First Security (FSGI) 10-Q 2010 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

OR

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

For the transition period from ____________________ to _____________________.

COMMISSION FILE NO. 000-49747

FIRST SECURITY GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

Tennessee	58-2461486
(State of Incorporation)	(I.R.S. Employer Identification No.)

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           x           No           o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes           o           No           o

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

Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o

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

Yes           o           No           x

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

Common Stock, $0.01 par value:

16,418,327 shares outstanding and issued as of May 10, 2010

First Security Group, Inc. and Subsidiary

Form 10-Q

INDEX

PART I.	FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
		Consolidated Balance Sheets - March 31, 2010, December 31, 2009 and March 31, 2009	1
		Consolidated Income Statements - Three months ended March 31, 2010 and 2009	3
		Consolidated Statement of Stockholders’ Equity - Three months ended March 31, 2010	4
		Consolidated Statements of Cash Flows - Three months ended March 31, 2010 and 2009	5
		Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		52
Item 4.	Controls and Procedures		53
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors		53
Item 6.	Exhibits		56
SIGNATURES			57

PART I - FINANCIAL INFORMATION

ITEM 1.  Financial Statements

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

(in thousands)	March 31, 2010 (unaudited)		December 31, 2009		March 31, 2009 (unaudited)
ASSETS
Cash and Due from Banks	$	17,974	$	23,220	$	19,174
Federal Funds Sold and Securities Purchased under Agreements to Resell		-		-		-
Cash and Cash Equivalents		17,974		23,220		19,174
Interest Bearing Deposits in Banks		210,961		152,616		25,462
Securities Available-for-Sale		145,568		143,045		142,146
Loans Held for Sale		2,138		1,225		4,028
Loans		903,374		950,793		988,619
Total Loans		905,512		952,018		992,647
Less: Allowance for Loan and Lease Losses		26,101		26,492		20,028
		879,411		925,526		972,619
Premises and Equipment, net		32,717		33,157		33,686
Goodwill		-		-		27,156
Intangible Assets		1,800		1,918		2,269
Other Assets		80,539		74,352		51,873
TOTAL ASSETS	$	1,368,970	$	1,353,834	$	1,274,385

(See Accompanying Notes to Consolidated Financial Statements)

1

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

(in thousands, except share data)	March 31, 2010 (unaudited)			December 31, 2009			March 31, 2009 (unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest Bearing Demand	$	156,736		$	151,174		$	149,372
Interest Bearing Demand		70,729			62,429			63,953
Savings and Money Market Accounts		177,998			177,543			169,497
Certificates of Deposit less than $100 thousand		239,446			244,312			243,746
Certificates of Deposit of $100 thousand or more		203,340			207,465			199,912
Brokered Deposits		353,396			339,750			239,915
Total Deposits		1,201,645			1,182,673			1,066,395
Federal Funds Purchased and Securities Sold under Agreements to Repurchase		18,371			17,911			21,226
Security Deposits		1,188			1,376			1,771
Other Borrowings		90			94			106
Other Liabilities		7,671			10,181			9,905
Total Liabilities		1,228,965			1,212,235			1,099,403
STOCKHOLDERS’ EQUITY
Preferred Stock – no par value – 10,000,000 shares authorized; 33,000 issued as of March 31, 2010, December 31, 2009 and March 31, 2009		31,431			31,339			31,071
Common Stock - $.01 par value - 50,000,000 shares authorized; 16,418,327 issued as of March 31, 2010 and December 31, 2009; 16,419,883 issued as of March 31, 2009		114			114			114
Paid-In Surplus		111,852			111,964			111,912
Common Stock Warrants		2,006			2,006			2,006
Unallocated ESOP Shares		(5,907	)		(6,193	)		(6,767	)
(Accumulated Deficit) Retained Earnings		(5,442	)		(3,823	)		30,326
Accumulated Other Comprehensive Income		5,951			6,192			6,320
Total Stockholders’ Equity		140,005			141,599			174,982
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,368,970		$	1,353,834		$	1,274,385

(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)	2010			2009
INTEREST INCOME
Loans, including fees	$	13,450		$	14,873
Debt Securities – taxable		1,090			1,184
Debt Securities – non-taxable		378			404
Other		123			14
Total Interest Income		15,041			16,475
INTEREST EXPENSE
Interest Bearing Demand Deposits		45			51
Savings Deposits and Money Market Accounts		408			472
Certificates of Deposit of less than $100 thousand		1,343			2,049
Certificates of Deposit of $100 thousand or more		1,194			1,760
Brokered Deposits		2,254			1,765
Other		122			141
Total Interest Expense		5,366			6,238
NET INTEREST INCOME		9,675			10,237
Provision for Loan and Lease Losses		4,375			4,993
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		5,300			5,244
NONINTEREST INCOME
Service Charges on Deposit Accounts		1,000			1,147
Gain on Sales of Available-for-Sale Securities		57			-
Other		1,247			1,304
Total Noninterest Income		2,304			2,451
NONINTEREST EXPENSES
Salaries and Employee Benefits		4,948			5,357
Expense on Premises and Fixed Assets, net of rental income		1,383			1,520
Other		3,541			2,583
Total Noninterest Expenses		9,872			9,460
LOSS BEFORE INCOME TAX BENEFIT		(2,268	)		(1,765	)
Income Tax Benefit		(1,154	)		(913	)
NET LOSS		(1,114	)		(852	)
Preferred Stock Dividends		413			371
Accretion on Preferred Stock Discount		92			77
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(1,619	)	$	(1,300	)
NET LOSS PER COMMON SHARE:
Net Loss Per Share - Basic	$	(0.10	)	$	(0.08	)
Net Loss Per Share - Diluted	$	(0.10	)	$	(0.08	)
Dividend Declared Per Common Share	$	-		$	0.05

 (See Accompanying Notes to Consolidated Financial Statements)

3

First Security Group, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity

			Common Stock
(in thousands)	Preferred Stock		Shares		Amount		Paid-In Surplus			Common Stock Warrants		Accumulated Deficit			Accumulated Other Comprehensive Income			Unallocated ESOP Shares			Total
Balance – December 31, 2009	$	31,339		16,418	$	114	$	111,964		$	2,006	$	(3,823	)	$	6,192		$	(6,193	)	$	141,599
Comprehensive Income:
Net Loss (unaudited)													(1,114	)								(1,114	)
Change in Unrealized Gain:
Securities Available-for-Sale, net of tax and reclassification adjustments (unaudited)																85						85
Fair Value of Derivatives, net of tax and reclassification adjustments (unaudited)																(326	)					(326	)
Total Comprehensive Loss																						(1,355	)
Accretion of Discount Associated with Preferred Stock (unaudited)		92											(92	)								-
Preferred Stock Dividend (unaudited)													(413	)								(413	)
Stock-based Compensation (unaudited)								25														25
ESOP Allocation (unaudited)								(137	)										286			149
Balance – March 31, 2010 (unaudited)	$	31,431		16,418	$	114	$	111,852		$	2,006	$	(5,442	)	$	5,951		$	(5,907	)	$	140,005

(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)	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(1,114	)	$	(852	)
Adjustments to Reconcile Net Loss to Net Cash (Used in) Provided by Operating Activities -
Provision for Loan and Lease Losses		4,375			4,993
Amortization, net		182			144
Stock-Based Compensation		25			169
ESOP Compensation		149			166
Depreciation		473			545
Gain on Sale of Premises and Equipment		(8	)		(3	)
Loss (Gain) on Sale of Other Real Estate and Repossessions, net		240			(8	)
Write-down of Other Real Estate and Repossessions		6			182
Gain on the Sale of Available-for-Sale Securities		(57	)		-
Accretion of Fair Value Adjustment, net		(15	)		(55	)
Accretion of Cash Flow Swaps		-			(528	)
Accretion of Terminated Cash Flow Swaps		(519	)		(169	)
Changes in Operating Assets and Liabilities -
Loans Held for Sale		(897	)		(2,419	)
Interest Receivable		237			40
Other Assets		(3,923	)		1,248
Interest Payable		(753	)		(1,107	)
Other Liabilities		(2,209	)		(306	)
Net Cash (Used in) Provided by Operating Activities		(3,808	)		2,040
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Interest Bearing Deposits in Banks		(58,345	)		(24,544	)
Activity in Available-for-Sale-Securities
Maturities, Prepayments, and Calls		16,541			4,578
Sales		14,762			-
Purchases		(33,704	)		(6,387	)
Loan Originations and Principal Collections, net		38,459			13,794
Receipts for Interim Settlements of Cash Flow Swaps, net		-			938
Proceeds from Termination of Cash Flow Swaps		-			5,778
Proceeds from Sale of Premises and Equipment		8			13
Proceeds from Sales of Other Real Estate and Repossessions		1,837			770
Additions to Premises and Equipment		(33	)		(464	)
Capital Improvements to Other Real Estate and Repossessions		(391	)		(36	)
Net Cash Used in Investing Activities		(20,866	)		(5,560	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits		18,972			(9,892	)
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		460			(18,810	)
Net Decrease of Other Borrowings		(4	)		(2,671	)
Proceeds from Issuance of Preferred Stock and Common Stock Warrants		-			33,000
Repurchase of Common Stock for 401(K) and ESOP Plan		-			(1,023	)
Repurchase and Retirement of Common Stock		-			-
Dividends Paid on Preferred Stock		-			(371	)
Dividends Paid on Common Stock		-			(761	)
Net Cash Provided by (Used in) Financing Activities		19,428			(528	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(5,246	)		(4,048	)
CASH AND CASH EQUIVALENTS - beginning of period		23,220			23,222
CASH AND CASH EQUIVALENTS - end of period	$	17,974		$	19,174

 (See Accompanying Notes to Consolidated Financial Statements)

5

	Three Months Ended March 31,
(in thousands)	2010		2009
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed Properties and Repossessions	$	5,248	$	6,391
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest Paid	$	6,119	$	7,345
Income Taxes Paid	$	38	$	198

(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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 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, 2009.

NOTE 2 – COMPREHENSIVE INCOME

Comprehensive income is a measure of all changes in equity, not only reflecting net income but certain other changes as well.  The following table presents the comprehensive income for the three-month period ended March 31, 2010 and 2009, respectively.

	Three months ended March 31,
	2010			2009
	(in thousands)
Net loss	$	(1,114	)	$	(852	)
Other comprehensive income (loss)
Available-for-sale securities
Unrealized net gain on securities arising during the period		186			1,041
Tax expense related to unrealized net gain		(63	)		(354	)
Reclassification adjustments for realized gain included in net income		(57	)		-
Tax expense related to gain realized in net income		19			-
Unrealized gain on securities, net of tax		85			687
Derivative cash flow hedges
Unrealized gain on derivatives arising during the period		25			279
Tax expense related to unrealized gain		(8	)		(96	)
Reclassification adjustments for realized gain included in net income		(519	)		(697	)
Tax expense related to gain realized in net income		176			237
Unrealized loss on derivatives, net of tax		(326	)		(277	)
Other comprehensive (loss) income, net of tax		(241	)		410
Comprehensive loss	$	(1,355	)	$	(442	)

7

NOTE 3 – 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,
	2010			2009
	(in thousands, except per share data)
Net loss available to common shareholders	$	(1,619	)	$	(1,300	)
Denominator:
Weighted average common shares outstanding		15,649			15,573
Equivalent shares issuable upon exercise of stock options, stock warrants and restricted stock awards		-			-
Diluted shares		15,649			15,573
Net loss per common share:
Basic	$	(0.10	)	$	(0.08	)
Diluted	$	(0.10	)	$	(0.08	)

For the three months ended March 31, 2010 and 2009, there were 2,006 thousand and 2,297 thousand stock options, stock warrants and restricted stock awards that were not included in the computation of diluted earnings per share because the options were anti-dilutive under the treasury stock method, respectively.  The anti-dilutive options expire between 2010 and 2019.

NOTE 4 – SECURITIES

Investment Securities by Type

The following table presents the amortized cost and fair value of securities, with gross unrealized gains and losses.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Securities available-for-sale
March 31, 2010
Debt securities—
Federal agencies	$	25,836	$	148	$	15	$	25,969
Mortgage-backed		77,534		2,864		52		80,346
Municipals		37,804		1,421		56		39,169
Other		126		-		42		84
Total	$	141,300	$	4,433	$	165	$	145,568
Securities available-for-sale
December 31, 2009
Debt securities—
Federal agencies	$	17,226	$	144	$	16	$	17,354
Mortgage-backed		80,338		3,225		477		83,086
Municipals		41,216		1,373		66		42,523
Other		126		-		44		82
Total	$	138,906	$	4,742	$	603	$	143,045

8

Proceeds from sales of securities available-for-sale totaled $14,762 thousand for the three months ended March 31, 2010.  Gross realized gains from sales of securities were $368 thousand for the three months ended March 31, 2010.  Gross losses were $311 thousand for the three months ended March 31, 2010.  There were no sales of securities during the three months ended March 31, 2009.

At March 31, 2010 and December 31, 2009, federal agencies, municipals and mortgage-backed securities with a carrying value of $31,666 thousand and $12,600 thousand, respectively, were pledged to secure public deposits. At March 31, 2010 and December 31, 2009, the carrying amount of securities pledged to secure repurchase agreements was $25,577 thousand and $26,472 thousand, respectively.  At March 31, 2010, securities of $6,195 thousand were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions.

Maturity of Securities
 

The following table presents the amortized cost and fair value of debt securities by contractual maturity at March 31, 2010.

	Amortized Cost		Fair Value
	(in thousands)
Within 1 year	$	2,808	$	2,834
Over 1 year through 5 years		26,781		27,454
5 years to 10 years		29,305		30,044
Over 10 years		4,872		4,890
		63,766		65,222
Mortgage-backed securities		77,534		80,346
Total	$	141,300	$	145,568

Impairment Analysis

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010 and December 31, 2009.

