquid assets has decreased, we believe our current level provides an appropriate level of liquidity and provides a proper balance to our interest rate and credit risk in our loan portfolio.  At March 31, 2007, the available-for-sale securities portfolio had unrealized net losses of approximately $123 thousand, net of tax.

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All investment securities purchased to date have been classified as available-for-sale. Our securities portfolio at March 31, 2007 consisted of tax-exempt municipal securities, federal agency bonds, federal agency issued Real Estate Mortgage Investment Conduits (REMICs), federal agency issued pools and asset-backed securities and collateralized mortgage obligations (CMOs).

The following table provides the amortized cost of our available-for-sale securities 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 AVAILABLE-FOR-SALE INVESTMENT SECURITIES – AMORTIZED COST
	Less than			One to			Five to			More than
	One Year			Five Years			Ten Years			Ten Years
	(in thousands, except percentages)
				(Restated)
Municipal-tax exempt	$	1,370		$	7,175		$	22,977		$	12,524
Agency bonds		5,493			26,936			3,983			-
Agency issued REMICs		-			36,409			-			-
Agency issued pools		511			24,072			2,505			2,497
Asset backed & CMOs		-			6,763			-			-
Other		-			-			-			620
Total	$	7,374		$	101,355		$	29,465		$	15,641
Tax Equivalent Yield		4.45	%		4.76	%		5.53	%		6.06	%

Excluding the securities associated with the restatement, we currently have the ability and intent to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities.  We consider the overall quality of the securities portfolio to be high. All securities held are traded in liquid markets, except for one bond.  This $250 thousand investment is a Qualified Zone Academy Bond (within the meaning of Section 1379E of the Internal Revenue Code of 1986, as amended) issued by The Health, Educational and Housing Facility Board of the County of Knox under the authority from the State of Tennessee. As of March 31, 2007, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our stockholders’ equity. As of the first quarter ended 2007, the amortized cost and market value of the securities from each such issuer are as follows:

	Book Value		Market Value
	(in thousands)
Fannie Mae	$	34,852	$	34,551
FHLMC*	$	54,498	$	54,043

* Federal Home Loan Mortgage Corporation

At March 31, 2007 we did not hold federal funds sold compared to $1.6 million at December 31, 2006 and $16.8 million at March 31, 2006.  The decrease in federal funds sold is the result of strong loan demand and our efforts to invest a portion of these federal funds into liquid investment securities and loans to improve our average yield on earning assets.

As of March 31, 2007, we held $100 thousand in certificates of deposit at other FDIC insured financial institutions.  At March 31, 2007, we held $22.5 million in bank owned life insurance, compared to $22.3 million at December 31, 2006 and $21.7 million at March 31, 2006.

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Deposits and Other Borrowings

As of March 31, 2007, deposits increased by 0.5% (1.9% annualized) from December 31, 2006 and by 5.0% from March 31, 2006.  Year-over-year increases were due to our sales team drawing customers away from other financial institutions and our branching efforts.  Excluding the changes in brokered CDs, our year-over-year growth rate of deposits was 6.4%.  During the first quarter of 2007, we elected not to replace $7.7 million in maturing brokered CDs, but instead replaced them with overnight FHLB borrowings.  This decision was based on anticipated declining interest rates for the remainder of 2007 and a desire to position our liability sensitivity accordingly.  In the first quarter of 2007, the fastest growing sector of our core deposit base was interest bearing demand deposits and retail CDs which grew 2.8% (11.2% annualized) and 2.0% (7.8% annualized), respectively, and outpaced our total deposit growth.  We define our core deposits to include interest bearing and noninterest bearing demand deposits, savings and money market accounts, as well as retail certificates of deposits with denominations less than $100,000.  We consider our retail CDs to be a stable source of funding because they are in-market, relationship-oriented deposits.  Core deposit growth is an important tenant to our business strategy.  We believe that by improving our branching network, we will provide more convenient opportunities for customers to bank with us, and thus improve our core deposit funding.  For this reason, we opened a de novo branch in Algood, Tennessee in April 2007 and will open one in Cleveland, Tennessee in May 2007.  Additional de novo branches may be planned for the remainder of the year as opportunities arise.  Currently, we have not located additional de novo locations.  As a result of our branch network and branches opened in recent periods, we anticipate that our deposits will continue to increase throughout 2007.

