Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - FIRST SECURITY GROUP INC/TNfsgi-2015630xex311.htm
EX-32.1 - EXHIBIT 32.1 - FIRST SECURITY GROUP INC/TNfsgi-2015630xex321.htm
EX-32.2 - EXHIBIT 32.2 - FIRST SECURITY GROUP INC/TNfsgi-2015630xex322.htm
EX-31.2 - EXHIBIT 31.2 - FIRST SECURITY GROUP INC/TNfsgi-2015630xex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________
FORM 10-Q
_________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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  ý    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
ý
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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: 66,811,909 shares outstanding and issued as of August 5, 2015



First Security Group, Inc. and Subsidiary
Form 10-Q
INDEX
 
 
 
Page
No.
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 



PART I - FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)

First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets
 
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
(in thousands)
(unaudited)
 
 
(unaudited)
ASSETS
 
 
 
 
 
Cash and Due from Banks
$
17,810

 
$
18,447

 
$
8,880

Interest Bearing Deposits in Banks
5,954

 
29,582

 
16,498

Cash and Cash Equivalents
23,764

 
48,029

 
25,378

Securities Available-for-Sale
90,610

 
95,571

 
102,429

Securities Held-to-Maturity, at amortized cost (fair value - $118,739 at June 30, 2015, $128,058 at December 31, 2014 and $133,077 at June 30, 2014)
115,704

 
124,485

 
130,709

Loans Held-for-Sale
36,107

 
72,242

 
28,547

Loans
764,411

 
663,622

 
659,539

Less: Allowance for Loan and Lease Losses
9,600

 
8,550

 
9,400

Net Loans
754,811

 
655,072

 
650,139

Premises and Equipment, net
29,567

 
28,347

 
26,510

Bank Owned Life Insurance
29,543

 
29,204

 
28,835

Other Real Estate Owned
4,441

 
4,511

 
7,717

Other Assets
14,362

 
12,783

 
12,421

TOTAL ASSETS
$
1,098,909

 
$
1,070,244

 
$
1,012,685



(See Accompanying Notes to Consolidated Financial Statements)
1


First Security Group, Inc. and Subsidiary
Consolidated Balance Sheets

 
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
(in thousands, except share and per share data)
(unaudited)
 
 
(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deposits
 
 
 
 
 
Noninterest Bearing Demand
$
169,462

 
$
159,996

 
$
149,588

Interest Bearing Demand
112,123

 
111,021

 
102,106

Savings and Money Market Accounts
268,901

 
258,694

 
233,502

Certificates of Deposit less than $250 thousand
241,916

 
248,140

 
269,798

Certificates of Deposit of $250 thousand or more
21,580

 
22,463

 
25,679

Brokered Deposits
107,704

 
105,299

 
87,036

Total Deposits
921,686

 
905,613

 
867,709

Securities Sold under Agreements to Repurchase
14,034

 
12,750

 
15,911

Other Borrowings
65,100

 
56,000

 
38,075

Other Liabilities
7,467

 
5,901

 
4,424

Total Liabilities
1,008,287

 
980,264

 
926,119

SHAREHOLDERS’ EQUITY
 
 
 
 
 
Common Stock – $.01 par value – 150,000,000 shares authorized; 66,811,909 shares issued as of June 30, 2015, 66,826,134 issued as of December 31, 2014, and 66,632,601 issued as of June 30, 2014
766

 
766

 
764

Paid-In Surplus
198,210

 
197,614

 
197,197

Accumulated Deficit
(101,882
)
 
(101,625
)
 
(103,474
)
Accumulated Other Comprehensive Loss
(6,472
)
 
(6,775
)
 
(7,921
)
Total Shareholders’ Equity
90,622

 
89,980

 
86,566

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,098,909

 
$
1,070,244

 
$
1,012,685



(See Accompanying Notes to Consolidated Financial Statements)
2


First Security Group, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
 
Loans, including fees
$
8,571

 
$
7,672

 
$
17,027

 
$
14,615

Investment Securities – taxable
818

 
936

 
1,659

 
1,996

Investment Securities – non-taxable
73

 
198

 
151

 
438

Other
36

 
37

 
54

 
50

Total Interest Income
9,498

 
8,843

 
18,891

 
17,099

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest Bearing Demand Deposits
47

 
48

 
94

 
95

Savings Deposits and Money Market Accounts
207

 
144

 
410

 
274

Certificates of Deposit
490

 
505

 
964

 
1,118

Brokered Deposits
307

 
531

 
617

 
1,097

Other
189

 
70

 
216

 
45

Total Interest Expense
1,240

 
1,298

 
2,301

 
2,629

NET INTEREST INCOME
8,258

 
7,545

 
16,590

 
14,470

Provision (Credit) for Loan and Lease Losses
643

 
(270
)
 
1,350

 
(1,242
)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN AND LEASE LOSSES
7,615

 
7,815

 
15,240

 
15,712

NONINTEREST INCOME
 
 
 
 
 
 
 
Service Charges on Deposit Accounts
728

 
769

 
1,402

 
1,510

Gain on Sales of Loans Originated to be Held-for-Sale
241

 
279

 
453

 
459

Gain on Sales of Securities Available-for-Sale

 
247

 
8

 
618

Gain on Sales of Loans Transferred to Held-for-Sale
183

 
450

 
1,243

 
472

Other
729

 
1,285

 
3,256

 
2,606

Total Noninterest Income
1,881

 
3,030

 
6,362

 
5,665

NONINTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and Employee Benefits
5,319