	Less than 12 months				12 months or greater				Totals
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
March 31, 2010
Federal agencies	$	6,999	$	15	$	-	$	-	$	6,999	$	15
Mortgage-backed		8,927		52		-		-		8,927		52
Municipals		1,408		27		624		29		2,032		56
Other		-		-		84		42		84		42
Totals	$	17,334	$	94	$	708	$	71	$	18,042	$	165
December 31, 2009
Federal agencies	$	1,982	$	16	$	-	$	-	$	1,982	$	16
Mortgage-backed		2,375		6		3,086		471		5,461		477
Municipals		1,404		31		617		35		2,021		66
Other		-		-		82		44		82		44
Totals	$	5,761	$	53	$	3,785	$	550	$	9,546	$	603

9

As of March 31, 2010, the Company performed an impairment assessment of the securities in its portfolio that had an unrealized loss to determine whether the decline in the fair value of these securities below their cost was other-than-temporary.  Under authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) the Company intends to sell the security, (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized costs basis or (3) the Company does not expect to recover the security’s entire amortized cost basis, even if the Company does not intend to sell. Additionally, accounting guidance requires that for impaired securities that the Company does not intend to sell and/or that it is not more-like ly-than-not that the Company will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.

In evaluating the recovery of the entire amortized cost basis, the Company considers factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.

As of March 31, 2010, gross unrealized losses in the Company’s portfolio totaled $165 thousand, compared to $603 thousand as of December 31, 2009.  The unrealized losses in other securities are two trust preferred securities.  The unrealized losses are primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities.  The unrealized losses in mortgage-backed, agency and municipal securities are primarily due to widening credit spreads and changes in interest rates subsequent to purchase.  Based on results of the Company’s impairment assessment, the unrealized losses at March 31, 2010 are considered temporary.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans by type are summarized as follows:

	March 31, 2010			December 31, 2009			March 31, 2009
	(in thousands)
Loans secured by real estate-
Residential 1-4 family	$	278,695		$	281,354		$	294,314
Commercial		255,174			259,819			223,759
Construction		125,603			153,144			190,581
Multi-family and farmland		41,314			37,960			36,541
		700,786			732,277			745,195
Commercial loans		138,156			146,016			162,534
Consumer installment loans		45,564			48,927			53,406
Leases, net of unearned income		17,405			19,730			29,117
Other		3,601			5,068			2,395
Total loans		905,512			952,018			992,647
Allowance for loan and lease losses		(26,101	)		(26,492	)		(20,028	)
Net loans	$	879,411		$	925,526		$	972,619

10

The following table presents an analysis of the allowance for loan and lease losses.  The provision expense for loan and lease losses in the table does not include the Company’s provision accrual for unfunded commitments of $6 thousand and $6 thousand for the three months ended March 31, 2010 and 2009, respectively.  The reserve for unfunded commitments is included in other liabilities in the consolidated balance sheets.

	March 31, 2010			March 31, 2009
	(in thousands)
Allowance for loan and lease losses-beginning of period	$	26,492		$	17,385
Provision expense for loan and lease losses		4,369			4,987
Loans charged-off		(5,056	)		(2,408	)
Loan loss recoveries		296			64
Allowance for loan and lease losses-end of period	$	26,101		$	20,028

The Company classifies a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans were, $43,965 thousand, $40,118 thousand and $17,921 thousand at March 31, 2010, December 31, 2009 and March 31, 2009, respectively.  Loans past due 90 days or more and still accruing interest were $3,993 thousand, $4,524 thousand and $5,413 thousand at March 31, 2010, December 31, 2009 and March 31, 2009, respectively.  The Company had no significant outstanding commitments to lend additional funds to customers whose loans have been placed on nonaccrual status.

Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may change in the near term.  However, the amount of the change that is reasonably possible cannot be estimated.

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, 2010, December 31, 2009, and March 31, 2009 was $15,394 thousand, $16,07 7 thousand, and $25,579 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

Common Stock and ESOP Activity

On January 27, 2010, the Company’s Board of Directors elected to suspend the dividend on the Company’s common stock and elected to defer payment of the Series A Preferred Stock (Preferred Stock) for the first quarter of 2010.  The Company may not pay dividends on common stock unless all dividends have been paid on the Preferred Stock.

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On March 31, 2010, 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		Compensation Expense (in thousands)
Shares as of December 31, 2009		768,787			—		431,889
Shares allocated for first quarter 2010 match		(65,655	)		—		65,655	$	149
Shares as of March 31, 2010		703,132			—		497,544

Preferred Stock

On January 27, 2010, the Company’s Board of Directors elected to defer payment on the February 15, 2010 dividend on the Preferred Stock.  Dividends for the Series A Preferred Stock are cumulative.  The Company recognized $413 thousand in expense for Preferred Stock dividends for the three months ended March 31, 2010.  As of March 31, 2010, the unpaid, accrued dividend is $619 thousand.  As of March 31, 2010, the Company recognized $92 thousand in Preferred Stock discount accretion.

NOTE 8 – TAXES

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

For the three months ended March 31, 2010 and 2009, the Company recognized an income tax benefit of $1,154 thousand and $913 thousand, respectively.  The following reconciles the income tax benefit to statutory rates:

	For the Three Months Ended March 31,
	2010			2009
	(in thousands)
Federal taxes at statutory tax rate	$	(771	)	$	(600	)
Tax exempt earnings on loans and securities		(131	)		(139	)
Tax exempt earnings on bank owned life insurance		(86	)		(86	)
Low-income housing tax credits		(103	)		-
Other, net		52			38
State tax provision, net of federal effect		(115	)		(126	)
Income tax benefit	$	(1,154	)	$	(913	)

The income tax benefit recognized during 2010 primarily relates to increases in deferred tax assets including the increase associated with the net operating loss for the period.  The income tax benefit during 2009 primarily relates to the increase in deferred tax assets including the increase associated with the temporary difference in the allowance for loan and lease losses as well as the net operating loss for the period.  Based on the Company’s historical pattern of taxable income, the Company expects to produce sufficient income in the future to realize its deferred tax assets.  A valuation allowance is established for any portion of a deferred tax asset that the Company believes is more likely than not that the Company will not be able to realize the benefits.  As of March 31, 2010, the Company has no valuation allowances associated with deferred tax assets.

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The Company evaluated its material tax positions as of March 31, 2010.  Under the “more-likely-than-not” threshold guidelines, the Company believes it has identified all significant uncertain tax benefits.  The Company evaluates, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant.  In the event a significant uncertain tax position is determined to exist, penalty and interest will be accrued, in accordance with Internal Revenue Service guidelines, and recorded as a component of income tax expense in the Company’s consolidated financial statements.  The roll-forward of unrecognized tax benefits is as follows:

	Amount
	(in thousands)
Balance at January 1, 2010	$	1,146
Increases related to prior year tax positions		-
Increases related to current year tax positions		51
Lapse of statute		-
Balance at March 31, 2010	$	1,197

NOTE 9 – FAIR VALUE MEASUREMENTS

The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  Authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.  In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.  Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  In certain cases, the inputs used to measure fair value may fall into different levels of the hierarchy.  In such cases, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2010.

	Balance as of March 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial assets
Securities available-for-sale	$	145,568	$	-	$	145,318	$	250
Loans held for sale		2,138		-		2,138		-
Forward loan sales contracts		64		-		64		-
Financial liabilities
None		-		-		-		-

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The following table presents additional information about changes in assets and liabilities measured at fair value on a recurring basis and for which the Company utilized Level 3 inputs to determine fair value as of March 31, 2010.

	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, 2010, the Company also had assets and liabilities measured at fair value on a non-recurring basis.  Items measured at fair value on a non-recurring basis include other real estate owned (OREO), repossessions, and collateral-dependent impaired loans.  Such measurements were determined utilizing Level 2 and Level 3 inputs.

Upon initial recognition, OREO and repossessions are measured at fair value, which becomes the cost basis.  The cost basis is subsequently re-measured at fair value when events or circumstances occur that indicate the initial fair value has declined.  Collateral-dependent impaired loans are measured at fair value based on the appraised value of the collateral.  If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan and lease losses or the expense is recognized as a charge-off.  The following table presents the carrying value and associated valuation allowance of those assets measured at fair value on a non-recurring basis for which impairment was recognized for during the three months ended March 31, 2010.

	Carrying Value as of  March 31, 2010		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Valuation Allowance as of March 31, 2010
	(in thousands)
Other real estate owned	$	1,448	$	-	$	1,448	$	-	$	(1,137	)
Repossessions		460		-		460		-		(277	)
Collateral-dependent impaired loans		15,817		-		15,817		-		(3,142	)

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The following table presents the estimated fair values of the Company’s financial instruments.

	March 31, 2010						December 31, 2009
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	(in thousands)
Financial assets
Cash and cash equivalents	$	17,974		$	17,974		$	23,220		$	23,220
Interest bearing deposits in banks	$	210,961		$	210,961		$	152,616		$	152,616
Securities available-for-sale	$	145,568		$	145,568		$	143,045		$	143,045
Loans held for sale	$	2,138		$	2,138		$	1,225		$	1,225
Loans	$	903,374		$	916,417		$	950,793		$	959,689
Allowance for loan and lease losses	$	(26,101	)	$	(26,101	)	$	(26,492	)	$	(26,492	)
Financial liabilities
Deposits	$	1,201,645		$	1,209,858		$	1,182,673		$	1,187,263
Federal funds purchased and securities sold under agreements to repurchase	$	18,371		$	18,371		$	17,911		$	17,911
Other borrowings	$	90		$	90		$	94		$	94

The following methods and assumptions were used by the Company in estimating fair value of each class of financial instruments for which it is practicable to estimate that value:

· Cash and cash equivalents – The carrying value of cash and cash equivalents approximates fair value.

· Interest bearing deposits in banks – The carrying amounts of interest bearing deposits in banks approximate fair value.

· Securities – The Company’s securities are valued utilizing Level 2 inputs with the exception of one $250 thousand bond.  Level 2 inputs are based on quoted prices for similar assets in active markets.

· Loans held for sale – Fair value for loans held for sale are based on quoted prices for similar assets in active markets.

· Loans – For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values.  Fair values for certain mortgage loans and other consumer loans are estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.  The fair value of other types of loans and leases are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers of similar credit ratings quality.  Fair value for impaired loans and leases is estimated using discounted cash flow analysis or underlying collateral values, where applicable.

· Deposit liabilities – The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected maturities on time deposits.

· Federal funds purchased and securities sold under agreements to repurchase – These borrowings generally mature in 90 days or less and, accordingly, the carrying amount reported in the balance sheet approximates fair value.

· Other borrowings – Other borrowings carrying amount reported in the consolidated balance sheets approximates fair value.

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NOTE 10 – FAIR VALUE OPTION

Authoritative accounting guidance provides a fair value option election (FVO) that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. The guidance permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

The Company records all newly-originated loans held for sale under the fair value option.  Origination fees and costs are recognized in earnings at the time of origination.  The servicing value is included in the fair value of the loan and recognized at origination of the loan.  The Company uses derivatives to hedge changes in servicing value as a result of including the servicing value in the fair value of the loan.  The estimated impact from recognizing servicing value, net of related hedging costs, as part of the fair value of the loan is captured in the mortgage loan and related fees component of noninterest income.

As of March 31, 2010, December 31, 2009 and March 31, 2009, there was $2,138 thousand, $1,225 thousand and $4,028 thousand in loans held for sale recorded at fair value, respectively.  For the three months ended March 31, 2010, $149 thousand in loan origination and related fee income was recognized in non-interest income and an insignificant amount of origination and related fee expense was recognized in non-interest expense utilizing the fair value option.

For the three months ended March 31, 2010, the Company recognized a loss of $122 thousand due to changes in fair value for loans held for sale in which the fair value option was elected.  This amount does not reflect the change in fair value attributable to the related hedges the Company used to mitigate the interest rate risk associated with loans held for sale.  The changes in the fair value of the hedges were also recorded in the mortgage loan and related fee component of noninterest income, and offset $58 thousand of the change in fair value of loans held for sale.

The following table provides the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale for which the fair value option has been elected.

	Aggregate fair value		Aggregate unpaid principal balance under FVO		Fair value carrying amount over (under) unpaid principal
	(in thousands)
Loans held for sale	$	2,138	$	2,202	$	(64	)

NOTE 11 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivatives in accordance with ASC 815. The Company records all derivative financial instruments at fair value in the financial statements.  It is the policy of the Company to enter into various derivatives both as a risk management tool and in a dealer capacity, as necessary, to facilitate client transactions.  Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.  As of March 31, 2010, the Company has not entered into a transaction in a dealer capacity.

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

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

The Company’s derivatives are based on underlying risks, primarily interest rates.  The Company has utilized swaps to reduce the risks associated with interest rates.  Swaps are contracts in which a series of net cash flows, based on a specific notional amount that is related to an underlying risk, are exchanged over a prescribed period.  The Company also utilizes forward contracts on the held for sale loan portfolio.  The forward contracts hedge against changes in fair value of the held for sale loans.

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

On August 28, 2007 and March 26, 2009, the Company elected to terminate a series of interest rate swaps with a total notional value of $150 million and $50 million, respectively.  At termination, the swaps had a market value of $2.0 million and $5.8 million, respectively.  These gains are being accreted into interest income over the remaining life of the originally hedged items.  The Company recognized a total of $519 thousand in interest income for the three months ended March 31, 2010.

The following table presents the accretion of the remaining gain for the terminated swaps.

		2010	1		2011		2012		2013	Total
	(in thousands)
Accretion of gain from 2007 terminated swaps	$	277		$	219	$	62	$	-	$	558
Accretion of gain from 2009 terminated swaps	$	1,227		$	1,629	$	1,272	$	-	$	4,128

1Represents the gain accretion for April 1, 2010 to December 31, 2010.  Excludes the amounts recognized in the first three months of 2010.

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The following table presents the cash flow hedges as of March 31, 2010.

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income		Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Forward contracts	$	2,138	$	64	$	-	$	42	Various
	$	2,138	$	64	$	-	$	42
Terminated asset hedges
Cash flow hedges: 1
Interest rate swap	$	25,000	$	-	$	-	$	18	June 28, 2010
Interest rate swap		25,000		-		-		89	June 28, 2011
Interest rate swap		14,000		-		-		7	June 28, 2010
Interest rate swap		20,000		-		-		67	June 28, 2011
Interest rate swap		35,000		-		-		187	June 28, 2012
Interest rate swap		25,000		-		-		1,362	October 15, 2012
Interest rate swap		25,000		-		-		1,362	October 15, 2012
	$	169,000	$	-	$	-	$	3,092

1 The $3.1 million of gains, net of taxes, recorded in accumulated other comprehensive income as of March 31, 2010, will be reclassified into earnings as interest income over the remaining life of the respective hedged items.