Federal funds purchased and securities sold under agreements to repurchase were $27.0 million as of March 31, 2007, compared to $20.9 million and $19.5 million as of December 31, 2006 and March 31, 2006, respectively.  The increase in federal funds purchased and repurchase agreements has been used as a source to fund the growth in our loan portfolio.

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 qualifying commercial real estate loans equal to at least 135% and 300%, respectively, of outstanding advances.  We also use FSGbank’s borrowing capacity at FHLB to purchase a letter of credit that we pledged to the State of Tennessee Bank Collateral Pool.  The letter of credit allows us to release investment securities from the Collateral Pool and thus improve our liquidity ratio.  During the fourth quarter of 2006, we began utilizing the secured overnight advances to replace existing higher rate unsecured Federal Funds purchased.   The following table details the maturities and rates of our borrowings from the FHLB of Cincinnati as of March 31, 2007.

Date	Type	Principal	Term	Rate	Maturity
3/30/2007	Fixed rate advance	$  26,460,000	Overnight	5.35%	4/2/07
12/6/2004*	Fixed rate advance	2,667,000	48 months	3.34%	1/25/08
12/6/2005*	Fixed rate advance	2,667,000	48 months	4.11%	1/26/09
6/18/1996*	Fixed rate advance	1,717	180 months	7.70%	7/1/11
9/16/1996*	Fixed rate advance	3,233	180 months	7.50%	10/1/11
9/9/1997*	Fixed rate advance	4,035	180 months	7.05%	10/1/12
		$  31,802,985

Aggregate composite rate	5.08%
Overnight rate	5.35%
48 month composite rate	3.73%
180 month composite rate	7.34%

* Assumed as part of the acquisition of Jackson Bank.

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Liquidity

Liquidity refers to our ability to adjust future cash flows to meet the needs of our daily operations.  We rely primarily on management fees from FSGBank to fund our daily operations’ liquidity needs.  Our cash balance on deposit with FSGBank, which totaled approximately $4.1 million as of March 31, 2007, is available for funding activities for which FSGBank would not receive direct benefit, such as acquisition due diligence, shareholder relations and holding company operations.  These funds should adequately meet our cash flow needs.  If we determine that our cash flow needs will be satisfactorily met, we may deploy a portion of the funds into FSGBank or use them in an acquisition in order to support continued growth.

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

At March 31, 2007, our liquidity ratio (defined as cash, due from banks, federal funds sold, and investment securities less securities pledged to secure liabilities divided by short-term funding liabilities less liabilities secured by pledged securities) was 17.2% (excluding anticipated loan repayments).  As of December 31, 2006 and March 31, 2006, the liquidity ratios were 18.1% and 22.2% respectively.

As of March 31, 2007, the unused borrowing capacity (using 1-4 family residential mortgage and commercial real estate loans) for FSGBank at FHLB was $70.2 million.  FHLB maintains standards for loan collateral files.  Therefore, our borrowing capacity may be restricted if our collateral file has exceptions.

FSGBank also had unsecured federal funds lines in the aggregate amount of $99.5 million at March 31, 2007 under which it can borrow funds to meet short-term liquidity needs.   The aggregate amount of the federal funds lines was available as of March 31, 2007.  Another source of funding is loan participations sold to other commercial banks (in which we retain the service rights).  As of quarter-end, we had $6.2 million in loan participations sold.  FSGBank may continue 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 quarter-end, FSGBank had no borrowings against our investment securities, except for repurchase agreements and public-fund deposits attained in the ordinary course of business.  As of March 31, 2007, FSGBank had $79.2 million in brokered CDs outstanding with a weighted average remaining life of approximately 9 months, a weighted average coupon rate of 4.48% and a weighted average all-in cost (which includes fees paid to deposit brokers) of 4.72%.    Our certificates of deposit greater than $100 thousand were generated in FSGBank’s communities and are considered relatively stable.  We believe that FSGBank’s liquidity sources are adequate to meet its operating needs.

