First Security (FSGI) 10-Q/A 2010 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(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 June 30, 2010

OR

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

For the transition period from            to            .

COMMISSION FILE NO. 000-49747

FIRST SECURITY GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

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

(423) 266-2000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  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 August 9, 2010

EXPLANATORY NOTE

As described in a Current Report on Form 8-K filed October 28, 2010 and as discussed in Note 2 of the consolidated financial statements included herein, First Security Group, Inc. (the Company) is filing amendments to its Annual Report on Form 10-K for the annual period ended December 31, 2009, the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, and the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 (collectively “the restatements”) to amend and restate its financial statements and other financial information to reflect the appropriate timing and recognition of charge-offs and write-downs associated with other real estate owned. While the changes were not quantitatively material, the restatements will ensure consistency with the Company’s publicly available financial information.

Subsequent to filing the June 30, 2010 Quarterly Report on Form 10-Q and a change in personnel responsible for the Company’s other real estate owned, the Company determined that certain write-downs associated with other real estate owned were not recorded in the appropriate accounting periods. Upon completion of the Company’s internal review, the primary regulator of the Company’s wholly-owned subsidiary bank, FSGBank, N.A. (Bank), verified the findings as part of its ongoing annual safety and soundness examination. The Bank has been requested to file amended Call Reports with the FDIC and the Company to file amended FR Y-9C and FR Y-9LP reports with the Federal Reserve, for December 31, 2009, March 31, 2010 and June 30, 2010 to reflect the findings.

This Form 10-Q as amended hereby continues to speak as of August 9, 2010, the date of the originally filed Form 10-Q, and the disclosures included in the Form 10-Q as amended hereby have not been updated to speak as of any later date. Information not affected by the restatement of financial statements or information as of and for the period ended June 30, 2010 is unchanged and reflects the disclosures made at the time of filing the original Form 10-Q.

For convenience, the entire Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 has been re-filed in this Form 10-Q/A. Pursuant to SEC Rule 12b-15, in connection with this filing, First Security is filing updated exhibits 31.1, 31.2, 32.1 and 32.2.

First Security Group, Inc. and Subsidiary

Form 10-Q

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets - June 30, 2010, December 31, 2009 and June 30, 2009		1
	Consolidated Income Statements - Three months and six months ended June 30, 2010 and 2009		3
	Consolidated Statement of Stockholders’ Equity - Six months ended June 30, 2010		4
	Consolidated Statements of Cash Flows - Six months ended June 30, 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		53
Item 4.	Controls and Procedures		54
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors		55
Item 3.	Defaults Upon Senior Securities		57
Item 6.	Exhibits		57
SIGNATURES			58

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

(in thousands)	June 30, 2010 (unaudited and restated)		December  31, 2009 (restated)		June 30, 2009 (unaudited)
ASSETS
Cash and Due from Banks	$	8,960	$	23,220	$	20,908
Federal Funds Sold and Securities Purchased under Agreements to Resell		—		—		—
Cash and Cash Equivalents		8,960		23,220		20,908
Interest Bearing Deposits in Banks		232,720		152,616		12,354
Securities Available-for-Sale		153,031		143,045		137,494
Loans Held for Sale		2,713		1,225		3,806
Loans		848,639		950,793		964,687
Total Loans		851,352		952,018		968,493
Less: Allowance for Loan and Lease Losses		26,830		26,492		19,275
		824,522		925,526		949,218
Premises and Equipment, net		32,274		33,157		33,948
Goodwill		—		—		27,156
Intangible Assets		1,685		1,918		2,139
Other Assets		79,948		73,917		55,176
TOTAL ASSETS	$	1,333,140	$	1,353,399	$	1,238,393

(See Accompanying Notes to Consolidated Financial Statements)

1

First Security Group, Inc. and Subsidiary

Consolidated Balance Sheets

(in thousands, except share data)	June 30, 2010 (unaudited and restated)			December  31, 2009 (restated)			June 30, 2009 (unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Noninterest Bearing Demand	$	152,284		$	151,174		$	153,345
Interest Bearing Demand		67,122			62,429			63,720
Savings and Money Market Accounts		172,588			177,543			157,560
Certificates of Deposit less than $100 thousand		232,646			244,312			246,652
Certificates of Deposit of $100 thousand or more		189,066			207,465			204,133
Brokered Deposits		352,545			339,750			207,636
Total Deposits		1,166,251			1,182,673			1,033,046
Federal Funds Purchased and Securities Sold under Agreements to Repurchase		19,347			17,911			20,538
Security Deposits		961			1,376			1,558
Other Borrowings		85			94			102
Other Liabilities		9,745			10,181			10,686
Total Liabilities		1,196,389			1,212,235			1,065,930
STOCKHOLDERS’ EQUITY
Preferred Stock – no par value – 10,000,000 shares authorized; 33,000 issued as of June 30, 2010, December 31, 2009 and June 30, 2009		31,525			31,339			31,158
Common Stock - $.01 par value - 50,000,000 shares authorized as of June 30, 2010, December 31, 2009 and June 30, 2009; 16,418,327 issued as of June 30, 2010, December 31, 2009 and June 30, 2009		114			114			114
Paid-In Surplus		111,623			111,964			111,933
Common Stock Warrants		2,006			2,006			2,006
Unallocated ESOP Shares		(5,518	)		(6,193	)		(6,602	)
(Accumulated Deficit) Retained Earnings		(8,509	)		(4,258	)		28,262
Accumulated Other Comprehensive Income		5,510			6,192			5,592
Total Stockholders’ Equity		136,751			141,164			172,463
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,333,140		$	1,353,399		$	1,238,393

(See Accompanying Notes to Consolidated Financial Statements)

2

First Security Group, Inc. and Subsidiary

Consolidated Income Statements

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2010 (restated)			2009			2010 (restated)			2009
INTEREST INCOME
Loans, including fees	$	12,731		$	14,524		$	26,181		$	29,397
Debt Securities – taxable		994			1,154			2,084			2,338
Debt Securities – non-taxable		349			400			727			804
Other		216			21			339			35
Total Interest Income		14,290			16,099			29,331			32,574
INTEREST EXPENSE
Interest Bearing Demand Deposits		50			50			95			101
Savings Deposits and Money Market Accounts		356			399			764			871
Certificates of Deposit of less than $100 thousand		1,248			1,900			2,591			3,949
Certificates of Deposit of $100 thousand or more		1,097			1,644			2,291			3,404
Brokered Deposits		2,456			1,488			4,710			3,253
Other		122			118			244			259
Total Interest Expense		5,329			5,599			10,695			11,837
NET INTEREST INCOME		8,961			10,500			18,636			20,737
Provision for Loan and Lease Losses		3,634			6,196			8,009			11,189
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		5,327			4,304			10,627			9,548
NONINTEREST INCOME
Service Charges on Deposit Accounts		1,048			1,170			2,048			2,317
Gain on Sales of Available-for-Sale Securities		—			—			57			—
Other		1,510			1,474			2,757			2,778
Total Noninterest Income		2,558			2,644			4,862			5,095
NONINTEREST EXPENSES
Salaries and Employee Benefits		4,703			5,043			9,651			10,400
Expense on Premises and Fixed Assets, net of rental income		1,373			1,512			2,756			3,032
Other		5,704			3,337			9,245			5,920
Total Noninterest Expenses		11,780			9,892			21,652			19,352
LOSS BEFORE INCOME TAX BENEFIT		(3,895	)		(2,944	)		(6,163	)		(4,709	)
Income Tax Benefit		(1,769	)		(1,536	)		(2,923	)		(2,449	)
NET LOSS		(2,126	)		(1,408	)		(3,240	)		(2,260	)
Preferred Stock Dividends		412			413			825			784
Accretion on Preferred Stock Discount		94			87			186			164
NET LOSS TO COMMON STOCKHOLDERS	$	(2,632	)	$	(1,908	)	$	(4,251	)	$	(3,208	)
NET LOSS PER SHARE:
Net Loss Per Share - Basic	$	(0.17	)	$	(0.12	)	$	(0.27	)	$	(0.21	)
Net Loss Per Share - Diluted	$	(0.17	)	$	(0.12	)	$	(0.27	)	$	(0.21	)
Dividends Declared Per Common Share	$	—		$	0.01		$	—		$	0.06

(See Accompanying Notes to Consolidated Financial Statements)

3

First Security Group, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity

				Common Stock												Accumulated Other Comprehensive Income
(in thousands)		Preferred Stock		Shares		Amount		Paid-In Surplus			Common Stock Warrants		Accumulated Deficit						Unallocated ESOP Shares			Total
Balance – December 31, 2009 (restated)		$	31,339		16,418	$	114	$	111,964		$	2,006	$	(4,258	)	$	6,192		$	(6,193	)	$	141,164
Comprehensive Income:
Net Loss (unaudited and restated)														(3,240	)								(3,240	)
Change Unrealized Gain:
Securities Available-for-Sale, net of tax and reclassification adjustments (unaudited)																	39						39
Fair Value of Derivatives, net of tax and reclassification adjustments (unaudited)																	(721	)					(721	)
Total Comprehensive Loss																							(3,922	)
Accretion of Discount Associated with Preferred Stock (unaudited)	��		186											(186	)								—
Preferred Stock Dividend (unaudited)														(825	)								(825	)
Stock-based Compensation, net of forfeitures (unaudited)									49														49
ESOP Allocation (unaudited)									(390	)										675			285
Balance – June 30, 2010 (unaudited and restated)		$	31,525		16,418	$	114	$	111,623		$	2,006	$	(8,509	)	$	5,510		$	(5,518	)	$	136,751

(See Accompanying Notes to Consolidated Financial Statements)

4

First Security Group, Inc. and Subsidiary

Consolidated Statements of Cash Flow

(unaudited)

	Six Months Ended June 30,
(in thousands)	2010 (restated)			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(3,240	)	$	(2,260	)
Adjustments to Reconcile Net Loss to Net Cash (Used in) Provided by Operating Activities -
Provision for Loan and Lease Losses		8,009			11,189
Amortization, net		416			324
Stock-Based Compensation		49			200
ESOP Compensation		285			321
Depreciation		929			1,065
Gain on Sale of Premises and Equipment		(8	)		(3	)
Loss (Gain) on Sale of Other Real Estate and Repossessions, net		511			(72	)
Write-down of Other Real Estate and Repossessions		1,140			387
Gain on Sale of Available-for-Sale Securities		(57	)		—
Accretion of Fair Value Adjustment, net		(25	)		(99	)
Accretion of Cash Flow Swaps		—			(528	)
Accretion of Terminated Cash Flow Swaps		(1,042	)		(722	)
Changes in Operating Assets and Liabilities -
Loans Held for Sale		(1,488	)		2,197
Interest Receivable		484			287
Other Assets		(5,992	)		(1,072	)
Interest Payable		(128	)		(847	)
Other Liabilities		(1,158	)		256
Net Cash (Used in) Provided by Operating Activities		(1,315	)		10,623
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Interest Bearing Deposits in Banks		(80,104	)		(11,436	)
Activity in Available-for-Sale-Securities -
Maturities, Prepayments, and Calls		30,329			12,891
Sales		14,762			—
Purchases		(55,143	)		(10,781	)
Loan Originations and Principal Collections, net		85,871			21,984
Proceeds for Interim Settlements of Cash Flow Swaps, net		—��			938
Proceeds for 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		7,001			3,969
Additions to Premises and Equipment		(46	)		(1,246	)
Capital Improvements to Repossessions and Other Real Estate		(628	)		(114	)
Net Cash Provided by Investing Activities		2,050			21,996
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits		(16,422	)		(43,242	)
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		1,436			(19,498	)
Net Decrease of Other Borrowings		(9	)		(2,675	)
Proceeds from Issuance of Preferred Stock and Common Stock Warrants		—			33,000
Repurchase and Retirement of Common Stock		—			—
Repurchase of Common Stock for 401(k) and ESOP Plan		—			(1,023	)
Dividends Paid on Preferred Stock		—			(578	)
Dividends Paid on Common Stock		—			(917	)
Net Cash Used in Financing Activities		(14,995	)		(34,933	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(14,260	)		(2,314	)
CASH AND CASH EQUIVALENTS - beginning of period		23,220			23,222
CASH AND CASH EQUIVALENTS - end of period	$	8,960		$	20,908

(See Accompanying Notes to Consolidated Financial Statements)

5

	Six Months Ended June 30,
(in thousands)	2010		2009
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Transfers to Foreclosed Properties and Repossessions	$	11,604	$	11,784
SUPPLEMENTAL SCHEDULE OF CASH FLOWS
Interest Paid	$	10,823	$	12,684
Income Taxes Paid	$	46	$	539

(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 bank, which is wholly-owned. All significant intercompany balances and transactions have been eliminated.

Operating results for the three and six months ended June 30, 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 – RESTATEMENT

Subsequent to filing the June 30, 2010 Quarterly Report on Form 10-Q and a change in personnel responsible for the Company’s other real estate owned, the Company determined that certain write-downs associated with other real estate owned (OREO) were not recorded in the appropriate accounting periods. Upon completion of the Company’s internal review, the primary regulator of the Company’s wholly-owned subsidiary bank, FSGBank, N.A. (Bank), verified the findings as part of its ongoing annual safety and soundness examination. The Bank has been requested to file amended Call Reports with the FDIC and the Company to file amended FR Y-9C and FR Y-9LP reports with the Federal Reserve, for December 31, 2009, March 31, 2010 and June 30, 2010 to reflect the findings.

