The following discussion and analysis should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and notes included in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report. Our actual results could differ materially from those discussed in this Annual Report on Form 10-K.

Year Ended December 31, 2008

The following discussion and analysis sets forth the major factors that affected First Security's financial condition as of December 31, 2008 and 2007, and results of operations for the three years ended December 31, 2008 as reflected in the audited financial statements.

Recent Regulatory Events

In response to the financial crisis affecting the banking system and financial markets, on October 3, 2008, the $700 billion Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. On October 14, 2008, pursuant to EESA, the U.S. Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts.

Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (TARP CPP), the Treasury will make up to $250 billion of capital available to U.S. financial institutions in the form of preferred stock, from the $700 billion authorized by the EESA. In conjunction with the purchase of preferred stock, the Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the Treasury's standards for executive compensation and corporate governances for periods during which the Treasury holds equity issued under the TARP CPP.

On January 9, 2009, as part of the TARP CPP, we agreed to issue and sell, and the Treasury agreed to purchase (1) 33,000 shares (Preferred Shares) of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, and (2) a ten-year warrant to purchase up to 823,627 shares of our common stock, $0.01 par value, at an exercise price of $6.01 per share, for an aggregate purchase price of $33,000 thousand in cash.

The Preferred Shares qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Dividends are payable quarterly on February 15, May 15, August 15 and November 15 of each year.

On February 25, 2009, the Treasury announced an additional program to purchase equity stakes in banks and thrifts, known as the Troubled Asset Relief Program Capital Assistance Program (TARP CAP). Under TARP CAP, the Treasury will purchase preferred stock that is convertible into common stock. In conjunction with the purchase of preferred stock, the Treasury will receive warrants to purchase common stock with an aggregate market price equal to 20% of the preferred investment. Companies participating in the TARP CAP may also convert any preferred shares issued under the TARP CPP into convertible preferred shares under the TARP CAP. The deadline to apply to participate in the TARP CAP is May 25, 2009. We have not decided whether to apply under the TARP CAP.

Overview

As of December 31, 2008, we had total consolidated assets of approximately $1.3 billion, total loans of approximately $1.0 billion, total deposits of approximately $1.1 billion and stockholders' equity of approximately $144.2 million. In 2008, our net income was $1.4 million, resulting in basic and diluted net income of $0.08 per share.

As of December 31, 2007, we had total consolidated assets of approximately $1.2 billion, total loans of approximately $953.1 million, total deposits of approximately $902.6 million and stockholders' equity of approximately $147.7 million. In 2007, our net income was $11.4 million, resulting in basic and diluted net income of $0.67 and $0.66 per share, respectively.

Net interest income for 2008 decreased by $3.7 million while noninterest income increased by $382 thousand. Non-interest expense for 2008 decreased by $1.1 million as compared to 2007. Provision expense increased by $13.6 million for 2008. Excluding the available-for-sale gains in 2008 and the other-than-temporary impairment and the securities losses in 2007, non-interest income decreased $516 thousand. The decline in net interest income is primarily a result of the rate cuts by the Federal Reserve that started in September 2007. Consistent with our approach to control expenses, noninterest expense decreased through reductions in salaries and benefits, furniture and equipment expenses, and printing and supplies expense. Full-time equivalent employees were 361 at December 31, 2008 and 371 at December 31, 2007.

Our efficiency ratio in 2008 increased to 71.0% versus 68.8% in 2007 and 68.3% in 2006. The efficiency ratio for 2008 increased as a result of the $3.7 million decline in net interest income offsetting the increase in noninterest income and decrease of $1.1 million in noninterest expense. We anticipate our efficiency ratio to be consistent for 2009 as the full effect of the 2008 rate cuts will continue to negatively affect our net interest income as well as the additional expense associated with the planned opening of a de novo branch in Hixson, Tennessee in the middle of 2009.

Net interest margin in 2008 was 4.07% or 72 basis points lower as compared to the prior period of 4.79%. The net interest margin of our peer group (as reported on the December 31, 2008 Uniform Bank Performance Report) was 3.69% and 3.95% for 2008 and 2007, respectively. As expected, our margin declined due to the easing of the federal funds target rate by the Federal Reserve Board which reduced our yield on earning assets faster than the reduction in the rates paid on deposits. Through December 31, 2008, the Federal Reserve Board has reduced the target federal funds target rate by 400 basis points since December 31, 2007 and a total of 500 basis points since September 2007. We anticipate our margin will stabilize during 2009. Our margin for 2009 will be dependent on our ability to raise core deposits, our growth rate in loans, and any possible further actions by the Federal Reserve Board.