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We also have contractual cash obligations and commitments, which included certificates of deposit, other borrowings, operating leases and loan commitments.  Unfunded loan commitments totaled $280.1 million at March 31, 2007.  The following table illustrates our significant contractual obligations at March 31, 2006 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 deposit	(1	)	$	555,275	$	465,131	$	79,780	$	10,364	$	-
Federal funds purchased and securities sold under agreements to repurchase	(2	)		26,991		26,991		-		-		-
FHLB borrowings	(3	)		31,803		26,460		5,334		5		4
Operating lease obligations	(4	)		5,902		1,010		1,911		1,301		1,680
Note payable	(5	)		125		12		27		32		54
Total			$	620,096	$	519,604	$	87,052	$	11,702	$	1,738

¹ Certificates of deposit 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 deposit, see “Deposits and Other Borrowings.”

² We expect securities repurchase agreements to be re-issued and, as such, do not necessarily represent an immediate need for cash.

³ For more information regarding FHLB borrowings, see “Deposits and Other Borrowings.”

⁴ Operating lease obligations include existing and future property and equipment non-cancelable lease commitments.

⁵ This note payable is a mortgage on the land of our branch facility located at 2905 Maynardville Highway, Maynardville, Tennessee.

Net cash provided by operations during the first quarter of 2007 totaled $6.6 million compared to $7.2 for the same period in 2006.  The decrease is primarily due to a reduction in other liabilities, specifically the payment of our annual incentive compensation liabilities and tax liabilities, offset by an increase in earnings combined with an increase in loans held for sale.  Net cash used in investing activities decreased to $18.9 million as compared to $23.3 million primarily due to decreases in purchases of securities.  Net cash provided by financing activities decreased to $15.6 million compared to $19.0 million in 2006.  The decrease is primarily due to slower growth in deposits, partially offset by increases in other borrowings.

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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.

Our maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at March 31, 2007 and 2006 was as follows:

	As of March 31,
	2007		2006
	(in thousands)
Commitments to Extend Credit	$	280,106	$	266,700
Standby Letters of Credit	$	15,941	$	13,659

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 credit worthiness 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.

Capital Resources

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Comptroller of the Currency 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.  First Security and FSGBank both maintain capital levels exceeding the minimum capital levels required in addition to exceeding those capital requirements for well capitalized banks and holding companies under applicable regulatory guidelines.

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

March 31, 2007	Well Capitalized	Adequately Capitalized	First Security	FSGBank
Tier I capital to risk adjusted assets	6.0%	4.0%	12.1%	11.3%
Total capital to risk adjusted assets	10.0%	8.0%	13.1%	12.4%
Leverage ratio	5.0%	4.0%	10.4%	9.8%
December 31, 2006
Tier I capital to risk adjusted assets	6.0%	4.0%	13.1%	11.1%
Total capital to risk adjusted assets	10.0%	8.0%	13.1%	12.1%
Leverage ratio	5.0%	4.0%	10.5%	9.7%
March 31, 2006
Tier I capital to risk adjusted assets	6.0%	4.0%	12.3%	10.6%
Total capital to risk adjusted assets	10.0%	8.0%	13.5%	11.8%
Leverage ratio	5.0%	4.0%	10.7%	9.2%

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.  In the first quarter of 2007, we paid total cash dividends of $0.05 per share or $864 thousand.  On April 25, 2007, the Board of Directors declared the second quarter cash dividend of $0.05 per share payable on June 18, 2007 to shareholders of record on June 1, 2007.

On November 29, 2006, our Board of Directors authorized a plan to buy back up to 500,000 shares of our common stock in open market transactions.  As of March 31, 2007, we have repurchased 92,056 shares at a weighted average price of $11.85.