On October 28, 2010, the Company’s Audit/Corporate Governance Committee determined that the previously issued audited consolidated financial statements for the year ended December 31, 2009 (contained in the Company’s Annual Report on Form 10-K filed March 16, 2010, and subsequently amended by that certain Amendment No. 1 to the Annual Report on Form 10-K filed on April 30, 2010) and the previously issued unaudited consolidated financial statements for the quarters ended March 31, 2010 and June 30, 2010 (contained in the Company’s Quarterly Reports on Form 10-Q filed, respectively, on May 10, 2010 and August 8, 2010) should no longer be relied upon. The restatements to these consolidated financial statements reflect the appropriate timing and recognition of charge-offs and write-downs associated with other real estate owned. While the changes were not quantitatively material, the restatements ensure consistency with the Company’s publicly available financial information.

For the period ended December 31, 2009, the Company determined that additional OREO write-downs totaling $616 thousand and additional OREO charge-offs totaling $89 thousand were improperly reflected in future periods. The December 31, 2009 Form 10-K/A (Amendment No.2) properly reflects these items as well as an increase in provision for loan and lease losses of $89 thousand to return the allowance for loan and lease losses to the previously reported balance. The tax benefit associated with the additional expenses totaled $270 thousand. The net impact on these items increased the net loss available to common stockholders by $435 thousand from the previously reported net loss of $34,974 thousand to $35,409 thousand.

For the three-month period ended March 31, 2010, the Company previously reported no OREO write-downs. The Company’s policies require an appraisal to determine the initial fair value of the property at the time of foreclosure. An updated appraisal is required on at least an annual basis. The Company’s internal review determined that 15 properties were subject to new appraisals during the first quarter of 2010; however, all 15 appraisals were received subsequent to March 31, 2010. These findings were consistent with the properties due for a new appraisal during the fourth quarter of 2009; ten of the twelve appraisals due in the fourth quarter were received in the second quarter of 2010. The other two appraisals were received during the fourth quarter but the associated write-downs were not recorded. Accordingly, the March 31, 2010 Form 10-Q/A only reflects changes to the December 31, 2009 and March 31, 2010 consolidated balance sheets.

For the three-month period ended June 30, 2010, the Company previously reported $1,337 thousand in write-downs to OREO/repossessions. Of this amount, $292 thousand were inappropriately accounted for in this reporting period. These write-downs have been included in the above restatements. Additionally, the Company’s internal review determined that a charge-off of $89 thousand and a write-down of $24 thousand were not properly reported in the three months ended June 30, 2010. The June 30, 2010 Form 10-Q/A reflects the changes described above, including the tax effects thereof, as well as an additional $89 thousand in provision for loan and lease losses to return the allowance to the previously reported balance.

For the three months ended September 30, 2010, the Company’s internal review identified $526 thousand of write-downs that were associated with prior periods. These have been reclassified in the above restatements. As the Company’s internal review was completed prior to filing the September 30, 2010 quarterly report on Form 10-Q, no restatement is required for this period.

The following table provides the previously reported and the restated amounts included in the restatements:

	Previously Reported as of December 31, 2009			Anticipated Restatement Adjustments			Restated as of December 31, 2009
	(in thousands)
Changes to the Consolidated Balance Sheet
Other Assets	$	74,352		$	(435	)	$	73,917
Accumulated Deficit	$	(3,823	)	$	(435	)	$	(4,258	)
Changes to the Consolidated Income Statements
Provision for Loan and Lease Losses	$	25,315		$	89		$	25,404
Other Non-Interest Expense	$	14,938		$	616		$	15,554
Income Tax (Benefit) Provision	$	(7,982	)	$	(270	)	$	(8,252	)
Net (Loss) Income Available to Common Shareholders	$	(34,974	)	$	(435	)	$	(35,409	)
	Previously Reported as of March 31, 2010			Anticipated Restatement Adjustments			Restated as of March 31, 2010
	(in thousands)
Changes to the Consolidated Balance Sheet
Other Assets	$	80,539		$	(435	)	$	80,104
Accumulated Deficit	$	(5,442	)	$	(435	)	$	(5,877	)
	Previously Reported as of June 30, 2010			Anticipated Restatement Adjustments			Restated as of June 30, 2010
	(in thousands)
Changes to the Consolidated Balance Sheet
Other Assets	$	80,313		$	(365	)	$	79,948
Accumulated Deficit	$	(8,144	)	$	(365	)	$	(8,509	)
Changes to the Consolidated Income Statements for the three months ended June 30, 2010
Provision for Loan and Lease Losses	$	3,544		$	90		$	3,634
Other Non-Interest Expense	$	5,907		$	(203	)	$	5,704
Income Tax Benefit	$	(1,812	)	$	43		$	(1,769	)
Net (Loss) Income Available to Common Shareholders	$	(2,702	)	$	70		$	(2,632	)

NOTE 3 – 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 loss for the three and six month periods ended June 30, 2010 and 2009, respectively.

	Three Months Ended June 30,						Six Months Ended June 30,
	2010 (restated)			2009			2010 (restated)			2009
	(in thousands)
Net loss	$	(2,126	)	$	(1,408	)	$	(3,240	)	$	(2,260	)
Other comprehensive income (loss)
Available-for-sale securities
Unrealized net (loss) gain on securities arising during the period		(70	)		(683	)		117			358
Tax benefit (expense) related to unrealized net (loss) gain		24			232			(40	)		(122	)
Reclassification adjustments for realized gain included in net income		—			—			(57	)		—
Tax expense related to gain realized in net income		—			—			19			—
Unrealized (loss) gain on securities, net of tax		(46	)		(451	)		39			236
Derivative cash flow hedges
Unrealized gain (loss) on derivatives arising during the period		15			33			(51	)		312
Tax (expense) benefit related to unrealized (loss) gain		(5	)		(10	)		18			(106	)
Reclassification adjustments for realized gain included in net income		(614	)		(455	)		(1,042	)		(1,152	)
Tax expense related to gain realized in net income		209			155			354			392
Unrealized loss on derivatives, net of tax		(395	)		(277	)		(721	)		(554	)
Other comprehensive loss, net of tax		(441	)		(728	)		(682	)		(318	)
Comprehensive loss, net of tax	$	(2,567	)	$	(2,136	)	$	(3,922	)	$	(2,578	)

7

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 4 – EARNINGS PER SHARE

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2010 (restated)			2009			2010 (restated)			2009
	(in thousands, except per share data)
Net loss available to common stockholders	$	(2,632	)	$	(1,908	)	$	(4,251	)	$	(3,208	)
Denominator:
Weighted average common shares outstanding		15,715			15,503			15,682			15,537
Equivalent shares issuable upon exercise of stock options, stock warrants and restricted stock grants		—			—			—			—
Weighted average diluted shares outstanding		15,715			15,503			15,682			15,537
Net loss per share:
Basic	$	(0.17	)	$	(0.12	)	$	(0.27	)	$	(0.21	)
Diluted	$	(0.17	)	$	(0.12	)	$	(0.27	)	$	(0.21	)

For the three and six months ended June 30, 2010, the weighted average stock options, stock warrants and restricted stock awards that were anti-dilutive totaled 1,963 thousand and 2,017 thousand, respectively, compared to 1,321 thousand and 1,387 thousand for the same periods in 2009. Anti-dilutive options expire between 2010 and 2020. Anti-dilutive options and awards are not included in the computation of diluted earnings per share under the treasury stock method.

8

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 5 – SECURITIES

Investment Securities by Type

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(in thousands)
Securities available-for-sale
June 30, 2010
Debt securities—
Federal agencies	$	29,316	$	216	$	—	$	29,532
Mortgage-backed		83,173		3,075		162		86,086
Municipals		36,218		1,193		75		37,336
Other		126		—		49		77
Total	$	148,833	$	4,484	$	286	$	153,031
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
Securities available-for-sale
June 30, 2009
Debt securities—
Federal agencies	$	12,835	$	115	$	34	$	12,916
Mortgage-backed		80,190		2,394		813		81,771
Municipals		42,233		709		232		42,710
Other		125		—		28		97
Total	$	135,383	$	3,218	$	1,107	$	137,494

Proceeds from sales of securities available-for-sale totaled $14,762 thousand for the six months ended June 30, 2010. Gross realized gains from sales of securities were $368 thousand for the six months ended June 30, 2010. Gross losses were $311 thousand for the six months ended June 30, 2010. There were no sales of securities during the six months ended June 30, 2009.

At June 30, 2010, December 31, 2009 and June 30, 2009, federal agencies, municipals and mortgage-backed securities with a carrying value of $29,484 thousand, $12,600 thousand and $17,547 thousand, respectively, were pledged to secure public deposits. At June 30, 2010, December 31, 2009 and June 30, 2009, the carrying amount of securities pledged to secure repurchase agreements was $22,491 thousand, $26,472 thousand and $34,915 thousand, respectively. At June 30, 2010, securities of $5,893 thousand were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions.

9

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

Maturity of Securities

The following table presents the amortized cost and fair value of debt securities by contractual maturity at June 30, 2010.

	Amortized Cost		Fair Value
	(in thousands)
Within 1 year	$	2,396	$	2,429
Over 1 year through 5 years		33,712		34,446
5 years to 10 years		24,971		25,526
Over 10 years		4,581		4,544
		65,660		66,945
Mortgage-backed securities		83,173		86,086
Total	$	148,833	$	153,031

Impairment Analysis

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010, December 31, 2009 and June 30, 2009.

	Less than 12 months				12 months or greater				Totals
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
June 30, 2010
Federal agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed		2,905		162		—		—		2,905		162
Municipals		1,675		41		618		34		2,293		75
Other		—		—		77		49		77		49
Totals	$	4,580	$	203	$	695	$	83	$	5,275	$	286
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
June 30, 2009
Federal agencies	$	3,301	$	34	$	—	$	—	$	3,301	$	34
Mortgage-backed		6,896		109		4,777		704		11,673		813
Municipals		6,704		96		2,055		136		8,759		232
Other		97		28		—		—		97		28
Totals	$	16,998	$	267	$	6,832	$	840	$	23,830	$	1,107

As of June 30, 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-likely-than-not that the Company will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses,

10

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 June 30, 2010, gross unrealized losses in the Company’s portfolio totaled $286 thousand, compared to $603 thousand as of December 31, 2009. The unrealized losses in mortgage-backed and municipal securities are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. The unrealized losses in other securities are two trust preferred securities. The unrealized losses in the trust preferred securities are primarily due to widening credit spreads subsequent to purchase and a lack of demand for trust preferred securities. Based on results of the Company’s impairment assessment, the unrealized losses at June 30, 2010 are considered temporary.

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents loans by type.

	June 30, 2010			December 31, 2009			June 30, 2009
	(in thousands)
Loans secured by real estate-
Residential 1-4 family	$	273,030		$	281,354		$	288,836
Commercial		247,009			259,819			225,790
Construction		113,877			153,144			183,623
Multi-family and farmland		40,550			37,960			33,847
		674,466			732,277			732,096
Commercial loans		117,279			146,016			150,472
Consumer installment loans		42,262			48,927			54,261
Leases, net of unearned income		13,006			19,730			26,784
Other		4,339			5,068			4,880
Total loans		851,352			952,018			968,493
Allowance for loan and lease losses		(26,830	)		(26,492	)		(19,275	)
Net loans	$	824,522		$	925,526		$	949,218

11

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 $11 thousand and $11 thousand for the six months ended June 30, 2010 and 2009, respectively. The reserve for unfunded commitments as of June 30, 2010 and 2009 was $217 thousand and $193 thousand, respectively, and is included in other liabilities in the consolidated balance sheets.

	June 30,  2010 (restated)			June 30, 2009
	(in thousands)
Allowance for loan and lease losses-beginning of period	$	26,492		$	17,385
Provision expense for loan and lease losses		7,998			11,178
Loans charged-off		(8,046	)		(9,436	)
Loan loss recoveries		386			148
Allowance for loan and lease losses-end of period	$	26,830		$	19,275

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, $46,745 thousand, $40,118 thousand and $10,085 thousand at June 30, 2010, December 31, 2009 and June 30, 2009, respectively. Loans past due 90 days or more and still accruing interest were $342 thousand, $4,524 thousand and $3,373 thousand at June 30, 2010, December 31, 2009 and June 30, 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 7 – 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 standby letters of credit at June 30, 2010, December 31, 2009, and June 30, 2009 was $14,124 thousand, $16,077 thousand, and $19,236 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, the Company obtains on an extension of credit is based on its credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties.

NOTE 8 – STOCKHOLDERS’ EQUITY

Common Stock and ESOP Activity

On January 27, 2010 and April 28, 2010, the Company’s Board of Directors elected to suspend the dividend on the Company’s common stock and elected to defer payment on the Series A Preferred Stock (Preferred Stock) for the first and second quarters of 2010. If the Company misses six quarterly Preferred Stock dividend payments, whether or not consecutive, the Treasury will have the right to appoint two directors to the Company’s Board of Directors until all accrued but unpaid dividends have been paid. The Company may not pay dividends on common stock unless all dividends have been paid on the Preferred Stock.

12

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

On June 30, 2010 and March 31, 2010, the Company released 70,701 and 65,655 shares, respectively, 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 presented in the following table.