 
5,225

 
10,739

 
10,499

Expense on Premises and Fixed Assets, net of rental income
1,521

 
1,296

 
2,984

 
2,673

Other
3,308

 
3,580

 
7,846

 
7,374

Total Noninterest Expense
10,148

 
10,101

 
21,569

 
20,546

(LOSS) INCOME BEFORE INCOME TAX PROVISION
(652
)
 
744

 
33

 
831

Income Tax Provision
145

 
131

 
290

 
263

NET (LOSS) INCOME
$
(797
)
 
$
613

 
$
(257
)
 
$
568

NET (LOSS) INCOME PER SHARE:
 
 
 
 
 
 
 
Net (Loss) Income Per Share – Basic
$
(0.01
)
 
$
0.01

 
$
0.00

 
$
0.01

Net (Loss) Income Per Share – Diluted
$
(0.01
)
 
$
0.01

 
$
0.00

 
$
0.01


(See Accompanying Notes to Consolidated Financial Statements)
3


First Security Group, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Net (loss) income
$
(797
)
 
$
613

 
$
(257
)
 
$
568

Other comprehensive income (loss)
 
 
 
 
 
 
 
Change in securities available-for-sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses) for the period
(554
)
 
751

 
(369
)
 
1,385

Reclassification adjustment for securities gains realized in income

 
(247
)
 
(8
)
 
(618
)
Unrealized gains (losses) on available-for-sale securities
(554
)
 
504

 
(377
)
 
767

Change in securities held-to-maturity:
 
 
 
 
 
 
 
Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income
627

 
453

 
1,034

 
935

Changes from securities held-for-maturity
627

 
453

 
1,034

 
935

Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized derivative gains (losses) on cash flow hedges
318

 
(14
)
 
(354
)
 
(13
)
Changes from cash flow hedges
318

 
(14
)
 
(354
)
 
(13
)
Other comprehensive income, net of tax
391

 
943

 
303

 
1,689

Comprehensive (loss) income
$
(406
)
 
$
1,556

 
$
46

 
$
2,257







(See Accompanying Notes to Consolidated Financial Statements)
4


First Security Group, Inc. and Subsidiary
Consolidated Statement of Shareholders’ Equity
(unaudited)
 
 
Common Stock
 
 
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
(in thousands)
Shares
 
Amount
 
Paid-In
Surplus
 
Accumulated
Deficit
 
Total
Balance - December 31, 2014
66,826

 
$
766

 
$
197,614

 
$
(101,625
)
 
$
(6,775
)
 
$
89,980

Net Loss

 

 

 
(257
)
 

 
(257
)
Other Comprehensive Income

 

 

 

 
303

 
303

Issuance of Restricted Stock, net of forfeitures
(14
)
 

 

 

 

 

Share-Based Compensation, net of forfeitures

 

 
596

 

 

 
596

Balance - June 30, 2015
66,812

 
$
766

 
$
198,210

 
$
(101,882
)
 
$
(6,472
)
 
$
90,622



(See Accompanying Notes to Consolidated Financial Statements)
5


 
First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
 
 
 
 
 
Six Months Ended
 
June 30,
(in thousands)
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(257
)
 
$
568

Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities
 
 
 
Provision (credit) for Loan and Lease Losses
1,350

 
(1,242
)
Amortization, net
590

 
701

Share-Based Compensation
596

 
661

Depreciation
866

 
820

Gain on Sales of Loans Originated to be Held-For-Sale
(453
)
 
(459
)
Gain on Sales of Loans Transferred to Held-For-Sale
(1,243
)
 
(472
)
Gain on Sales of Available-for-Sale Securities
(8
)
 
(618
)
Net loss (gains) on Sales of Other Real Estate Owned and Repossessions, net
5

 
(5
)
Write-down of Other Real Estate Owned and Repossessions
163

 
385

Accretion of Fair Value Adjustment, net


 
(28
)
Loans Originated to be Held-for-Sale
(11,001
)
 
(9,787
)
Sale of Loans Originated to be Held-for-Sale
12,487

 
9,906

Changes in Operating Assets and Liabilities -
 
 
 
Interest Receivable
55

 
377

Other Assets
(2,052
)
 
667

Interest Payable
72

 
(279
)
Other Liabilities
1,099

 
566

Net Cash Provided by Operating Activities
2,269

 
1,761

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Activity in Securities Available-for-Sale:
 
 
 
Maturities, Prepayments and Calls
8,068

 
6,707

Sales
2,008

 
64,475

Purchases
(5,974
)
 

Activity in Securities Held-to-Maturity:
 
 
 
Maturities, Prepayments and Calls
9,815

 
2,794

Loan Originations and Principal Collections, net
(136,758
)
 
(119,250
)
Proceeds from Sale of Loans
70,887

 
14,887

Proceeds from Sales of Other Real Estate and Repossessions
1,056

 
2,184

Additions to Premises and Equipment
(2,086
)
 
(943
)
Capital Improvements to Other Real Estate and Repossessions
(7
)
 
(11
)
Net Cash Used in Investing Activities
(52,991
)
 
(29,157
)

(See Accompanying Notes to Consolidated Financial Statements)
6


First Security Group, Inc. and Subsidiary
Consolidated Statements of Cash Flow
(unaudited)
 
 
 
 
 
Six Months Ended
 
June 30,
(in thousands)
2015
 
2014
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net Increase in Deposits
16,073

 
10,440

Net Increase in Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
1,284

 
3,391

Net Increase of Other Borrowings
9,100

 
18,075

Net Cash Provided by Financing Activities
26,457

 
31,906

NET CHANGE IN CASH AND CASH EQUIVALENTS
(24,265
)
 