EFFECTS OF INFLATION

Inflation generally increases the cost of funds and operating overhead, and, to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction, or to the same extent, as the prices of goods and services, increases in inflation generally have resulted in increased interest rates.  If the Federal Reserve believes that the rate of inflation is likely to increase to undesired levels, its method of curbing inflation in the past has been to increase the interest rate charged on short-term federal borrowings.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).  The Statement allows an irrevocable election to measure certain financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with unrealized gains and losses recognized currently in earnings.  Under SFAS 159, the fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events.  Additionally, SFAS 159 provides that application of the fair value option must be based on the fair value of an entire financial asset or financial liability and not selected risks inherent in those assets or liabilities.  SFAS 159 requires that assets and liabilities which are measured at fair value pursuant to the fair value option be reported in the financial statements in a manner that separates those fair values from the carrying amounts of similar assets and liabilities which are measured using another measurement attribute.  SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS No. 159 is effective prospectively for fiscal years beginning after November 15, 2007, with early adoption permitted for fiscal years in which interim financial statements have not been issued, provided that all of the provisions of SFAS No. 157 are early adopted as well.  We early adopted SFAS 159 effective January 1, 2007.  Notes 2 and Note 10 provide further information.

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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) to clarify how to measure fair value and to expand disclosures about fair value measurements.  The expanded disclosures include the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value on earnings and is applicable whenever other standards require (or permit) assets and liabilities to be measured at fair value.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years with early adoption permitted.  We adopted SFAS 157 effective January 1, 2007.  Note 9 provides further information.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48).  The Interpretation provides guidance for recognition and measurement of uncertain tax positions that are “more likely than not” of being sustained upon audit, based on the technical merits of the position.   FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The effective date is for fiscal years beginning after December 15, 2006.  We adopted FIN 48 as of January 1, 2007.  The adoption did not have a material impact on our consolidated financial statements.  Note 8 provides further information.

In December 2005, the FASB issued FASB Staff Position (FSP) SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk.This FSP was issued in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions to address the circumstances in which the terms of loan products give rise to a concentration of credit risk as that term is used in SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and what disclosures apply to entities who deal with loan products whose terms may give rise to a concentration of credit risk.  An entity shall provide the disclosures required by SFAS No. 107 for either an individual loan product type or a group of loan products with similar features that are determined to represent a concentration of credit risk in accordance with the guidance of SOP 94-6-1 for all periods presented in financial statements. This SOP is effective for interim and annual periods ending after December 19, 2005. The adoption of FSP SOP 94-6-1 did not have a material impact on our consolidated financial statements.

In November 2005, the FASB issued a FSP on SFAS No. 115-1 and SFAS No. 124-1 (“the FSP”), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging issues Task Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to be other-than-temporary, must be recognized in earnings at an amount equal to the entire difference between the securities cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption did not have a material impact on our consolidated financial statements.

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In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3, which eliminates the requirement to reflect changes in accounting principles as cumulative adjustments to net income in the period of the change and requires retrospective application to prior periods’ financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. If it is impracticable to determine the cumulative effect of the change to all prior periods, SFAS No. 154 requires that the new accounting principle be adopted prospectively. For new accounting pronouncements, the transition guidance in the pronouncement should be followed. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used.  SFAS 154 did not change the guidance for reporting corrections of errors, changes in estimates or for justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 did not have a material impact on our consolidated financial statements.

ITEM 3. 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.  With adoption of SFAS 159, we are exposed to market risk on our trading assets.  Changes in the market values of these assets must be recorded through our income statement.  Subsequent to March 31, 2007, we sold our trading assets.  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.  As we continue to diversify our risks, we anticipate utilizing the fair value option on future securities in circumstances that we can match market value or interest rate sensitive liabilities.  We do not deal in international instruments, and therefore are not exposed to risk inherent to foreign currency.

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.

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Our income simulation analysis projected net interest income based on both a rise and fall in interest rates of 200 basis points (i.e. 2.00%) over a twelve-month period.  Given this scenario, we had, as of March 31, 2007, an exposure to falling rates and a benefit from rising rates. More specifically, our model forecasts a decline in net interest income of $934 thousand or 7.88%, as a result of a 200 basis point decline in rates. The model also predicts an $889 thousand increase in net interest income, or 7.5% as a result of a 200 basis point increase in rates. The forecasted results of the model are within the limits specified by ALCO. The following chart reflects our sensitivity to changes in interest rates as of March 31, 2007. The numbers are based on a static balance sheet, and the chart assumes that pay downs and maturities of both assets and liabilities are reinvested in like instruments at current interest rates, rates down 200 basis points, and rates up 200 basis points.