On July 15, 2008, the Volkswagen Group of America, Inc. announced plans to build a $1 billion automobile production facility in Chattanooga, Tennessee. The plant will bring about 2,000 direct jobs, including approximately 400 white-collar jobs, and up to 12,000 indirect jobs to the region. On February 26, 2009, Wacker Chemie AG announced plans to build a $1 billion chemical plant in Cleveland, Tennessee. The plant is expected to initially employ nearly 600 people. We believe the positive economic impact on Chattanooga and the surrounding region will be significant from these new investments. We believe these projects will help stabilize and possibly increase real estate values, as well as provide increased overall economic activity in the region.

On November 6, 2008, our Board of Directors approved an amendment to our Articles of Incorporation authorizing up to 10,000,000 shares of blank check preferred stock. The amendment was approved by our shareholders on December 18, 2008.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Critical accounting policies include the initial adoption of an accounting policy that has a material impact on our financial presentation as well as accounting estimates reflected in our financial statements that require us to make estimates and assumptions about matters that were highly uncertain at the time. Disclosure about critical estimates is required if different estimates that we reasonably could have used in the current period would have a material impact on the presentation of our financial condition, changes in financial condition or results of

operations. Accounting policies related to the allowance for loan and lease losses, fair value, and the impairment of goodwill and other intangible assets each represent a critical accounting estimate.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is established and maintained at levels management deems adequate to absorb credit losses inherent in the portfolio as of the balance sheet date. The level is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, underlying estimated values of collateral securing loans, current economic conditions and other factors.

Our financial results are affected by the changes and absolute level of the allowance for loan and lease losses. The quarterly analysis involves complex internal and external variables, and it requires that we exercise judgment to estimate an appropriate allowance. As a result of uncertainty associated with the subjectivity, we cannot assure the precision of the amount reserved, should we experience sizable loan or lease losses in any particular period. For example, changes in the financial condition of individual borrowers, economic conditions or the various markets in which collateral may be sold could require us to significantly decrease or increase the level of the allowance. Such an adjustment could materially affect net income as a result of the change in provision for loan and lease losses. During 2008, we experienced considerable quarterly increases in our provision due to declining economic conditions, increases in nonperforming assets and several significant charge-offs. Should any of these factors change, the estimate of credit losses in the loan portfolio and the related allowance would also change. Refer to the "Provision for Loan and Lease Losses" section for a discussion of our methodology of establishing the allowance for loan and lease losses.

Estimates of Fair Value

We measure or monitor many of our assets and liabilities on a fair value basis. Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. The extent to which we use fair value on a recurring basis was significantly expanded upon the adoption of SFAS 159 as of January 1, 2007. Examples of recurring uses of fair value include available-for-sale securities and held for sale loans. Additionally, fair value is used on a non-recurring basis to evaluate assets and liabilities for impairment or for disclosure purposes in accordance with SFAS 107. Examples of these non-recurring uses of fair value include other real estate owned, goodwill, intangible assets and other long-lived assets. Depending on the nature of the asset or liability, we use various valuation techniques and assumptions when estimating fair value. These valuation techniques and assumptions are in accordance with SFAS 157 and when applicable, FSP FAS 157-3.

Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Estimating fair value in accordance with SFAS 157 requires that we make a number of significant judgments. Where observable market prices for identical assets or liabilities are not available, SFAS 157 requires that we identify, what we believe to be, similar assets or liabilities. This is known as Level 2 pricing. If observable market prices are unavailable or impracticable to obtain for any such similar assets or liabilities, then fair value is estimated using modeling techniques, such as discounted cash flow analysis These modeling techniques incorporate our assessments regarding assumptions that market participants would use in pricing the asset or the liability, including market-based assumptions, such as interest rates, as well as assumptions about the risks inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. In certain cases, our assessments with respect to assumptions that market participants would make may be inherently difficult to determine and the use of different assumptions could result in material changes to these fair value measurements. This is known as Level 3 pricing. The use of SFAS 157 is described in Note 16 to our consolidated financial statements.

In estimating fair value for available-for-sale securities and derivative cash flow swaps, we believe that independent, third-party market prices are the best evidence of exit price. If such third-party market prices are not available on the exact securities that we own, fair value is based on the market prices of similar instruments,

third-party broker quotes or is estimated using industry-standard or proprietary models whose inputs may be unobservable. The fair value of held for sale loans is based on observable market prices in the secondary loan market.