	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 during 2010		(136,356	)		—		136,356	$	285
Shares as of June 30, 2010		632,431			—		568,245

Preferred Stock

On January 27, 2010 and April 28, 2010, the Company’s Board of Directors elected to defer payment on the February 15, 2010 and May 15, 2010 dividends on the Preferred Stock. Dividends for the Series A Preferred Stock are cumulative. The Company recognized $412 thousand and $825 thousand for the three and six months ended June 30, 2010. As of June 30, 2010, the unpaid, accrued dividend is $1,031 thousand. For the three and six months ended June 30, 2010, the Company recognized $94 thousand and $186 thousand, respectively, in Preferred Stock discount accretion.

NOTE 9 – 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 bases of assets and liabilities and their reported amounts in the consolidated financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect on deferred income taxes of a change in tax rates is recognized in income in the period when the change is enacted.

For the three and six months ended June 30, 2010, the Company recognized an income tax benefit of $1,769 thousand and $2,923 thousand, respectively, compared to $1,536 thousand and $2,449 thousand for the same periods in 2009, respectively. The following reconciles the income tax benefit to statutory rates:

	For the three months ended June 30,						For the six months ended June 30,
	2010 (restated)			2009			2010 (restated)			2009
	(in thousands)
Federal taxes at statutory tax rate	$	(1,324	)	$	(1,001	)	$	(2,095	)	$	(1,601	)
Tax exempt earnings on loans and securities		(121	)		(138	)		(250	)		(277	)
Tax exempt earnings on bank owned life insurance		(86	)		(86	)		(171	)		(171	)
Low-income housing tax credits		(103	)		—			(207	)		—
Other, net		46			(119	)		96			(81	)
State tax provision, net of federal effect		(181	)		(192	)		(296	)		(319	)
Income tax benefit	$	(1,769	)	$	(1,536	)	$	(2,923	)	$	(2,449	)

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 June 30, 2010, the Company has no valuation allowances associated with deferred tax assets.

13

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The Company evaluated its material tax positions as of June 30, 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		100
Lapse of statute		—
Balance at June 30, 2010	$	1,246

NOTE 10 – 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 June 30, 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 June 30, 2010.

	Balance as of June 30, 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	$	153,031	$	—	$	152,781	$	250
Loans held for sale		2,713		—		2,713		—
Financial liabilities
Forward loan sales contracts		11		—		11		—

14

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 June 30, 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 June 30, 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. A loan is collateral-dependent when repayment of the loan is expected solely by the underlying collateral and there are no other available and reliable sources of repayment. If the recorded investment in the impaired loan exceeds the measure of fair value, the shortfall 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 six months ended June 30, 2010.

	Carrying Value as of June 30, 2010		Level 1 Fair Value Measurement		Level 2 Fair Value Measurement		Level 3 Fair Value Measurement		Valuation Allowance as of June 30, 2010
	(in thousands)
Other real estate owned	$	11,131	$	—	$	11,131	$	—	$	(3,989	)
Repossessions		118		—		118		—		(189	)
Collateral-dependent loans		4,000		—		4,000		—		(113	)

15

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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

	June 30, 2010						December 31, 2009						June 30, 2009
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Carrying Amount			Fair Value
	(in thousands)
Financial assets
Cash and cash equivalents	$	8,960		$	8,960		$	23,220		$	23,220		$	20,908		$	20,908
Interest bearing deposits in banks	$	232,720		$	232,720		$	152,616		$	152,616		$	12,354		$	12,354
Securities available-for-sale	$	153,031		$	153,031		$	143,045		$	143,045		$	137,494		$	137,494
Loans held for sale	$	2,713		$	2,713		$	1,225		$	1,225		$	3,806		$	3,806
Loans	$	848,639		$	862,760		$	950,793		$	959,689		$	964,687		$	971,571
Allowance for loan and lease losses	$	(26,830	)	$	(26,830	)	$	(26,492	)	$	(26,492	)	$	(19,275	)	$	(19,275	)
Financial liabilities
Deposits	$	1,166,251		$	1,175,546		$	1,182,673		$	1,187,263		$	1,033,046		$	1,040,345
Federal funds purchased and securities sold under agreements to repurchase	$	19,347		$	19,347		$	17,911		$	17,911		$	20,538		$	20,538
Other borrowings	$	85		$	85		$	94		$	94		$	102		$	102

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 is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers of similar credit ratings quality. Fair value for impaired loans and leases are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

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

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

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

16

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

NOTE 11 – 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 June 30, 2010 and 2009, there was $2,713 thousand and $3,806 thousand in loans held for sale recorded at fair value, respectively. For the three and six months ended June 30, 2010, approximately $236 thousand and $385 thousand in loan origination and related fee income was recognized in noninterest income, respectively, and an insignificant amount of origination and related fee expense, respectively, was recognized in noninterest expense utilizing the fair value option.

For the six months ended June 30, 2010, the Company recognized a loss of $58 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 provided $69 thousand of income.

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	$	2,713	$	2,702	$	11

NOTE 12 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company records all derivative financial instruments at fair value in the financial statements. It is the policy of the Company to enter into various derivatives both as a risk management tool and in a dealer capacity, as necessary, to facilitate client transactions. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks. As of June 30, 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).

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

17

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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

The Company’s derivatives are based on underlying risks, primarily interest rates. The Company has 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 $2,010 thousand and $5,778 thousand, respectively. These gains are being accreted into interest income over the remaining life of the originally hedged items. The Company recognized a total of $1,042 thousand for the six months ended June 30, 2010.

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

	20101		2011		2012		Total
	(in thousands)
Accretion of gain from 2007 terminated swaps	$	159	$	219	$	62	$	440
Accretion of gain from 2009 terminated swaps	$	821	$	1,628	$	1,272	$	3,721

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

18

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

The following table presents the cash flow hedges as of June 30, 2010.

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income (Loss)			Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Forward contracts	$	2,713	$	5	$	16	$	(7	)		Various
	$	2,713	$	5	$	16	$	(7	)
Terminated asset hedges
Cash flow hedges:1
Interest rate swap	$	25,000	$	—	$	—	$	71			June 28, 2011
Interest rate swap		20,000		—		—		54			June 28, 2011
Interest rate swap		35,000		—		—		166			June 28, 2012
Interest rate swap		25,000		—		—		1,228			October 15, 2012
Interest rate swap		25,000		—		—		1,228			October 15, 2012
	$	130,000	$	—	$	—	$	2,747

¹ The $2.7 million of gains, net of taxes, recorded in accumulated other comprehensive income as of June 30, 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 June 30, 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

$

2,713

Other assets

$

N/A

Other liabilities

$

11

Noninterest income – other

$

69

Hedged Items:

Loans held for sale

N/A

Loans held for sale

$

2,713

N/A

N/A

Noninterest income – other

N/A

For the three and six months ended June 30, 2010, no significant amounts were recognized for hedge ineffectiveness.

NOTE 13 – 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.

19

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 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, for such liabilities fair value 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 FASB 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.

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. Effective upon its issuance in February 2010, the Company adopted the provisions of ASU 2010-09, “Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements” (ASU 2010-09). ASU 2010-09 amends ASC 855 to clarify that an entity must disclose the date through which subsequent events have been evaluated in both originally issued and restated financial statements unless the entity has a regular requirement to review subsequent events up through the filing or furnishing of financial statements with the Securities and Exchange Commission. Upon adoption of the provisions of ASU 2010-09, the Company revised its disclosures accordingly.

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

20

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 10 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 basis, 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 the 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.

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.

21

FIRST SECURITY GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

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 the 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 14 – REGULATORY ACTION

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, 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 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.

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 June 30, 2010, the Bank’s total capital to risk-weighted assets was in compliance with the Order with a ratio of 14.26 percent. The Bank’s Tier 1 capital to adjusted total assets was out of compliance with the Order with a ratio of 8.75 percent.

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.

NOTE 15 – SUBSEQUENT EVENTS

On July 21, 2010, the Board of Directors of the Company increased the size of the Board to six and elected Ralph E. Mathews, Jr. to the Board of the Company. Mr. Mathews was elected to the Board of FSGBank on June 23, 2010.

On July 22, 2010, the Company filed with the State of Tennessee, Articles of Amendment to the Charter of Incorporation to increase the number of authorized shares of common stock from 50 million to 150 million, in accordance with shareholder approval obtained on June 30, 2010.

22

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

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

As discussed in Note 2 of the consolidated financial statements, our unaudited consolidated financial statements as of and for the three and six months ended June 30, 2010 have been restated to reflect the appropriate timing and recognition of charge-offs and write-downs associated with other real estate owned (OREO). The accompanying Management’s Discussion and Analysis incorporates the effects of that restatement. Revised tables are marked as “Restated”. The following discussion and analysis continues to speak as of the date we originally filed the Form 10-Q. Information not affected by the restatement of the financial statements is unchanged.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

SECOND 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 and six month periods ended June 30, 2010 and 2009. Such discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the notes attached thereto.

Restatement and Material Weakness in Internal Controls over Financial Reporting

Subsequent to filing the June 30, 2010 Quarterly Report on Form 10-Q and a change in personnel responsible for OREO, we determined that certain write-downs associated with OREO were not recorded in the appropriate accounting periods. Upon completion of the management’s internal review, the primary regulator of our wholly-owned subsidiary bank, FSGBank, N.A. (the “Bank”), verified the findings as part of its ongoing annual safety and soundness examination. The Bank has been requested to file amended Call Reports with the FDIC and First Security to file amended FR Y-9C and FR Y-9LP reports with the Federal Reserve, for December 31, 2009, March 31, 2010 and June 30, 2010 to reflect the findings.

On October 28, 2010, our Audit/Corporate Governance Committee determined that the previously issued audited consolidated financial statements for the year ended December 31, 2009 and the previously issued unaudited consolidated financial statements for the quarters ended March 31, 2010 and June 30, 2010 should no longer be relied upon. The restatements to these consolidated financial statements reflect the appropriate timing and recognition of charge-offs and write-downs associated with OREO. While the changes were not quantitatively material, the restatements ensure consistency with our publicly available financial information.

Our internal review identified a total of $818 thousand of OREO write-downs that were not reported in the appropriate accounting periods. The internal review also assessed the compliance with our OREO policies. Our policies require an initial appraisal to determine the fair value of the property at the time of foreclosure. The initial fair value becomes the cost basis of the asset. Subsequent to the initial valuation, an updated appraisal is required on at least an annual basis. Our internal review determined that 27 properties were subject to new appraisals during the fourth quarter of 2009 and the first quarter of 2010. Of these properties, two appraisals were received in the fourth quarter of 2009 and the remaining 25 appraisals were received subsequent to March 31, 2010. Additionally, the two appraisals received in the fourth quarter of 2009 indicated write-downs totaling $222 thousand, however, these write-downs were not recorded until after a change in personnel on July 1, 2010. In the opinion of management and the Audit/Corporate Governance Committee, the control deficiencies related to the administration of OREO could have led to a material misstatement of the consolidated financial statements, and thus, we have amended our assessment over internal controls over financial reporting to indicate that a material weakness existed as of December 31, 2009.

We have taken a series of steps designed to improve our control processes. We implemented several changes in our internal control over financial reporting during the third quarter designed to remediate this material weakness, and we believe that these measures will appropriately address the material weakness related to the issues described above.

Company Overview

First Security Group, Inc. is a bank holding company headquartered in Chattanooga, Tennessee, with $1.3 billion in assets as of June 30, 2010. Founded in 1999, First Security’s community bank subsidiary, FSGBank, N.A. has 38 full-service banking offices, including the headquarters, along the interstate corridors of eastern and middle Tennessee and northern Georgia and 333 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.

23

Recent Regulatory Events

Effective April 28, 2010, FSGBank reached an agreement with its primary regulatory, 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.

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
•     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
•     Loan policy	Amended existing loan policy to provide the framework and guidelines for current and future loans	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
•     Retail banking president	Created new executive level position that will be responsible for customer and small-business loan relationships and associated lenders	3rd quarter 2010
•     Commercial banking president	Created new executive level position that will be responsible for commercial loan relationships and associated commercial lenders	3rd quarter 2010

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

24

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 closely monitor and evaluate local and regional economic trends.

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 8.7% and 7.9%, respectively (as of May 2010, the most recent available data), than the Tennessee rate of 9.8%. 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 11.5% (as of May 2010) compared to the Georgia rate of 9.8%. For the Chattanooga and Knoxville MSAs, the number of unemployed workers is decreasing and, as of May 2010, has declined by 14.5% in Chattanooga and 16.3% 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 5.0% and 5.2% for the Chattanooga and Knoxville MSAs, respectively, from 2008 to 2009 compared to 12.5% decline for the nation and a 8.5% decline for the census region identified as the South. While residential real estate values may continue to decline, we are hopeful that housing prices will begin to stabilize.

Financial Results

As of June 30, 2010, we had total consolidated assets of $1.3 billion, total loans of $851.4 million, total deposits of $1.2 billion and stockholders’ equity of $136.8 million. For the three and six months ended June 30, 2010, our net loss available to common shareholders was $2.6 million and $4.3 million, respectively, resulting in basic and diluted net loss of $0.17 per share for the quarter and $0.27 per share for the year-to-date period.

As of June 30, 2009, we had total consolidated assets of $1.2 billion, total loans of $968.5 million, total deposits of $1.0 billion and stockholders’ equity of $172.5 million. For the three and six months ended June 30, 2009, our net loss available to common shareholders was $1.9 million and $3.2 million, respectively, resulting in basic and diluted net loss of $0.12 per share for the quarter and $0.21 per share for the year-to-date period.

