SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2006 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22842
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FIRST BANCSHARES, INC.
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(Name of small business issuer as specified in its charter)
Missouri 43-1654695
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
142 E. First Street
Mountain Grove, Missouri 65711
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (417) 926-5151
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share The Nasdaq Stock Market LLC
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(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act [ ]
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES x
NO ---
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes No x
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The issuer's revenues for the fiscal year ended June 30, 2006 were
$15,195,000.
As of October 5, 2006, registrant had outstanding 1,552,065 shares of
common stock. The registrant's common stock is traded over-the-counter and is
listed on the Nasdaq Global Market of The Nasdaq Stock Market LLC under the
symbol "FBSI." The aggregate market value of the common stock held by
nonaffiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on The Nasdaq Stock Market LLC on October
5, 2006, was $20.7 million. For purposes of this calculation, officers and
directors of the registrant and the Employee Stock Ownership Plan are
considered affiliates of the registrant. The exclusion of the value of the
shares owned by these individuals shall not be deemed an admission by the
issuer that such person is an affiliates of the issuer.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
June 30, 2006. (Parts I and II)
2. Portions of the Proxy Statement for the 2006 Annual Meeting of
Stockholders. (Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements throughout that are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Company and the Bank. Words such as anticipates, believes, estimates,
expects, forecasts, intends, is likely, plans, projects, variations of such
words and similar expressions are intended to identify such forward-looking
statements. These forward-looking statements are intended to be covered by
the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions that are difficult to predict
with regard to timing, extent, likelihood and degree of occurrence. Actual
results and outcomes may materially differ from what may be expressed or
forecasted in the forward-looking statements. The Company undertakes no
obligation to update, amend, or clarify forward looking statements, whether as
a result of new information, future events (whether anticipated or
unanticipated), or otherwise.
Future factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the
following: the credit risks of lending activities, including changes in the
level and direction of loan delinquencies, other loans of concern, loan
write-offs and changes in estimates of the adequacy of the allowance for loan
losses; competitive pressures among depository institutions; interest rate
movements and their impact on customer behavior and net interest margin; the
impact of repricing and competitor's pricing initiatives on loan and deposit
products; the ability to adapt successfully to technological changes to meet
customers' needs and development in the market place; our ability to access
cost-effective funding; changes in financial markets; changes in economic
conditions in general and particularly as related to our market areas; new
legislation or regulatory changes, including but not limited to changes in
federal and/or state tax laws or interpretations thereof by taxing
authorities; changes in accounting principles, policies or guidelines; the
economic impact of any terrorist actions on our loan originations and loan
repayments; and other risks detailed from time to time in our filings with the
Securities and Exchange Commission.
ii
PART I
Item 1. Description of Business
General
First Bancshares, Inc. ("First Bancshares" or the "Company"), a Missouri
corporation, was incorporated on September 30, 1993 for the purpose of
becoming the holding company for First Home Savings Bank ("First Home" or the
"Savings Bank") upon the Savings Bank's conversion from a state-chartered
mutual to a state-chartered stock savings and loan association ("Conversion").
The Conversion was completed on December 22, 1993. At June 30, 2006, the
Company had consolidated total assets of $228.4 million, total customer
deposits of $179.1 million and stockholders' equity of $26.3 million. The
Company is not engaged in any significant activity other than holding the
stock of First Home. Accordingly, the information set forth in this report,
including consolidated financial statements and related data, relates
primarily to operations of the Savings Bank. The Company's common shares trade
on The Nasdaq Stock Market LLC under the symbol "FBSI."
The Savings Bank is a Missouri-chartered, federally insured stock savings
and loan association organized in 1911. The Savings Bank conducts its
business from its home office in Mountain Grove and nine full service branch
facilities in Marshfield, Ava, Gainesville, Sparta, Theodosia, Crane, Galena,
Kissee Mills and Rockaway Beach, Missouri. In July 2006, a full service
branch was opened in Springfield, Missouri. The deposits of the Savings Bank
are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). As a Missouri-chartered savings and loan association,
First Home derives its authority from, and is governed by, the provisions of
the Missouri Savings and Loan Law ("Missouri Law") and regulations of the
Missouri Division of Finance ("Division") and the Office of Thrift Supervision
("OTS"). See "-Regulation and Supervision" below.
The Savings Bank provides its customers with a full array of community
banking services. The Savings Bank is primarily engaged in the business of
attracting deposits from the general public and using such deposits, together
with other funding sources, to invest primarily in residential mortgage loans,
commercial real estate loans, land loans, second mortgage loans and commercial
business loans and consumer loans, for its loan portfolio. Excess funds are
typically invested in securities and other assets. At June 30, 2006, the
Savings Bank's net loans were $142.0 million, or 62.2% of consolidated total
assets, including $82.5 million, or 55.6% of total loans, for residential
mortgage, $37.1 million or 25.0% of total loans for commercial real estate,
$8.0 million or 5.4% of total loans for land loans, $3.7 million, or 2.5% of
total loans, for second mortgage loans and $17.2 million of consumer and
commercial business loans, or 11.6% of total loans. Of loans maturing after
June 30, 2007, adjustable rate mortgage ("ARM") loans account for
approximately 95% of loans secured by real estate and 87% of the total loan
portfolio. See "-- Lending Activities" below.
Risk Factors
An investment in our common stock is subject to risks inherent in our
business. Before making an investment decision, you should carefully consider
the risks and uncertainties described below together with all of the other
information included or incorporated by reference in this report. The risks
and uncertainties described below are not the only ones that affect us.
Additional risks and uncertainties that we are not aware of or focused on or
that we currently deem immaterial may also impair the Company's business
operations. This report is qualified in its entirety by these risk factors.
If any of the circumstances described in the following risk factors
actually occur, our financial condition and results of operations could be
materially and adversely affected. If this were to happen, the value of our
common stock could decline significantly, and you could lose all or part of
your investment.
