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

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

FIRST QUARTER 2008 AND RECENT EVENTS

The following discussion and analysis sets forth the major factors that affected results of operations and financial condition reflected in the unaudited financial statements for the three-month periods ended March 31, 2008 and 2007. Such discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the notes attached thereto.

OVERVIEW

As of March 31, 2008, we had total consolidated assets of $1.2 billion, total loans of $977.4 million, total deposits of $935.5 million and stockholders' equity of $150.3 million.

Net income for the three months ended March 31, 2008, was $2.2 million, or $0.14 per basic and diluted share, compared to net income of $2.4 million, or $0.14 and $0.13 per basic and diluted share, respectively, for the comparative period in 2007. Net interest income decreased by $344 thousand due to a reduction in our net interest margin, partially offset by additional volume of earning assets. The provision for loan and lease losses increased by $761 thousand due to our analysis of inherent risks in the loan portfolio in relation to the portfolio's growth, trends in non-performing and classified loans and general economic conditions. Noninterest income, excluding the $584 thousand impairment of securities in the first quarter of 2007, increased by $156 thousand, while noninterest expense decreased by $134 thousand. The increase in noninterest income is attributable to growing revenue from deposit fees, as well as the trust department, while noninterest expense decreased primarily from efficiency improvements. There were 366 full-time equivalent employees as of March 31, 2008, as compared to 369 as of March 31, 2007.

Our efficiency ratio improved in the first quarter of 2008 to 69.6% as compared to 72.5% in the same period of 2007 primarily due to the impairment on securities charge in 2007. Excluding the impairment charge, the efficiency ratio remained unchanged as compared to the first quarter of 2007. We expect to continue achieving further efficiencies by growing our operating revenue faster than our expenses, although declining net interest income may lead to a higher efficiency ratio in the near term. In April and May 2007, we opened de novo branches in Algood, Tennessee and Cleveland, Tennessee, respectively. We are currently concentrating on identifying additional locations in Chattanooga, Knoxville, and Cleveland, Tennessee, as well as the north metro Atlanta, Georgia and metro Nashville, Tennessee markets. At this time, we have a contract to purchase land for a branch in Hixson (Chattanooga), Tennessee as well as an option to purchase land for a second branch in Hixson, Tennessee. We anticipate the completion of the first Hixson branch in the second half of 2008 and the second Hixson branch in early 2009. Other locations have not been determined, and therefore no timetable is provided. While we will be opportunistic, we are mindful of the additional expense associated with the de novo growth model.

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Index

Net interest margin in the first quarter of 2008 was 4.30% or 56 basis points lower than the prior year period of 4.86%. We believe that our net interest margin will continue to decline in the second quarter before stabilizing in the second half of 2008. The projected stabilization of our net interest margin is dependant on competitive pricing pressure, our ability to raise core deposits and any possible further action to the target federal funds rate by the Federal Reserve.

On April 23, 2008, our Board of Directors approved a second quarter cash dividend of $0.05 per share payable on June 16, 2008 to shareholders of record on June 2, 2008.

RESULTS OF OPERATIONS

We reported net income for the first quarter of 2008 of $2.2 million versus net income for the same period in 2007 of $2.4 million. In 2008, basic and diluted net income per share was $0.14, on approximately 16,144 thousand basic and 16,334 thousand diluted weighted average shares outstanding, respectively.

Net income in the first quarter of 2008 was below the 2007 level as a result of the contraction in the net interest margin and higher provision for loan and lease loss expense. While we have opened two additional branches and a loan production office, our overhead decreased for the first quarter 2008, as compared to the same period in 2007, through a reduction in professional fees and fewer full-time equivalent employees. As of March 31, 2008 we had 39 banking offices, including the headquarters, five loan/lease production offices and 366 full-time equivalent employees. Although we expect to expand our branch network and our employee force in 2008, we are mindful of the fact that growth and increasing the number of branches adds expenses (such as administrative costs, occupancy, and salaries and benefits expenses) before earnings.

The following table summarizes the components of income and expense and the changes in those components for the period ended March 31, 2008 as compared to the same period in 2007.