First Security Group, Inc. Announces Strategic Recapitalization

  First Security Group, Inc. Announces Strategic Recapitalization

 Recapitalization Includes New Capital, Loan Sale and TARP CPP Restructuring

Business Wire

CHATTANOOGA, Tenn. -- February 26, 2013

First Security Group, Inc. (NASDAQ: FSGI) (the “Company” or “First Security”),
the bank holding company for its wholly-owned subsidiary FSGBank, N.A.
(“FSGBank”), announced today that it has entered into definitive stock
purchase agreements with institutional investors as part of an approximate $90
million recapitalization (the “Recapitalization”). Four investors will lead
the Recapitalization, which also includes a conversion of the Company’s TARP
CPP Preferred Stock to common stock and sale of under- and non-performing
loans. The lead investors will each invest approximately $9 million to acquire
pro-forma ownership of approximately 9.9% of the total outstanding common
stock, respectively. The Recapitalization is priced at $1.50 per share and was
unanimously approved by the Company’s board of directors.

“Today marks an important milestone for First Security Group and FSGBank and
reflects the culmination of our efforts over the last fifteen months,” said
Michael Kramer, President and Chief Executive Officer of First Security. “We
have rebuilt our executive management team with talented and experienced
bankers, solidified our board with four new directors, three of which are
former bank CEOs, and initiated the execution of our strategic plan. We
appreciate the confidence and support of our lead investors. Their commitment
to our Recapitalization will enable us to strengthen our balance sheet and
provide growth capital to complete the transformation of FSGBank into a
banking franchise that our clients, communities and shareholders can be proud
of.” Kramer concluded, “We are also pleased to announce that our current
shareholders will have the opportunity to buy additional shares in First
Security at the same price as the Recapitalization through a follow-on rights

The Company plans to downstream a majority of the net proceeds to FSGBank in
order to support future balance sheet growth as well as fund the losses
associated with the recently completed loan sale. The combined effects of the
additional capital and the loan sale are expected to result in an improved
risk profile, enhanced profitability and compliance with most, if not all,
aspects of the regulatory orders of the Company and FSGBank.

The Recapitalization is subject to a number of conditions, including the lead
investors receiving the necessary bank regulatory determinations. On February
25, 2013, the Company executed definitive stock purchase agreements, including
subscription agreements to accredited individual investors, totaling in excess
of $90 million. Under the terms of the Recapitalization, First Security is
permitted to conduct a $5 million follow-on rights offering after the closing
of the Recapitalization that would allow existing shareholders to purchase
shares of common stock at the same price as the Recapitalization.

Capital Structure and Tax Preservation Plan

The Recapitalization is structured to preserve the Company’s net operating
losses (“NOLs”) under Section 382 of the Internal Revenue Code. As announced
on October 30, 2012, First Security enacted a Tax Benefit Preservation Plan
(“Preservation Plan”) to ensure the anticipated recapitalization was not
impacted by changes in ownership between the enacting of the Preservation Plan
and the closing of the Recapitalization.

“The ability to organize the capital structure to fully preserve our net
operating losses was an important component of our value proposition of the
Recapitalization,” said John R. Haddock, EVP and Chief Financial Officer of
First Security. “As of December 31, 2012, the valuation allowance against our
net deferred tax assets, primarily consisting of the NOLs, exceeded $50
million. This $50 million valuation allowance can be released back into
earnings and capital once profitability is restored and we achieve consistent
and predictable earnings.”

TARP CPP Restructuring

In connection with the Recapitalization, the Company negotiated with the U.S.
Treasury (the “Treasury”) a restructuring of the Company’s Preferred Stock
issued under the Capital Purchase Program. The Company will issue common stock
to the Treasury for full satisfaction of the par value of the Preferred Stock,
accrued dividends and common stock warrants previously issued to the Treasury.
The Company has deferred payment on the Preferred Stock dividends since
January 2010. Treasury will contemporaneously sell the common stock to
investors identified by the Company.

Loan Sale

On December 10, 2012, the Company entered into an asset purchase agreement
with a third party to sell certain loans. During the fourth quarter of 2012,
the Company identified $36.2 million of under- and non-performing loans to
sell and recorded a $13.9 million loss to reduce the loan balances to the
expected net proceeds. The Company completed the loan sale during February
2013. As a result of the loan sale, the Company’s non-performing assets as a
percentage of total assets was 2.36% as of December 31, 2012.