The following table presents additional information on the active derivative positions as of March 31, 2010.

			Consolidated Balance Sheet Presentation						Consolidated Income Statement Presentation
			Assets			Liabilities			Gains
	Notional		Classification	Amount		Classification	Amount		Classification	Amount Recognized
	(in thousands)
Hedging Instrument:
Forward contracts	$	2,138	Other assets	$	64	Other liabilities		N/A	Noninterest income – other	$	58
Hedged Items:
Loans held for sale		N/A	Loans held for sale	$	2,138	N/A		N/A	Noninterest income – other		N/A

For the three months ended March 31, 2010, no significant amounts were recognized for hedge ineffectiveness.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2010, the Company adopted the provisions of the FASB Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-06), which updates ASC 820 to require disclosure of significant transfers into and out of Level 1 and Level 2 of the fair value hierarchy, as well as disclosure of an entity’s policy for determining when transfers between all levels of the hierarchy are recognized. ASC 820, as amended, also provides enhanced disclosure requirements regarding purchases, sales, issuances, and settlements related to recurring Level 3 measurements, and requires separate disclosure in the Level 3 reconciliation of total gains and losses recognized in other comprehensive income. The updated provisions of ASC 820 require that fair value measurement disclosures be provided by each “class” of assets and liabilities, and that disclosures providing a description of the valuation techniques and inputs used to measure fair value be included for both recurring and nonrecurring fair value measurements classified as either Level 2 or Level 3. The provisions of ASU 2010-06 are effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis which will be effective for periods beginning after December 15, 2010. Comparative disclosures are required only for periods ending subsequent to initial adoption. The Company revised its disclosures accordingly.

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Effective January 1, 2010, the Company adopted the provisions of the FASB Accounting Standards Update 2009-16, “Accounting for Transfers of Financial Assets” (ASU 2009-16). ASU 2009-16 updates ASC 860 to provide for the removal of the qualifying special purpose entity (“QSPE”) concept from GAAP, resulting in the evaluation of all former QSPEs for consolidation on and after January 1, 2010 in accordance with ASC 810. The amendments to ASC 860 modify the criteria for achieving sale accounting for transfers of financial assets and define the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. The updated provisions of ASC 860 also provide that a transferor should recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. ASC 860, as amended, requires enhanced disclosures which are generally consistent with, and supersede, the disclosures previously required by the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. The provisions of ASU 2009-16 are effective prospectively for new transfers of financial assets occurring in fiscal years beginning after November 15, 2009, and in interim periods within those fiscal years. ASC 860’s amended disclosure requirements should be applied to transfers that occurred both before and after the effective date of the Codification update, with comparative disclosures required only for periods subsequent to initial adoption for those disclosures not previously required under the Codification update to ASC 810 and ASC 860 which was effective for periods ending after December 15, 2008. The adoptions did not impact the Company’s consolidated financial statements.

Effective December 31, 2009, the Company adopted the provisions of FASB Accounting Standards Update (ASU) 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05) to the FASB Accounting Standards Codification (ASC or Codification). ASU 2009-05 updates ASC 820 to clarify that a quoted price for the identical liability, when traded as an asset in an active market, is a Level 1 measurement for that liability when no adjustment to the quoted price is required. ASU 2009-05 further amends ASC 820 to provide that if a quoted price for an identical liability does not exist in an active market, the fair value of the liability should be measured using an approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. Under the updated provisions of ASC 820, fair value for such liabilities will be measured using either a valuation technique that uses the quoted price of the identical liability when traded as an asset, a valuation technique that uses the quoted price for similar liabilities or similar liabilities when traded as an asset, or another valuation technique that is consistent with the principles of ASC 820.  The adoption had no significant impact on the Company’s consolidated financial statements.

Effective September 30, 2009, the Company adopted the provisions of the FASB Accounting Standard Codification 105-10, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standards Codification as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, other than guidance issued by the SEC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants.  All guidance contained in the Codification carries an equal level of authority, with this Statement superseding all then-existing non-SEC accounting and reporting standards as of its effective date. Following this Statement, the F ASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standard Updates that will serve only to update the Codification.  In conjunction with the adoption of this Statement, all references to pre-Codification Statements have either been removed or updated to reflect the new Codification reference. The adoption of this Statement did not have a significant impact on the Company’s consolidated financial statements.

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Effective June 30, 2009, the Company adopted the FASB ASC 855, “Subsequent Events.”  ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance requires disclosure of the date through which a company has evaluated subsequent events. The required disclosures are presented in Note 13 to the consolidated financial statements.

Effective June 30, 2009, the Company adopted ASC 825-10, “Financial Instruments.”  This update requires disclosures about the fair value of financial instruments in interim financial statements. The guidance requires that disclosures be included in both interim and annual financial statements of the methods and significant assumptions used to estimate the fair value of financial instruments. Comparative disclosures are required only for periods ending subsequent to initial adoption. The additional required disclosures are presented in Note 9 of the Company’s consolidated financial statements.

Effective March 31, 2009, the Company adopted the FASB Codification update ASC 320-10-35 which replaces the “intent and ability to hold to recovery” indicator of other-than-temporary impairment in ASC 320-10-35 for debt securities.  The guidance, issued in April 2009, establishes a new method of recognizing and reporting other-than-temporary impairments of debt securities as well as requiring additional disclosures related to debt and equity securities. Under the new guidance, an impairment is other-than-temporary if any of the following conditions exist: (1) the entity intends to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis or (3) the entity does not expect to recover the security’s entire amortized cost bas is, even if the entity does not intend to sell. Additionally, the guidance requires that for impaired securities that an entity does not intend to sell that it is not more-likely-than-not that it will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. The guidance discusses the proper interaction with other authoritative guidance, including the additional factors that must be considered in an other-than-temporary impairment analysis. The additional disclosure requirements include a roll-forward of amounts recognized in earnings for debt securities for which an other-than-temporary impairment has been recognized and the noncredit portion of the other-than-temporary impairment that has been recognized in other comprehensive income. The adoption did not impact the Company’s consolidated financial statements.

Effective March 31, 2009, the Company first applied the provisions of the FASB ASC 820-10, “Fair Value Measurements and Disclosures,” that was issued in April 2009. The update provides factors that an entity should consider when determining whether a market for an asset is not active. If, after evaluating the relevant factors, the evidence indicates that a market is not active, the guidance provides an additional list of factors that an entity must consider when determining whether events and circumstances indicate that a transaction which occurred in an inactive market is orderly. The guidance requires that entities place more weight on observable transactions determined to be orderly and less weight on transactions for which there is insufficient information to determine whether the transaction is orderly when determining t he fair value of an asset or liability under applicable authoritative guidance. The guidance also requires enhanced disclosures, including disclosure of a change in valuation technique that results from its application and disclosure of fair value measurements for debt and equity securities by major security types. The adoption did not impact the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted the provisions of the Codification update to ASC 815-10-50 which requires expanded disclosures about an entity’s derivative instruments and hedging activities, but does not change previous authoritative guidance on scope or accounting. This updated guidance requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under GAAP and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. To meet those objectives, this guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures in a tabular format about fair value amounts and gains and losses on derivative instruments including specific disclosures regarding the location and amounts of derivative instruments in the financial statements, and disclosures about credit-risk-related contingent features in derivative agreements. The guidance also clarifies derivative instruments that are subject to the concentration of credit-risk disclosures. The adoption did not impact the Company’s consolidated financial statements.

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Effective January 1, 2009, the Company adopted the provisions of a Codification update to ASC 805. This update establishes principles and requirements for how an acquirer in a business combination: recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and discloses information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption did not impact the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted the provisions of a Codification update to ASC 805, which requires that an acquirer recognize at fair value as of the acquisition date an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of the asset or liability can be determined during the measurement period. The guidance provides that if the acquisition-date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, the asset or liability should be recognized at the acquisition date if information available before the end of the measurement period indicates that it is probable that an asset existed or a liability had been incurred at the acquisition date and t he amount of the asset or liability can be reasonably estimated. Additionally, the guidance requires enhanced disclosures regarding assets and liabilities arising from contingencies which are recognized at the acquisition date of a business combination, including the nature of the contingencies, the amounts recognized at the acquisition date and the measurement basis applied. The adoption did not impact the Company’s consolidated financial statements.

Effective January 1, 2009, the Company adopted the provisions of a Codification update to ASC 810, as amended.  The update establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be clearly reported as equity in the consolidated financial statements. Additionally, the guidance requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. The adoptions did not impact the Company’s consolidated financial statements.

NOTE 13 – SUBSEQUENT EVENTS

 On April 28, 2010, the Company’s Board of Directors elected to defer the May 15, 2010 Preferred Stock dividend.

On April 28, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order (Order), FSGBank, N.A. (Bank), the Company’s wholly-owned subsidiary, through its Board of Directors, consented and agreed to the issuance of a Consent Order by the Office of the Comptroller of the Currency (OCC), the Bank’s primary regulator.

The Bank and the OCC agreed as to the areas of the Bank’s operations that warrant improvement and a plan for making those improvements.  The Order requires the Bank to develop and submit written strategic and capital plans covering at least a three-year period.  The Bank is required to review and revise various policies and procedures, including those associated with concentration management, the allowance for loan and lease losses, liquidity management, criticized asset, loan review and credit.

Within 120 days of the effective date of the Order, the Bank is required to achieve and thereafter maintain total capital at least equal to 13 percent of risk-weighted assets and Tier 1 capital at least equal to 9 percent of adjusted total assets.  As of March 31, 2010, the Bank’s total capital to risk-weighted assets was in compliance with the Order with a ratio of 13.76 percent.  The Bank’s Tier 1 capital to adjusted total assets was out of compliance with the Order with a ratio of 8.95 percent.

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Because the Order established specific capital amounts to be maintained by the Bank, the Bank may not be considered better than “adequately capitalized” for capital adequacy purposes, even if the Bank exceeds the levels of capital set forth in the Order.  As an adequately capitalized institution, the Bank may not pay interest on deposits that are more than 75 basis points above the rate applicable to the applicable market of the Bank as determined by the FDIC.  Additionally, the Bank may not accept, renew or roll over brokered deposits without prior approval of the FDIC.

On April 29, 2010, the Company filed a current report on Form 8-K describing the Order and the Bank’s actions to date.  The Form 8-K also provides the final, executed Order.

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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.

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” (MD&A) 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,R 21; “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 217;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 2010 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, 2010 and 2009.  Such discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the notes attached thereto.

Company Overview

First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee, with $1.4 billion in assets as of March 31, 2010.  Founded in 1999, First Security’s community bank subsidiary, FSGBank, N.A. (Bank) has 38 full-service banking offices, including the headquarters, along the interstate corridors of eastern and middle Tennessee and northern Georgia and 345 full-time equivalent employees.  In Dalton, Georgia, FSGBank operates under the name of Dalton Whitfield Bank; along the Interstate 40 corridor in Tennessee, FSGBank operates under the name of Jackson Bank & Trust.  FSGBank provides retail and commercial banking services, trust and investment management, mortgage banking, financial planning and internet banking (www.FSGBank.com) services.

Recent Regulatory Events

Effective April 28, 2010, FSGBank reached an agreement with its primary regulator, the Office of the Controller of the Currency (OCC), regarding the issuance of a Consent Order (Order).  The Order is a result of the OCC’s regular examination of the Bank in the fall of 2009 and directs the Bank to take actions intended to strengthen its overall condition.  All customer deposits remain fully insured by the FDIC to the maximum extent allowed by law; the Order does not impact this coverage in any manner.  On April 29, 2010, First Security filed a current report on Form 8-K describing the Order and the related actions taken by the Bank to date.  The Form 8-K also provides a copy of the fully executed Order.

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Prior to and following the OCC’s regularly scheduled exam in the fall of 2009, we developed and began implementing a number of strategic initiatives designed to improve both the operations and the financial performance of First Security.  The Order establishes a framework and timeline for fully implementing certain of our strategic initiatives.  We believe the successful execution of our initiatives will result in full compliance with the Order and position us for long-term growth and a return to profitability.

Strategic Initiatives

During 2009 and 2010, we initiated a set of strategic initiatives to position us appropriately for both short-term stability and long-term success.  The following are the primary initiatives with associated target dates for implementation:

Strategic Initiative	Current and/or Potential Impact	Actual/Expected Implementation
Capital
·CPP participation	Received $33 million in Preferred Stock capital	1st quarter 2009
·Capital stress test	Outsourced a SCAP capital stress test to assist in capital planning	4th quarter 2009
Liquidity
·Liquidity enhancement	Increased longer term brokered deposits and excess cash to fund future contractual obligations and prudent investments	1st quarter 2010
Asset Quality
·Asset Quality Committee	Created board-level committee to focus on asset quality	1st quarter 2009
·OREO sales team	Dedicated resources to exclusively sell OREO	1st quarter 2009
·Loan review department expansion	Added resources to increase frequency and coverage of the review of our portfolio	4th quarter 2009
·Extensive loan review	Outsourced an extensive loan review prior to year-end 2009	4th quarter 2009
Credit Administration
·Lines of business	Credit functions aligned by retail and commercial lines of business with dedicated credit officers and staff supporting each portfolio	4th quarter 2009
·Loan underwriting centralization	Ensures consistency in underwriting, pricing, loan structure and policy compliance	2nd quarter 2010
·Collections centralization	Dedicated collections department created to focus on collection of past due loans and recovery of prior charge-offs	2nd quarter 2010
·Loan document preparation centralization	Operational efficiencies and reduction of loan policy exceptions	2nd quarter 2010
Management
·Chief risk officer	Elevated risk manager to executive level with expanded responsibilities	1st quarter 2010
·Chief credit officer	Hired experienced credit officer to oversee credit administration	2nd quarter 2010

The above initiatives are discussed in additional detail throughout MD&A.