For the three and six month periods ended June 30, 2010, net interest income decreased by $1.5 million and $2.1 million, respectively, and noninterest income decreased by $86 thousand and $233 thousand, respectively, compared to the same periods in 2009. For the three and six months ended June 30, 2010, noninterest expense increased by $1.9 million and $2.3 million, respectively, compared to the same periods in 2009. The decline in net interest income is primarily attributable to the shift in earning assets from loans to noninterest cash partially offset by reductions in rates on interest bearing liabilities. Noninterest income decreased primarily due to lower deposit fees while noninterest expense increased primarily due to higher expenses associated with nonperforming assets, including write-downs, losses and holding costs. These increases were partially offset by reductions in salary and benefit expense. Full-time equivalent employees were 333 at June 30, 2010, compared to 353 at June 30, 2009.

25

The provision for loan and lease losses decreased $2.6 million and $3.2 million for the three and six month periods ended June 30, 2010, respectively, compared to the same periods in 2009.

Our efficiency ratio increased in the second quarter of 2010 to 102.3% compared to 75.3% 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 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 potential changes to the federal funds target rate, and micro-economic factors, such as local unemployment and real estate values.

Net interest margin in the first quarter of 2010 was 2.93%, or 84 basis points lower than the prior year period of 3.77%. 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 multiple factors including our ability to raise core deposits, our growth or contraction in loans, our deposit and loan pricing, maturities of brokered deposits, and any possible further action by the Federal Reserve Board.

During the second quarter, our Board of Directors again elected to defer payment on the Series A Preferred Stock (Preferred Stock). To date, the Company has deferred two consecutive Preferred Stock dividend payments. 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 to common stockholders for the three and six month periods ended June 30, 2010 of $2.6 million and $4.3 million compared to a net loss for the same periods in 2009 of $1.9 million and $3.2 million, respectively. In the second quarter of 2010, basic and diluted net loss per share was $0.17 on approximately 15.7 million weighted average shares outstanding. On a year-to-date basis, basic and diluted net loss per share was $0.27 on approximately 15.7 million weighted average shares outstanding.

Net income on a quarterly and year-to-date basis in 2010 was below the comparable amounts in 2009 as a result of the contraction in the net interest margin and higher expenses associated with nonperforming assets. As of June 30, 2010, we had 38 banking offices, including the headquarters, and 333 full-time equivalent employees.

26

The following table summarizes the components of income and expense and the changes in those components for the three and six month periods ended June 30, 2010 compared to the same periods in 2009.

CONDENSED CONSOLIDATED INCOME STATEMENT

	For the Three Months Ended June 30,			Change from Prior Year						For the Six Months Ended June 30,			Change from Prior Year
	2010			Amount			Percentage			2010			Amount			Percentage
	(restated)
	(in thousands, except percentages)
Interest income	$	14,290		$	(1,809	)		-11.2	%	$	29,331		$	(3,243	)		-10.0	%
Interest expense		5,329			(270	)		-4.8	%		10,695			(1,142	)		-9.6	%
Net interest income		8,961			(1,539	)		-14.7	%		18,636			(2,101	)		-10.1	%
Provision for loan and lease losses		3,634			(2,562	)		-41.3	%		8,009			(3,180	)		-28.4	%
Net interest income after provision for loan and lease losses		5,327			1,023			23.8	%		10,627			1,079			11.3	%
Noninterest income		2,558			(86	)		-3.3	%		4,862			(233	)		-4.6	%
Noninterest expense		11,780			1,888			19.1	%		21,652			2,300			11.9	%
Net loss before income taxes		(3,895	)		(951	)		-32.3	%		(6,163	)		(1,454	)		-30.9	%
Income tax benefit		(1,769	)		(233	)		15.2	%		(2,923	)		(474	)		19.4	%
Net loss		(2,126	)		(718	)		-51.0	%		(3,240	)		(980	)		-43.4	%
Preferred stock dividends and discount accretion		506			6			1.2	%		1,011			63			6.6	%
Net loss available to common stockholders	$	(2,632	)	$	(724	)		-37.9	%	$	(4,251	)	$	(1,043	)		-32.5	%

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 June 30, 2010, net interest income decreased by $1.5 million, or 14.7%, to $9.0 million compared to $10.5 million for the same period in 2009. For the six months ended June 30, 2010, net interest income decreased by $2.1 million, or 10.1%, to $18.6 million for the period ended June 30, 2010, compared to $20.7 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.

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

27

The following tables summarize net interest income and average yields and rates paid for the quarters ended June 30, 2010 and 2009.

AVERAGE CONSOLIDATED BALANCE SHEETSAND NET INTEREST ANALYSIS

FULLY TAX EQUIVALENT BASIS

	For the Three Months Ended June 30,
	2010								2009
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
	(restated)
	(in thousands, except percentages)
ASSETS
Earning assets:
Loans, net of unearned income(1) (2)	$	873,418		$	12,734		5.85	%	$	984,210		$	14,527		5.92	%
Debt securities – taxable		109,078			1,007		3.70	%		97,282			1,169		4.82	%
Debt securities – non-taxable(2)		38,193			533		5.60	%		43,227			611		5.67	%
Other earning assets		231,707			216		0.37	%		17,619			21		0.48	%
Total earning assets		1,252,396			14,490		4.64	%		1,142,338			16,328		5.73	%
Allowance for loan and lease losses		(26,339	)							(19,388	)
Intangible assets		1,748								29,365
Cash & due from banks		7,726								18,873
Premises & equipment		32,541								33,972
Other assets		80,147								53,203
TOTAL ASSETS	$	1,348,219							$	1,258,363
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits	$	68,743			50		0.29	%	$	63,118			50		0.32	%
Money market accounts		133,524			330		0.99	%		124,750			373		1.20	%
Savings deposits		39,179			26		0.27	%		36,054			26		0.29	%
Time deposits of less than $100 thousand		235,766			1,248		2.12	%		245,233			1,900		3.11	%
Time deposits of $100 thousand or more		194,408			1,097		2.26	%		201,923			1,644		3.27	%
Brokered CDs and CDARS®		352,915			2,456		2.79	%		150,371			1,327		3.54	%
Brokered money markets and NOWs		—			—		—	%		77,498			161		0.83	%
Federal funds purchased		—			—		—	%		9			—		1.00	%
Repurchase agreements		18,992			120		2.53	%		21,999			116		2.11	%
Other borrowings		87			2		7.66	%		367			2		2.19	%
Total interest bearing liabilities		1,043,614			5,329		2.05	%		921,322			5,599		2.44	%
Net interest spread				$	9,161		2.59	%				$	10,729		3.29	%
Noninterest bearing demand deposits		156,542								148,918
Accrued expenses and other liabilities		9,152								12,555
Stockholders’ equity		133,214								169,125
Accumulated other comprehensive income		5,697								6,443
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,348,219							$	1,258,363
Impact of noninterest bearing sources and other changes in balance sheet composition							0.34	%							0.48	%
Net interest margin							2.93	%							3.77	%

⁽¹⁾ Nonaccrual loans have been included in the average balance. Only the interest collected on such loans has been included as income.

⁽²⁾ Interest income from securities and loans includes the effects of taxable-equivalent adjustments using a federal income tax rate of approximately 34% for both years reported and where applicable, state income taxes, to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable equivalent adjustment amounts included in the above table were $200 thousand and $229 thousand for the three months ended June 30, 2010 and 2009, respectively.

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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.

CHANGEIN INTEREST INCOMEAND EXPENSEONA TAX EQUIVALENT BASIS

FORTHE THREE MONTHS ENDED JUNE 30, 2010 COMPAREDTO 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	$	(1,635	)	$	(158	)	$	(1,793	)
Debt securities – taxable		142			(304	)		(162	)
Debt securities – non-taxable		(71	)		(7	)		(78	)
Other earning assets		255			(60	)		195
Total earning assets		(1,309	)		(529	)		(1,838	)
Interest bearing liabilities:
Interest bearing demand deposits		4			(4	)		—
Money market accounts		26			(69	)		(43	)
Savings deposits		2			(2	)		—
Time deposits of less than $100 thousand		(73	)		(579	)		(652	)
Time deposits of $100 thousand or more		(61	)		(486	)		(547	)
Brokered CDs and CDARS®		1,787			(658	)		1,129
Brokered money markets and NOWs		(161	)		—			(161	)
Federal funds purchased		—			—			—
Repurchase agreements		(16	)		20			4
Other borrowings		(2	)		2			—
Total interest bearing liabilities		1,506			(1,776	)		(270	)
Increase (decrease) in net interest income	$	(2,815	)	$	1,247		$	(1,568	)

29

The following tables summarize net interest income and average yields and rates paid for the year-to-date periods ended June 30, 2010 and 2009.

AVERAGE CONSOLIDATED BALANCE SHEETSAND NET INTEREST ANALYSIS

FULLY TAX EQUIVALENT BASIS

	For the Six Months Ended June 30,
	2010								2009
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
	(restated)
	(in thousands, except percentages)
ASSETS
Earning assets:
Loans, net of unearned income(1) (2)	$	902,332		$	26,186		5.85	%	$	992,039		$	29,404		5.98	%
Debt securities – taxable		107,230			2,111		3.97	%		95,977			2,368		4.98	%
Debt securities – non-taxable(2)		39,732			1,111		5.64	%		43,576			1,228		5.68	%
Other earning assets		210,218			339		0.33	%		23,569			35		0.30	%
Total earning assets		1,259,512			29,747		4.76	%		1,155,161			33,035		5.77	%
Allowance for loan and lease losses		(26,556	)							(18,792	)
Intangible assets		1,805								29,431
Cash & due from banks		8,320								17,625
Premises & equipment		32,771								33,876
Other assets		79,105								54,988
TOTAL ASSETS	$	1,354,957							$	1,272,289
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits	$	65,855			95		0.29	%	$	62,383			101		0.33	%
Money market accounts		135,881			713		1.06	%		125,025			821		1.32	%
Savings deposits		38,193			51		0.27	%		35,242			50		0.29	%
Time deposits of less than $100 thousand		239,837			2,591		2.18	%		244,921			3,949		3.25	%
Time deposits of $100 thousand or more		200,386			2,291		2.31	%		201,428			3,404		3.41	%
Brokered CDs and CDARS®		338,363			4,653		2.77	%		165,742			2,926		3.56	%
Brokered money markets and NOWs		13,231			57		0.87	%		78,122			327		0.84	%
Federal funds purchased		—			—		—	%		629			4		1.28	%
Repurchase agreements		19,434			241		2.50	%		22,173			243		2.21	%
Other borrowings		89			3		6.80	%		893			12		2.71	%
Total interest bearing liabilities		1,051,269			10,695		2.05	%		936,558			11,837		2.55	%
Net interest spread				$	19,052		2.71	%				$	21,198		3.22	%
Noninterest bearing demand deposits		153,511								148,651
Accrued expenses and other liabilities		9,871								12,881
Stockholders’ equity		134,410								167,605
Accumulated other comprehensive income		5,896								6,594
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,354,957							$	1,272,289
Impact of noninterest bearing sources and other changes in balance sheet composition							0.34	%							0.48	%
Net interest margin							3.05	%							3.70	%

⁽¹⁾ Nonaccrual loans have been included in the average balance. Only the interest collected on such loans has been included as income.

⁽²⁾ Interest income from securities and loans includes the effects of taxable-equivalent adjustments using a federal income tax rate of approximately 34% for both years reported and where applicable, state income taxes, to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable equivalent adjustment amounts included in the above table were $416 thousand and $461 thousand for the six months ended June 30, 2010 and 2009, respectively.

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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.

CHANGEIN INTEREST INCOMEAND EXPENSEONA TAX EQUIVALENT BASIS

FORTHE SIX MONTHS ENDED JUNE 30, 2010 COMPAREDTO 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	$	(2,732	)	$	(486	)	$	(3,218	)
Debt securities – taxable		270			(527	)		(257	)
Debt securities – non-taxable		(111	)		(6	)		(117	)
Other earning assets		276			28			304
Total earning assets		(2,297	)		(991	)		(3,288	)
Interest bearing liabilities:
Interest bearing demand deposits		5			(11	)		(6	)
Money market accounts		69			(177	)		(108	)
Savings deposits		4			(3	)		1
Time deposits of less than $100 thousand		(93	)		(1,265	)		(1,358	)
Time deposits of $100 thousand or more		(27	)		(1,086	)		(1,113	)
Brokered CDs and CDARS®		3,031			(1,304	)		1,727
Brokered money markets and NOWs		(272	)		2			(270	)
Federal funds purchased		(4	)		—			(4	)
Repurchase agreements		(31	)		29			(2	)
Other borrowings		(11	)		2			(9	)
Total interest bearing liabilities		2,671			(3,813	)		(1,142	)
Increase (decrease) in net interest income	$	(4,968	)	$	2,822		$	(2,146	)

Net Interest Income – Volume and Rate Changes

Interest income for the second quarter of 2010 was $14.3 million, an 11.2% decrease compared to the same period in 2009. Average earning assets increased $110.1 million, or 9.6%, in the second quarter of 2010 compared to the same period in 2009. Average loans declined in the second quarter of 2010 by $110.8 million, offset by a $214.1 million increase in other earning assets and a $6.8 million increase in investment securities. Average loans declined primarily due to reducing certain concentration risks along with the current economic conditions, while other earning assets increased as we maintained over $225 million in an interest bearing account at the Federal Reserve Bank of Atlanta. The yield on this account is approximately 25 basis points. The increase in this account was primarily funded 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 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.