Certain Financial and Pro-Forma Information

Pro-Forma Stockholders’ Equity
                 December 31,   Estimated       Estimated Impact
                2012          Impact of CPP  of                Pro-Forma
                 (unaudited)    Restructuring   Recapitalization
                                ^1              ^2
                 (amounts in thousands)
Stock – no par
value –
authorized;      $ 32,548       $  (32,548  )   $     -            $ -
33,000 issued
as of December
31, 2012;
value of
Common Stock -
$0.01 par
value –
shares             115             93                 507            715
shares issued
as of December
31, 2012
Paid-In            106,533         13,896             71,004         191,433
Common Stock       2,006           (2,006   )         -              -
Accumulated        (115,392 )      25,726             -              (89,666 )
Other             3,300         -                -             3,300   
Shareholders’    $ 29,110      $  5,161       $     71,511       $ 105,782 

^1 CPP Restructuring – The Company will issue common stock equal to 26.75% of
the $33,000 par value of the Preferred Stock plus 100% of the accrued but
unpaid dividends. The net increase of $5,161 represents the conversion of the
accrued dividends from a liability into capital. The above is based on the
accrued but unpaid dividends as of December 31, 2012 and will be adjusted for
additional accrued but unpaid dividends from January 1, 2013 through the
transaction date.
^2 Recapitalization – The Company will issue $90 million of aggregate new
shares of common stock, inclusive of the shares issued to the U.S. Treasury as
part of the CPP restructuring. The Company has deducted $4.5 million as the
estimated transaction expenses that will reduce the net proceeds to the
Company. The transaction expenses are an estimate and subject to change.

Pro-Forma Regulatory Capital Ratios
                                                                  Minimum to
                                                                  be Well
                  December 31,     Estimated                      Capitalized
                 2012            Impact of     Pro-Forma      under
                  (unaudited)      Transaction                    Prompt
                  (amounts in thousands)
Capital Levels
Tier 1 capital    $  25,210        $   76,672     $  101,882
risk-based        $  32,743        $   76,672     $  109,415
Tier leverage        2.3     %                       9.4      %   n/a
risk-based           5.5     %                       18.4     %   n/a
Capital Levels
Tier 1 capital    $  27,058        $   65,000     $  92,058
risk-based        $  34,588        $   65,000     $  99,588
Tier leverage        2.5     %                       8.5      %   5.0     %
risk-based           5.8     %                       16.7     %   10.0    %

^1 FSGBank continues to operate under a Consent Order with capital adequacy
requirements. Accordingly, FSGBank would be considered “adequately
capitalized” based on the estimated pro-forma capital levels.

Asset Quality Ratios
                       December 31,         September 30,        December 31,
                       2012                2012                2011
                       (unaudited)          (unaudited)
                       (amounts in thousands)
Nonaccrual loans       $   11,696           $   32,254           $  46,907
Loans past due 90 days    939                2,572             2,822   
and still accruing
Total nonperforming
loans, including loans $   12,635          $   34,826          $  49,729  
90 days and still
Other real estate      $   13,441           $   15,803           $  25,141
Repossessed assets         8                    51                  302
Nonaccrual loans          11,696             32,254            46,907  
Total nonperforming    $   25,145          $   48,108          $  72,350  
Nonperforming loans as
a percentage of total      2.33     %           6.03     %          8.51    %
Nonperforming assets
as a percentage of         2.36     %           4.31     %          6.49    %
total assets
Nonperforming assets
plus loans past due 90
days and still             2.45     %           4.54     %          6.74    %
accruing as a
percentage of total

NOTE: The above asset quality information excludes the $22.2 million of loans
that were classified as “held-for-sale” as of December 31, 2012 and sold in
February 2013.

About First Security Group, Inc.

Founded in 1999, First Security's community bank subsidiary, FSGBank, has 30
full-service banking offices along the interstate corridors of eastern and
middle Tennessee and northern Georgia. 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 services

Additional Information

Certain investments discussed above involve the sale of securities in private
transactions that will not be registered under the Securities Act of 1933, as
amended, and will be subject to the resale restrictions under that Act. Such
securities may not be offered or sold absent registration or an applicable
exemption from registration. This news release does not constitute an offer to
sell or a solicitation of an offer to buy any securities, nor shall there be
any offer or sale of securities in any state or jurisdiction in which such an
offer, solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such state or jurisdiction.
Offers and sales to persons in the Rights Offering shall only be made pursuant
to an effective registration statement under the Securities Act.

Note Regarding Forward Looking Statements

Some of our statements contained in this release are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements relate to future events or our future
financial performance and include statements about the Company’s plans for
raising capital, including transactions described in this press release, the
new shareholders expected, the conditions necessary for closing on proposed
capital investments and the exchange of preferred shares for common shares,
including Treasury and bank regulatory approvals, asset sales, the Company’s
future growth and market position, and the execution of its business plans.
When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,”
“intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,”
“should,” “would,” “will,” and similar expressions, you should consider them
as identifying forward-looking statements, although we may use other phrasing.
These forward-looking statements involve risks and uncertainties and are based
on our beliefs and assumptions, and on the information available to us at the
time that these disclosures were prepared.

These forward-looking statements involve risks and uncertainties and may not
be realized due to a variety of factors. There can be no assurance that the
Company will be able to close on the transactions with Investors and obtain
required capital, or that other actual results, performance or achievements of
the Company will not differ materially from those expressed or implied by
forward-looking statements. Factors that could cause actual events or results
to differ significantly from those described in the forward-looking statements
include, but are not limited to, our ability to complete the transactions
announced today and other aspects of our recapitalization and recovery plans.
For details on these and other factors that could affect expectations, see the
cautionary language included under the headings “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2011 and the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2012, and other filings with the SEC.

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

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


First Security Group, Inc.
John R. Haddock, CFO, 423-308-2075
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