4,510

CASH AND CASH EQUIVALENTS – beginning of period
48,029

 
20,868

CASH AND CASH EQUIVALENTS – end of period
$
23,764

 
$
25,378

 
 
 
 
 
Six Months Ended
 
June 30,
 
2015
 
2014
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Loans and leases transferred to OREO and repossessions
$
1,168

 
$
2,064

Transfers of loans to loans held-for-sale at lower of cost or market value
$
43,397

 
$
40,501

SUPPLEMENTAL SCHEDULE OF CASH FLOWS
 
 
 
Interest paid
$
2,229

 
$
2,981

Income taxes paid
$
51

 
$
203

 











(See Accompanying Notes to Consolidated Financial Statements)
7


FIRST SECURITY GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
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. Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net loss or shareholders’ equity.
The consolidated financial statements include the accounts of First Security Group, Inc. ("First Security" , "FSG" or the "Company") and FSGBank, N.A. ("FSGBank" or the "Bank"), its wholly owned subsidiary bank. All significant intercompany balances and transactions have been eliminated.
Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 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, 2014.
Recent Developments
On June 8, 2015, First Security and Atlantic Capital Bancshares, Inc. (“Atlantic Capital”) entered into an Amendment (the “Merger Agreement Amendment”) to the Agreement and Plan of Merger, dated March 25, 2015, by and between First Security and Atlantic Capital (the “Merger Agreement”) providing for the merger of First Security with and into Atlantic Capital (the “Merger”).
Under the terms of the Merger Agreement, Atlantic Capital will purchase First Security for total consideration of approximately $160 million. FSG shareholders may elect cash equal to $2.35 per share, stock based on a fixed exchange ratio of 0.188 shares of Atlantic Capital common stock for each FSG share or any combination thereof. Atlantic Capital intends to register its shares with the SEC and seek a listing on NASDAQ concurrent with the closing of the transaction. The Merger Agreement, as originally executed, provided for approximately 40% of the shares of First Security common stock outstanding at the effective time of the Merger to be exchanged for cash merger consideration, with the remaining 60% to be exchanged for shares of Atlantic Capital common stock. Elections as to the form of merger consideration to be received by First Security shareholders were subject to allocation to meet the 40% cash election threshold.
The Merger Agreement Amendment alters the mix of consideration to be received by First Security shareholders in the Merger. Pursuant to the Merger Agreement, as amended by the Merger Agreement Amendment, between 30-35% of the shares of First Security common stock outstanding at the effective time of the Merger will be exchanged for cash, with the remaining 65-70% to be exchanged for shares of Atlantic Capital common stock. First Security shareholders may elect the form of merger consideration to be received, but such elections are subject to allocation in the event that less than 30% or more than 35% of the outstanding shares of First Security common stock are subject to a cash election.
Other than as expressly modified pursuant to the Merger Agreement Amendment, the Merger Agreement, which was previously filed as Exhibit 2.1 to the Current Report on Form 8-K filed by First Security with the Securities and Exchange Commission on March 27, 2015, remains in full force and effect as originally executed on March 25, 2015. On June 10, 2015, First Security filed a Current Report on Form 8-K that provides additional details relating to the Merger Agreement Amendment. A copy of the Merger Agreement Amendment is is filed as Exhibit 2.1 to such Form 8-K. The transaction has been unanimously approved by the board of directors of each company. The transaction is expected to close in the fourth quarter of 2015 and is subject to Atlantic Capital and First Security shareholder approval, regulatory approval and other conditions set forth in the merger agreement.

NOTE 2 – REGULATORY CAPITAL
Regulatory Capital Ratios
Banks and bank holding companies, as regulated institutions, are subject to various regulatory capital requirements administered by the OCC and Federal Reserve, the primary federal regulators for FSGBank and the Company, respectively. The OCC and Federal Reserve 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

8


with the risk profile assigned to their assets in accordance with the guidelines. Regulatory capital guidelines require that capital be measured in relation to the credit and market risks of both on- and off-balance-sheet items as calculated under regulatory accounting practices. On January 1, 2015, the Company became subject to Basel III rules, which include transition provisions through January 1, 2019. Under Basel III, total capital consist of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of Common Equity Tier 1 Capital and additional Tier 1 capital.
The transition provisions include important differences in determining the composition of regulatory capital between the Basel I Rules and Basel III rules including, changes in capital deductions related to the Company's deferred tax assets and defined benefit pension assets, and the inclusion of unrealized gains and losses on AFS debt and certain marketable equity securities recorded in accumulated other comprehensive income ("AOCI"). These changes are impacted by, among other things, future changes in interest rates, overall earnings performance and company actions. Changes to the composition of regulatory capital under Basel III, as compared to the Basel I rules, are recognized in 20 percent annual increments, and will be fully recognized as of January 1, 2019. When presented on a fully phased-in basis, capital, risk-weighted assets and the capital ratios assume all regulatory capital adjustments and deductions are fully recognized.
Common Equity Tier 1 Capital primarily includes qualifying common shareholders' equity, retained earnings, accumulated other comprehensive income and certain minority interests. Goodwill, disallowed intangible assets and certain disallowed deferred tax assets are excluded from Common Equity Tier 1 Capital.
Additional Tier 1 capital primarily includes qualifying non-cumulative preferred stock, trust preferred securities subject to phase-out and certain minority interests. Certain deferred tax assets are also excluded.
Tier 2 capital primarily consists of qualifying subordinated debt, a limited portion of the allowance for loan and lease losses, trust preferred securities subject to phase-out and reserves for unfunded lending commitments. The Company's total capital is the sum of Tier 1 capital plus Tier 2 capital.
To meet adequately capitalized regulatory requirements, an institution must maintain a Common Equity Tier 1 Capital of 4.5%, a Tier 1 capital ratio of 6.0% and a Total capital ratio of 8.0%. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines. The risk-based capital rules have been further supplemented by a Tier 1 leverage ratio, defined as Tier 1 capital divided by quarterly average total assets, after certain adjustments. The Bank must maintain a Tier 1 leverage ratio of at least 5.0% to be classified as “well capitalized.” Failure to meet the capital requirements established by the joint agencies can lead to certain mandatory and discretionary actions by regulators that could have a material adverse effect on the Company's consolidated financial statements.
The Basel III rules also introduced a capital conservation buffer which will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
The Basel III rules were implemented in the first quarter of 2015. The Company opted out of the AOCI treatment under the new requirements and, as such, unrealized security gains and losses will continue to be excluded from bank regulatory capital.