Our loan portfolio includes loans with a higher risk of loss. We
originate residential mortgage loans (including second mortgage loans),
construction loans, commercial mortgage and land loans, commercial loans and
consumer loans primarily within our market area. Generally, the types of loans
other than residential mortgage loans have a higher risk of loss than
residential mortgage loans. We had $62.3 million or 41.9% of our total loan
portfolio outstanding in these higher risk loans at June 30, 2006. We have had
a significant increase in these types of loans since 1999. Construction,
commercial mortgage and land, commercial, and consumer loans may expose a
lender to greater credit risk than loans secured by residential real estate
because the collateral securing these loans may not be sold as easily as
residential real estate. These loans also have greater credit risk than
residential real estate for the following reasons and as discussed in detail
under "-- Lending Activities":
. Commercial Mortgage and Land Loans. These loans typically involve
higher principal amounts than other types of loans and repayment is
dependent upon income being generated in amounts sufficient to cover
operating expenses and debt service. Loans on land under development
or held for future construction also poses additional risk because
of the lack of income being produced by the property and the
potential illiquid nature of the security. The repayment of loans
secured by farm properties is dependent upon the successful
operation of the farming operations, which is contingent on many
things outside the control of either us or the borrowers. These
factors include adverse weather conditions, fluctuating market
prices of both final product and production costs, factors affecting
the physical condition of the cattle and government regulations.
. Commercial Loans. Repayment is dependent upon the successful
operation of the borrower's business.
. Consumer Loans. Consumer loans (such as personal lines of credit)
are collateralized, if at all, with assets that may not provide an
adequate source of payment of the loan due to depreciation, damage,
or loss.
. Construction Loans. This type of lending contains the inherent
difficulty in estimating both a property's value at completion of
the project and the estimated cost of the project. If the estimate
of construction cost proves to be inaccurate, we may be required to
advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value upon completion
proves to be inaccurate, we may be confronted at, or prior to, the
maturity of the loan with a project the value of which is
insufficient to assure full repayment.
Strong competition within our market area has limited our growth and
profitability. Competition in the banking and financial services industry is
intense. We compete in our market area with numerous commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies,
mutual funds, insurance companies, and brokerage and investment banking firms
operating locally and elsewhere. Some of these competitors have substantially
2
greater resources and lending limits than we have, have greater name
recognition and market presence that benefit them in attracting business, and
offer certain services that we do not or cannot provide. In addition, larger
competitors may be able to price loans and deposits more aggressively than we
do. Our profitability depends upon the Company's continued ability to
successfully compete in its market area. The greater resources and deposit and
loan products offered by some of our competitors may limit the Company's
ability to increase its interest-earning assets. For additional information
see "-- Competition."
As a result of this competition, our loan portfolio declined $15.7
million, or 9.6%, from June 30, 2005 to June 30, 2006. The reason for the
decline is that we do not offer many of fixed rate products offered by our
competitors and in the current low interest rate environment many of our
competitors are offering these and other loans and at interest rates that are
lower than we are able to offer. The decline in loans reduces our interest
income and therefore decreases our profitability.
We have had a significant decline in our profitability. We experienced a
net loss of $173,000 for the year ended June 30, 2006 compared to net income
of $1.3 million during the year ended June 30, 2005. This decline was the
result of reduced interest income from loans receivable and losses on
property, including property that had been acquired for a branch expansion and
a loss on the sale and impairment of securities. Also contributing to the
decline was a reduction in our non-interest income. During the year ended
June 30, 2005 we had non-interest income in connection with the receipt of
insurance proceeds with no comparable amount received during the year ended
June 30, 2006.
We have a significant amount of problem loans and losses related to these
loans. Since 1999 we focused our efforts in increasing our commercial loan and
commercial real estate loan portfolios. However, as a result we have
recognized substantial losses in the past years. The volume of classified
loans remains high relative to our peers. At June 30, 2006 classified loans
were $8.3 million, an increase of $2.2 million, or 36.1%, from $6.1 million at
June 30, 2005. This increase is, in part, attributable to our new stricter
internal policies relating to the identification and monitoring of our problem
loans as well as the problems experienced in the commercial, commercial
business and consumer loan portfolios. In addition to the classified loans,
we identified an additional $7.1 million of loans at June 30, 2006 on our
internal watch list including $5.1 million, $700,000, $1.0 million and
$300,000 of commercial real estate, commercial business, one-to-four family
and consumer loans, respectively. We identified these loans as high risk
loans and any deterioration in their financial condition could further
increase our classified loans.
Our ratio of non-performing assets to total assets has decreased from
2.2% at June 30, 2005 to 0.6% at June 30, 2006. The decrease in non-
performing assets does not indicate an improvement in the quality of our loan
portfolio as evidenced by the increase in our classified loans. The decrease
was primarily the result of payoffs and charge-offs on impaired loans (which
includes nonaccrual loans) identified in 2005.
During the year ended June 30, 2006 we had loan charge-offs, net of
recoveries, of $1.9 million compared to $722,000 for the fiscal year ended
June 30, 2005. Of the charge-offs during the current year, $1.7 million, or
89.5%, related to commercial business loans.
If our allowance for loan losses is not sufficient to cover actual loan
losses, our earnings could decrease further. We make various assumptions and
judgments about the collectibility of our loan portfolio, including the
3
creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for the repayment of many of our loans. In
determining the amount of the allowance for loan losses, we review our loans
and the loss and delinquency experience, and evaluates economic conditions. If
our assumptions are incorrect, the allowance for loan losses may not be
sufficient to cover losses inherent in the loan portfolio, resulting in the
need for additions to our allowance. Material additions to the allowance could
materially decrease our net income. Our allowance for loan losses was 1.7% of
total loans and 184.5% of non-performing assets at June 30, 2006, however, at
June 30, 2006 our allowance was only 29.8% of total classified loans.