Interest income for the six months ended June 30, 2010 was $29.3 million, a 10.0% decrease compared to the same period in 2009. Average earning assets increased $104.4 million, or 9.0%, in 2010 compared to 2009. On a year-to-date basis, average other earning assets increased $186.6 million, average investment securities increased $7.4 million while loans decreased $89.7 million. The change in mix of earning assets, particularly from loans to interest bearing cash, reduced interest income by $2.3 million.

The tax equivalent yield on earning assets decreased by 109 basis points and 101 basis points for the three and six month periods ended June 30, 2010, respectively, compared to the same periods in 2009. Comparing the second quarter of 2010 to 2009, the yield on loans declined 7 basis points from 5.92% to 5.85%. 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

31

selling approximately $14.8 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 transactions eliminated the credit risk associated with our private-label CMO securities, as well as certain municipal securities. We anticipate the yield on investment securities for the remaining quarters of 2010 will be consistent with the yield for second quarter 2010 and lower than the comparable 2009 periods. We are maintaining an asset-sensitive balance sheet and will benefit from an eventual increase in the federal funds rate. As of June 30, 2010, our loan portfolio is approximately 57% fixed rate, 41% 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.

Total interest expense was $5.3 million in the second quarter of 2010, or 4.8% lower than the same period in 2009. On a year-to-date basis, total interest expense was $10.7 million, or 9.6% lower than the same period in 2009. Average interest bearing liabilities increased by $122.3 million and $114.7 million for the three and six month periods of 2010, respectively, compared to the same periods in 2009. Fully offsetting the additional interest expenses associated with higher volumes was the reductions in the average rates paid on deposits. The decrease in rates is due primarily to term deposits maturing and repricing at lower current market rates. The growth in interest-bearing liabilities was primarily a result of increases in brokered deposits that improved our contingent funding capacity.

We expect average loans to decline before beginning to stabilize over the remainder of 2010 as the regional economy begins to enter into some measure of recovery. Investment securities will continue to grow as earnings are reinvested into new securities. We expect other earning assets to begin to decline during the remainder of 2010 as brokered deposits mature without being replaced. For the remainder of 2010, we expect average interest bearing liabilities to be comparable to the second quarter 2010 results. Rates paid on deposits for the remainder of the year are expected to be consistent with second quarter 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 2.59% and 2.71% for the three and six months ended June 30, 2010, respectively, compared to 3.29% and 3.22% for the same periods in 2009, respectively. Our net interest margin (on a tax equivalent basis) was 2.93% and 3.05% for the three and six months ended June 30, 2010, respectively, compared to 3.77% and 3.70% for the same periods in 2009, respectively. The reductions in our net interest spread and margin are the result of the combination of lower loan volumes and higher brokered deposit volumes partially offset by deposit rates reducing faster than assets. During December of 2009 and the first quarter of 2010, we issued over $180.0 million in brokered deposits to improve our contingent funding capacity. A portion of these funds was utilized to pay off our variable-rate brokered money market account during the first quarter of 2010. The remaining funds were placed in our interest bearing account at the Federal Reserve Bank of Atlanta. As of June 30, 2010, our balance at the Federal Reserve Bank was approximately $232 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 83.3% for the three-month period ended June 30, 2010 compared to 80.7% for the same period in 2009. Noninterest bearing funding sources contributed 34 basis points to the net interest margin during the second quarter of 2010 compared to 48 basis points in the same period in 2009.

32

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 and six months ended June 30, 2010, the accretion of the swaps added approximately $523 thousand and $1.0 million, respectively, to interest income compared to $553 thousand and $1.3 million for the same periods in 2009.

We anticipate our net interest margin will stabilize and improve during the remainder of 2010. However, improvement is dependent on multiple factors including our ability to raise core deposits, our growth or contraction in loans, our deposit and loan pricing, maturities of brokered deposits, and any possible further action by the Federal Reserve Board.

Provision for Loan and Lease Losses

The provision for loan and lease losses charged to operations during the three and six month periods ended June 30, 2010 were $3.6 million and $8.0 million, respectively, compared to $6.2 million and $11.2 million, respectively, for the same periods in 2009. Net charge-offs for the three and six months ended June 30, 2010 were $2.9 million and $7.7 million, respectively, compared to net charge-offs of $6.9 million and $9.3 million, respectively, for the same periods in 2009. Annualized net charge-offs as a percentage of average loans were 1.70% for the six months ended June 30, 2010 compared to 1.87% 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 both the three and six month periods of 2010 compared to the same periods 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 June 30, 2010, management determined our allowance of $26.8 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 September 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 $2.6 million for the second quarter of this year, a decrease of $86 thousand, or 3.3%, from the same period in 2009. On a year-to-date basis, noninterest income totaled $4.9 million, a decrease of $233 thousand, or 4.6%, from the 2009 level. The quarterly and year-to-date declines are primarily a result of lower deposit fees.

33

The following table presents the components of noninterest income for the periods ended June 30, 2010 and 2009.

NONINTEREST INCOME

	Three Months Ended June 30,							Six Months Ended June 30,
	2010		Percent Change			2009		2010		Percent Change			2009
	(in thousands, except percentages)
Non-sufficient funds (NSF) fees	$	799		-10.5	%	$	893	$	1,558		-11.1	%	$	1,753
Service charges on deposit accounts		249		-10.1	%		277		490		-13.1	%		564
Point-of-sale (POS) fees		340		19.7	%		284		626		17.2	%		534
Bank-owned life insurance income		251		0.0	%		251		503		0.0	%		503
Mortgage loan and related fees		236		18.6	%		199		385		-12.7	%		441
Trust fees		192		4.9	%		183		377		9.0	%		346
Net gain on sale of available-for-sale securities		—		—			—		57		100.0	%		—
Other income		491		11.8	%		557		866		-9.2	%		954
Total noninterest income	$	2,558		-3.3	%	$	2,644	$	4,862		-4.6	%	$	5,095

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 second quarter of 2010, a decrease of $122 thousand, or 10.4%, from the same period in 2009. While service charges and fees on deposit accounts typically correspond to the level and mix of our customer deposits, the recently-enacted Dodd Frank financial reform bill may directly or indirectly impact the fee structure of our deposit products; therefore, we cannot reasonably estimate deposit fees for the remainder of 2010.

Point-of-sale fees (POS fees) increased 19.7% and 17.2% to $340 thousand and $626 thousand for the three and six months ended June 30, 2010, respectively, compared to the same periods 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, although it is unclear if certain provisions affecting interchange fees for card issuers included in the recently-enacted Dodd Frank financial reform bill will have a future material impact on this product and its revenue.

Bank-owned life insurance income was $251 thousand and $503 thousand for the three and six months ended June 30, 2010, respectively, remaining consistent with 2009 levels. The Company is the owner and beneficiary of these contracts. The income generated by the cash value of the insurance policies accumulates on a tax-deferred basis and is tax-free to maturity. In addition, the insurance death benefit will be a tax-free payment to the Company. This tax-advantaged asset enables us to provide benefits to our employees. On a fully tax-equivalent basis, the weighted average interest rate earned on the policies was 6.03% through June 30, 2010.

Mortgage loan and related fees for the second quarter of 2010 increased $37 thousand, or 18.6%, to $236 thousand compared to $199 thousand in the second quarter of 2009. For the six months ended June 30, 2010, mortgage income decreased $56 thousand, or 12.7%, compared to the same period in 2009. As discussed in Note 11 to 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 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 in the secondary market totaled $7.9 million and $17.8 million for the three and six months ended June 30, 2010, respectively. Mortgages sold in the secondary market for the three and six months ended June 30, 2010 totaled $7.4 million and $16.3 million, respectively. Mortgages originated for sale in the secondary markets totaled $23.1 million and $36.0 million for the three and six months ended June 30, 2009, respectively. Mortgages sold in the secondary market totaled $23.2 million

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and $33.8 million for the first three and six months of 2009, respectively. We sold these loans with the right to service the loan being released to the purchaser for a fee. Mortgage income for the remainder of the year is dependent on mortgage rates as well as our ability to generate higher levels of held for sale loans.

Trust fees increased $9 thousand and $31 thousand for the three and six months ended June 30, 2010 compared to 2009. As of June 30, 2010, our trust and wealth management department had 462 accounts with assets held under management of $191.5 million compared to 410 accounts with assets held under management of $165.6 million as of June 30, 2009. For the remainder of 2010, we anticipate increased trust fees compared to the first half of the year, as we continue to add additional accounts.

During the first quarter of 2010, we conducted a bond swap that resulted in a $57 thousand gain on sale of available-for-sale securities. This transaction is discussed above in theNet Interest Income – Volume and Rate Change section of MD&A.

Other income for the second quarter of 2010 was $491 thousand compared to $557 thousand for the same period in 2009. For the six months ended June 30, 2010, other income decreased $88 thousand to $866 thousand compared to the same period in 2009. The components of other income primarily consist of ATM fee income, gains on sales of other real estate owned (OREO) and repossessions, underwriting revenue, and safe deposit box fee income.

Noninterest Expense

Noninterest expense for the second quarter of 2010 increased $1.9 million, or 19.1%, to $11.8 million compared to $9.9 million for the same period in 2009. On a year-to-date basis, noninterest expense increased $2.3 million, or 11.9%, to $21.7 million compared to $19.4 million for the same period in 2009. The increases for both periods are primarily due to higher nonperforming asset costs, including write-downs, losses and holding costs associated with other real estate owned and repossessions, partially offset by lower salaries and benefits costs.

The following table represents the components of noninterest expense for the three and six month periods ended June 30, 2010 and 2009.

NONINTEREST EXPENSE

	Three Months Ended June 30,							Six Months Ended June 30,
	2010		Percent Change			2009		2010		Percent Change			2009
	(restated)		(restated)					(restated)		(restated)
	(in thousands, except percentages)
Salaries & benefits	$	4,703		-6.7	%	$	5,043	$	9,651		-7.2	%	$	10,400
Occupancy		872		-0.6	%		877		1,725		-1.4	%		1,749
Furniture and equipment		502		-20.9	%		635		1,032		-19.6	%		1,283
FDIC insurance		1,090		43.8	%		758		1,537		62.1	%		948
Professional fees		916		134.9	%		390		1,408		89.0	%		745
Write-downs on OREO and repossessions		1,134		455.9	%		204		1,140		194.6	%		387
Losses on OREO and repossessions		383		361.4	%		83		675		378.7	%		141
OREO and repossession holding costs		561		276.5	%		149		913		192.6	%		312
Data processing		363		2.5	%		354		735		5.9	%		694
Communications		132		-25.8	%		178		292		-12.3	%		333
Intangible asset amortization		115		-10.9	%		129		233		-11.7	%		264
Printing & supplies		87		-4.4	%		91		176		-11.1	%		198
Advertising		33		-51.5	%		68		86		-33.8	%		130
Other expense		889		-4.7	%		933		2,049		15.9	%		1,768
Total noninterest expense	$	11,780		19.1	%	$	9,892	$	21,652		11.9	%	$	19,352

Salaries and benefits for the second quarter of 2010 decreased $340 thousand, or 6.7%, compared to the same period in 2009 and $749 thousand, or 7.2%, on a year-to-date basis. The decrease in salaries and benefits is primarily related to our reductions in staffing. As of June 30, 2010, we had 333 full time equivalent employees compared to 353 as of June 30, 2009. As of June 30, 2010, we operated 38 full-service banking offices.

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Occupancy expense for the second quarter and year-to-date period of 2010 was comparable to the same periods in 2009. As of June 30, 2010, First Security 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.

Furniture and equipment expense decreased on a quarterly and year-to-date basis $133 thousand, or 20.9%, and $251 thousand, or 19.6%, respectively, primarily due to lower equipment depreciation expense.

FDIC deposit premium insurance increased $332 thousand and $589 thousand to $1.1 million and $1.5 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in 2009. For the remaining quarters of the 2010, we anticipate FDIC insurance to be comparable to the second quarter expense.

Professional fees increased $526 thousand for the second quarter of 2010 compared to the same period in 2009 and $663 thousand on a year-to-date basis. The increase is primarily due to consulting costs related to complying with the Consent Order, as well as additional legal costs associated with higher levels of nonperforming assets. Professional fees include fees related to investor relations, outsourcing compliance and 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.

Write-downs on OREO and repossessions increased $930 thousand and $753 thousand for the three and six month periods ended June 30, 2010 compared to the same periods in 2009. At foreclosure or repossession, the fair value of the property is determined and a charge-off to the allowance is recorded, if applicable. Any decreases in value subsequent to the initial determination of fair value are recorded as a write-down. As a general policy, we re-assess the fair value of OREO and repossessions on at least an annual basis or sooner if indications exist that deterioration in value has occurred. Write-downs are based on property-specific appraisals or valuations. Write-downs for the remainder of 2010 are dependent on real estate market conditions and our ability to liquidate properties.

Losses on OREO and repossessions totaled $383 thousand and $675 thousand for the three and six months ending June 30, 2010, respectively, compared to $83 thousand and $141 thousand for the same periods in 2009. The increase is primarily a result of higher levels of OREO properties and repossessions. We anticipate increases in losses for the remainder of 2010 as nonperforming assets continue to increase and we seek to liquidate existing properties and repossessions in a timely manner.

OREO and repossession holding costs include, among other items, maintenance, repairs, utilities, taxes and storage costs. Holding costs increased $412 thousand and $601 thousand for the three and six months ended June 30, 2010 compared to the same periods in 2009. We anticipate the level of holding costs to remain elevated for 2010.