The fair value of other real estate owned is typically determined based on recent appraisals by third-parties, less estimated selling costs. The fair value of repossession is typically determined based on the current pricing in the secondary market. For both other real estate owned and repossessions, changes in economic, real estate and supply and demand conditions can significantly change the fair value. Estimates of fair value are also required when evaluating impairment of goodwill, other intangible assets and long-lived assets.

Changes in the estimates and assumptions used to evaluate fair value may have a material impact on the Company's consolidated financial statements, results of operations or liquidity.

Goodwill and Other Intangible Assets

We periodically review the carrying values of intangible assets not subject to amortization, including goodwill, to determine whether an impairment exists. Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets, prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. These assets are subject to at least an annual impairment review and more frequently if certain impairment indicators are in evidence. The impairment assessment primarily uses discounted cash flow analysis, which requires assumptions about short and long-term net cash flow growth, as well as discount rates. The assessment also uses market data, including recent, similar bank acquisition transactions. Changes in the estimates and assumptions used to evaluate impairment may have a material impact on the Company's consolidated financial statements, results of operations or liquidity.

Results of Operations

We reported net income for 2008 of $1.4 million versus net income for 2007 of $11.4 million and net income for 2006 of $11.1 million. In 2008, basic net income per share was $0.08 on approximately 16.0 million shares and diluted net income per share was $0.08 on approximately 16.1 million weighted average shares outstanding. In 2007, basic net income per share was $0.67 on approximately 17.0 million shares and diluted net income per share was $0.66 on approximately 17.3 million weighted average shares outstanding. In 2006, basic net income per share was $0.64 on approximately 17.3 million shares and diluted net income per share was $0.63 on approximately 17.7 million weighted average shares outstanding.

Net income in 2008 was significantly below the 2007 level predominately as a result of higher provision expense. Declining margins also resulted in lower net interest income, which was partially offset by lower overhead as a result of our efforts to control expenses. As of December 31, 2008, we had 39 banking offices, including the headquarters, three leasing/loan production offices and 361 full time equivalent employees. Although we expect to continue to expand our branch network and our employee force in 2009, we are mindful of the fact that growth and increasing the number of branches adds expenses (such as administrative costs and occupancy, salaries and benefits expenses) before earnings.

The following table summarizes the components of income and expense and the changes in those components for the past three years.

                                                                         Condensed Consolidated Statements of Income
                                                                              For the Years Ended December 31,
                                                    Change                                  Change                                  Change
                                                     From                                    From                                    From
                                                     Prior        Percent                    Prior       Percent                    Prior        Percent
                                       2008          Year         Change          2007       Year        Change          2006        Year        Change
                                                                                (dollar amounts in thousands)
Gross interest income                $ 76,088      $  (7,435 )       (8.9 )%    $ 83,523    $ 8,396         11.2 %     $ 75,127    $ 18,823         33.4 %
Gross interest expense                 30,861         (3,740 )      (10.8 )%      34,601      7,456         27.5 %       27,145      11,282         71.1 %

Net interest income                    45,227         (3,695 )       (7.6 )%      48,922        940          2.0 %       47,982       7,541         18.6 %
Provision for loan
and lease losses                       15,753         13,598        631.0 %        2,155        (29 )       (1.3 )%       2,184        (738 )      (25.3 )%

Net interest income after
provision for loan and lease
losses                                 29,474        (17,293 )      (37.0 )%      46,767        969          2.1 %       45,798       8,279         22.1 %
Noninterest income                     11,682            382          3.4 %       11,300        683          6.4 %       10,617       1,770         20.0 %
Noninterest expense                    40,382         (1,059 )       (2.6 )%      41,441      1,424          3.6 %       40,017       4,644         13.1 %

Income before income taxes                774        (15,852 )      (95.3 )%      16,626        228          1.4 %       16,398       5,405         49.2 %
Income tax (benefit) provision           (587 )       (5,857 )     (111.1 )%       5,270        (16 )       (0.3 )%       5,286       1,689         47.0 %

Income before extraordinary item        1,361         (9,995 )      (88.0 )%      11,356        244          2.2 %       11,112       3,716         50.2 %
Extraordinary gain on business
combination, net of income tax             -              -            -              -          -            -              -       (2,175 )     (100.0 )%

Net income                           $  1,361      $  (9,995 )      (88.0 )%    $ 11,356    $   244          2.2 %     $ 11,112    $  1,541         16.1 %

Further explanation, with year-to-year comparisons of the income and expense, is provided below.