Overview

Market Conditions

Most indicators point toward the overall U.S. economy transitioning to a gradual recovery period over the balance of 2010.  Some economists have indicated that the future recovery may bring with it few new jobs.  As our financial results can be a reflection of our regional economy, we monitor and evaluate local and regional economic trends.

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Announced in 2008, the $1 billion Volkswagen automotive production facility is currently under construction and hiring has commenced.  The Volkswagen plant will bring about 2,000 direct jobs, including approximately 400 white-collar jobs, and up to 12,000 indirect jobs to the region.  We believe the positive economic impact on Chattanooga and the surrounding region from Volkswagen and other recently announced large economic investments will be significant and it may stabilize and possibly increase real estate values and enhance economic activity within our market area.

While the economic recession has resulted in higher unemployment across the country, our market areas benefit from more stable rates of employment.  Our major market areas of Chattanooga and Knoxville have a lower unemployment rate of 9.8% and 9.1%, respectively (as of February 2010, the most recent available data), than the Tennessee rate of 11.1%.  The economy of the Dalton, Georgia MSA is primarily centered on the carpet and floor-covering industries.  With the decline in housing starts and the overall economy, Dalton has been the most negatively impacted region in our footprint.  The unemployment rate in the Dalton MSA is 12.8% (as of February 2010) compared to the Georgia rate of 10.8%.  For the Chattanooga and Knoxville MSAs, the number of unemployed workers is decreasing and, as of February 2010, has declined by 4.9% in Chattanooga and 5.9% in Knoxville since the peak in June 2009.  We believe these positive employment trends will continue throughout 2010.

Our market area has also benefited from a relatively stable housing market.  According to the National Association of REALTORS, the median sales prices of existing single-family homes declined only 5.0% and 5.2% for the Chattanooga and Knoxville MSAs, respectively, from 2008 to 2009 (the most recent available data) compared to 11.9% for the nation and 8.7% for the census region identified as the South.  While real estate values may continue to decline, we are hopeful that housing prices will remain above the regional and national levels due to the significant economic investments being made in our market.

Financial Results

As of March 31, 2010, we had total consolidated assets of $1.4 billion, total loans of $905.5 million, total deposits of $1.2 billion and stockholders’ equity of $140.0 million.  For the three months ended March 31, 2010, our net loss available to common shareholders was $1.6 million, resulting in basic and diluted net loss of $0.10 per share.

As of March 31, 2009, we had total consolidated assets of $1.3 billion, total loans of $992.6 million, total deposits of $1.1 billion and stockholders’ equity of $175.0 million.  For the three months ended March 31, 2009, our net loss available to common shareholders was $1.3 million, or $0.08 per basic and diluted share.

Net interest income decreased by $562 thousand primarily due to a reduction in our net interest margin.  The provision for loan and lease losses decreased by $618 thousand based on our analysis of inherent risks in the loan portfolio in relation to the portfolio’s growth, trends in non-performing and classified loans and general economic conditions.  Noninterest income decreased by $147 thousand, while noninterest expense increased by $412 thousand.  The decrease in noninterest income is attributable to a reduction in revenue from deposit fees and a decline in mortgage loan and related fee income.  Noninterest expense increased primarily due to higher costs associated with nonperforming assets and FDIC insurance expense.  There were 345 full-time equivalent employees as of March 31, 2010, compared to 361 as of March 31, 2009.

Our efficiency ratio increased in the first quarter of 2010 to 82.4% compared to 74.6% in the same period of 2009 primarily due to reductions in net interest income and noninterest income and increases to noninterest expense.  We anticipate our efficiency ratio to stabilize and begin to improve during the second half of 2010 as we focus on enhancing revenue while reducing certain overhead expenses.  However, the stabilization and possible improvement of our efficiency ratio in the second half of 2010 is contingent on both macro-economic factors, such as changes to the federal funds target rate, and micro-economic factors, such as local unemployment and real estate value.

Net interest margin in the first quarter of 2010 was 3.17%, or 46 basis points lower than the prior year period of 3.63%.  We believe that our net interest margin will stabilize and possibly improve in the second half of 2010.  The projected stabilization of our net interest margin is dependent on our loan and deposit pricing, our ability to raise core deposits and any possible actions to the target federal funds rate by the Federal Reserve Board.

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On January 27, 2010, our Board of Directors elected to suspend the dividend on the Company’s common stock and elected to defer payment of the Series A Preferred Stock (Preferred Stock) for the first quarter of 2010.  First Security may not pay dividends on common stock unless all dividends have been paid on the Preferred Stock.

Results of Operations

We reported a net loss available to common shareholders for the first quarter of 2010 of $1.6 million versus net loss for the same period in 2009 of $1.3 million.  In 2010, our net loss per share (basic and diluted) was $0.10, on approximately 15,649 thousand basic and diluted weighted average shares outstanding compared to a net loss per share (basic and diluted) of $0.08 for the same period in 2009.

Net income available to common shareholders in the first quarter of 2010 was below the 2009 level as a result of the contraction in the net interest margin and higher operating expenses.  Noninterest expense increased by $412 thousand, while noninterest income declined by $147 thousand.  As of March 31, 2010, we had 38 banking offices, including the headquarters, and 345 full-time equivalent employees.

The following table summarizes the components of income and expense and the changes in those components for the period ended March 31, 2010 compared to the same period in 2009.

Condensed Consolidated Income Statement

				Change from Prior Year
	2010			Amount			Percentage
	(in thousands, except percentages)
Interest income	$	15,041		$	(1,434	)		(8.7	)%
Interest expense		5,366			(872	)		(14.0	)%
Net interest income		9,675			(562	)		(5.5	)%
Provision for loan and lease losses		4,375			(618	)		(12.4	)%
Net interest income after provision for loan and lease losses		5,300			56			1.1	%
Noninterest income		2,304			(147	)		(6.0	)%
Noninterest expense		9,872			412			4.4	%
Net loss before income taxes		(2,268	)		(503	)		(28.5	)%
Income tax benefit		(1,154	)		(241	)		26.4	%
Net loss		(1,114	)		(262	)		(30.8	)%
Preferred stock dividends and discount accretion		505			57			12.7	%
Net loss available to common shareholders	$	(1,619	)	$	(319	)		(24.5	)%

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, 2010, net interest income decreased by $562 thousand, or 5.5%, to $9.7 million for the first quarter of 2010 compared to $10.2 million for the same period in 2009.

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.

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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 funding, such as noninterest bearing deposits.

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The following table summarizes net interest income and average yields and rates paid for the quarters ended March 31, 2010 and 2009.

Average Consolidated Balance Sheets and Net Interest Analysis

Fully Tax Equivalent Basis

	For the Three Months Ended March 31,
	2010								2009
	Average Balance			Income / Expense		Yield / Rate			Average Balance			Income / Expense		Yield / Rate
	(in thousands, except percentages)
Assets
Earning assets:
Loans, net of unearned income	$	931,566		$	13,453		5.86	%	$	999,954		$	14,877		6.03	%
Investment securities – taxable		105,361			1,104		4.25	%		94,657			1,199		5.14	%
Investment securities – non-taxable		41,289			578		5.68	%		43,929			617		5.70	%
Other earning assets		188,491			123		0.26	%		29,595			14		0.19	%
Total earning assets		1,266,707			15,258		4.89	%		1,168,135			16,707		5.80	%
Allowance for loan and lease losses		(26,776	)							(18,189	)
Intangible assets		1,864								29,498
Cash & due from banks		8,920								16,352
Premises & equipment		33,003								33,778
Other assets		78,486								56,797
TOTAL ASSETS	$	1,362,204							$	1,286,371
Liabilities and Stockholders’ Equity
Interest bearing liabilities:
NOW accounts	$	62,935			45		0.29	%	$	61,640			51		0.34	%
Money market accounts		138,264			384		1.13	%		125,303			448		1.45	%
Savings deposits		37,195			24		0.26	%		34,422			24		0.28	%
Time deposits less than $100 thousand		243,953			1,343		2.23	%		244,607			2,049		3.40	%
Time deposits of $100 thousand, or more		206,429			1,194		2.35	%		200,926			1,760		3.55	%
Brokered CDs and CDARS®		323,650			2,197		2.75	%		181,284			1,599		3.58	%
Brokered money markets and NOWs		26,609			57		0.87	%		78,752			166		0.85	%
Federal funds purchased		-			-		-	%		1,256			3		0.97	%
Repurchase agreements		19,882			121		2.47	%		22,348			128		2.32	%
Other borrowings		91			1		4.46	%		1,425			10		2.85	%
Total interest bearing liabilities		1,059,008			5,366		2.05	%		951,963			6,238		2.66	%
Net interest spread				$	9,892		2.84	%				$	10,469		3.14	%
Noninterest bearing demand deposits		150,447								148,382
Accrued expenses and other liabilities		10,597								13,211
Stockholders’ equity		136,054								166,069
Accumulated other comprehensive income		6,098								6,746
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,362,204							$	1,286,371
Impact of noninterest bearing
sources and other changes in
balance sheet composition							0.33	%							0.49	%
Net interest margin							3.17	%							3.63	%

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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, 2010 Compared to 2009

	Increase (Decrease) in Interest Income and Expense Due to Changes in:
	Volume			Rate			Total
	(in thousands)
Interest earning assets:
Loans, net of unearned income	$	(1,017	)	$	(407	)	$	(1,424	)
Investment securities – taxable		136			(231	)		(95	)
Investment securities – non-taxable		(37	)		(2	)		(39	)
Other earning assets		75			34			109
Total earning assets		(843	)		(606	)		(1,449	)
Interest bearing liabilities:
NOW accounts		1			(7	)		(6	)
Money market accounts		46			(110	)		(64	)
Savings deposits		2			(2	)		-
Time deposits less than $100 thousand		(5	)		(701	)		(706	)
Time deposits of $100 thousand, or more		48			(614	)		(566	)
Brokered CDs and CDARS®		1,256			(658	)		598
Brokered money markets accounts and NOWs		(110	)		1			(109	)
Federal funds purchased		(3	)		-			(3	)
Repurchase agreements		(14	)		7			(7	)
Other borrowings		(9	)		-			(9	)
Total interest bearing liabilities		1,212			(2,084	)		(872	)
Increase (decrease) in net interest income	$	(2,055	)	$	1,478		$	(577	)

Net Interest Income – Volume and Rate Changes

Interest income for the first quarter of 2010 was $15.0 million, which is an 8.7% decrease compared to the same period in 2009.  Average earnings assets for the first quarter of 2010 increased $98.6 million, or 8.4%, compared to the same period in 2009.  Average other earning assets increased by $158.9 million in 2010 compared to 2009, while average loans in 2010 declined by $68.4 million, or 6.8%.  The change in mix and volume of earning assets reduced interest income by $843 thousand comparing 2010 to 2009.  The increase in other earnings asset relates to our interest bearing account at the Federal Reserve Bank of Atlanta that averaged $184.9 million during 2010.  The yield on this account is approximately 25 basis points.  The increase in this account was primarily funde d by an increase in brokered deposits, as well as reductions from the loan portfolio.  The purpose of the increase in liquid assets was to reduce liquidity risk, which we describe more fully below in the Liquidity Section, resulting from deteriorating asset quality and the Consent Order. We anticipate average loans to continue to decline as loan reductions continue to exceed new loan demand. In addition, we anticipate average earning assets to decline as brokered deposits mature and are not replaced.

The yield on average earning assets declined 91 basis points from 5.80% to 4.89% comparing the three months ended March 31, 2010 to the same period in 2009.  The decline in yield further reduced interest income by an additional $606 thousand.  Comparing 2010 to 2009, the yield on loans declined 17 basis points from 6.03% to 5.86%.  We anticipate the yield on loans to stabilize or improve in 2010 as we have instituted higher loan pricing floors on new and renewing loans.  During the first quarter of 2010, we conducted a bond swap by selling approximately $14.7 million of investment securities with an average tax-equivalent yield of 5.20% and replacing with $14.6 million of bonds with an average tax-equivalent yield of 3.17%.  The transaction eliminated the credit risk associated with our p rivate-label CMO securities, as well as certain municipal securities.  We anticipate the yield on investment securities to reduce accordingly for the remainder of 2010.  We are maintaining an asset-sensitive balance sheet and will benefit from the eventual increase in the federal funds rate.  As of March 31, 2010, our loan portfolio is approximately 58% fixed rate, 40% variable rate and 2% adjustable rate.  The variable rate loans reprice simultaneously with changes in the associated index, such as the Prime, LIBOR or Treasury bond rates, while the repricing of adjustable rate loans are based on a time component in addition to changes in the associated index.   Accordingly, changes in the target federal funds rate have an immediate impact on the yield of our earning assets.

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Total interest expense was $5.4 million in the first quarter of 2010, or 14.0% lower than the comparable period in 2009.  Interest expense decreased due to a decline in rates paid with significant reductions in retail, jumbo and brokered certificates of deposit as new and maturing deposits repriced at lower current rates.  Average interest bearing liabilities increased $107.0 million, or 11.2%, for the three months ended March 31, 2010 compared to the same period in 2009.  The growth in interest bearing liabilities was primarily a result of increases in brokered deposits and traditional money market accounts.  The deposit gathering activities at the branch level increased the level of traditional money market accounts by $13.0 million, or 10.3%.  Average total deposits increased $114.2 mi llion, or 10.6%, to $1.2 billion in the first quarter of 2010 compared to the same period in 2009 as we increased our brokered deposits to improve our contingent funding capacity.  The average rate paid on interest bearing liabilities decreased 61 basis points to 2.05% from 2.66% for the period ended March 31, 2010 and 2009, respectively.  The decrease is due primarily to term deposits maturing and repricing at lower current market rates.

We expect average loans to continue to decline in 2010 while all other earning assets to increase or be comparable to the 2009 levels.  The average yield on loans in 2010 should stabilize or improve compared to 2009 while the overall yield on earning assets may decline in 2010 due to the increase in interest-bearing cash and the associated lower yield.  For the remainder of 2010, we expect average interest bearing liabilities to be comparable to the first quarter 2010 results, except for brokered CDs increasing due to the elimination of brokered money markets and brokered NOWs.  Rates paid on deposits for the remainder of the year are expected to be consistent with first quarter 2010 results.