In addition, bank regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory authorities may
have a material adverse effect on our financial condition and results of
operations.
We are subject to extensive government regulation and supervision. We
are subject to extensive federal and state regulation and supervision. Banking
regulations are primarily intended to protect depositors' funds, federal
deposit insurance funds and the banking system as a whole, not shareholders.
These regulations affect our lending practices, capital structure, investment
practices, dividend policy and growth, among other things. Congress and
federal regulatory agencies continually review banking laws, regulations and
policies for possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject us to additional costs, limit
the types of financial services and products we may offer and/or increase the
ability of non-banks to offer competing financial services and products, among
other things. Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on our business,
financial condition and results of operations. While we have policies and
procedures designed to prevent any such violations, there can be no assurance
that such violations will not occur. For additional information, see the
section in this Item 1 captioned "Regulation of First Home."
We have had turnover in a senior management and as a result our growth
and profitability could be adversely affected. Our success is, and is
expected to remain, highly dependent on our executive management team. This
is particularly true because, as a community bank, we depend on management's
ties to the community to generate business for us. Our growth will continue
to place significant demands on our management. Our operations have been
affected by changes in senior management. In September 2005 our Chief
Executive Officer resigned and we hired a new Chief Executive Officer on
December 16, 2005. On September 18, 2006 our Chief Financial Officer left the
Company and the Chief Executive Officer became the acting interim Chief
Financial Officer.
If we fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our financial
results or prevent fraud, and, as a result, investors and depositors could
lose confidence in our financial reporting, which could adversely affect our
business, the trading price of our stock and our ability to attract additional
deposits. In connection with the enactment of the Sarbanes-Oxley Act of 2002
and the implementation of the rules and regulations promulgated by the SEC,
the Company evaluates its internal control over financial reporting. If the
Company fails to identify and correct any significant deficiencies in the
4
design or operating effectiveness of its internal control over financial
reporting or fail to prevent fraud, current and potential shareholders and
depositors could lose confidence in our internal controls and financial
reporting, which could adversely affect our business, financial condition and
results of operations, the trading price of our stock and our ability to
attract additional deposits.
We determined that at June 30, 2006 our disclosure procedures and
controls were not effective. More specifically, at June 30, 2006 we did not
properly identify or record certain transactions related to the other than
temporary impairment of two equity securities. For further information see
"Item 8A Controls and Procedures - Evaluation of Disclosure Controls and
Procedures" included herein.
Market Area
The Savings Bank is headquartered in the town of Mountain Grove, in
Wright County, Missouri. Wright County has a population of approximately
17,000 and its economy is highly diversified, with an emphasis on the beef and
dairy industry. The Savings Bank's market area is predominantly rural in
nature and its deposit taking and lending activities primarily encompass
Wright, Webster, Douglas, Christian, Ozark, Stone and Taney counties.
Significant companies in the area include Hutchens Steel, Bore Flex, Inc.,
Copeland Corporation, Dairy Farmers of America and WoodPro Cabinetry. The
Savings Bank also transacts a significant amount of business in Texas and
Greene Counties, Missouri. The Savings Bank's market area, especially Ozark
County because of its proximity to Norfolk and Bull Shoals lakes, has
experienced a rather slow but steady growth from retirees. Economic
conditions in the Savings Bank's market area have been relatively stable.
Selected Consolidated Financial Information
This information is incorporated by reference to pages 4 and 5 of the
2006 Annual Report to Stockholders ("Annual Report") attached hereto as
Exhibit 13.
Average Balances, Yields Earned and Rates Paid
This information is incorporated by reference to page 13 of the Annual
Report attached hereto as Exhibit 13.
Yields Earned and Rates Paid
This information is incorporated by reference to page 15 of the Annual
Report attached hereto as Exhibit 13.
Rate/Volume Analysis
This information is incorporated by reference to page 16 of the Annual
Report attached hereto as Exhibit 13.
Lending Activities
General. The principal lending activity of the Savings Bank is the
origination of conventional mortgage loans for the purpose of purchasing,
constructing or refinancing one-to-four family owner occupied homes within its
primary market area. In an attempt to diversify its lending portfolio,
however, the Savings Bank also originates commercial real estate loans, land
loans, commercial business loans and consumer loans such as mobile home
loans, automobile and loans secured by savings accounts. The ratios of
residential and commercial real estate loans to total loans has shifted
gradually in recent years as a result of a significant decrease in one-to-four
family residential
5
portfolio and the Savings Bank's increase in commercial and agricultural
lending. Additionally, the Savings Bank has used the Small Business
Administration's ("SBA") guaranteed programs since September 2000. As of June
30, 2006, 38 commercial business and commercial real estate loans with an
aggregate balance of $8.7 million have SBA guarantees.
In addition to loans within the Savings Bank's primary market area, the
Savings Bank also has originated five one-to-four family loans and eight
commercial real estate loans in Arkansas, California, Colorado, Nebraska, and
Oregon. The 13 loans had an aggregate balance of $3.3 million at June 30,
2006. These loans were performing according to their scheduled terms at June
30, 2006.