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. In 2008, net interest income was $45.2 million or 8% less than the 2007 level of $48.9 million, which, in contrast, was 2% more than the 2006 level of $48.0 million.

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.

The following table summarizes net interest income on a fully tax-equivalent basis and average yields and rates paid for the years ended December 31, 2008, 2007 and 2006.

         Average Consolidated Balance Sheets and Net Interest Analysis

                           Fully Tax-Equivalent Basis



                                                                                      For the Years Ended,
                                                     2008                                     2007                                     2006
                                        Average        Income/     Yield/        Average        Income/     Yield/        Average        Income/     Yield/
                                        Balance        Expense      Rate         Balance        Expense      Rate         Balance        Expense      Rate
                                                                                  (dollar amounts in thousands)
                                                                                  (fully tax-equivalent basis)
ASSETS
Earning assets:
Loans, net of unearned
income(1)(2)                          $   997,371      $ 69,863      7.00 %    $   904,490      $ 77,309      8.55 %    $   796,866      $ 67,996      8.53 %
Debt securities-taxable                    89,711         4,647      5.18 %         90,093         4,545      5.04 %        114,518         5,350      4.67 %
Debt securities-non-taxable(2)             42,780         2,452      5.73 %         43,489         2,493      5.73 %         42,673         2,448      5.74 %
Federal funds sold and other
earning assets                              3,100            49      1.58 %          3,005           134      4.46 %          6,909           306      4.43 %

Total earning assets                    1,132,962        77,011      6.80 %      1,041,077        84,481      8.11 %        960,966        76,100      7.92 %

Allowance for loan losses                 (12,030 )                                (10,452 )                                (10,241 )
Intangible assets                          29,948                                   30,838                                   31,699
Cash & due from banks                      23,280                                   25,841                                   26,125
Premises & equipment                       34,429                                   35,799                                   33,060
Other assets                               49,880                                   42,845                                   39,766

Total assets                          $ 1,258,469                              $ 1,165,948                              $ 1,081,375

LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
NOW accounts                          $    63,262      $    327      0.52 %    $    63,983      $    536      0.84 %    $    70,125      $    589      0.84 %
Money market accounts                     103,137         2,139      2.07 %        100,206         2,875      2.87 %        105,557         2,574      2.44 %
Savings deposits                           35,120           146      0.42 %         35,851           293      0.82 %         38,243           287      0.75 %
Time deposits less than $100
thousand                                  256,664        10,549      4.11 %        265,099        13,021      4.91 %        245,140        10,417      4.25 %
Time deposits > $100 thousand             214,705         9,310      4.34 %        216,732        11,147      5.14 %        182,764         8,378      4.58 %
Brokered CDs and CDARS®                   121,736         4,735      3.89 %         76,635         3,711      4.84 %         85,545         3,649      4.27 %
Brokered money market accounts              4,624            74      1.60 %             -             -         -  %             -             -         -  %
Federal funds purchased                    23,710           689      2.91 %          3,304           173      5.24 %          6,563           347      5.29 %
Repurchase agreements                      34,513           835      2.42 %         27,260           734      2.69 %         19,290           395      2.05 %
Other borrowings                           78,108         2,057      2.63 %         45,683         2,111      4.62 %         12,277           509      4.15 %

Total interest bearing liabilities        935,579        30,861      3.30 %        834,753        34,601      4.15 %        765,504        27,145      3.55 %

Net interest spread                                    $ 46,150      3.50 %                     $ 49,880      3.96 %                     $ 48,955      4.37 %

Noninterest bearing demand
deposits                                  157,746                                  166,081                                  159,945
Accrued expenses and other
liabilities                                16,489                                   18,532                                   15,459
Stockholders' equity                      144,622                                  146,873                                  142,371
Accumulated other comprehensive
gain (loss)                                 4,033                                     (291 )                                 (1,904 )

Total liabilities and
stockholders' equity                  $ 1,258,469                              $ 1,165,948                              $ 1,081,375

Impact of noninterest bearing
sources and other changes in
balance sheet composition                                            0.57 %                                   0.83 %                                   0.72 %

Net interest margin                                                  4.07 %                                   4.79 %                                   5.09 %

(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 all 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 $923 thousand, $958 thousand and $973 thousand for the three years ended December 31, 2008, 2007 and 2006.

The following table shows 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 amounts of the change in each category.

. . .