Net Interest Income – Net Interest Spread and Net Interest Margin

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.

Our net interest rate spread (on a tax equivalent basis) was 2.84% for the period ended March 31, 2010 compared to 3.14% for the same period in 2009.  Net interest margin (on a tax equivalent basis) was 3.17% for the period ended March 31, 2010 compared to 3.63% for the same period in 2009.  The decreased net interest spread and margin are the result of the combination of lower loan volumes, higher other earning asset volumes and higher brokered deposit volumes partially offset by deposit rates reducing faster than asset yields.  During December of 2009 and first quarter of 2010, we issued over $180.0 million in brokered deposits to improve our contingent funding capacity.  Approximately $77 million of these funds was utilized to payoff our variable-rate brokered money market account. 0; The remaining funds were placed in our interest-bearing account at the Federal Reserve Bank of Atlanta.  As of March 31, 2010, our balance at the Federal Reserve Bank was approximately $204 million.  The negative spread associated between the interest-bearing cash and the brokered deposits will continue to negatively impact our net interest spread and margin.  Average interest bearing liabilities as a percentage of average earning assets was 83.6% for the period ended March 31, 2010 compared to 81.5% for the same period in 2009.  Noninterest bearing funding sources contributed 33 basis points to the net interest margin during the first quarter of 2010 compared to 49 basis points in the same period in 2009.

In prior years, we terminated two sets of interest rate swaps.  The combined gains at termination were $7.8 million, which are being accreted into interest income over the remaining life of the originally hedged items.  For the three months ended March 31, 2010, the accretion of the swaps added approximately $519 thousand to interest income.  The accretion for the remainder of 2010 will be approximately $500 thousand per quarter.

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Our net interest margin may decline in the second quarter before stabilizing or increasing during the second half of 2010.  The anticipated decline is associated with the negative spread created during the first quarter of 2010 by issuing additional brokered deposits and placing a portion of the proceeds in our interest-bearing account at the Federal Reserve Bank of Atlanta, as well as the reduction in yield on the investment securities portfolio as a result of the bond swap transaction.  The stabilization for the second half of 2010 depends on multiple factors, including our ability to raise core deposits, anticipated maturities of brokered deposits, our growth or contraction in loans, our deposit and loan pricing, and any possible action by the Federal Reserve Board to adjust the target federal funds rate.

Provision for Loan and Lease Losses

The provision for loan and lease losses charged to operations during the three months ended March 31, 2010 was $4.4 million compared to $5.0 million in the same period of 2009.  Net charge-offs for the first quarter of 2010 were $4.8 million compared to net charge-offs of $2.3 million for the same period in 2009.  Annualized net charge-offs as a percentage of average loans were 2.04% for the three months ended March 31, 2010 compared to 0.94% for the same period in 2009.  Our peer group’s average annualized net charge-offs (as reported in the March 31, 2010 Uniform Bank Performance Report) were 1.04%.

The decrease in our provision for loan and lease losses for the first quarter of 2010 compared to the same period in 2009 resulted from our analysis of inherent risks in the loan portfolio in relation to the reduction of our portfolio, the level of past due, charged-off, classified and nonperforming loans, as well as general economic conditions.  As of March 31, 2010, management determined our allowance of $26.1 million was adequate to provide for credit losses, which we describe more fully below in the Allowance for Loan and Lease Losses section.  We will reanalyze the allowance on at least a quarterly basis, and the next review will be at June 30, 2010, or sooner if needed, and the provision expense will be adjusted accordingly, if necessary.

We will continue to provide provision expense to maintain an allowance level adequate to absorb known and estimated losses inherent in our loan portfolio.  As the determination of provision expense is a function of the adequacy of the allowance for loan and lease losses, we cannot reasonably estimate the provision expense for the remainder of 2010.  Furthermore, the provision expense could materially increase or decrease in 2010 depending on a number of factors, including, among others, the level of net charge-offs, the amount of classified loans and the value of collateral associated with impaired loans.

Noninterest Income

Noninterest income totaled $2.3 million for the first quarter of this year, a decrease of $147 thousand, or 6.0%, from the same period in 2009.  The decrease is a result of lower deposit fees and a reduction in mortgage loan and related fee income.

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The following table presents the components of noninterest income for the periods ended March 31, 2010 and 2009.

Noninterest Income

	Three Months Ended March 31,
	2010		Percent Change			2009
	(in thousands, except percentages)
Non-sufficient funds (NSF) fees	$	759		(11.7	)%	$	860
Service charges on deposit accounts		241		(16.0	)%		287
Point-of-sale (POS) fees		286		14.4	%		250
Bank-owned life insurance income		252		0.0	%		252
Trust fees		185		13.5	%		163
Mortgage loan and related fees		149		(38.4	)%		242
Net gain on sale of available-for-sale securities		57		100.0	%		-
Other income		375		(5.5	)%		397
Total noninterest income	$	2,304		(6.0	)%	$	2,451

Our largest sources of noninterest income are service charges and fees on deposit accounts.  Total service charges, including non-sufficient funds (NSF) fees, were $1.0 million for the first quarter of 2010, a decrease of $147 thousand, or 12.8%, from the same period in 2009.

Point-of-sale fees increased 14.4% to $286 thousand for the first quarter of 2010 compared to the same period in 2009.  POS fees are primarily generated when our customers use their debit cards for retail purchases.  We anticipate POS fees to continue to grow as customer trends show increased use of debit cards.

Bank-owned life insurance income was consistent at $252 thousand for the three months ended March 31, 2010 and 2009.  FSGBank 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 FSGBank.  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 6.05% for the three months ended March 31, 2010.

Trust fees increased by 13.5% to $185 thousand for the three months ended March 31, 2010 compared to the same period in 2009.  As of March 31, 2010, our trust and wealth management department managed 460 accounts with assets held under management of approximately $190.0 million compared to 415 accounts with assets held under management of $152.3 million as of March 31, 2009.  For the remainder of 2010, we anticipate trust fees to be higher than the comparable 2009 periods due to the increase in the stock market over the last 12 months.  A decline in the stock market may negatively impact trust fees.

Mortgage loan and related fees for the first quarter of 2010 decreased $93 thousand, or 38.4%, to $149 thousand compared to $242 thousand in the first quarter of 2009.  As discussed in Note 10 of our consolidated financial statements, we elect the fair value option for all held for sale loan originations.  This election impacts the timing and recognition of origination fees and costs, as well as the value of the servicing rights.  The recognition of the income and fees is concurrent with the origination of the loan.

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 $9.8 million for the first three months of 2010.  Mortgages sold in the secondary market totaled $8.9 million for the first three months of 2010.  Mortgages originated and sold in the secondary market totaled $12.9 million and $10.5 million, respectively, for the first three months of 2009.  We sold these loans with the right to service the loan being released to the purchaser for a fee.  While the real estate market is showing signs of improvement, the risk of rising interest rates may negatively impact the volume of refinancing activity.  The impact of these two factors will largely determine the level of mortgage income for the remainder of 2010.

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Other income for the first quarter of 2010 was $375 thousand, compared to $397 thousand for the same period in 2009.  The components of other income primarily consist of ATM fee income, gains on sales of other real estate (OREO) and repossessions, underwriting revenue and safe deposit box fee income.

Noninterest Expense

Noninterest expense for the first quarter of 2010 increased $412 thousand, or 4.4%, to $9.9 million compared to $9.5 million for the same period in 2009.  The increase in noninterest expense primarily reflects higher costs associated with nonperforming assets and increased FDIC insurance, partially offset by reductions in salary and benefits as well as furniture and fixtures expense.

The following table represents the components of noninterest expense for the three month periods ended March 31, 2010 and 2009.

Noninterest Expense

	Three Months Ended March 31,
	2010		Percent Change			2009
	(in thousands, except percentages)
Salaries & benefits	$	4,948		(7.6	)%	$	5,357
Occupancy		853		(2.2	)%		872
Furniture and equipment		530		(18.2	)%		648
Professional fees		492		38.6	%		355
FDIC insurance		447		135.3	%		190
Data processing		372		9.4	%		340
OREO and repossession holding costs		352		116.0	%		163
Losses and write-downs on other real estate owned, repossessions, fixed assets and other assets		298		23.7	%		241
Communications		160		3.2	%		155
Intangible asset amortization		118		(12.6	)%		135
Printing & supplies		89		(16.8	)%		107
Advertising		53		(14.5	)%		62
Other expense		1,160		38.9	%		835
Total noninterest expense	$	9,872		4.4	%	$	9,460

Salaries and benefits for the first quarter of 2010 decreased $409 thousand, or 7.6%, compared to the same period in 2009.  The decrease in salaries and benefits is primarily related to a reduction of 16 full-time equivalent employees.  As of March 31, 2010, we had 345 full-time equivalent employees. We currently operate 38 full service banking offices.

Occupancy expense for the first quarter of 2010 was slightly below the same period in 2009.  As of March 31, 2010, we leased nine facilities and the land for five 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 $118 thousand for the first quarter of 2010 compared to the same period in 2009 due to a reduction in depreciation expense and equipment maintenance costs.

Professional fees increased 38.6% for the first quarter of 2010 compared to the same period in 2009.  The increase is primarily due to additional legal costs associated with higher levels of non-performing assets.  Professional fees include fees related to investor relations, outsourcing compliance and a portion of internal audit to Professional Bank Services, as well as external audit, tax services and legal and accounting advice related to, among other things, foreclosures, lending activities, employee benefit programs, prospective capital offerings and regulatory matters.

The premium paid for FDIC deposit insurance increased $257 thousand to $447 thousand for the first quarter of 2010 compared to the same period in 2009.  During the fourth quarter of 2009, the FDIC approved a rule mandating all banks prepay deposit premium insurance assessments for the three year period ending December 31, 2012.  The total prepayment amount factored in an estimated five percent annual growth rate in the deposit base, as well as a uniform three basis point increase in the assessment rate effective January 1, 2011.  No additional cash payments or refunds are required or issued until the later of the date the prepayment is exhausted or December 31, 2014.  The FDIC indicated that it intends the prepayment to eliminate the need for additional special assessments.

Data processing fees increased $32 thousand for the first quarter of 2010 compared to the same period in 2009.  The monthly fees associated with data processing are typically based on transaction volume.

OREO and repossession holding costs include, among other items, maintenance, repairs, utilities, taxes and storage costs.  Holding costs increased $189 thousand to $352 thousand for the first quarter of 2010 compared to the same period in 2009.  We anticipate the level of holding costs will remain elevated for 2010.

Losses and write-downs on other real estate owned, repossessions, fixed assets and other assets increased $57 thousand to $298 thousand for the first quarter of 2010 compared to the same period in 2009.  Losses and write-downs are dependent on multiple factors, including the volume of non-performing assets, as well as changes in the associated market values of those assets.

Intangible asset amortization expense decreased $17 thousand, or 12.6%, in the first quarter of 2010 compared to the same period in 2009.  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 2010.

Other expense increased $325 thousand during the first quarter of 2010 compared to the same period in 2009.  The increase is primarily related to a legal settlement.

Income Taxes

We recorded an income tax benefit of $1.2 million for the first quarter of 2010 compared to a benefit of $913 thousand for the same period in 2009.  For the three months ended March 31, 2010, our tax-exempt income from municipal securities and bank-owned life insurance was approximately $630 thousand.  We also recorded low-income housing tax credits of $103 thousand.  Adjusting for these items, our effective tax rate approximates 36%.

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At March 31, 2010, we evaluated our significant uncertain tax positions.  Under the “more-likely-than-not” threshold guidelines, we believe we have identified all significant uncertain tax benefits.  We evaluate, on a quarterly basis or sooner if necessary, to determine if new or pre-existing uncertain tax positions are significant.  In the event a significant uncertain tax position is determined to exist, penalty and interest will be accrued, in accordance with Internal Revenue Service guidelines, and recorded as a component of income tax expense in our consolidated financial statements.  During the fourth quarter of 2009, we accrued $1.1 million for an uncertain tax position and approximately $155 thousand in associated interest and penalties.  As of March 31, 2010, our tota l accrual for uncertain tax positions is $1.2 million.

At March 31, 2010, we have no valuation allowance associated with our deferred tax assets.  In evaluating our deferred tax assets, we use all available information, both quantitative and qualitative.  A valuation allowance is required when it is “more-likely-than-not” that some or all of the deferred tax assets will not be realized.  As of March 31, 2010, our deferred tax asset is approximately $8.2 million.

STATEMENT OF FINANCIAL CONDITION

Our total assets were $1.37 billion at March 31, 2010, $1.35 billion at December 31, 2009, and $1.27 billion at March 31, 2009.  The growth from March 31, 2009 to March 31, 2010 is primarily due to the issuance of brokered deposits in the fourth quarter of 2009 and first quarter of 2010 and retaining a majority of the proceeds in our interest-bearing account at the Federal Reserve Bank of Atlanta.  We issued brokered deposits to enhance our liquidity as well as to lock-in longer term and historically low-cost brokered deposits.  The growth in total assets from March 31, 2009 to March 31, 2010 is primarily a result from increases in interest-bearing cash and deposits, partially offset by declining loan balances and a higher allowance.  For the remainder of 2010, we anticipate funding prudent investm ent opportunities through our existing cash reserves or with growth in core deposits .

Loans

Our active efforts to reduce certain credit exposures and their related balance sheet risk, as well as the effects of the economic recession, which includes reduced loan demand and increased loan charge-offs, have resulted in declining loan balances.  As of March 31, 2010, total loans declined by $46.5 million, or 4.9% (19.5% annualized), from December 31, 2009 and by $87.1 million, or 8.8%, from March 31, 2009.  For both the trailing three and twelve month periods, we have reduced our exposure to construction and development (C&D) loans by $27.5 million and $41.5 million, respectively.

The following table presents our loan portfolio by type.