At June 30, 2006, the Savings Bank's net loans receivable totaled $142.0
million representing 62.2% of consolidated total assets. Historically, the
Savings Bank has primarily originated ARM loan products. At June 30, 2006,
ARM loans with a maturity date after June 30, 2007 accounted for $118.4
million or 83.4% of the total loan portfolio and 90.2% of loans secured by
real estate. The Savings Bank focuses on serving the needs of its local
community and strongly believes in a lending philosophy that emphasizes
individual customer service and flexibility in meeting the needs of its
customers. During the past four years the Savings Bank has experienced a
significant decline in its one-to-four family loan portfolio. As a result,
subsequent to June 30, 2006 the Savings Bank began offering long-term fixed
rate loans that qualify for sale in the secondary market to better meet the
needs of its customers in the current interest rate environment. While the
sale of loans in the secondary market will not increase the Savings Bank's
loan portfolio, it will afford the Savings Bank the opportunity to generate
fee income and to maintain a relationship with its customers who want a fixed
rate product. In addition, the Savings Bank currently anticipates that it
will retain a few fixed rate mortgage loans in its portfolio. The loans that
are retained in the Savings Bank's portfolio are expected to have a higher
interest rate than the loans that are sold in the secondary market.
Generally, loans that are retained in the Savings Bank's portfolio will be
small loans ($50,000 or less) where the costs of selling such loans in the
secondary market is too great or loans where the value of the acreage is too
great for the residence to qualify under the secondary market standard. Both
of these are common occurrences in the Savings Bank's primary trade market in
rural Missouri.
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan as of the dates
indicated. Construction loans are included in residential and commercial loans
depending on the type of security as these loans are typically made with the
intent to convert to permanent financing. At June 30, 2006, the Savings Bank
had $5.1 million, or 3.4% of total loans, in interim construction loans in its
portfolio of which all were for residential construction, as described below.
Because of the long-term nature and amount of its construction loans, the
Savings Bank does not separately account for these types of loans.
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At June 30,
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2006 2005
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Amount Percent Amount Percent
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(Dollars in thousands)
Type of Loan:
Residential $ 82,519 55.59% $ 89,220 54.36%
Commercial real estate (1) 37,097 24.99 41,492 25.28
Land 7,949 5.36 9,450 5.76
Second mortgage loans 3,659 2.47 4,161 2.54
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Total mortgage loans 131,224 88.41 144,323 87.94
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Other Loans:
Automobile loans 3,467 2.34 4,910 2.99
Savings account loans 1,709 1.15 1,709 1.04
Mobile home loans 2,438 1.64 2,139 1.30
Other consumer 1,060 0.71 979 .60
Commercial business 8,532 5.75 10,057 6.13
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Total other loans 17,206 11.59 19,794 12.06
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Total loans 148,430 100.00% 164,117 100.00%
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Add:
Unamortized deferred loan costs,
net of origination fees 184 201
Less:
Undisbursed loans in process 4,153 3,324
Allowance for possible loan
losses 2,474 2,851
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Total loans receivable, net $141,987 $158,143
======== ========
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(1) Includes multi-family residential loans.
One-to-Four Family Residential Loans. The primary lending activity of the
Savings Bank has been the origination of residential mortgage loans to enable
borrowers to purchase existing homes, to construct new one-to-four family
homes or refinance existing debt on their homes. Management believes that
this policy of focusing on one-to-four family residential mortgage loans has
been successful in contributing to interest income. The increases in
delinquencies and losses over the last three years have primarily been the
result of other lending activities rather than one-to-four family residential
mortgage lending. At June 30, 2006, $82.5 million, or 55.6% of the Savings
Bank's gross loan portfolio, consisted of residential mortgage loans (almost
all of which are non-indexed ARMs, with the principal amortizing over loan
terms ranging from 10 to 30 years). Since 1973 until the current year, the
Savings Bank had originated almost exclusively ARM loan products. Initially,
ARM loans were indexed to the Savings Bank's cost of funds. In 1979, the
Savings Bank discontinued the use of the indexed ARM loans and changed to its
current policy of non-indexed ARMs, which generally allows, but does not
require, the Savings Bank to adjust the interest rate once a year, up or down,
not to exceed 1% per year. Loans of this nature originated after 1988
generally were limited to a 6% maximum increase over the life of the loan.
During the current year, the Savings Bank began offering fixed rate
one-to-four family residential mortgage lending in an effort to compete with
products offered by other lenders.
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The Savings Bank's lending policies generally limit the maximum loan-to-
value ratio on mortgage loans to 100% of the lesser of the appraised value or
purchase price of the underlying residential property. Loans exceeding 80%
loan to value have a higher interest rate (portfolio loans) and loans
exceeding 90% loan to value have private mortgage insurance, which reduces the
loan-to-value ratio to 78%. Reducing the loan to value ratio of these loans
limits the Savings Bank's exposure and allows these loans to qualify for sale
in the secondary market. The Savings Bank requires title insurance, fire and
casualty coverage and a flood zone determination on all mortgage loans
originated or purchased. All of the Savings Bank's real estate loans contain
"due on sale" clauses. In prior years, the Savings Bank's personnel prepared
all property evaluations at no expense to the borrower unless the property is
outside its normal lending territory or the loan exceeds $250,000, in which
event, independent appraisers are utilized. During the current year, the
Savings Bank changed its practice and now obtains independent appraisals on
all mortgage loans.
At June 30, 2006, the Savings Bank had $5.1 million in residential
construction loans in its portfolio with maximum loan to value ratios of 85%
based upon the estimated value upon completion. Typically, the Savings Bank
limits its construction lending to individuals who are building their primary
residences. Generally, loan proceeds are disbursed in increments as
construction progresses based on invoices presented to the Savings Bank.
Construction financing generally is considered to involve a higher degree of
loss than long-term financing on improved, occupied real estate. Risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost of construction. During the construction phase, a
number of factors could result in delays and cost overruns. The Savings Bank
has sought to minimize this risk by primarily limiting construction lending to
qualified borrowers in the Savings Bank's market area. At June 30, 2006,
speculative construction loans amounted to $726,000, or 0.5% of the total loan
portfolio and custom construction loans amounted to $4.4 million, or 2.9% of
the total loan portfolio. The majority of these loans are converted into
permanent residential real estate loans. During construction, these loans
typically require monthly interest-only payments. Once construction is
completed, these loans convert to monthly principal and interest based on
amortization schedules for conventional residential or commercial buildings.