INTEREST RATE RISK

INCOME SENSITIVITY SUMMARY

	DOWN 200 BP			CURRENT			UP 200 BP
	(in thousands, except percentages)
	(Restated)			(Restated)			(Restated)
Net interest income	$	10,925		$	11,859		$	12,748
$ change net interest income		(934	)		-			889
% change net interest income		(7.88	)%		0.00	%		7.50	%

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 Sendero Vision Asset/Liability system 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 has the capability to model derivative instruments such as interest rate swap contracts.

ITEM 4.  CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 Quarterly 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 (hereinafter in Item 4 “management, including the CEO and CFO,” are referred to collectively as “management”), as appropriate to allow timely decisions regarding required disclosure.

Our management 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.

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As a result of the restatement discussed in Note 2 of our consolidated financial statements included elsewhere in this Form 10-Q/A, management reevaluated the effectiveness of our Disclosure Controls in connection with the filing of this Form 10-Q/A.  Based upon their controls evaluation, and in light of, and giving due consideration to, the restatement and the reasons therefor, they have concluded that our Disclosure Controls are effective at a reasonable assurance level.

At the time of early adoption, management had determined that the application was proper and consistent with the general interpretations of SFAS 159 in effect in the accounting industry.  Management based its conclusion on its extensive review of the applicable accounting literature regarding SFAS 159 and its consultation with its independent registered public accounting firm (Joseph Decosimo and Company, PLLC).  Management then presented the accounting guidance to the Board of Directors, who approved the early adoption and application of the fair value option to the selected investment securities.  Management believes that the internal processes regarding the evaluation of accounting treatment, including discussions with the Board of Directors and the extensive communications with First Security’s independent registered public accounting firm, indicate that appropriate Disclosure Controls were, and continue to be, in place.

In the fourth quarter of 2007, management reevaluated the accounting treatment for SFAS 159 due to discussions with the OCC, which focused on the evolving interpretations of existing guidance.  As a result, management and the Board of Directors, in consultation with our independent registered public accounting firm, decided to restate the financial statements contained in the Form 10-Q.

There have been no significant changes in our internal control over financial reporting during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.  We have evaluated and concluded that the restatement does not indicate a material weakness in internal controls over financial reporting and that the restatement does not impact such controls and procedures that were effective as of the end of the periods covered by the restatement. We believe that our internal controls are functional and adequate, and on an ongoing basis we will continue to review and, as appropriate, improve our internal controls.

Under Auditing Standard No. 5 of the Public Company Accounting Oversight Board, a restatement of previously issued financial statements is an indicator of the existence of a “material weakness” in internal control over financial reporting. Under the relevant SEC rules, management will not be permitted to conclude that internal control over financial reporting is effective if it has identified one or more material weaknesses in those internal controls.  Management believes that the restatement was the result of the evolving interpretations of existing guidance regarding the application of new accounting pronouncements and not the result of a lack of personnel or technical expertise.  As such, management believes that this restatement is not the result of a “material weakness.”

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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On November 29, 2006, our Board of Directors authorized a plan to buy back up to 500,000 shares of our common stock in open market transactions.  As of March 31, 2007, we have repurchased 92,056 shares at a weighted average price of $11.85.  The specific timing and amount of repurchases will vary based on market conditions, securities law limitations and other factors.  The repurchases will be made with our cash resources.  The repurchase program may be suspended or discontinued at any time without prior notice.  The following table provides additional information on the purchases:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2007 – January 31, 2007		-	$	-		-		500,000
February 1, 2007 – February 28, 2007		41,620	$	12.00		41,620		458,380
March 1, 2007 – March 31, 2007		50,436	$	11.72		50,436		407,944
		92,056				92,056

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ITEM 6. EXHIBITS

Exhibits:
	EXHIBIT NUMBER	DESCRIPTION
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of1934
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of1934
	32.1	Certification of Chief Executive Officer pursuant to18 U.S.C. Section 1350 as adopted pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934

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SIGNATURES

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

	FIRST SECURITY GROUP, INC.
	(Registrant)
December 18, 2007	/s/ Rodger B. Holley
	Rodger B. Holley
	Chairman & Chief Executive Officer
December 18, 2007	/s/ William L. Lusk, Jr.
	William L. Lusk, Jr.
	Secretary, Chief Financial Officer &
	Executive Vice President

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