Loan Portfolio

										Percent change from
	March 31, 2010			December 31, 2009			March 31, 2009			December 31, 2009			March 31, 2009
	(in thousands, except percentages)
Loans secured by real estate-
Residential 1-4 family	$	278,695		$	281,354		$	294,314			(0.9	)%		(5.3	)%
Commercial		255,174			259,819			223,759			(1.8	)%		14.0	%
Construction		125,603			153,144			190,581			(18.0	)%		(34.1	)%
Multi-family and farmland		41,314			37,960			36,541			8.8	%		13.1	%
		700,786			732,277			745,195			(4.3	)%		(6.0	)%
Commercial loans		138,156			146,016			162,534			(5.4	)%		(15.0	)%
Consumer installment loans		45,564			48,927			53,406			(6.9	)%		(14.7	)%
Leases, net of unearned income		17,405			19,730			29,117			(11.8	)%		(40.2	)%
Other		3,601			5,068			2,395			(28.9	)%		50.4	%
Total loans		905,512			952,018			992,647			(4.9	)%		(8.8	)%
Allowance for loan and lease losses		(26,101	)		(26,492	)		(20,028	)		(1.5	)%		30.3	%
Net loans	$	879,411		$	925,526		$	972,619			(5.0	)%		(9.6	)%

Year-to-date, the largest declining loan balances were construction and land development (C&D) loans of $27.5 million, or 18.0%, commercial and industrial (C&I) loans of $7.9 million, or 5.4%, and commercial real estate loans of $4.6 million, or 1.8%.  From March 31, 2009 to March 31, 2010, the largest declining loan balances were C&D loans of $65.0 million, or 34.1%, C&I loans of $24.4 million, or 15.0%, residential 1-4 family loans of $15.6 million, or 5.3%, and leases of $11.7 million, or 40.2%.

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We will continue to extend prudent loans to credit-worthy consumers and businesses during 2010.  However, due to the current economic environment and the corresponding decline in loan demand, we anticipate our loans may remain stable or possibly decline in the near term.  Funding for future loans may be restricted by our ability to raise core deposits, although we may use our current cash reserves, as necessary and appropriate.  Loan growth may also be restricted by the necessity for us to maintain appropriate capital levels, as well as adequate liquidity.

Allowance for Loan and Lease Losses

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

· our loan loss experience;

· specific known risks;

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

· underlying estimated values of collateral secured loans;

· current and anticipated economic conditions; and

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

The allowance is composed of three primary components: (1) specific impairments for substandard/nonaccrual loans and leases, (2) general allocations for classified loan pools, including special mention and substandard/accrual loans, and (3) general allocations for the remaining pools of loans.  Specific impairments are commonly referred to as SFAS 114 impairments and general allocations are commonly referred to as SFAS 5 allocations.  We accumulate pools based on the underlying classification of the collateral.  Each pool is assigned a loss severity rate based on historical loss experience and various qualitative and environmental factors, including, but not limited to, credit quality and economic conditions.

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

Our allowance for loan and lease losses is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance compared to a group of peer banks.  During their routine examinations of banks, the regulators may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, their credit evaluations and allowance methodology differ materially from the bank’s methodology.  We believe our allowance methodology is in compliance with regulatory interagency guidance as well as applicable GAAP guidance.

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

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The following table presents an analysis of the changes in the allowance for loan and lease losses for the three months ended March 31, 2010 and 2009.  The provision for loan and lease losses of $4.4 million and $5.0 million for March 31, 2010 and 2009, respectively, in the table below does not include our provision accrual for unfunded commitments of $6 thousand and $6 thousand for the first quarter of 2010 and 2009, respectively.  The reserve for unfunded commitments is included in other liabilities in the accompanying consolidated balance sheets and totaled $211 thousand and $187 thousand as of March 31, 2010 and 2009, respectively.

Analysis of Changes in Allowance for Loan and Lease Losses

	For the three months ended March 31,
	2010			2009
	(in thousands, except percentages)
Allowance for loan and lease losses –
Beginning of period	$	26,492		$	17,385
Provision for loan and lease losses		4,369			4,987
Sub-total		30,861			22,372
Charged-off loans:
Real estate – Residential 1-4 family		429			251
Real estate – Commercial		-			797
Real estate – Construction		2,413			94
Real estate – Multi-family and farmland		130			-
Commercial loans		1,232			672
Consumer installment loans and Other		358			515
Leases, net of unearned income		494			79
Total charged-off		5,056			2,408
Recoveries of charged-off loans:
Real estate – Residential 1-4 family		3			-
Real estate – Commercial		145			-
Real estate – Construction		1			8
Real estate – Multi-family and farmland		-			2
Commercial loans		109			5
Consumer installment loans and Other		38			48
Leases, net of unearned income		-			1
Total recoveries		296			64
Net charged-off loans		4,760			2,344
Allowance for loan and lease losses – end of period	$	26,101		$	20,028
Total loans – end of period	$	905,512		$	992,647
Average loans	$	931,566		$	999,954
Net loans charged-off to average loans, annualized		2.04	%		0.94	%
Provision for loan and lease losses to average loans, annualized		1.88	%		1.99	%
Allowance for loan and lease losses as a percentage of:
Period end loans		2.88	%		2.02	%
Non-performing loans		48.07	%		62.36	%

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

Allocation of the Allowance for Loan and Lease Losses

	As of March 31, 2010					As of December 31, 2009					As of March 31, 2009
	Amount		Percent of Portfolio1			Amount		Percent of Portfolio1			Amount		Percent of Portfolio1
	(in thousands, except percentages)
Real estate – residential 1-4 family	$	5,353		30.8	%	$	5,037		29.6	%	$	4,043		29.6	%
Real estate – commercial		5,399		28.2	%		4,525		27.3	%		2,778		22.6	%
Real estate – construction		4,609		13.8	%		6,706		16.0	%		4,242		19.2	%
Real estate – multi-family and farmland		567		4.6	%		766		4.0	%		361		3.7	%
Commercial loans		7,521		15.3	%		6,953		15.4	%		5,131		16.4	%
Consumer installment loans		1,318		5.0	%		1,107		5.1	%		930		5.4	%
Leases, net of unearned income		1,317		1.9	%		1,386		2.1	%		2,506		2.9	%
Other		17		0.4	%		12		0.5	%		37		0.2	%
Total	$	26,101		100.0	%	$	26,492		100.0	%	$	20,028		100.0	%

____________________

1 Represents the percentage of loans in each category to total loans.

Over the last twelve to eighteen months, the allowance significantly increased largely because of the economic downturn and the associated decline in real estate values.  These two factors have contributed to a significant increase in classified loans.  From March 31, 2009 to March 31, 2010, the allowance increased $6.1 million, or 30.3%.  Specific impairments decreased by $290 thousand over the last twelve months, while the FAS 5 allowance increased $6.4 million due to higher levels of risk rated loans, as well as the associated higher loss factors.

As of March 31, 2010, the largest components of the allowance were associated with commercial loans and real estate secured loans.  The allowance associated with commercial loans as of March 31, 2010, has increased $2.4 million compared to March 31, 2009.  The majority of the increase is a result of higher levels of classified commercial loans.  Reduced earnings and cash flow of the associated borrowers due to the economic recession is the primary factor in the increase of classified commercial loans.  The allowance associated with real estate construction loans totaled $4.6 million as of March 31, 2010.  The decline in real estate values combined with the slowdown in new home sales has increased our classified loans in this category.  We consider the following factors in the de cision to downgrade a real estate construction loan, including, but not limited to, the decline in the associated collateral value, the length of time the finished home has been on the market, and the borrower’s ability to begin amortizing the loan.  In many cases, a downgraded loan may not be past due or involve a borrower missing scheduled payments; a downgraded loan instead indicates a risk of future non-performance, rather than a measure of actual non-performing loans.  As of March 31, 2010, approximately 49% of our nonaccrual loans were current on all contractual interest and principal payments.

We believe that the allowance for loan and lease losses as of March 31, 2010 is sufficient to absorb losses inherent in the loan portfolio based on our assessment of the information available, including the results of ongoing internal reviews of our loan portfolio, as discussed in the Asset Quality and Non-Performing Asset section below.  Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance 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, may require additional charges to the provision for loan losses in future periods if the results of their reviews warrant.

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Asset Quality and Non-Performing Assets

Asset Quality Strategic Initiatives for 2009 and 2010

We consider our asset quality to be of primary importance.  At March 31, 2010, our loan portfolio was 64.2% of total assets.  During 2009, as the economy continued to deteriorate, we implemented several significant strategies to further address our asset quality, including:

· Created a board-level Asset Quality Committee

· Established a dedicated OREO sales team

· Restructured our credit department adding depth to management

· Developed centralized underwriting, document preparation and collections processes

· Conducted an extensive third-party loan review, and

· Expanded our loan review department

The board-level Asset Quality Committee was created during the first quarter of 2009.  The committee meets monthly and is charged with providing oversight for (1) action plans associated with significant classified loans and leases, (2) sales plans for OREO and repossessions, (3) reviewing the allowance for loan and lease losses and related impairment recommendation and (4) monitoring asset quality reports, ratios and trends.  The committee has assisted management in reviewing significant credit relationships and developing appropriate work-out plans.

During 2009, we moved primary responsibility for the OREO sales process from the special assets department to a dedicated sales team.  This enabled our special assets department to focus its energy on loan work-outs while centralizing and streamlining the OREO sales process.  Our OREO sales team is focused on achieving the proper balance between maximizing the realized value upon sale and minimizing the holding period and carrying costs.

During the fourth quarter of 2009, we began the process of restructuring our credit administration department to add additional depth and expertise.  Specifically, the credit department is now aligned by line of business for commercial and retail credit with dedicated credit officers and staff supporting each of these portfolios.  The chief credit officer serves to support both senior credit officers.  As of March 31, 2010, we had successfully hired a chief credit officer, two experienced senior credit officers and two seasoned special assets officers.

With the additional depth and expertise of our restructured credit department, we have centralized our loan underwriting, document preparation and collections processes.  This centralization will improve consistency, increase quality and provide higher levels of operational efficiencies.  Collectively, we believe these changes will assist in reducing current and future non-performing assets.

During the fourth quarter of 2009, we engaged an independent consulting firm to conduct an extensive loan review.  The primary purpose of the loan review was to evaluate individual credits for compliance with credit and underwriting standards, and to assess the potential impairment of certain credits in which we might experience additional risks of loss.  The consultants reviewed over 50% of our entire portfolio.  Combining this review with existing loan review processes, approximately 71% of the entire portfolio was reviewed.  The efforts of these combined loan reviews included approximately 85% of commercial real estate loans and 95% of construction and land development loans.

Our internal loan review department performs risk-based reviews and historically targets 60% to 70% of our portfolio over an 18-month cycle.  In the last six months, we added two additional employees to our internal loan review department.  For 2010, we are combining the additional internal resources with external assistance to condense the normal 18-month cycle to a 12-month cycle, focusing on a risk-based approach to loan reviews.

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We believe these initiatives will assist us during the current economic environment, as well as position us for growth once economic conditions improve.

Asset Quality and Non-Performing Assets Analysis and Discussion
 

Our asset quality ratios weakened in the first quarter of 2010 compared to year-end and the same period in 2009.  As of March 31, 2010, our allowance for loan and lease losses as a percentage of total loans was 2.88%, which is an increase from the 2.78% as of December 31, 2009 and 2.02% as of March 31, 2009.  Net charge-offs as a percentage of average loans (annualized) increased to 2.04% from 0.94% for the three month periods ended March 31, 2010 and 2009, respectively.  Non-performing assets as a percentage of total assets was 5.31% at March 31, 2010, compared to 3.13% for the same period in 2009.  As of March 31, 2010, non-performing assets, including loans that are 90 days past due, increased to $76.7 million, or 5.60% of total assets, from $69.9 million, or 5.16% as of December 31, 2009, and $ 45.3 million, or 3.55% of total assets as of March 31, 2009.

We believe that overall asset quality will stabilize in 2010, but remain above comparable 2009 levels.  Our special assets department actively collects past due loans and develops action plans for classified and criticized loans and leases.  As for managing and marketing repossession and OREO, we are focused on achieving the proper level of balance between maximizing the realized value upon sale and minimizing the holding period and carrying costs.

Nonperforming assets include nonaccrual loans, restructured loans, OREO 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.  The following table presents our non-performing assets and related ratios.

Non-Performing Assets by Type

	March 31, 2010			December 31, 2009			March 31, 2009
	(in thousands, except percentages)
Nonaccrual loans	$	50,305		$	45,454		$	26,706
Loans past due 90 days and still accruing		3,993			4,524			5,413
Total nonperforming loans	$	54,298		$	49,978		$	32,119
Other real estate owned	$	18,933		$	16,017		$	11,309
Repossessed assets		3,466			3,881			1,864
Nonaccrual loans		50,305			45,454			26,706
Total nonperforming assets	$	72,704		$	65,352		$	39,879
Nonperforming loans as a percentage of total loans		6.00	%		5.25	%		3.24	%
Nonperforming assets as a percentage of total assets		5.31	%		4.83	%		3.13	%
Nonperforming assets plus loans 90 days past due to total assets		5.60	%		5.16	%		3.55	%

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The following table provides the activity in our non-performing asset for the last five quarters.  Additions may include transfer into the category or additions to previously existing loans/properties.  Reductions for nonaccrual loans may include (1) a transfer to other real estate owned, (2) a charge-off, (3) a principal payment and/or (4) transfers to accrual status.  Reductions in other real estate owned may include (1) a charge-off or write-down or (2) a sale of the property.

Non-Performing Assets – Activity

	1st Quarter 2010			4th Quarter 2009			3rd Quarter 2009			2nd Quarter 2009			1st Quarter 2009
	(in thousands)
Nonaccrual loans
Beginning balance	$	45,454		$	31,463		$	26,782		$	26,706		$	18,453
Additions		16,701			20,378			11,837			9,643			12,589
Reductions		(11,850	)		(6,387	)		(7,156	)		(9,567	)		(4,336	)
Ending balance	$	50,305		$	45,454		$	31,463		$	26,782		$	26,706
Other real estate owned
Beginning balance	$	16,017		$	14,206		$	12,930		$	11,309		$	7,145
Additions		3,866			4,415			5,599			4,522			5,111
Reductions		(950	)		(2,604	)		(4,323	)		(2,901	)		(947	)
Ending balance	$	18,933		$	16,017		$	14,206		$	12,930		$	11,309
Repossessions
Beginning balance	$	3,881		$	2,050		$	1,473		$	1,864		$	1,680
Additions		1,383			3,588			1,978			810			1,318
Reductions		(1,798	)		(1,757	)		(1,401	)		(1,201	)		(1,134	)
Ending balance	$	3,466		$	3,881		$	2,050		$	1,473		$	1,864

The following table provides the classifications for nonaccrual loans and other real estate owned as of March 31, 2010, December 31, 2009 and March 31, 2009.