Second Mortgage Loans. The Savings Bank offers fixed and adjustable rate
second mortgage loans that are usually made on the security of the borrower's
residence. Loans normally do not exceed 80% of the appraised value of the
residence, less the outstanding principal of the first mortgage, and have
terms of up to 10 years requiring monthly payments of principal and interest.
At June 30, 2006, second mortgage loans amounted to $3.7 million, or 2.5% of
total loans of the Savings Bank.
Land and Commercial Real Estate Loans. The Savings Bank had loans
outstanding secured by land and commercial real estate of $45.0 million, or
30.4% of the Savings Bank's gross loan portfolio, at June 30, 2006. The
commercial real estate loans originated by the Savings Bank amounted to $37.1
million, or 25.0%, and are primarily located in the Savings Bank's market
area. The average size of these loans is $143,000. These loans typically are
made with a fixed rate for one to five years and then adjust at least
annually, thereafter based on prime rate or the Constant Maturity Treasury
Index ("CMT"). The Savings Bank's commercial real estate portfolio consists of
loans on a variety of property types with no large concentrations by property
type. Land loans amounted to $7.9 million, or 5.4% of the total loan
portfolio at June 30, 2006 and are secured primarily by property located in
the Savings Bank's primary market area. The Savings Bank's land loans
generally are secured by farm land used in beef or dairy operations and
involve the risks associated
8
with general agricultural or ranching operations. These risks include adverse
weather conditions, fluctuating market prices of both final product and
production costs, factors affecting the physical condition of the cattle and
government regulations.
The Savings Bank's largest commercial real estate loan at June 30, 2006
was a $1.9 million loan. The loan is for a term of 15 years and is
collateralized by an industrial commercial building located in Mountain Grove,
Missouri. At June 30, 2006, the loan was performing according to its
repayment terms.
Loans secured by farm properties are of particular concern since
repayment is dependent upon the successful operation of the farming
operations, which is greatly contingent on various factors outside the control
of the Savings Bank or the borrower. These factors include adverse weather
conditions, fluctuating market prices of both final product and production
costs, factors affecting the physical condition of the cattle and government
regulations.
Of primary concern in commercial real estate lending is the feasibility
and cash flow potential of the property along with the borrower's
creditworthiness and the value of the underlying collateral. Loans secured by
income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are often dependent on successful operation or management of the
properties. As a result, repayment of such loans may be subject, to a greater
extent than residential real estate loans, to supply and demand in the market
in the type of property securing the loan and therefore, may be subject to
adverse conditions in the real estate market or the economy. If the cash flow
from the project is reduced, the borrowers' ability to repay the loan may be
impaired. Commercial real estate loans also tend to have shorter maturities
than residential mortgage loans and may not be fully amortizing, meaning that
they may have a significant principal balance or "balloon" payment due on
maturity. In addition, commercial real estate properties, particularly
industrial properties, are generally subject to relatively greater
environmental risks than non-commercial properties and to the corresponding
burdens and costs of compliance with environmental laws and regulations.
Also, there may be costs and delays involved in enforcing rights of a property
owner against tenants in default under the terms of leases with respect to
commercial properties. For example, tenants may seek the protection of the
bankruptcy laws, which could result in termination of lease contracts,
reducing cash flow.
At June 30, 2006, multi-family residential loans were approximately $1.4
million, or 1.0% of the Savings Bank's gross loan portfolio consisted of five
loans secured by multi-family residential real estate. Multi-family real
estate loans are generally originated at 80% of the appraised value of the
property or selling price, whichever is less, and carry interest rates that
are fixed for 1-5 years and then adjust annually based on the CMT with the
principal amortized over 15 to 30 years. Loans secured by multi-family real
estate are generally larger and involve a greater degree of risk than one-to-
four family residential loans. In addition, multi-family real estate loans
carry risks similar to those associated with commercial real estate lending.
For a discussion of these risks, see " -- Consumer and Commercial Business
Loans." At June 30, 2006, four of the loans were performing according to
payment terms and one loan was delinquent by one monthly payment.
Consumer. The Savings Bank's consumer loans consist of automobile loans,
recreational vehicles, mobile home loans, savings account loans, and various
other consumer loans. At June 30, 2006, the Savings Bank's consumer loans
totaled $8.7 million, or 5.8% of the Savings Bank's total loans. Subject to
9
market conditions, management expects to continue to market and originate
consumer loans as part of its strategy to provide a wide range of personal
financial services to its depository customer base and as a means to enhance
the interest rate sensitivity of the Savings Bank's interest-earning assets
and its interest rate spread.
At June 30, 2006, the Savings Bank's loan portfolio secured by
automobiles amounted to $3.5 million, or 2.3% of total loans. These loans are
originated directly with the borrower with a maximum term of 60 months. The
Savings Bank may lend up to 100% of the purchase price of a new automobile or
up to the National Automobile Dealers Association published loan value for a
used vehicle. The Savings Bank requires all borrowers to maintain automobile
insurance, including collision, fire and theft insurance, with the Savings
Bank listed as loss payee.
Loans secured by mobile homes at June 30, 2006 were $2.4 million, or 1.6%
of total loans. These loans are generally considered to involve relatively
higher credit risk as compared with conventional one-to-four family
residential mortgage loans. The age, size and overall condition of the mobile
home are additional factors in the mobile home loan underwriting consideration
process. The Savings Bank's procedures for underwriting consumer loans
include an assessment of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan.
Although the borrower's creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the security,
if any, to the proposed loan amount.