Data processing fees increased 2.5% for the second quarter of 2010 compared to the same period in 2009 and 5.9% on a year-to-date basis. The monthly fees associated with data processing are typically based on transaction volume.

We anticipate communications, printing and supplies and advertising expenses to remain stable or decline for the remainder of 2010 as we continue to reduce discretionary expenses.

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Intangible asset amortization expense decreased $14 thousand, or 10.9%, in the second quarter of 2010 compared to the same period in 2009 and 11.7% on a year-to-date basis. 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 $281 thousand for the six months ended June 30, 2010 compared to the same period in 2009. The increase is primarily due to a legal settlement.

Income Taxes

We recorded an income tax benefit of $1.8 million and $2.9 million for the three and six months ended June 30, 2010 compared to a benefit of $1.5 million and $2.4 million for the same periods in 2009. For the six months ended June 30, 2010, our tax-exempt income from municipal securities and bank-owned life insurance was approximately $1.2 million. We also recorded low-income housing tax credits of $207 thousand. Adjusting for these items, our effective tax rate approximates 37%.

At June 30, 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 June 30, 2010, our total accrual for uncertain tax positions is $1.2 million.

At June 30, 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 June 30, 2010, our deferred tax asset is approximately $11.5 million.

STATEMENT OF FINANCIAL CONDITION

Our total assets were $1.3 billion at June 30, 2010, $1.4 billion at December 31, 2009 and $1.2 billion at June 30, 2009. For the remainder of 2010, we anticipate that our total assets will continue to decline as brokered deposits mature and are funded with our current interest bearing cash. Due to the economic recession, we anticipate loan demand to continue to remain low.

Loans

Our active efforts to reduce certain credit exposures and their related balance sheet risk, as well as the effects of the economic recession, have resulted in declining loan balances. Year-to-date, loans contracted by $100.7 million, or 10.6%. From June 30, 2009 to June 30, 2010, our loans declined by $117.1 million, or 12.1%.

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The following table presents our loan portfolio by type.

LOAN PORTFOLIO

										Percent change from
	June 30, 2010			December 31, 2009			June 30, 2009			December 31, 2009			June 30, 2009
	(in thousands, except percentages)
Loans secured by real estate-
Residential 1-4 family	$	273,030		$	281,354		$	288,836			-3.0	%		-5.5	%
Commercial		247,009			259,819			225,790			-4.9	%		9.4	%
Construction		113,877			153,144			183,623			-25.6	%		-38.0	%
Multi-family and farmland		40,550			37,960			33,847			6.8	%		19.8	%
		674,466			732,277			732,096			-7.9	%		-7.9	%
Commercial loans		117,279			146,016			150,472			-19.7	%		-22.1	%
Consumer installment loans		42,262			48,927			54,261			-13.6	%		-22.1	%
Leases, net of unearned income		13,006			19,730			26,784			-34.1	%		-51.4	%
Other		4,339			5,068			4,880			-14.4	%		-11.1	%
Total loans		851,352			952,018			968,493			-10.6	%		-12.1	%
Allowance for loan and lease losses		(26,830	)		(26,492	)		(19,275	)		1.3	%		39.2	%
Net loans	$	824,522		$	925,526		$	949,218			-10.9	%		-13.1	%

Year-to-date, the largest declining loan balances were construction and land development (C&D) loans of $39.3 million, or 25.6%, commercial loans of $28.7 million, or 19.7%, and commercial real estate (CRE) loans of $12.8 million, or 4.9%. Comparing June 30, 2010 to June 30, 2009, the largest declining loan balances were C&D loans of $69.7 million, or 38.0%, commercial loans of $33.2 million, or 22.1%, and residential 1-4 family loans of $15.8 million, or 5.5%. These declines were partially offset by an increase in CRE loans of $21.2 million, or 9.4%.

We will continue to extend prudent loans to creditworthy consumers and businesses. However, due to the economic environment, we anticipate our loans may remain stable or possibly decline for the remainder of 2010. Funding of future loans may be restricted by our ability to raise core deposits, although we may use 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 nonperforming 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.

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An analysis of the credit quality of the loan portfolio and the adequacy of the allowance for loan and lease losses is prepared jointly by our accounting and credit administration departments and presented to our Board of Directors or the Directors’ Loan 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 six months ended June 30, 2010 and 2009. The provision for loan and lease losses in the table below does not include our provision accrual for unfunded commitments of $11 thousand and $11 thousand for the six month periods ended June 30, 2010 and 2009, respectively. The reserve for unfunded commitments totaled $217 thousand and $193 thousand as of June 30, 2010 and 2009, respectively, and is included in other liabilities in the accompanying consolidated balance sheets.

ANALYSISOF CHANGESIN ALLOWANCEFOR LOANAND LEASE LOSSES

	For the six months ended June 30,
	2010			2009
	(restated)
	(in thousands, except percentages)
Allowance for loan and lease losses –
Beginning of period	$	26,492		$	17,385
Provision for loan and lease losses		7,998			11,178
Sub-total		34,490			28,563
Charged-off loans:
Real estate – residential 1-4 family		872			656
Real estate – commercial		795			1,313
Real estate – construction		3,077			367
Real estate – multi-family and farmland		130			58
Commercial loans		1,717			6,129
Consumer installment and Other loans		515			663
Leases, net of unearned income		940			250
Total charged-off		8,046			9,436
Recoveries of charged-off loans:
Real estate – residential 1-4 family		33			19
Real estate – commercial		152			—
Real estate – construction		3			9
Real estate – multi-family and farmland		—			3
Commercial loans		129			44
Consumer installment and Other loans		69			72
Leases, net of unearned income		—			1
Total recoveries		386			148
Net charged-off loans		7,660			9,288
Allowance for loan and lease losses – end of period	$	26,830		$	19,275
Total loans – end of period	$	851,352		$	968,493
Average loans	$	902,332		$	992,039
Net loans charged-off to average loans, annualized		1.70	%		1.87	%
Provision for loan and lease losses to average loans, annualized		1.77	%		2.25	%
Allowance for loan and lease losses as a percentage of:
Period end loans		3.15	%		1.99	%
Nonperforming loans		45.72	%		63.92	%

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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 financial reporting and credit administration group enables us to allocate the allowance based on risk elements within the portfolio.

ALLOCATIONOFTHE ALLOWANCEFOR LOANAND LEASE LOSSES

	As of June 30, 2010					As of December 31, 2009					As of June 30, 2009
	Amount		Percent  of Portfolio1			Amount		Percent of Portfolio1			Amount		Percent  of Portfolio1
	(in thousands, except percentages)
Real estate – residential 1-4 family	$	5,326		32.1	%	$	5,037		29.6	%	$	4,235		29.8	%
Real estate – commercial		5,325		29.0	%		4,525		27.3	%		2,460		23.3	%
Real estate – construction		4,459		13.3	%		6,706		16.0	%		4,341		19.0	%
Real estate – multi-family and farmland		794		4.8	%		766		4.0	%		272		3.5	%
Commercial loans		8,030		13.8	%		6,953		15.4	%		4,404		15.5	%
Consumer installment loans		1,072		5.0	%		1,107		5.1	%		871		5.6	%
Leases, net of unearned income		1,801		1.5	%		1,386		2.1	%		2,682		2.8	%
Other		23		0.5	%		12		0.5	%		10		0.5	%
Total	$	26,830		100.0	%	$	26,492		100.0	%	$	19,275		100.0	%

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

Over the last eighteen to twenty-four months, the allowance significantly increased 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 June 30, 2009 to June 30, 2010, the allowance increased $7.6 million, or 39.2%. Specific impairments increased by $3.2 million over the last twelve months, while the SFAS 5 allowance increased $4.4 million due to higher levels of risk rated loans, as well as higher associated loss factors applicable to classified loan pools.

As of June 30, 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 June 30, 2010, has increased $3.6 million compared to June 30, 2009. The majority of the increase is a result of higher specific impairments on commercial loans. Reduced earnings and cash flow of the associated borrowers due to the economic recession is the primary factor for the increase of classified commercial loans. The allowance associated with real estate construction loans totaled $5.3 million as of June 30, 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 decision to downgrade real estate construction loans; these factors include but are 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 nonperforming loans. As of June 30, 2010, approximately 43% 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 June 30, 2010 is sufficient to absorb losses inherent in the loan portfolio based on our assessment of the information available, including the results of extensive internal and independent reviews of our loan portfolio, as discussed in the Asset Quality and Nonperforming 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 based on their reviews.

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Asset Quality and Nonperforming Assets

Asset Quality Strategic Initiatives for 2009 and 2010

We consider our asset quality to be of primary importance. At June 30, 2010, our loan portfolio was 61.8% of total assets. Over the past twelve months, we implemented several significant strategies to further address our asset quality. To date, we have:

• hired a new Chief Credit Officer;

• restructured our credit department;

• developed centralized underwriting, document preparation and collections processes;

• conducted a third-party loan review;

• expanded our special assets department; and

• expanded our loan review department.

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 managing each of these portfolios. The chief credit officer serves to support both senior credit officers. As of June 30, 2010, we have successfully hired a chief credit officer and two experienced senior credit officers. We anticipate hiring additional credit staff during the second half of 2010.

With the additional depth and expertise of the restructured credit department, we have centralized our loan underwriting, document preparation and collections processes. This centralization is intended to improve consistency, increase quality and provide higher levels of operational efficiencies. Collectively, we believe these changes will assist in reducing the level of nonperforming 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. Subsequent to the 2009 review, we continued to evaluate our loan portfolio and adjusted risk-ratings appropriately. Loan officers are responsible for assigning risk-ratings, with ongoing independent reviews by our loan review department, as discussed below.

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 nine months, we have added two additional employees to our internal loan review department. This year, 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 for the 2010 loan reviews.

Over the last nine months, we have successfully hired two seasoned special asset officers and internally transferred additional staff to the special assets department. With the additional depth and expertise, we formalized the process of transferring criticized and classified loans to the special assets department. During the third quarter of 2010, we transitioned managing and marketing our OREO properties to this department. We anticipate increased OREO sales volume as we focus on liquidating properties. We anticipate hiring additional special asset staff during the second half of 2010.

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

Asset Quality and Nonperforming Assets Analysis and Discussion

Our asset quality ratios weakened in the second quarter of 2010 compared to year-end 2009 and the same period in 2009. As of June 30, 2010, our allowance for loan and lease losses as a percentage of total loans was 3.15%, which is an increase from the 2.78% as of December 31, 2009 and 1.99% as of June 30, 2009. Net charge-offs as a percentage of average loans (annualized) decreased to 1.70% from 1.87% for the six month periods ended June 30, 2010 and 2009, respectively. Nonperforming assets as a percentage of total assets was 5.85% as of June 30, 2010, compared to 3.33% for the same period in 2009. As of June 30, 2010, nonperforming assets, including loans that are 90 days past due, increased to $78.4 million, or 5.88% of total assets, from $69.2 million, or 5.11% as of December 31, 2009, and $44.6 million, or 3.60% of total assets as of June 30, 2009.

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We believe that overall asset quality will continue to be stressed by the economic environment and will remain above comparable 2009 levels. Our special assets department actively manages the collection and disposition of past due loans and develops action plans for criticized and classified loans and leases. As for managing and marketing repossessions and OREO properties, 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 with a bias towards liquidation.

Nonperforming assets include nonaccrual 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 nonperforming assets and related ratios.

NONPERFORMING ASSETSBY TYPE

	June 30, 2010			December 31, 2009			June 30, 2009
	(restated)			(restated)
	(in thousands, except percentages)
Nonaccrual loans	$	58,339		$	45,454		$	26,782
Loans past due 90 days and still accruing		342			4,524			3,373
Total nonperforming loans	$	58,681		$	49,978		$	30,155
Other real estate owned	$	17,795		$	15,312		$	12,930
Repossessed assets		1,921			3,881			1,473
Nonaccrual loans		58,339			45,454			26,782
Total nonperforming assets	$	78,055		$	64,647		$	41,185
Nonperforming loans as a percentage of total loans		6.89	%		5.25	%		3.11	%
Nonperforming assets as a percentage of total assets		5.85	%		4.78	%		3.33	%
Nonperforming assets plus loans 90 days past due to total assets		5.88	%		5.11	%		3.60	%

The following table provides the activity in our nonperforming assets 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.

NONPERFORMING ASSETS – ACTIVITY

	2nd  Quarter 2010			1st  Quarter 2010			4th  Quarter 2009			3rd  Quarter 2009			2nd  Quarter 2009
	(restated)			(restated)			(restated)
	(in thousands)
Nonaccrual loans
Beginning balance	$	50,305		$	45,454		$	31,463		$	26,782		$	26,706
Additions		15,525			16,701			20,378			11,837			9,643
Reductions		(7,491	)		(11,850	)		(6,387	)		(7,156	)		(9,567	)
Ending balance	$	58,339		$	50,305		$	45,454		$	31,463		$	26,782
Other real estate owned
Beginning balance	$	18,228		$	15,312		$	14,206		$	12,930		$	11,309
Additions		6,274			3,866			4,415			5,599			4,522
Reductions		(6,707	)		(950	)		(3,309	)		(4,323	)		(2,901	)
Ending balance	$	17,795		$	18,228		$	15,312		$	14,206		$	12,930
Repossessions
Beginning balance	$	3,466		$	3,881		$	2,050		$	1,473		$	1,864
Additions		709			1,383			3,588			1,978			810
Reductions		(2,254	)		(1,798	)		(1,757	)		(1,401	)		(1,201	)
Ending balance	$	1,921		$	3,466		$	3,881		$	2,050		$	1,473

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The following table provides the classifications for nonaccrual loans and other real estate owned as of June 30, 2010, December 31, 2009 and June 30, 2009.