9



The following table presents capital ratios for the Company and FSGBank at June 30, 2015, December 31, 2014 and June 30, 2014:
CAPITAL RATIOS
First Security Group, Inc.
Actual
 
Capital Adequacy
 
Excess
June 30, 2015
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Common Equity Tier 1 Capital (to risk-weighted assets)
97,060

10.8
%
 
40,458

4.5
%
 
56,602

6.3%
Tier 1 capital (to risk-weighted assets)
97,060

10.8
%
 
53,944

6.0
%
 
43,116

4.8%
Total capital (to risk-weighted assets)
106,968

11.9
%
 
71,926

8.0
%
 
35,042

3.9%
Tier 1 leverage ratio
97,060

8.9
%
 
43,415

4.0
%
 
53,645

4.9%
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Tier 1 capital (to risk-weighted assets)
92,928

11.9
%
 
25,264

4.0
%
 
67,664

7.9%
Total capital (to risk-weighted assets)
101,475

13.0
%
 
50,529

8.0
%
 
50,946

5.0%
Tier 1 leverage ratio
92,928

9.4
%
 
44,879

4.0
%
 
48,049

5.4%
 
 
 
 
 
 
 
 

June 30, 2014
 
 
 
 
 
 
 

Tier 1 capital (to risk-weighted assets)
94,254

12.4
%
 
30,527

4.0
%
 
63,727

8.4%
Total capital (to risk-weighted assets)
103,796

13.6
%
 
61,054

8.0
%
 
42,742

5.6%
Tier 1 leverage ratio
94,254

9.4
%
 
40,224

4.0
%
 
54,030

5.4%


FSGBank
Actual
 
Well Capitalized
 
Excess
June 30, 2015
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Common Equity Tier 1 Capital (to risk-weighted assets)
92,162

10.25
%
 
58,434

6.5
%
 
33,728

3.8%
Tier 1 capital (to risk-weighted assets)
92,162

10.25
%
 
71,919

8.0
%
 
20,243

2.3%
Total capital (to risk-weighted assets)
102,070

11.35
%
 
89,899

10.0
%
 
12,171

1.4%
Tier 1 leverage ratio
92,162

8.49
%
 
54,267

5.0
%
 
37,895

3.5%
 
 
 
 
 
 
 



December 31, 2014
 
 
 
 
 
 



Tier 1 capital (to risk-weighted assets)
86,781

11.31
%
 
39,192

6.0
%
 
47,589

5.3%
Total capital (to risk-weighted assets)
95,264

12.40
%
 
65,319

10.0
%
 
29,945

2.4%
Tier 1 leverage ratio
86,781

8.88
%
 
55,983

5.0
%
 
30,798

3.9%
 
 
 
 
 
 
 



June 30, 2014
 
 
 
 
 
 



Tier 1 capital (to risk-weighted assets)
88,769

11.6
%
 
45,773

6.0
%
 
42,996

5.6%
Total capital (to risk-weighted assets)
98,307

12.9
%
 
76,289

10.0
%
 
22,018

2.9%
Tier 1 leverage ratio
88,769

8.8
%
 
50,280

5.0
%
 
38,489

3.8%



10




NOTE 3 –OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) for the Company consists of changes in net unrealized gains and losses on investment securities available-for-sale and derivatives.  The following tables present a summary of the changes in accumulated other comprehensive income (loss) balances for the applicable periods.

Changes In Accumulated Other Comprehensive Income (Loss) from March 31, 2015 to June 30, 2015
 
 
Unrealized Gain (Loss) on Derivatives
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Unrealized Gain (Loss) on Held-to-Maturity Securities Transferred from AFS
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands)
Beginning balance, March 31, 2015
 
(807
)
 
(315
)
 
(5,741
)
 
(6,863
)
Other comprehensive income (loss) before reclassifications
 
318

 
(554
)
 

 
(236
)
Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income
 

 

 
627

 
627

Net current period other comprehensive income (loss)
 
318

 
(554
)
 
627

 
391

Ending balance, June 30, 2015
 
$
(489
)
 
$
(869
)
 
$
(5,114
)
 
$
(6,472
)


Changes In Accumulated Other Comprehensive Income (Loss) from March 31, 2014 to June 30, 2014
 
 
Unrealized Gain (Loss) on Derivatives
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Unrealized Gain (Loss) on Held-to-Maturity Securities Transferred from AFS
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands)
Beginning balance, March 31, 2014
 
(36
)
 
(1,367
)
 
(7,461
)
 
(8,864
)
Other comprehensive income (loss) before reclassifications
 
(14
)
 
751

 