Consumer loans are considered a greater risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or
secured by rapidly depreciating assets such as automobiles, mobile homes,
boats and recreational vehicles. Any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Consumer loans may also give rise to claims and defenses by a borrower against
an assignee of such loans such as the Savings Bank, and a borrower may be able
to assert against the assignee claims and defenses that it has against the
seller of the underlying collateral. The largest balance of consumer loans
are loans for automobiles, boats , recreational vehicles, mobile homes and
small unsecured loans. The Savings Bank's delinquency levels for these types
of loans are reflective of these risks. Several factors which contributed to
the increase in delinquencies and charge-offs of consumer loans during fiscal
2006 were that the Savings Bank did not include all relevant parties on note
agreements and related documents, lack of regular monitoring procedures on
delinquent or problem loans, and lack of prompt or no repossession of
underlying collateral on seriously delinquent loans. At June 30, 2006, only
$3,000 of the Savings Bank's consumer loan portfolio was 90 days or more past
due. However, $148,000 was on nonaccrual status at June 30, 2006.
Commercial Business Loans. Commercial business loans consist of loans to
businesses with no real estate as security, such as business equipment loans,
farm equipment loans and cattle loans. As of June 30, 2006, these loans
totaled $8.5 million See "-- Non-Performing Assets and Delinquencies" and "
10
Reserve for Loan Losses" for data on loans originated by the Savings Bank and
categorized as "other loans" in the past three fiscal years.
At June 30, 2006, the average size of a loan in the commercial business
category was $43,000. These loans are typically structured with maturities of
five years or less and have variable interest rates based on the prime rate.
The largest commercial loan at June 30, 2006 was a line of credit loan to an
area family-owned automobile dealership. At June 30, 2006 the balance of this
loan was $408,000 and it was performing according to its repayment terms.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often
dependent on successful operation of the business involved, repayment of such
loans may be subject to adverse conditions in the economy. In recognition of
this risk, the Savings Bank attempts to make loans secured by adequate
collateral to provide the majority of repayment of the principal balance when
business operations are not successful. However, collateral for these types
of loans may quickly decline in market value through normal usage and changes
in technology and may fluctuate in value based on the success of the business.
In addition, the Savings Bank limits this type of lending to its market area
and to borrowers with which it has prior experience or who are otherwise well
known to the Savings Bank.
The substantial increase in non-performing loans and delinquencies, as
well as charge-offs, in the Savings Bank's commercial business loans during
the year ended June 30, 2006 reflects underwriting and credit analysis
weaknesses rather than weaknesses in the overall economic condition of the
Savings Bank's market area. In addition to the problems experienced by the
borrowers, the collateral underlying these loans was in many instances not
properly securitized by the Savings Bank and regular inspections were not
performed. Also, the collateral was not adequately analyzed at the time of the
loan origination. The Savings Bank has recently implemented procedures to
monitor the financial performance of its commercial portfolio.
Loan Maturity and Repricing
The following table sets forth scheduled contractual amortization of
loans at June 30, 2006 and the dollar amount of such loans at that date which
are scheduled to mature after one year and have fixed or adjustable interest
rates. Demand loans, loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less.
At June 30, 2006
------------------------------------------------------
Non- Commercial
Commercial Real Commercial
Mortgage Estate Consumer Business Total
Loans Loans Loans Loans Loans
----- ----- ----- ----- -----
Amounts due:
Within one year $ 4,202 $ 2,492 $ 2,358 $ 3,591 $ 12,643
After one year
through three
years 752 1,532 2,566 1,229 6,079
After three
years through
five years 1,595 237 1,385 2,127 5,344
After five years 87,578 32,836 2,365 1,585 124,364
-------- ------- ------- ------- --------
Total $ 94,127 $37,097 $ 8,674 $ 8,532 $148,430
======== ======= ======= ======= ========
(table continued on following page)
11
At June 30, 2006
------------------------------------------------------
Non- Commercial
Commercial Real Commercial
Mortgage Estate Consumer Business Total
Loans Loans Loans Loans Loans
----- ----- ----- ----- -----
Interest rate terms
on amounts due
after one year:
Fixed $ 3,872 $ 2,243 $ 4,292 $ 3,978 $ 14,385
Adjustable 86,053 32,362 2,024 963 121,402
-------- -------- ------- ------- --------
Total $ 89,925 $ 34,605 $ 6,316 $ 4,941 $135,787
======== ======== ======= ======= ========
Mortgage Loan Solicitation and Processing. The Savings Bank's main
source of loans is from contact and relationships with real estate agents,
referrals from customers, and to a lesser extent walk-in applicants. Once a
loan application is received, a credit report, along with verification of
income is obtained. Then asset and liability verification as an appraisal of
the proposed collateral is ordered. Real estate appraisals are completed by
independent appraisers on all one-to four family loans originated after March
2006 and on all other real estate secured loans. The application is then
reviewed by the loan officer and action is taken or loan write-up is
presented to the Savings Bank's loan committee if the amount is greater than
the loan officer's lending authority.
Commercial and commercial real estate loans are also primarily obtained
through referrals or loan officer contacts. While loan officers are delegated
reasonable commitment authority based on their qualification, credit decisions
on significant commercial loans and commercial real estate loans are made by
the loan committee, which is made up of senior loan officers and members of
the Board of Directors.
Consumer loans are originated through referrals and existing deposit and
loan customers of the Savings Bank. Consumer loan applications below set
limits may be processed at branch locations or by loan documentation personnel
at the main office.
Loan Originations, Purchases and Sales. The Savings Bank has never sold
loans in the secondary market.
12
The following table shows total mortgage loans originated, purchased,
sold and repaid during the periods indicated.