NONPERFORMING ASSETS – CLASSIFICATIONAND NUMBEROF UNITS

	June 30, 2010				December 31, 2009				June 30, 2009
	Amount		Units		Amount		Units		Amount		Units
	(restated)				(restated)
	(dollar amounts in thousands)
Nonaccrual loans
Construction/development loans	$	18,120		46	$	13,706		36	$	8,706		9
Residential real estate loans		8,910		62		6,059		52		3,713		30
Commercial real estate loans		7,050		30		6,156		26		4,595		16
Commercial and industrial loans		17,501		46		15,397		38		3,160		15
Commercial leases		4,690		58		2,389		20		5,126		16
Consumer and other loans		2,068		17		1,747		15		1,482		5
Total	$	58,339		259	$	45,454		187	$	26,782		91
Other real estate owned
Construction/development loans	$	8,103		58	$	6,023		37	$	7,187		38
Residential real estate loans		5,186		46		4,647		34		2,657		14
Commercial real estate loans		4,506		19		4,642		14		3,086		9
Total	$	17,795		123	$	15,312		85	$	12,930		61

Nonaccrual loans totaled $58.3 million, $45.5 million and $26.8 million as of June 30, 2010, December 31, 2009 and June 30, 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 June 30, 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. We have individually reviewed each nonaccrual loan in excess of $500 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.

As of June 30, 2010, nonaccruals increased by $12.9 million, or 28.3%, 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 June 30, 2010, the new borrower brings additional capital and energy to complete the land development project and remains current on contractual payments. Comparing June 30, 2010 to December 31, 2009, each classification grew with C&D loans increasing $4.4 million, residential real estate increasing $2.9 million and commercial leases increasing $2.3 million. We are actively pursuing the appropriate strategies to reduce the current level of nonaccruals through aggressive asset management and problem resolution.

Other real estate increased $2.5 million from December 31, 2009 to June 30, 2010, as additions continued to outpace dispositions. During the six months ended June 30, 2010, we sold twenty properties with total proceeds of $4.1 million, resulting in a 99% realization of the carrying value prior to sale and an 83% realization of the original loan balance. 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 $4.2 million from year-end 2009 in a positive trend. As of June 30, 2010, $342 thousand in past due loans was comprised of two residential loans totaling $134 thousand, six commercial loans totaling $194 thousand and three consumer and other loans totaling $14 thousand.

Total nonperforming assets at the end of the second quarter of 2010 were $78.1 million compared to $65.4 million at December 31, 2009 and $41.2 million at June 30, 2009.

Our asset quality ratios were generally less favorable 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 June 30, 2010 and our UBPR peer group ratios as of March 31, 2010, which is the latest available information.

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NONPERFORMING ASSET RATIOS

	First Security Group, Inc			UBPR Peer Group
Nonperforming loans1 as a percentage of gross loans		6.89	%		3.86	%
Nonperforming loans1 as a percentage of the allowance		218.71	%		167.91	%
Nonperforming loans1 as a percentage of equity capital		42.80	%		28.42	%
Nonperforming loans1 plus OREO as a percentage of gross loans plus OREO		8.80	%		4.96	%

¹ Nonperforming 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 consolidated balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. Currently, all of our investments are classified as available-for-sale. While we have no plans to liquidate a significant amount of any available-for-sale securities, the securities classified as available-for-sale may be used for liquidity purposes should we deem it to be in our best interest.

Available-for-sale securities totaled $153.0 million at June 30, 2010, $143.0 million at December 31, 2009 and $137.5 million at June 30, 2009. We maintain a level of securities to provide an appropriate level of liquidity and to provide a proper balance to our interest rate and credit risk in our loan portfolio. At June 30, 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 June 30, 2010 consisted of tax-exempt municipal securities, federal agency mortgage 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.

MATURITYOF 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	$	2,396		$	14,388		$	14,979		$	4,455		$	36,218
Agency bonds		—			19,324			9,992			—			29,316
Agency issued REMICs		9,246			30,402			3,002			—			42,650
Agency issued mortgage pools		252			32,219			7,218			834			40,523
Other		—			—			—			126			126
Total	$	11,894		$	96,333		$	35,191		$	5,415		$	148,833
Tax Equivalent Yield		5.18	%		3.93	%		4.27	%		6.08	%		4.19	%

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.

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As of June 30, 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 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, we consider factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.

As of June 30, 2010, gross unrealized losses in our portfolio totaled $286 thousand, compared to $603 thousand and $1.1 million as of December 31, 2009 and June 30, 2009, respectively. The unrealized losses associated with two trust preferred securities total $49 thousand. The unrealized losses associated with the trust preferred securities 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 June 30, 2010 are considered temporary.

As of June 30, 2010, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our stockholders’ equity. The following table presents the amortized cost and market value of the securities from each such issuer as of June 30, 2010.

	Book Value		Market Value
	(in thousands)
FHLMC*	$	47,900	$	47,812
Fannie Mae	$	38,567	$	38,244
Ginnie Mae	$	18,190	$	18,151

* Federal Home Loan Mortgage Corporation

We held no federal funds sold as of June 30, 2010, December 31, 2009 or June 30, 2009. As of June 30, 2010, we held $232.7 million in interest bearing deposits, primarily at the Federal Reserve Bank of Atlanta, compared to $152.6 million at December 31, 2009 and $12.4 million as of June 30, 2009. The yield on our account at the Federal Reserve Bank is approximately 25 basis points.

As of June 30, 2010, we held $100 thousand in certificates of deposit at another FDIC insured financial institution. At June 30, 2010, we held $25.3 million in bank-owned life insurance, compared to $24.9 million at December 31, 2009 and $24.5 million at June 30, 2009.

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Deposits and Other Borrowings

As of June 30, 2010, deposits decreased by 1.4% from December 31, 2009 while increasing by 12.9% from June 30, 2009. Excluding the changes in brokered deposits, our deposits decreased by 3.5% from December 31, 2009 and 1.4% from June 30, 2009. In the first six months of 2010, the fastest growing sectors of our core deposit base were interest bearing demand deposits and noninterest bearing demand deposits which grew 7.5% and 0.7%, respectively. 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 deposit with denominations less than $100,000. We consider our retail certificates of deposit to be a stable source of funding because they are in-market, relationship-oriented deposits. Core deposit growth is an important tenet to our business strategy.

Brokered deposits increased $144.9 million from June 30, 2009 to June 30, 2010 with the majority of the increase in the fourth quarter of 2009 and first quarter of 2010. We issued approximately $86 million of brokered certificates of deposit in December 2009 and an additional approximately $94.5 million in January 2010. These issuances were used to eliminate our brokered money market account and to otherwise enhance our liquidity position in advance of the anticipated Consent Order.

As discussed in the Note 14 to 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 nine months was in part to ensure we have adequate funding to meet our short-term contractual obligations. Following publication of the Consent Order, we have continued to closely monitor our deposit levels, which have generally remained strong. 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.

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 insurance of up to $50 million. Additionally, members have the opportunity to purchase or sell one-way time deposits. As of June 30, 2010, our CDARS^® balance consists of $18.4 million in purchased time deposits and $11.2 million in our customers’ reciprocal accounts.

Brokered deposits at June 30, 2010, December 31, 2009 and June 30, 2009 were as follows:

BROKERED DEPOSITS

	June 30, 2010		December 31, 2009		June 30, 2009
	(in thousands)
Brokered deposits –
Brokered certificates of deposits	$	322,944	$	239,283	$	107,064
Brokered money market accounts		—		76,749		75,774
Brokered NOW accounts		—		514		1,488
CDARS®		29,601		23,204		23,310
Total	$	352,545	$	339,750	$	207,636

The table below is a maturity scheduled 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	$	55,261	$	215,298
CDARS®		2,498		14,861		5,004		5,773		1,465
Total	$	22,858	$	14,861	$	37,029	$	61,034	$	216,763

As of June 30, 2010, December 31, 2009 and June 30, 2009, we had no Federal funds purchased.

Securities sold under agreements to repurchase with commercial checking customers were $9.3 million as of June 30, 2010, compared to $7.9 million and $10.5 million as of December 31, 2009 and June 30, 2009, respectively. In November 2007, we entered into a five-year structured repurchase agreement with

47

another financial institution for $10.0 million, with a stated maturity in November 2012. For the six months ended June 30, 2010 and 2009, we paid a fixed rate of 3.93% for the structured repurchase agreement. The agreement is 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 311% 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 June 30, 2010, December 31, 2009 and June 30, 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 $1.9 million as of June 30, 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 as additional capital into FSGBank.

During 2010, to further preserve our capital resources and liquidity, our Board of Directors elected to suspend the dividend on our common stock and twice elected to defer the dividend payment on our Series A Preferred Stock for the first and second quarters 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 available-for-sale securities.

As noted above, we issued approximately $86 million of brokered certificates of deposit in December 2009 and an additional approximately $94.5 million in January 2010. These issuances were used to eliminate our brokered money market account and to otherwise enhance our liquidity position in advance of the anticipated Consent Order.

As discussed in the Note 14 to 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 nine months was in part to ensure we have adequate funding to meet our short-term contractual obligations. Following publication of the Consent Order, we have continued to closely monitor our deposit levels, which have generally remained strong. We believe that our current liquidity, along with maintaining or increasing core deposits, is more than sufficient to provide for our short-term contractual obligations, including maturing brokered deposits.

As of June 30, 2010, our interest bearing account at the Federal Reserve Bank of Atlanta totaled approximately $232.0 million. This excess liquidity is available to fund our contractual obligations and prudent investment opportunities.

In light of the negative impact this excess liquidity has on our leverage capital ratio, we are exploring means to decrease our average assets by eliminating some higher priced volatile liabilities and funding the reduction with a portion of our liquid assets. As of quarter end, we are targeting a reduction in average assets of at least $33 million in order to achieve a 9.0% leverage capital ratio.

As of June 30, 2010, the unused borrowing capacity for FSGBank at FHLB was $35 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.

Another source of funding is loan participations sold to other commercial banks (in which we retain the service rights). As of June 30, 2010, we had $10.6 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 June 30, 2010, we had $322.9 million in brokered CDs outstanding with a weighted average remaining life of approximately 32 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 $29.6 million at June 30, 2010,

48

with a weighted average coupon rate of 2.08% and a weighted average life of approximately 8 months. As discussed in Note 14 to 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.

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.

We also have contractual cash obligations and commitments, which include certificates of deposit, other borrowings, operating leases and loan commitments. Unfunded loan commitments totaled $156.1 million at June 30, 2010. The following table illustrates our significant contractual obligations at June 30, 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	)	$	333,745		$	83,273	$	4,694	$	—	$	421,712
Brokered certificates of deposit	(1	)		52,385			137,655		120,129		12,775		322,944
CDARS®	(1	)		22,363			6,781		457		—		29,601
Federal funds purchased and securities sold under agreements to repurchase	(2	)		9,347			10,000		—		—		19,347
FHLB borrowings	(3	)		—			3		—		—		3
Operating lease obligations	(4	)		952			1,286		951		4,703		7,892
Commitments to fund affordable housing investments	(5	)		1,340			—		—		—		1,340
Note payable	(6	)		16			34		32		—		82
Total			$	420,148	��	$	239,032	$	126,263	$	17,478	$	802,921

¹ Certificates of deposits give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal. For more information regarding certificates of 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 six months of 2010 totaled $1.3 million compared to net cash provided by operations of $10.6 million for the same period in 2009. The decrease is primarily due to changes in other assets and a higher loss before provision expense. Net cash provided by investing activities decreased from $22.0 million to $2.1 million due a higher level of investment securities purchases in 2010, as well as the non-recurring $5.8 million proceeds from swap termination received during 2009. Net cash used by financing activities was $15.0 million for the first six months of 2010 compared to net cash used in financing activities of $34.9 million in the comparable 2009 period. The reduction is primarily attributable to a smaller year-over-year decline in deposits, as well as the suspension and deferment of all dividends.

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 by 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.

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The Asset/Liability Committee of the Board of Directors (ALCO) provides oversight by ensuring that policies and procedures are in place to monitor our significant 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 $1.0 million in interest income for the six months ended June 30, 2010.

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

	20101		2011		2012		Total
	(in thousands)
Accretion of gain from 2007 terminated swaps	$	159	$	219	$	62	$	440
Accretion of gain from 2009 terminated swaps	$	821	$	1,628	$	1,272	$	3,721

¹ Represents the gain accretion for July 1, 2010 to December 31, 2010. Excludes the amounts recognized in the first six 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 table presents the cash flow hedges as of June 30, 2010.

CASH FLOW HEDGES

	Notional Amount		Gross Unrealized Gains		Gross Unrealized Losses		Accumulated Other Comprehensive Income (Loss)			Maturity Date
	(in thousands)
Asset hedges
Cash flow hedges:
Forward contracts	$	2,713	$	5	$	16	$	(7	)	Various
	$	2,713	$	5	$	16	$	(7	)
Terminated asset hedges
Cash flow hedges:1
Interest rate swap	$	25,000	$	—	$	—	$	71		June 28, 2011
Interest rate swap		20,000		—		—		54		June 28, 2011
Interest rate swap		35,000		—		—		166		June 28, 2012
Interest rate swap		25,000		—		—		1,228		October 15, 2012
Interest rate swap		25,000		—		—		1,228		October 15, 2012
	$	130,000	$	—	$	—	$	2,747

¹ The $2.7 million of gains, net of taxes, recorded in accumulated other comprehensive income as of June 30, 2010, will be reclassified into earnings as interest income over the remaining life of the respective hedged items.