 
737

Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income
 

 

 
453


453

Reclassification adjustment for securities gain realized in income
 

 
(247
)
 

 
(247
)
Net current period other comprehensive income (loss)
 
(14
)
 
504

 
453

 
943

Ending balance, June 30, 2014
 
$
(50
)
 
$
(863
)
 
$
(7,008
)
 
$
(7,921
)







11




Changes in Accumulated Other Comprehensive Income (Loss) from December 31, 2014 to June 30, 2015
 
 
Unrealized Gain (Loss) on Derivatives
 
Unrealized Gain (Loss) on Available-for-Sale Securities
 
Unrealized Gain (Loss) on Held-to-Maturity Securities Transferred from AFS
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands)
Beginning balance, December 31, 2014
 
$
(135
)
 
$
(492
)
 
$
(6,148
)
 
$
(6,775
)
Other comprehensive loss before reclassifications
 
(354
)
 
(369
)
 

 
(723
)
Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income
 

 

 
1,034

 
1,034

Reclassification adjustment for securities gain realized in income
 

 
(8
)
 

 
(8
)
Net current period other comprehensive income (loss)
 
(354
)
 
(377
)
 
1,034

 
303

Ending balance, June 30, 2015
 
$
(489
)
 
$
(869
)
 
$
(5,114
)
 
$
(6,472
)


Changes in Accumulated Other Comprehensive Income (Loss) from December 31, 2013 to June 30, 2014
 
 
Unrealized Gain (Loss) on Derivatives
 
Unrealized Gain (Loss) on Available-for-sale Securities
 
Unrealized Gain (Loss) on Held-to-Maturity Securities Transferred from AFS
 
Accumulated Other Comprehensive Income (Loss)
 
 
(in thousands)
Beginning balance, December 31, 2013
 
$
(37
)
 
$
(1,630
)
 
$
(7,943
)
 
$
(9,610
)
Other comprehensive loss before reclassifications
 
(13
)
 
1,385

 

 
1,372

Amortization of fair value for securities held-to-maturity reclassified out of accumulated other comprehensive loss to investment income
 

 

 
935

 
935

Reclassification adjustment for securities gain realized in income
 

 
(618
)
 

 
(618
)
Net current period other comprehensive income (loss)
 
(13
)
 
767

 
935

 
1,689

Ending balance, June 30, 2014
 
$
(50
)
 
$
(863
)
 
$
(7,008
)
 
$
(7,921
)

For the three and six months ended June 30, 2015 and 2014, no amounts were reclassified into interest income due to gains on derivatives. For the three and six months ended June 30, 2015, there were zero and $8 thousand, respectively, and for the three and six months ended June 30, 2014, there were $247 thousand and $618 thousand, respectively, of gains reclassified from unrealized gains (losses) on available-for-sale securities to earnings as a result of sales during the period.

During 2013, approximately $143 million of available-for-sale securities were transferred to the held-to-maturity classification. As of the transfer date, the securities held an unrealized loss of approximately $8.9 million. The fair value as of the transfer date became the new amortized cost basis with the unrealized loss, along with any remaining purchase discount or premium, being reclassified out of accumulated other comprehensive loss over the remaining life of the security. For the three and six months ended June 30, 2015, approximately $627 thousand and $1.0 million, respectively, and for the three and six months ended June 30, 2014, approximately $453 thousand and $935 thousand, respectively, of the unrealized loss was reclassified out of accumulated other comprehensive loss.



12



NOTE 4 – EARNINGS PER COMMON SHARE
The difference in basic and diluted weighted average shares is due to the assumed conversion of outstanding stock options and restricted stock awards using the treasury stock method. The Company has issued certain restricted stock awards, which are unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents. These restricted shares are considered participating securities. Accordingly, the Company calculated net income available to common shareholders pursuant to the two-class method, whereby net income is allocated between common shareholders and participating securities. In periods of a net loss, no allocation is made to participating securities as they are not contractually required to fund net losses. The computation of basic and diluted earnings per share is as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(797
)
 
$
613

 
$
(257
)
 
$
568

Dividends and undistributed earnings allocated on participating securities

 
(8
)
 

 
(8
)
Net income available (loss allocated)
$
(797
)
 
$
605

 
$
(257
)
 
$
560

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding including participating securities
66,788

 
66,635

 
66,812

 
66,635

Less: Participating securities
866

 
904

 
876

 
907

Weighted average basic common shares outstanding
65,922

 
65,731

 
65,936

 
65,728

Effect of diluted securities:
 
 
 
 
 
 
 
Equivalent shares issuable upon exercise of stock options, stock warrants and restricted stock awards

 
6

 

 
4

Weighted average diluted common shares outstanding
65,922

 
65,737

 
65,936

 
65,732

Net earnings per share:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
0.01

 
$

 
$
0.01

Diluted
$
(0.01
)
 
$
0.01

 
$

 
$
0.01

As of June 30, 2015, all stock options and restricted stock grants of 3.4 million were considered anti-dilutive as the Company was in a net loss position. As of June 30, 2014, 3.3 million stock options and restricted stock grants were considered anti-dilutive. For the three and six months ended June 30, 2015, there were no equivalent shares included in the computation of diluted earnings per share and for the three and six months ended June 30, 2014, there were six thousand and four thousand shares, respectively, included in the computation of diluted earnings per share.

13


NOTE 5 – SECURITIES
Investment Securities by Type
The following table presents the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss.
 