Years Ended June 30,
--------------------
2006 2005
---- ----
(In thousands)
Total mortgage loans at beginning of period $ 144,323 $ 148,436
--------- ---------
Loans originated:
One-to-four family residential 27,839 23,711
Multi-family residential and
commercial real estate 7,715 10,709
Land 2,612 3,334
--------- ---------
Total loans originated 38,166 37,754
--------- ---------
Loans purchased:
Participation loans-commercial real estate - -
--------- ---------
Total loans purchased - -
Mortgage loan principal repayments 50,839 40,926
--------- ---------
Other-loans charged-off or
transferred to other real estate(1) 426 941
--------- ---------
Total other activity 426 941
--------- ---------
Total gross mortgage loans at end of period $ 131,224 $ 144,323
========= =========
------------
(1) Loans transferred to real estate owned amounted to $323,000 and $754,000
during fiscal 2006 and 2005, respectively. Mortgage loans charged-off
amounted to $103,000 and $187,000 during fiscal 2006 and 2005, respectively.
Loan Commitments. The Savings Bank issues commitments for one-to-four
family residential loans that are honored for up to a maximum of 60 days from
approval. If the commitment expires, it is generally renewed upon request
without penalty or expense to the borrower at the current market rate. The
Savings Bank had outstanding net loan commitments of $1.9 million at June 30,
2006. See Note 13 of the Notes to the Consolidated Financial Statements
contained in the Annual Report.
Non-Performing Assets and Delinquencies. The Savings Bank generally
institutes collection procedures when a monthly payment is two to four weeks
delinquent. A first notice is generally mailed to the borrower, or a phone
call is made. If necessary, a second notice follows at the end of the next
two week period. In most cases, delinquencies are cured promptly; however, if
the Savings Bank is unable to make contact with the borrower to obtain full
payment, or, full payment is not possible, and the Savings Bank cannot work
out a repayment schedule, a notice to commence foreclosure may be mailed to
the borrower. The Savings Bank makes every reasonable effort, however, to
work with delinquent borrowers. Understanding that borrowers sometimes cannot
make payments because of illness, loss of employment, etc., the Savings Bank
will attempt to work with delinquent borrowers who are communicating and
cooperating with the Savings Bank.
The Savings Bank institutes the same collection procedures for non-
mortgage loans.
13
The Savings Bank has implemented several new procedures between March 31,
2006 and June 30, 2006 in identifying watch list credits. All loans greater
than $50,000 that are 30 days or more past due or loans that have had events
occur that raise questions as to the ability of the loan to perform in the
future, is added to the watch list. On a quarterly basis, the account officer
must complete a write-up on the credit giving an update and outlining the
status of the credit and what is expected to remove the credit from the watch
list. Classified assets increased significantly at June 30, 2006 in part as a
result of implementing this procedure March 31, 2006.
The Board of Directors is informed on a monthly basis as to the status of
all mortgage and non-mortgage loans that are delinquent, as well as the status
on all loans currently in foreclosure or real estate owned by the Savings Bank
through foreclosure.
The table below sets forth the amounts and categories of non-performing
assets in the Savings Bank's loan portfolio at the dates indicated. Loans are
placed on nonaccrual status when it is determined that the payment of interest
or principal is doubtful of collection, or when interest or principal is past-
due 90 days or more. Any accrued but uncollected interest previously recorded
on such loans is generally reversed in the current period and interest income
is subsequently recognized upon collection. The Savings Bank would have
recorded interest income on nonaccrual loans of $117,000 and $167,000 during
the years ended June 30, 2006 and 2005, respectively, if such loans had been
performing during such periods.
Nonaccrual loans decreased from $2.9 million at June 30, 2005 to $841,000
at June 30, 2006. The balance of nonaccrual loans at June 30, 2005 consisted
primarily of commercial loans to one borrower and related companies that had
filed for protection under Chapter 11 bankruptcy. During fiscal 2006, these
loans were either charged-off or refinanced under the bankruptcy plan. Loans
past due 90 days or more and still accruing interest have decreased from
$148,000 at June 30, 2005 to $3,000 at June 30, 2006.
The Savings Bank considers all nonaccrual loans and loans past due 90
days or more to be impaired. Subsequent to June 30, 2006, one of these loans
underwent foreclosure proceeding with a subsequent charge-off of $50,000. The
remaining loans are being closely monitored and necessary action will be taken
if they become more seriously delinquent or the Savings Bank obtains
information of probable significant loss.
One-to-four family loans which are 60 or more days but less than 91 days
past due have decreased during the fiscal year 2006. This is partially
attributable to Savings Bank personnel's concentrated efforts on working with
borrowers who were past due in fiscal 2005. Not only did this process reduce
the amount of residential loans past due 60 days or more during fiscal 2006,
it also moved a number of these loans into the current category.
The following table sets forth information with respect to the Savings
Bank's non-performing assets at the dates indicated. At June 30, 2005, there
was one restructured loan of $428,000 which is included in the commercial
business line item as a nonaccrual loan. During 2006, this loan resulted in a
charge-off of $396,000. At June 30, 2006, there were two restructured loans
totaling $37,000 which are included in the commercial business line item as
nonaccrual loans. The decrease in total loans, net loans and total
consolidated assets was also a factor in the percentage increases in
nonperforming loans.