Non-Performing Assets – Classification and Number of Units

	March 31, 2010				December 31, 2009				March 31, 2009
	Amount		Units		Amount		Units		Amount		Units
	(amounts in thousands)
Nonaccrual loans
Construction/development loans	$	13,950		33	$	13,706		36	$	9,040		12
Residential real estate loans		7,392		53		6,059		52		2,179		18
Commercial real estate loans		6,903		26		6,156		26		3,575		12
Commercial and industrial loans		16,234		39		15,397		38		6,904		20
Commercial leases		3,943		37		2,389		20		3,523		4
Consumer and other loans		1,883		15		1,747		15		1,485		4
Total	$	50,305		203	$	45,454		187	$	26,706		70
Other real estate owned
Construction/development loans	$	7,725		50	$	6,243		37	$	5,484		30
Residential real estate loans		5,638		41		5,132		34		2,598		14
Commercial real estate loans		5,570		18		4,642		14		3,227		5
Total	$	18,933		109	$	16,017		85	$	11,309		49

Nonaccrual loans totaled $50.3 million, $45.5 million and $26.7 million as of March 31, 2010, December 31, 2009 and March 31, 2009, respectively.  We place loans on nonaccrual when we have concerns related to our ability to collect the loan principal and interest, and generally when loans are 90 or more days past due.  As of March 31, 2010, we are not aware of any additional material loans that we have doubts as to the collectability of principal and interest that are not classified as nonaccrual.  As previously described, we have individually reviewed each nonaccrual loan in excess of $250 thousand for possible impairment.  We measure impairment by adjusting loans to either the present value of expected cash flows, the fair value of the collateral or observable market prices.

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As of March 31, 2010, nonaccruals increased by $4.9 million, or 10.7%, compared to year-end 2009.  During the first quarter of 2010, we successfully reworked our second largest nonaccrual, totaling $5.5 million at December 31, 2009, by replacing the original borrowers with a new borrower.  While the reworked loan is still classified as nonaccrual as of March 31, 2010, the new borrower brings additional capital and energy to complete the land development project.  Comparing March 31, 2010 to December 31, 2009, each nonaccrual classification type grew with commercial leases increasing $1.6 million and residential real estate increasing $1.3 million.  For commercial leases, the increase was primarily due to the addition of a $1.2 million relationship that is well-collateralized for which we currently estimate no loss.  For residential real estate loans, two nonaccrual additions were in excess of $500 thousand.  Both relationships were reviewed for possible impairment with no loss currently estimated.  We continue to actively pursue the appropriate strategies to reduce the current level of nonaccrual loans.

Other real estate increased $2.9 million from December 31, 2009 to March 31, 2010, as additions continued to outpace dispositions.  During the first quarter, we sold four properties with total proceeds of $567 thousand, resulting in a 101% realization of the carrying value prior to sale.  We anticipate increased sales volume in the second quarter based on the current volume and amount of properties under contract as of the date of this filing.  We anticipate taking a more aggressive sales approach during the remainder of 2010 to dispose of our current properties, which may lead to a lower realization rate.

Loans 90 days past due and still accruing declined by $531 thousand from year-end 2009 in a positive trend.  As of March 31, 2010, the $4.0 million in past due loans was comprised of $1.0 million in C&D loans, $845 thousand in commercial real estate loans, $820 thousand in residential real estate loans and $615 thousand in C&I loans.

Total non-performing assets for the first quarter of 2010 were $72.7 million compared to $65.4 million at December 31, 2009 and $39.9 million at March 31, 2009.

Our asset ratios were generally less favorable as compared to our peer group.  Our peer group, as defined by the Uniform Bank Performance Report (UBPR), is all commercial banks between $1 billion and $3 billion in total assets.  The following table provides our asset quality ratios as of March 31, 2010 and our UBPR peer group ratios as of March 31, 2010, which is the latest available information.

Nonperforming Asset Ratios

	First Security Group, Inc.			UBPR Peer Group
Nonperforming loans1 as a percentage of gross loans		6.00	%		3.83	%
Nonperforming loans1 as a percentage of the allowance		208.03	%		166.41	%
Nonperforming loans1 as a percentage of equity capital		39.96	%		28.06	%
Nonperforming loans1 plus OREO as a percentage of gross loans plus OREO		7.92	%		4.92	%

____________________

1Nonperforming loans are: Nonaccrual loans plus loans 90 days past due and still accruing

Investment Securities and Other Earning Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.  Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds.  Currently, all of our investments are classified as available-for-sale.  As of March 31, 2010, 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.

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Available-for-sale securities totaled $145.6 million at March 31, 2010, $143.0 million at December 31, 2009 and $142.1 million at March 31, 2009.  We believe our current securities portfolio 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, 2010, the available-for-sale securities portfolio had unrealized net gains of approximately $2.8 million, net of tax.

All investment securities purchased to date have been classified as available-for-sale.  Our securities portfolio at March 31, 2010 consisted of tax-exempt municipal securities, federal agency bonds, federal agency issued Real Estate Mortgage Investment Conduits (REMICs) and federal agency issued pools.

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 AFS Investment Securities – Amortized Cost

	Less than One Year			One to Five Years			Five to Ten Years			More than Ten Years			Totals
	(in thousands, except percentages)
Municipal-tax exempt	$	2,808		$	12,937		$	17,313		$	4,746		$	37,804
Agency bonds		-			13,844			11,992			-			25,836
Agency issued REMICs		8,244			25,492			3,091			-			36,827
Agency issued pools		102			33,723			6,042			840			40,707
Other		-			-			-			126			126
Total	$	11,154		$	85,996		$	38,438		$	5,712		$	141,300
Tax Equivalent Yield		5.31	%		4.26	%		4.47	%		6.08	%		4.48	%

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 historically 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, 2010, we performed an impairment assessment of the securities in our portfolio that had an unrealized loss to determine whether the decline in the fair value of these securities below their cost was other-than-temporary.  Under authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) we intend to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (3) we do not expect to recover the security’s entire amortized cost basis, even if we do not intend to sell.  Additionally, accounting guidance requires that for impaired securities that we do not intend to sell and/or that it is not more-likely-than-not that we will have to sell prior to reco very but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income.  If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual security is written down to fair value, which then becomes the new cost basis.  The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.

In evaluating the recovery of the entire amortized cost basis, we consider factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.

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As of March 31, 2010, gross unrealized losses in our portfolio totaled $165 thousand, as compared to $603 thousand and $983 thousand as of December 31, 2009 and March 31, 2009, respectively.  The unrealized losses associated with two trust preferred securities total $42 thousand.  The unrealized losses are primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities.  The remaining unrealized losses in our portfolio are primarily due to widening credit spreads and changes in interest rates subsequent to purchase.  Based on results of our impairment assessment, the unrealized losses at March 31, 2010 are considered temporary.

As of March 31, 2010, 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 2010, the amortized cost and market value of the securities from each such issuer are as follows:

	Book Value		Market Value
	(in thousands)
Fannie Mae	$	32,485	$	33,489
Ginnie Mae	$	15,380	$	15,585
FHLMC*	$	44,168	$	46,094

* Federal Home Loan Mortgage Corporation

We held no federal funds sold as of March 31, 2010, December 31, 2009 or March 31, 2009.  As of March 31, 2010, we held $211.0 million in interest bearing deposits, primarily at the Federal Reserve Bank of Atlanta, compared to $152.6 million at December 31, 2009 and $25.5 million as of March 31, 2009.  The yield on our account at the Federal Reserve Bank is approximately 25 basis points.

As of March 31, 2010, we held $100 thousand in certificates of deposit at other FDIC insured financial institutions.  At March 31, 2010, we held $25.1 million in bank-owned life insurance, compared to $24.9 million at December 31, 2009 and $24.2 million at March 31, 2009.

Deposits and Other Borrowings

As of March 31, 2010, deposits increased by 1.6% (6.4% annualized) from December 31, 2009 and increased by 12.7% from March 31, 2009.  Excluding the changes in brokered deposits, our year-over-year deposits increased 2.6%.  From March 31, 2009 to March 31, 2010, the fastest growing sector of our core deposit base was interest-bearing demand deposit accounts that grew $6.8 million, or 10.6%, as well as savings and money market accounts, that grew $8.5 million, or 5.0%.  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.& #160; Core deposit growth is an important tenet of our business strategy.

Brokered deposits increased $113.5 million from March 31, 2009 to March 31, 2010 with the majority of the increase in longer maturities issued in the fourth quarter of 2009 and first quarter of 2010.  We issued approximately $86 million of brokered certificates of deposit in December 2009.  The issuance enhanced our liquidity position.  During January 2010, we issued an additional $94.5 million in brokered certificates of deposit.  Approximately $77 million of the January funds were used to eliminate our brokered money market account.  In addition to brokered certificates of deposits, we are a member bank of the Certificate of Deposit Account Registry Service® (CDARS®) network.  CDARS® is a network of banks that allows customers’ CDs to receive full FDIC ins urance of up to $50 million.  Additionally, members have the opportunity to purchase or sell one-way time deposits.  As of March 31, 2010, our CDARS balance consists of $18.4 million in purchased time deposits and $12.1 million in our customers’ reciprocal accounts.

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Brokered deposits at March 31, 2010, December 31, 2009 and March 31, 2009 were as follows:

Brokered Deposits

	March 31, 2010		December 31, 2009		March 31, 2009
	(in thousands)
Brokered deposits –
Brokered certificates of deposits	$	322,944	$	239,283	$	140,963
Brokered money market accounts		-		76,749		77,384
Brokered NOW accounts		-		514		1,381
CDARS®		30,452		23,204		20,187
Total	$	353,396	$	339,750	$	239,915

As discussed in Note 13 of our consolidated financial statements, the presence of a capital requirement in our Consent Order restricts our ability to accept, renew, or roll over brokered deposits without prior approval of the FDIC.  The liquidity enhancement over the last six months was in part to ensure we have adequate funding to meet our short-term contractual obligations.  We believe that our current liquidity, along with maintaining or increasing core deposits, will provide for our short-term contractual obligations, including maturing brokered deposits.  The table below is a maturity schedule for our brokered deposits.

Brokered Deposits – by Maturity

	Less than 3 months		Three months to six months		Six months to twelve months		One to two years		Greater than two years
	(in thousands)
Brokered certificates of deposit	$	-	$	20,360	$	32,025	$	34,861	$	235,698
CDARS®		951		2,445		19,828		5,766		1,462
Total	$	951	$	22,805	$	51,853	$	40,627	$	237,160

As of March 31, 2010, December 31, 2009 and March 31, 2009, we had no federal funds purchased.

Securities sold under agreements to repurchase with commercial checking customers were $8.4 million as of March 31, 2010, compared to $7.9 million and $11.2 million as of December 31, 2009 and March 31, 2009, respectively.  In November 2007, we entered into a five-year structured repurchase agreement with another financial institution for $10.0 million, with a stated maturity in November 2012.  For the three months ended March 31, 2010 and 2009, we paid a fixed rate of 3.93%.  The agreement in callable on a quarterly basis.

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 equal to at least 165% of outstanding advances.  We also use FSGBank’s borrowing capacity at the 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.  As of March 31, 2010, December 31, 2009 and March 31, 2009, we had no significant advances from the FHLB.

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 $1.8 million as of March 31, 2010, 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 to support the growth of our franchise.

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On January 27, 2010, to further preserve our capital resources and liquidity, our Board of Directors elected to suspend the dividend on our common stock and elected to defer the dividend payment on our Series A Preferred Stock for the first quarter of 2010.  Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our Board of Directors may deem relevant.

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.

As of March 31, 2010, our interest bearing account at the Federal Reserve Bank of Atlanta totaled approximately $204.4 million.  This excess liquidity is available to fund our contractual obligations and prudent investment opportunities.

As of March 31, 2010, the unused borrowing capacity for FSGBank at FHLB was $58.6 million.  FHLB maintains standards for loan collateral files.  Therefore, FSGBank’s borrowing capacity may be restricted if our collateral file has exceptions.  Our borrowing capacity may also be restricted if our aggregate asset quality deteriorates.

FSGBank also had unsecured federal funds lines in the aggregate amount of $35.0 million at March 31, 2010 under which it can borrow funds to meet short-term liquidity needs.   As of March 31, 2010, the full aggregate amount was available.

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 $10.8 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.

Historically, we have utilized brokered deposits to provide an additional source of funding.  As of March 31, 2010, we had $322.9 million in brokered CDs outstanding with a weighted average remaining life of approximately 35 months, a weighted average coupon rate of 2.60% and a weighted average all-in cost (which includes fees paid to deposit brokers) of 2.85%.  Our CDARS® product had $30.5 million at March 31, 2010, with a weighted average coupon rate of 2.01% and a weighted average life of approximately 12 months.  As discussed in Note 13 of our consolidated financial statements, the presence of a capital requirement in our Consent Order restricts our ability to accept, renew, or roll over brokered deposits without prior approval of the FDIC. We currently have more than adequate liquidity to fund the contractual maturities in our brokered deposits for more than two years.

Our certificates of deposit greater than $100 thousand were generated in our communities and are considered relatively stable.  Management believes that our liquidity sources are adequate to meet our operating needs.  We continue to study our contingency funding plans and update them as needed paying particular attention to the sensitivity of our liquidity and deposit base to positive and negative changes in our asset quality.

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We also have contractual cash obligations and commitments, which include certificates of deposit, other borrowings, operating leases and loan commitments.  Unfunded loan commitments totaled $157.8 million at March 31, 2010.  The following table illustrates our significant contractual obligations at March 31, 2010 by future payment period.