 Available-for-sale
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Mortgage-backed—residential
$
81,463

 
$
631

 
$
514

 
$
81,580

Municipals
2,995

 
10

 
7

 
2,998

Other
6,049

 
8

 
25

 
6,032

Total
$
90,507

 
$
649

 
$
546

 
$
90,610

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Mortgage-backed—residential
$
82,686

 
$
790

 
$
350

 
$
83,126

Municipals
4,355

 
20

 
12

 
4,363

Other
8,048

 
39

 
5

 
8,082

Total
$
95,089

 
$
849

 
$
367

 
$
95,571

 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Mortgage-backed—residential
$
86,420

 
$
845

 
$
755

 
$
86,510

Municipals
5,852

 
98

 
92

 
5,858

Other
10,049

 
19

 
7

 
10,061

Total
$
102,321

 
$
962

 
$
854

 
$
102,429


14



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

Held-to-maturity
Amortized
Cost
 
Gross
Unrecognized
Gains
 
Gross
Unrecognized
Losses
 
Fair Value

(in thousands)
June 30, 2015
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
55,182

 
$
987

 
$
433

 
$
55,736

Mortgage-backed—residential
33,384

 
1,100

 
282

 
34,202

Municipals
27,138

 
1,692

 
29

 
28,801

Total
$
115,704

 
$
3,779

 
$
744

 
$
118,739

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
60,537

 
$
1,191

 
$
278

 
$
61,450

Mortgage-backed—residential
36,798

 
809

 
13

 
37,594

Municipals
27,150

 
1,878

 
14

 
29,014

Total
$
124,485

 
$
3,878

 
$
305

 
$
128,058

 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
Debt securities—
 
 
 
 
 
 
 
Federal agencies
$
63,892

 
$
802

 
$
395

 
$
64,299

Mortgage-backed—residential
39,716

 
587

 
82

 
40,221

Municipals
27,101

 
1,456

 

 
28,557

Total
$
130,709

 
$
2,845

 
$
477

 
$
133,077


During 2013, approximately $143 million of available-for-sale securities were transferred to the held-to-maturity portfolio. As of the transfer date, the securities held an unrealized loss of approximately $8.9 million. The fair value as of the transfer date became the new amortized cost basis with the unrealized loss, along with any remaining purchase discount or premium, being reclassified into accumulated other comprehensive income to be amortized over the life of the security. No gain or loss was recognized at the time of the transfer. For the three and six months ended June 30, 2015, approximately $627 thousand and $1.0 million, respectively, of the unrealized loss was reclassified out of accumulated other comprehensive income and approximately $453 thousand and $935 thousand was reclassified for the same periods in 2014.
During the six months ended June 30, 2015, the Company sold one corporate bond resulting in proceeds of approximately $2.0 million and a gross gain of $8 thousand.
During the three months ended June 30, 2014, the Company sold thirty-seven tax exempt municipal securities resulting in proceeds of approximately $13.1 million and gross gains of $280 thousand and gross losses of $33 thousand. During the six months ended June 30, 2014, the Company sold fifty-eight tax exempt municipal securities resulting in proceeds of approximately $23.1 million and gross gains of $484 thousand and gross losses of $253 thousand, three federal agency securities resulting in proceeds of approximately $4.0 million and gross gains of $38 thousand and gross losses of $0 thousand and twenty-three mortgage-backed securities resulting in proceeds of $34.4 million and gross gains of $618 thousand and $269 thousand gross losses.
The Company also sold $2.9 million in certificates of deposit resulting in gross gains of $1 thousand and gross losses of $1 thousand, resulting in no gain or loss for the three and six months ended June 30, 2014.
At June 30, 2015December 31, 2014 and June 30, 2014, securities with a carrying value of $44.2 million, $35.5 million and $38.0 million, respectively, were pledged to secure public deposits. At June 30, 2015December 31, 2014 and June 30, 2014, the carrying amount of securities pledged to secure repurchase agreements was $15.2 million, $16.5 million and $18.1 million, respectively. At June 30, 2015December 31, 2014 and June 30, 2014, securities of $5.0 million, $5.0 million and $5.0

15


million were pledged to the Federal Reserve Bank of Atlanta to secure the Company’s daytime correspondent transactions. At June 30, 2015, December 31, 2014 and June 30, 2014 the carrying amount of securities pledged to secure lines of credit with the Federal Home Loan Bank (the "FHLB") totaled $82.8 million, $96.0 million and $102.6 million, respectively. At June 30, 2015, pledged and unpledged securities totaled $147.2 million and $59.1 million, respectively.

Maturity of Securities
The following table presents the amortized cost and fair value of debt securities by contractual maturity at June 30, 2015.
 
 
Available-For-Sale
 
Held-To-Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Within 1 year
$
100

 
$
100

 
$

 
$

Over 1 year through 5 years
5,163

 
5,148

 
25,948

 
26,263

5 years to 10 years
3,260

 
3,257

 
29,671

 
30,406

Over 10 years
521

 
525

 
26,701

 
27,868

 
9,044

 
9,030

 
82,320

 
84,537

Mortgage-backed residential securities
81,463

 
81,580

 
33,384

 
34,202

Total
$
90,507

 
$
90,610

 
$
115,704

 
$
118,739


Impairment Analysis
The following table shows the gross unrealized losses and fair value of the Company’s available-for-sale investments with unrealized losses and the gross unrecognized losses and fair value of the Company's held-to-maturity investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015December 31, 2014 and June 30, 2014.
 