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The following table presents additional information on the active derivative positions as of June 30, 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

$

2,713

Other assets

$

N/A

Other liabilities

$

11

Noninterest income – other

$

69

Hedged Items:

Loans held for sale

N/A

Loans held for sale

$

2,713

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 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.

Off-Balance Sheet Arrangements

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

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

The following table discloses our maximum exposure to credit risk for unfunded loan commitments and standby letters of credit at June 30, 2010 and 2009.

	As of June 30,
	2010		2009
	(in thousands)
Commitments to extend credit	$	156,074	$	245,830
Standby letters of credit	$	14,124	$	19,236

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

Capital Resources

Banks and bank holding companies, as regulated institutions, must meet required levels of capital. The Comptroller of the Currency and the Federal Reserve, the primary federal regulators for FSGBank and First Security, respectively, have adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. The Consent Order, as described in Note 14 to our consolidated financial statements, 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 the effective date of April 28, 2010 to achieve these ratios.

We are considering a variety of strategic alternatives intended to achieve and maintain the prescribed capital ratios. FSGBank’s leverage ratio declined from 9.6% as of December 31, 2009 primarily due to the increase in interest-bearing cash held at the Federal Reserve Bank of Atlanta that was associated with the issuance of additional long-term brokered deposits. Accordingly, compliance with the leverage ratio could be obtained by reducing the Bank’s average assets by approximately $33 million.

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

CAPITAL RATIOS

June 30, 2010	FSGBank Consent  Order1			Well Capitalized			Adequately Capitalized			First Security			FSGBank
										(restated)			(restated)
Tier I capital to risk adjusted assets		n/a			6.0	%		4.0	%		13.3	%		13.0	%3
Total capital to risk adjusted assets		13.0	%		10.0	%		8.0	%		14.6	%		14.3	%3
Leverage ratio		9.0	%		5.0	%2		4.0	%		9.0	%		8.8	%3
December 31, 2009
Tier I capital to risk adjusted assets		n/a			6.0	%		4.0	%		12.7	%		11.5	%
Total capital to risk adjusted assets		n/a			10.0	%		8.0	%		13.9	%		12.8	%
Leverage ratio		n/a			5.0	%2		4.0	%		10.6	%		9.6	%
June 30, 2009
Tier I capital to risk adjusted assets		n/a			6.0	%		4.0	%		13.0	%		9.5	%
Total capital to risk adjusted assets		n/a			10.0	%		8.0	%		14.2	%		10.7	%
Leverage ratio		n/a			5.0	%2		4.0	%		11.2	%		8.1	%

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.

During 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 and second 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.

EFFECTS OF GOVERNMENTAL POLICIES

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

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

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

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) which, among other things, alters the oversight and supervision of financial institutions by federal and state regulators, introduces minimum capital requirements, creates a new federal agency to supervise consumer financial products and services, and implements changes to corporate governance and compensation practices. Although the Act is particularly focused on large bank holding companies with consolidated assets of $50 billion or more, it does contain a number of provisions that may affect us, including:

• Minimum Leverage and Risk-Based Capital Requirements. Under the Act, the appropriate Federal banking agencies are required to establish minimum leverage and risk-based capital requirements on a consolidated basis for all insured depository institutions and bank holding companies, which can be no less than the currently applicable leverage and risk-based capital requirements for depository institutions.

• Deposit Insurance Modifications. The Act modifies the FDIC’s assessment base upon which deposit insurance premiums are calculated. The new assessment base will equal our average total consolidated assets minus the sum of our average tangible equity during the assessment period. The Act also makes permanent the increase in maximum federal deposit insurance limits from $100,000 to $250,000.

• Creation of New Consumer Protection Bureau. The Act creates a new Bureau of Consumer Financial Protection within the Federal Reserve with broad powers to supervise and enforce consumer protection laws. The Bureau of Consumer Financial Protection will have broad rule-making authority for a wide range of consumer protection laws that apply to all insured depository institutions. The Bureau of Consumer Financial Protection has examination and enforcement authority over all depository institutions with more than $10 billion in assets. Depository institutions with $10 billion or less in assets, such as FSGBank, will be examined by their applicable bank regulators.

• Executive Compensation and Corporate Governance Requirements. The Act includes provisions that may impact our corporate governance, including a grant of authority to the SEC to issue rules that allow shareholders to nominate directors by using the company’s proxy solicitation materials. The Act further requires the SEC to adopt rules that prohibit the listing of any equity security of a company that does not have an independent compensation committee and require all exchange-traded companies to adopt clawback policies for incentive compensation paid to executive officers in the event of accounting restatements based on material non-compliance with financial reporting requirements.

Many provisions of the Act will require our regulators to adopt additional rules in order to implement the mandates included in the Act. In addition, the Act requires multiple studies which could result in additional legislative action. Governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.

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RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the FASB issued Accounting Standards Update 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). ASU 2010-20 requires disclosures regarding loans and the allowance for loan losses that are disaggregated by portfolio segment and class of financing receivable. Existing disclosures were amended to require a rollforward of the allowance for loan losses by portfolio segment, with the ending balance broken out by basis of impairment method, as well as the recorded investment in the respective loans. Nonaccrual and impaired loans by class must also be shown. ASU 2010-20 also requires disclosures regarding: (1) credit quality indicators by class, (2) aging of past due loans by class, (3) troubled debt restructurings (TDRs) by class and their effect on the allowance for loan losses, (4) defaults on TDRs by class and their effect on the allowance for loan losses, and (5) significant purchases and sales of loans disaggregated by portfolio segment. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010, for end of period type disclosures. Activity related disclosures are effective for interim and annual reporting periods beginning on or after December 15, 2010. ASU 2010-20 will have an impact on our disclosures, but not our financial position or results of operations.

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 inherent to foreign currency.

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

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

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Our income simulation analysis projected net interest income based on both a rise and fall in interest rates of 200 basis points (i.e. 2.00%) over a twelve-month period. Given this scenario, we had, as of June 30, 2010, an exposure to falling rates and a benefit from rising rates. More specifically, our model forecasts a decline in net interest income of $8.5 million, or 22.8%, as a result of a 200 basis point decline in rates based on annualizing our financial results through June 30, 2010. The model also predicts an $8.6 million increase in net interest income, or 23.1%, as a result of a 200 basis point increase in rates. The following chart reflects our sensitivity to changes in interest rates as of June 30, 2010. The numbers are based on a static balance sheet, and the chart assumes that pay downs and maturities of both assets and liabilities are reinvested in like instruments at current interest rates, rates down 200 basis points, and rates up 200 basis points.

INTEREST RATE RISK

INCOME SENSITIVITY SUMMARY

	Down 200 BP			Current			Up 200 BP
	(in thousands, except percentages)
Annualized net interest income1	$	28,793		$	37,272		$	45,867
Dollar change net interest income		(8,479	)		—			8,595
Percentage change net interest income		(22.75	)%		0.00	%		23.06	%

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

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

In connection with the preparation of our previously filed Quarterly Report on Form 10-Q, as originally filed with the Securities and Exchange Commission (SEC) on August 9, 2010, our principal executive officer and principal financial officer evaluated the effectiveness of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Quarterly Report on Form 10-Q. Disclosure Controls, as defined in Rule 13a-15(e) of the Exchange Act, are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer (CEO) and chief financial officer (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.

Based upon their controls evaluation, our CEO and CFO previously concluded that our Disclosure Controls were effective.

As previously disclosed in First Security’s Current Report on Form 8-K, filed with the SEC on October 29, 2010, subsequent to filing the June 30, 2010 Quarterly Report on Form 10-Q and a change in personnel responsible for First Security’s other real estate owned, First Security determined that certain write-downs associated with other real estate owned were not recorded in the appropriate accounting periods. Upon completion of First Security’s internal review, the primary regulator of First Security’s wholly-owned subsidiary bank verified the findings as part of its ongoing annual safety and soundness examination. First Security has been requested to file amended Call Reports with the FDIC and amended FR Y-9C and FR Y-9LP reports with the Federal Reserve, for December 31, 2009, March 31, 2010 and June 30, 2010 to reflect the findings.

In connection with these regulatory restatements, First Security’s Audit/Corporate Governance Committee determined that the impacted SEC filings should not be relied upon. Accordingly, First Security is amending the December 31, 2009 Form 10-K, the March 31, 2010 Form 10-Q and the June 30, 2010 Form 10-Q. The Audit/Corporate Governance Committee also determined that a material weakness existed in the Company’s internal control over financial reporting during the relevant periods. First Security identified certain control deficiencies in its administration of other real estate owned, including the timely identification of charge-offs and write-downs. These control deficiencies were related to the lack of separation of duties and violations of First Security policy.

As a result of the restatement, a reevaluation was performed as of the end of the period covered by this Quarterly Report on Form 10-Q of our Disclosure Controls by management. Based upon this reevaluation, our CEO and CFO concluded that our Disclosure Controls were not effective as of June 30, 2010 due to the material weakness in our internal control over financial reporting related to our administration of other real estate owned.

Our management does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

In response to these deficiencies, First Security has implemented certain changes to its internal control over financial reporting which include: broadened segregation of duties; intensified management oversight and analysis of other real estate owned accounts; and expanded documentation and approval procedures for other real estate owned appraisals. In addition, management has instituted a program to require periodic testing of these changes. First Security believes that these measures will appropriately address the material weakness related to the issues described above.

First Security has restated its consolidated financial statements as of and for the period ended June 30, 2010 in this Form 10-Q/A as discussed in Note 2 to the consolidated financial statements contained herein. First Security is undertaking certain remedial actions as of the date of filing of this Form 10-Q/A and believes that the consolidated financial statements included in this Form 10-Q/A present fairly, in all material respects, First Security’s financial position, results of operations, and cash flows for the periods presented. However, at June 30, 2010, the material weakness described above still existed.

First Security made no other changes in its internal controls or in other factors that has materially affected, or is reasonably likely to materially affect these controls subsequent to the date of the evaluation of the controls by the Chief Executive and Chief Financial Officers.

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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 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.

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 June 30, 2010, we had approximately $352.5 million in out of market deposits, including brokered certificates of deposit and CDARS®, which represented approximately 30.2% 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 June 30, 2010, brokered deposits maturing in the next 24 months totaled $135.8 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 June 30,

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2010, the Bank’s total risk-based capital ratio was approximately 14.3 percent and its leverage ratio was approximately 8.8 percent. As of June 30, 2010, the Bank had excess capital of approximately $11.7 million above the Order’s total risk-based capital ratio and a capital shortfall of approximately $3.0 million 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 affect 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.

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 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.

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted on July 21, 2010. The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with power to promulgate and enforce consumer protection laws. Smaller depository institutions, those with $10 billion or less in assets, will be subject to the Consumer Financial Protection Bureau’s rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement authority for

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such institutions. The Dodd-Frank Act also establishes a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk and, among other things, includes provisions affecting (1) corporate governance and executive compensation of all companies whose securities are registered with the SEC, (2) FDIC insurance assessments, (3) interchange fees for debit cards, which would be set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard and (4) minimum capital levels for bank holding companies, subject to a grandfather clause for financial institutions with less than $15 billion in assets.

At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations may adversely impact us. However, compliance with these new laws and regulations may increase our costs, limit our ability to pursue attractive business opportunities, cause us to modify our strategies and business operations and increase our capital requirements and constraints, any of which may have a material adverse impact on our business, financial condition, liquidity or results of operations.

Item 3. Defaults Upon Senior Securities

As previously disclosed, First Security has decided to defer quarterly cash dividend payments on its Series A Preferred Stock. Cash dividends on the Series A Preferred Stock are cumulative and accrue and compound on each subsequent payment date. At June 30, 2010, First Security had unpaid preferred stock dividends in arrears of $1.0 million. If First Security misses six quarterly dividend payments on the Series A Preferred Stock, whether or not consecutive, the Treasury will have the right to appoint two directors to First Security’s board of directors until all accrued but unpaid dividends have been paid. First Security has deferred the February and May 2010 dividend payments as of June 30, 2010.

ITEM 6. EXHIBITS

Exhibits:

EXHIBIT NUMBER	DESCRIPTION
3.1	Amended and Restated Articles of Incorporation, as amended, as of July 22, 2010*
10.1	Consent Order, dated April 28, 20101
10.2	Stipulation and Consent to the Issuance of a Consent Order, dated April 28, 20102
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

* Previously filed.

¹ Incorporated by reference to the Exhibit 10.1 to the Current Report on Form 8-K filed on April 29, 2010.

² Incorporated by reference to the Exhibit 10.2 to the Current Report on Form 8-K filed on April 29, 2010.

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SIGNATURES

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

	FIRST SECURITY GROUP, INC.
	(Registrant)
November 16, 2010	/S/    RODGER B. HOLLEY
	Rodger B. Holley
	Chairman & Chief Executive Officer
November 16, 2010	/S/    WILLIAM L. LUSK, JR.
	William L. Lusk, Jr.
	Secretary, Chief Financial Officer & Executive Vice President

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