Contractual Obligations

			Less than One Year		One to Three Years		Three to Five Years		More than Five Years		Total
			(in thousands)
Certificates of deposit	(1	)	$	336,618	$	101,801	$	4,367	$	-	$	442,786
Brokered certificates of deposit	(1	)		52,385		107,822		149,962		12,775		322,944
CDARS®	(1	)		23,224		6,771		457		-		30,452
Federal funds purchased and securities sold under agreements to repurchase	(2	)		8,371		-		10,000		-		18,371
FHLB borrowings	(3	)		-		4		-		-		4
Operating lease obligations	(4	)		754		759		328		1,479		3,320
Commitments to fund affordable housing investments	(5	)		1,340		-		-		-		1,340
Note payable	(6	)		15		34		37		-		86
Total			$	422,707	$	217,191	$	165,151	$	14,254	$	819,303

____________________

1Certificates 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 We have commitments to certain investments in affordable housing and historic building rehabilitation projects within our market area.  The investments entitle us to receive historic tax credits and low-income housing tax credits.

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

Net cash used in operations during the first quarter of 2010 totaled $3.8 million compared to net cash provided by operations of $2.0 million for the same period in 2009.  The increase in cash used in operations is primarily due to changes in other assets and other liabilities, such as increases in OREO of $2.9 million and a $2.8 million low-income housing tax credit investment.  Net cash used in investing activities increased from $5.6 million to $20.9 million due to the increase in interest bearing deposits in banks.  Net cash provided by financing activities was $19.4 million for the first quarter of 2010 as compared to net cash used in financing activities of $528 thousand in the comparable 2009 period.  The increase is a result of additional deposits.

Derivative Financial Instruments

Derivatives are used as a risk management tool and to facilitate client transactions.  We utilize derivatives to hedge the exposure to changes in interest rates or other identified market risks.  Derivatives may also be used in a dealer capacity to facilitate client transactions by creating customized loan products for our larger customers.  These products allow us to meet the needs of our customers, while minimizing our interest rate risk.  We currently have not entered into any transactions in a dealer capacity.

The Asset/Liability Committee of the Board of Directors (ALCO) provides oversight through ensuring policies and procedures are in place to monitor our derivative positions.  We believe the use of derivatives will reduce our interest rate risk and potential earnings volatility caused by changes in interest rates.

Our derivatives are based on underlying risks, primarily interest rates.  Historically, we have utilized cash flow swaps to reduce the risks associated with interest rates.  On August 28, 2007 and March 26, 2009, we elected to terminate a series of interest rate swaps with a total notional value of $150 million and $50 million, respectively.  At termination, the swaps had a market value of $2.0 million and $5.8 million, respectively.  These gains are being accreted into interest income over the remaining life of the originally hedged items.  We recognized a total of $519 thousand in interest income for the three months ended March 31, 2010.

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The following table presents the remaining accretion of the gain for the terminated swaps.

	20101		2011		2012		2013		Total
	(in thousands)
Accretion of gain from 2007 terminated swaps	$	277	$	219	$	62	$	-	$	558
Accretion of gain from 2009 terminated swaps	$	1,227	$	1,629	$	1,272	$	-	$	4,128

1 Represents the gain accretion for April 1, 2010 to December 31, 2010.  Excludes the amounts recognized in the first three months of 2010.

We also use forward contracts to hedge against changes in interest rates on our held for sale loan portfolio.  Our practice is to enter into a best efforts contract with the investor concurrently with providing an interest rate lock to a customer.  The use of the fair value option on the closed held for sale loans and the forward contracts minimize the volatility in earnings from changes in interest rates.

The following are the cash flow hedges as of March 31, 2010:

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income		Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Forward contracts	$	2,138	$	64	$	-	$	42	Various
	$	2,138	$	64	$	-	$	42
Terminated asset hedges
Cash flow hedges: 1
Interest rate swap	$	25,000	$	-	$	-	$	18	June 28, 2010
Interest rate swap		25,000		-		-		89	June 28, 2011
Interest rate swap		14,000		-		-		7	June 28, 2010
Interest rate swap		20,000		-		-		67	June 28, 2011
Interest rate swap		35,000		-		-		187	June 28, 2012
Interest rate swap		25,000		-		-		1,362	October 15, 2012
Interest rate swap		25,000		-		-		1,362	October 15, 2012
	$	169,000	$	-	$	-	$	3,092

1 The $3.1 million of gains, net of taxes, recorded in accumulated other comprehensive income as of March 31, 2010, will be reclassified into earnings as interest income over the remaining life of the respective hedged items.

The following table presents additional information on the active derivative positions as of March 31, 2010:

			Consolidated Balance Sheet Presentation						Consolidated Income Statement Presentation
			Assets			Liabilities			Gains
	Notional		Classification	Amount		Classification	Amount		Classification	Amount Recognized
	(in thousands)
Hedging Instrument:
Forward contracts	$	2,138	Other assets	$	64	Other liabilities		N/A	Noninterest income – other	$	58
Hedged Items:
Loans held for sale		N/A	Loans held for sale	$	2,138	N/A		N/A	Noninterest income – other		N/A

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

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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, 2010 and 2009 was as follows:

	As of March 31,
	2010		2009
	(in thousands)
Commitments to extend credit	$	157,755	$	250,910
Standby letters of credit	$	15,394	$	25,579

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. Through this economic recession, we have intentionally reduced our potential credit exposure by reducing our unfunded loan commitments and stand by letters of credit.

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.  As described in Note 13 to our consolidated financial statements, the Consent Order requires FSGBank to achieve and maintain total capital to risk adjusted assets of at least 13% and a leverage ratio of at least 9%.  The Order provides 120 days from April 28, 2 010, the effective date of the Order, to achieve these ratios.

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

March 31, 2010	FSGBank Consent Order1			Well Capitalized			Adequately Capitalized			First Security			FSGBank
Tier I capital to risk adjusted assets		n/a			6.0	%		4.0	%		13.0	%		12.5	%3
Total capital to risk adjusted assets		13.0	%		10.0	%		8.0	%		14.2	%		13.8	%3
Leverage ratio		9.0	%		5.0	%2		4.0	%		9.3	%		8.95	%3
December 31, 2009
Tier I capital to risk adjusted assets		n/a			6.0	%		4.0	%		12.7	%		11.6	%
Total capital to risk adjusted assets		n/a			10.0	%		8.0	%		14.0	%		12.8	%
Leverage ratio		n/a			5.0	%2		4.0	%		10.6	%		9.6	%
March 31, 2009
Tier I capital to risk adjusted assets		n/a			6.0	%		4.0	%		12.9	%		9.6	%
Total capital to risk adjusted assets		n/a			10.0	%		8.0	%		14.1	%		10.8	%
Leverage ratio		n/a			5.0	%2		4.0	%		11.1	%		8.2	%

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

2 The Federal Reserve Board definition of well capitalized for bank holding companies does not include a leverage ratio component; accordingly, the leverage ratio requirement for well capitalized status only applies to FSGBank.

3 Due to the capital requirement within FSGBank’s Consent Order, FSGBank is considered to be adequately capitalized.

On January 27, 2010, to further preserve our capital resources, our Board of Directors elected to suspend our common stock dividend and defer the dividend on the Series A Preferred Stock for the first quarter of 2010.  Any future determination relating to dividend policy will be made at the discretion o four Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects, regulatory restrictions, and other factors that our Board of Directors may deem relevant.

EFFECTS OF GOVERNMENTAL POLICIES

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

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

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

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

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RECENT ACCOUNTING PRONOUNCEMENTS

During the three months ended March 31, 2010, the Financial Accounting Standards Board (FASB) is not issue any significant authoritative accounting guidance that would impact our disclosures or financial results.  Refer to the Notes to our consolidated financial statements for accounting changes that became effective during the current periods.

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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.  We manage several types of risk, such as credit, liquidity and interest rate.  We consider interest rate risk to be a significant risk that could potentially have a large material effect on our financial condition.  Further, we process hypothetical scenarios whereby we shock our balance sheet up and down for possible interest rate changes, we analyze the potential change (positive or negative) to net interest income, as well as the effect of changes in fair market values of assets and liabilities.  We do not deal in international instruments, and therefore are not exposed to risk inh erent to foreign currency.

Our interest rate risk management is the responsibility of the ALCO.  This committee has established policies and limits to monitor, measure and coordinate our sources, uses and pricing of funds.

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

Our income simulation analysis projected net interest income based on 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, 2010, an exposure to falling rates and a benefit from rising rates.  More specifically, our model forecasts a decline in net interest income of $9.3 million, or 23.7%, as a result of a 200 basis point decline in rates.  The model also predicts a $7.9 million increase in net interest income, or 20.2%, as a result of a 200 basis point increase in rates.  The following chart reflects our sensitivity to changes in interest rates as of March 31, 2010.  The numbers are based on a static balance sheet, and the chart assumes that pay downs and maturities of both assets and liabilitie s 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)
Annualized net interest income1	$	29,923		$	39,238		$	47,148
Dollar change net interest income		(9,315	)		-			7,910
Percentage change net interest income		(23.74	)%		0.00	%		20.16	%

1 Annualized net interest income is a twelve month projection based on year-to-date results.

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The preceding sensitivity summary 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 t o 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 mis take.  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.

Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.

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, 2009, 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.

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The following risks supplement the risk factors previously identified in our Annual Report on  Form 10-K for the year ended December 31, 2009.  The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Our inability to accept, renew or roll over brokered deposits without the prior approval of the FDIC could adversely affect our liquidity.

As of March 31, 2010, we had approximately $353.4 million in out of market deposits, including brokered certificates of deposit and CDARS®, which represented approximately 29.4% of our total deposits.  Because the Order establishes specific capital amounts to be maintained by the Bank, the Bank may not be considered better than “adequately capitalized” for capital adequacy purposes, even if the Bank exceeds the levels of capital set forth in the Order.  As an adequately capitalized institution, the Bank may not accept, renew or roll over brokered deposits without prior approval of the FDIC.  As of March 31, 2010, brokered deposits maturing in the next 24 months totaled $116.2 million.  Funding sources for the maturing brokered deposits include, among other sources: our cash account at the Federal Reserve Bank of Atlanta; growth, if any, of core deposits from current and new retail and commercial customers; scheduled repayments on existing loans; and the possible pledge or sale of investment securities. As an adequately capitalized institution, the Bank also may not pay interest on deposits that are more than 75 basis points above the rate applicable to the applicable market of the Bank as determined by the FDIC.  These interest rate limitations may limit the ability of the Bank to increase or maintain core deposits from current and new deposit customers.  The limitations on our ability to accept, renew or roll over brokered deposits, or pay more than 75 basis points above the applicable rate could adversely affect our liquidity.

Increased capital requirements, adverse market conditions or future losses may require us to raise additional capital in the future to support our operations, but that capital may not be available when it is needed or it could be dilutive to our existing stockholders, which could adversely affect our financial condition and our results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations, which may require us to maintain capital in excess of published regulatory standards for a “well-capitalized” institution.  The Order requires the Bank to, within 120 days of the effective date of the Order, to achieve and thereafter maintain total capital at least equal to 13 percent of risk-weighted assets and Tier 1 capital at least equal to 9 percent of adjusted total assets.  As of March 31, 2010, the Bank’s total risk-based capital ratio was approximately 13.78 percent and its leverage ratio was approximately 8.95 percent.  As of March 31, 2010, the Bank had excess capital of approximately $7.4 million above the Order’s total risk-based capital ratio and a capital shortfall of approximately $625 thousand compared to the Order’s leverage ratio.  The Company is considering a variety of strategic alternatives intended to achieve and maintain the prescribed capital ratios.

In addition, in the future, we may need to raise additional capital to comply with commitments made to our regulators or a new regulatory capital framework such as a new proposal for risk-based capital standards developed by federal or international regulatory groups. As a result of the financial crisis that has adversely affected global credit markets and increases in credit, liquidity, interest rate and other risks, in September 2009, the Treasury issued principles for stronger capital and liquidity standards for banking firms, which included recommendations for higher capital standards for all banking organizations to be implemented as part of a broader reconsideration of international risk-based capital standards developed by the Basel Committee on Banking Supervision (“Basel II”). Any new capital framework is likely to a ffect the cost and availability of different types of credit. U.S. banking organizations are likely to be required to hold higher levels of capital and could incur increased compliance costs; it is unclear, at this time, if similar increases in capital standards will be incorporated into a revised Basel II proposal that would be adopted by international financial institutions. Any of these developments, including increased capital requirements, could require us to raise additional capital.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. If we need to raise additional capital, there is no guarantee that we will be able to borrow funds or successfully raise capital at all or on terms that are favorable or otherwise not dilutive to existing stockholders. If we cannot raise additional capital when needed, our ability to operate or expand our business could be materially impaired.

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We are subject to an Order that could have a material negative effect on our business, operating flexibility, financial condition and the value of our common stock. In addition, addressing the Order will require significant time and attention from our management team, which may increase our costs, impede the efficiency of our internal business processes and adversely affect our profitability in the near-term.

On April 28, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order the Bank  by and through its Board of Directors consented and agreed to the issuance of a Consent Order by the OCC, the Bank’s primary regulator. The Bank and the OCC agreed as to the areas of the Bank’s operations that warrant improvement and a plan for making those improvements. The Order required the Bank to develop and submit written strategic and capital plans covering at least a three-year period. The Bank is required to review and revise various policies and procedures, including those associated with concentration management, the allowance for loan and lease losses, liquidity management, criticized asset, loan review and credit.

Any material failure to comply with the provisions of the Order could result in further enforcement actions by the OCC. In addition, if the OCC does not accept the capital plan or the Bank fails to achieve the minimum capital levels, the OCC may require that the Bank develop a plan to sell, merge or liquidate the Bank. While the Company intends to take such actions as may be necessary to enable the Bank to comply with the requirements of the Order, there can be no assurance that the Bank will be able to comply fully with the provisions of the Order, or that efforts to comply with the Order, particularly the limitations on interest rates offered by the Bank, will not have adverse effects on the operations and financial condition of the Company and the Bank.

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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 of 1934
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
32.1	Certification of Chief Executive Officer pursuant to 18 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)
May 10, 2010	By:	/s/ Rodger B. Holley
		Rodger B. Holley
		Chairman, CEO & President

May 10, 2010	By:	/s/ William L. Lusk, Jr.
		William L. Lusk, Jr.
		Secretary, Chief Financial Officer & Executive Vice President

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