 
Less than 12 months
 
12 months or greater
 
Totals
Available-For-Sale
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed—residential
$
18,914

 
$
169

 
$
25,355

 
$
345

 
$
44,269

 
$
514

Municipals

 

 
628

 
7

 
628

 
7

Other
50

 
11

 
2,986

 
14

 
3,036

 
25

Totals
$
18,964

 
$
180

 
$
28,969

 
$
366

 
$
47,933

 
$
546

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed—residential
$
4,553

 
$
29

 
$
34,715

 
$
321

 
$
39,268

 
$
350

Municipals

 

 
625

 
12

 
625

 
12

Other

 

 
2,995

 
5

 
2,995

 
5

Totals
$
4,553


$
29

 
$
38,335

 
$
338

 
$
42,888

 
$
367

June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed—residential
$
19,766

 
$
125

 
$
46,080

 
$
630

 
$
65,846

 
$
755

Municipals
2,255

 
59

 
1,411

 
33

 
3,666

 
92

Other

 

 
2,993

 
7

 
2,993

 
7

Totals
$
22,021

 
$
184

 
$
50,484

 
$
670

 
$
72,505

 
$
854



16


 
Less than 12 months
 
12 months or greater
 
Totals
Held-To-Maturity
Fair
Value
 
Unrecognized
Losses
 
Fair
Value
 
Unrecognized
Losses
 
Fair
Value
 
Unrecognized
Losses
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
7,431

 
$
119

 
$
20,725

 
$
314

 
$
28,156

 
$
433

Mortgage-backed—residential
1,970

 
25

 
12,964

 
257

 
14,934

 
282

Municipals
999

 
5

 
1,302

 
24

 
2,301

 
29

Totals
$
10,400

 
$
149

 
$
34,991

 
$
595

 
$
45,391

 
$
744

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$

 
$

 
$
15,102

 
$
278

 
$
15,102

 
$
278

Mortgage-backed—residential

 

 
8,022

 
13

 
8,022

 
13

Municipals
565

 
14

 

 

 
565

 
14

Totals
$
565

 
$
14

 
$
23,124

 
$
291

 
$
23,689

 
$
305

 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Federal agencies
$
52,283

 
$
395

 
$

 
$

 
$
52,283

 
$
395

Mortgage-backed—residential
26,478

 
82

 

 

 
26,478

 
82

Totals
$
78,761

 
$
477

 
$

 
$

 
$
78,761

 
$
477


As of June 30, 2015, the Company performed an impairment assessment of the available-for-sale and held-to-maturity securities in its portfolio that had unrealized losses to determine whether the decline in the fair value of these securities below their cost was other-than-temporary. Under authoritative accounting guidance, impairment is considered other-than-temporary if any of the following conditions exists: (1) the Company intends to sell the security, (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized costs basis or (3) the Company does not expect to recover the security’s entire amortized cost basis, even if the Company does not intend to sell. Additionally, accounting guidance requires that for impaired available-for-sale securities that the Company does not intend to sell and/or that it is not more-likely-than-not that the Company will have to sell prior to recovery but for which credit losses exist, the other-than-temporary impairment should be separated between the total impairment related to credit losses, which should be recognized in current earnings, and the amount of impairment related to all other factors, which should be recognized in other comprehensive income. Losses related to held-to-maturity securities are not recorded, as these securities are carried at their amortized cost. If a decline is determined to be other-than-temporary due to credit losses, the cost basis of the individual available-for-sale or held-to-maturity security is written down to fair value, which then becomes the new cost basis. The new cost basis would not be adjusted in future periods for subsequent recoveries in fair value, if any.
In evaluating the recovery of the entire amortized cost basis, the Company considers factors such as (1) the length of time and the extent to which the market value has been less than cost, (2) the financial condition and near-term prospects of the issuer, including events specific to the issuer or industry, (3) defaults or deferrals of scheduled interest, principal or dividend payments and (4) external credit ratings and recent downgrades.
As of June 30, 2015, gross unrealized losses in the Company’s available-for-sale portfolio totaled $546 thousand, compared to $367 thousand as of December 31, 2014 and $854 thousand as of June 30, 2014. As of June 30, 2015, gross unrecognized losses in the Company's held-to-maturity portfolio totaled $744 thousand compared to $305 thousand as of December 31, 2014 and $477 thousand as of June 30, 2014. As of June 30, 2015, the available-for-sale securities unrealized losses in mortgage-backed securities (consisting of nineteen securities), municipals (consisting of three security) and the held-to-maturity unrecognized losses in mortgage-backed securities (consisting of nine securities), municipals (consisting of four securities) and federal agencies (consisting of eight securities) are primarily due to widening credit spreads and changes in interest rates subsequent to purchase. Between June 30, 2014 and June 30, 2015, the rate on the 10-year U.S. Treasury decreased from approximately 2.53% to 2.35%. As this represented a decrease in interest rates, the market valuation of the Company's securities adjusted accordingly. The unrealized loss in other available-for-sale securities relates to two corporate notes. The unrealized loss in the corporate notes is primarily due to changes in interest rates subsequent to purchase. The Company does not intend to sell the available-for-sale investments with unrealized losses and it is not more likely than not that the Company will be required to sell the available-for-sale investments before recovery of their amortized cost basis, which

17


may be maturity. Based on results of the Company’s impairment assessment, the unrealized losses related to the available-for-sale securities and the unrecognized losses related to the held-to-maturity securities at June 30, 2015 are considered temporary.
On December 10, 2013, the Federal Reserve and other regulators jointly issued a proposed rule implementing requirements of a new Section 13 to the Bank Holding Company Act, commonly referred to as the “Volcker Rule.” We continue to monitor and review applicable regulatory guidance on the implementation of the Volcker Rule. The Federal Reserve Board granted an extension for conformance until July 21, 2017 and announced that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interests in and sponsorship of certain collateralized loan obligations (“CLOs”) covered by the Volcker Rule.
As of June 30, 2015, the Company has identified approximately $16.0 million of collateralized loan obligations ("CLOs") within its investment security portfolio that may be impacted by the Volcker Rule. If these securities are deemed to be prohibited bank investments, the Company would have to sell the securities prior to the compliance date of July 21, 2017. At this time, the Company continues to evaluate the additional regulatory guidance on the subject as well as the specific terms of the CLOs in the Company's portfolio to determine whether such CLOs will remain permitted investments. The unrealized gain as of June 30, 2015 for the Company's CLOs totaled $14 thousand.

NOTE 6 – LOANS HELD-FOR-SALE
The Company maintains loans held-for-sale in connection with three distinct departments: the mortgage department, the government lending department and the TriNet division. The Company's mortgage department primarily originates long-term loans held-for-sale and uses various correspondent relationships to sell the loans on the secondary market. The mortgage department also originates certain mortgage loans to be retained and classifies as loans held-for-investment. From time to time, certain of these loans may be marketed and sold in order to manage the Company's interest rate risk position and concentration limits. The government lending department originates SBA and USDA government guaranteed loans with the primary purpose of selling the guaranteed portion in the secondary market. The Company's TriNet division originates construction loans for pre-leased "build to suit" projects and provides interim and long-term financing to professional developers and private investors of commercial real estate with or subject to long-term leases to tenants that are investment grade or have investment grade attributes. The Company classifies all TriNet originations as held-for-investment. From time to time, the Company may evaluate a portion of the originated loans to sell in order to manage the Company's overall interest rate risk and asset-liability sensitivity. The Company transfers the loans to held-for-sale once specific loans are identified and the decision to sell the loan has been made. This is generally represented by the Company's execution of a letter of intent.
Residential loans held-for-sale by the Company's mortgage department totaled $1.3 million, $2.3 million and $547 thousand at June 30, 2015, December 31, 2014 and June 30, 2014, respectively.
The Company's government lending department had loans held-for-sale at June 30, 2015 of approximately $1.9 million. This amount represents the portion of the SBA loan the Company intends to sell to third parties. Sales of SBA loans have generated income of approximately $59 thousand and $73 thousand, respectively, for the three and six months ended June 30, 2015 and $99 thousand and $121 thousand for the same periods in 2014.
During the first six months of 2015, the Company identified groups of commercial real estate loans to be sold to third parties from the TriNet division. These loans were transferred from loans held-for-investment to loans held-for-sale at the lower of cost or market value of $43.4 million, which was net of an allowance of $63 thousand. The balance of TriNet loans held-for-sale at June 30, 2015 was $30.8 million, which was net of an allowance of $37 thousand. The sale of these loans is expected to take place in the third quarter of 2015. During the first quarter of 2014, the Company identified a group of commercial real estate loans to be sold to third parties from the TriNet division. These loans were transferred to loans held-for-sale at the lower of cost or market value at a value of $33.6 million, which was net of an allowance of approximately $100 thousand. During the third quarter of 2014, the Company identified additional commercial real estate loans from the TriNet division to sell. These loans were transferred to loans held-for-sale at the lower of cost or market value at a value of $45.6 million, which was net of an allowance of approximately $148 thousand. Sales of TriNet loans have resulted in gains of approximately $124 thousand and $1.2 million, respectively, for the three and six months ended June 30, 2015, and $351 thousand for the same periods in 2014.
During the first quarter of 2015, the Company also identified a group of residential 1-4 family loans to be sold to a third party. These loans were transferred from loans held-for-investment to loans held-for-sale at a market value of $2.1 million, which was net of an allowance of $20 thousand. The sale of these loans is expected to take place in the third quarter of 2015. During the second quarter of 2014, the Company identified a group of residential 1-4 family loans to be sold to a third party. These loans were transferred from the held-for-investment portfolio to the held-for-sale portfolio at approximately $6.9 million, which was the lower of cost or market value and were sold during the third quarter of 2014. There were no sales of residential 1-4 family loans during the three and six months ended June 30, 2015 and 2014.


18


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

 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
Loans secured by real estate—
(in thousands)
Residential 1-4 family originated to be held-for-sale
$
1,306

 
$
2,298

 
$
547

Residential 1-4 family transferred to held-for-sale
2,135

 

 
6,917

SBA commercial real estate originated to be held-for-sale
213

 

 

Commercial real estate loans transferred to held-for-sale
30,802

 
69,662

 
21,083

               Total real estate loans held-for-sale
34,456

 
71,960

 
28,547

SBA commercial and industrial loans originated to be held-for-sale
1,651

 

 

Commercial Loans transferred to held-for-sale

 
282

 

Total loans held-for-sale
$
36,107

 
$
72,242

 
$
28,547


All loans held-for-sale at June 30, 2015, December 31, 2014 and June 30, 2014 were rated as pass and no loans were past due or classified as non-accrual.

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Loans by type are summarized in the following table.
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
Loans secured by real estate—
(in thousands)
Residential 1-4 family
$
184,110

 
$
181,655

 
$
178,482

Commercial
392,222

 
314,843

 
311,527

Construction
47,197

 
47,840

 
52,784

Multi-family and farmland
20,476

 
18,108

 
16,178

 
644,005

 
562,446

 
558,971

Commercial loans
98,265

 
73,985

 
65,952

Consumer installment loans
17,493

 
22,539

 
30,041

Other
4,648

 
4,652

 
4,575

Total loans