14
At June 30,
-------------------
2006 2005
------ ------
Loans accounted for on a nonaccrual basis (Dollars in thousands)
Real estate:
Residential $ 322 $ 221
Commercial 306 1,112
Commercial business 65 1,502
Consumer 148 19
------ ------
Total $ 841 $2,854
====== ======
Accruing loans which are contractually
Past due 90 days or more:
Real estate:
Residential $ - $ 63
Commercial - 30
Commercial business - -
Consumer 3 55
------ ------
Total $ 3 $ 148
====== ======
Total of nonaccrual and
90 days past due loans $ 844 $3,002
Real estate owned 497 340
Other non-performing assets
Impaired loans not past due or past due
less than 60 days - 2,044
------ ------
Total non-performing assets $1,341 $5,386
====== ======
Total loans delinquent 90 days
or more to net loans 0.59% 1.90%
Total loans delinquent 90 days
or more to total consolidated assets 0.37% 1.23%
Total non-performing assets
to total consolidated assets 0.59% 2.21%
As of June 30, 2006, the Savings Bank had loans with an aggregate
outstanding balance of $8.3 million with respect to which known information
concerning possible credit problems with the borrowers or the cash flows of
the properties securing the respective loans has caused management to be
concerned about the ability of the borrowers to comply with present loan
repayment terms, which may result in the future inclusion of such loans in the
nonaccrual loan category. In addition, the Savings Bank has identified an
additional $7.1 million of loans on its internal watch list to review
quarterly for any deterioration in their capacity to perform as agreed.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
15
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. An asset is classified substandard
when it is inadequately protected by the current new worth and paying capacity
of the borrower or by the collateral pledged, if any. Assets so classified
must have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. The Savings Bank's policy is to classify as
substandard, for example, any loan, irrespective of payment record or
collateral value, when a bankruptcy filing occurs, the pay record becomes
erratic (i.e., miss several monthly payments, but make double payments in the
future), or a loan becomes contractually delinquent by three monthly payments.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, and
there is a high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for
loan losses for the full amount of the portion of the asset classified as loss
or charge-off such amount. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory
capital, while specific valuation allowances for loan losses generally do not
qualify as regulatory capital. During a State of Missouri Division of Finance
regulatory examination which began in June 2005, several loans, which the
Savings Bank had not previously identified as classified assets, were
identified as classified assets by the examiners. In light of this, an
extensive review was conducted by an outside consultant of the majority of
outstanding loans and current underwriting and monitoring procedures in the
fall of 2005. This review noted several weaknesses in the internal monitoring
procedures of the Savings Bank. This report was also critical of the
underwriting of some of the credits. Management is taking steps to address
these weaknesses. A follow-up review is scheduled with the same consultant
for the fall of 2006. The Savings Bank also utilizes an internal
classification of "special mention" for those loans requiring additional
monitoring, as described below.
16
At June 30, 2006 and 2005 the aggregate amounts of the Savings Bank's
classified assets as determined by the Savings Bank, and of the Savings Bank's
general and specific loss allowances and charge-offs, were as follows:
At June 30,
--------------------
2006 2005
------ ------
(In thousands)
Loss $ - $1,122
Doubtful 686 1,087
Substandard assets 5,898 3,841
Special mention 1,681 -
------ ------
Total classified assets $8,265 $6,050
====== ======
General loss allowances $2,474 $1,729
Specific loss allowances - 1,122
------ ------
Total loss allowances $2,474 $2,851
====== ======
Net charge-offs $1,897 $ 722
Prior to fiscal 2006, the Savings Bank did not use a special mention
category in its loan classification process. A category titled 'watch' is used
by the Savings Bank to monitor loans which are not typical in their repayment
terms, collateral, or a situation with the borrower that may create repayment
difficulties in the future. Loans classified as special mention are
designated when the ability to meet current payment schedules is questionable,
even though interest and principle are still being paid as agreed. Loans
classified as substandard, therefore, have one or more defined weaknesses and
are characterized by the distinct possibility the Savings Bank will sustain
some loss if the deficiencies are not corrected. The Savings Bank's policy is
to classify as substandard, for example, any loan, irrespective of payment
record or collateral value, when a bankruptcy filing occurs, the pay record
becomes erratic (i.e., miss several monthly payments, but make double payments
in the future), or a loan becomes contractually delinquent by three monthly
payments. The $2.1 million increase in substandard assets to $5.9 million at
June 30, 2006 from $3.8 million at June 30, 2005 was the result of the
classification of certain loans with erratic payment histories and the
possibility of inadequate collateral. The decrease in specific loss allowances
was attributable to the charge-off of commercial loans to one borrower and
related companies that had filed for protection under Chapter 11 bankruptcy.
At June 30, 2006, the Savings Bank's largest substandard loans to one
borrower consisted of five loans to an individual and related interests with a
collective outstanding balance of $1.8 million. These loans were past due
less than 60 days. The borrower had experienced cash flow difficulties
several times in the last twelve months. The loans are collateralized by
first deeds of trust on real estate and a security interest in equipment and
inventory.
During the year ended June 30, 2006, the Company made a number of
announcements with respect to the decline in its asset quality and the effect
on its earnings.
On September 9, 2005, the Company disclosed its earnings for the quarter
and the year ended June 30, 2005 and announced that it had a net loss of
$652,000 for the quarter. Included in the net loss for the quarter ended June
30, 2005 was a provision for the increase in allowance for loan losses of $1.8
17
million, as previously announced. The increase in the allowance for loan
losses was in connection with the Savings Bank's determination that there had
been further adverse developments with respect to certain loans in its loan
portfolio. The approximate after tax effect of the provision to increase the
allowance for loan losses was a $1.1 million reduction in net income for the
quarter ended June 30, 2005.
On October 21, 2005, the Company announced it would increase its
allowance for loan losses by $791,000 as a result of adverse developments with
respect to certain loans in its portfolio. The determination was the result
of an examination of the loan portfolio by a third party and the
implementation of stricter standards in identifying and analyzing classified
assets. The decrease in earnings on an after tax basis was $498,000.
On July 20, 2006, the Company reported a $407,000 increase in its
allowance for loan losses as a result of additional adverse developments
identified in its loan portfolio. A loss of $234,000 was also recorded on the
write-down of land owned for future expansion and a $161,000 loss on the sales
of securities. The after tax effect on earnings was a decrease of $506,000.
Finally on September 25, 2006, the Company became aware after the
September 1, 2006 release of earnings, that as of June 30, 2006, the Company
had not identified or recorded certain transactions related to the other than
temporary impairment of two equity securities. These transactions resulted in
a charge to earnings of $260,260 and were identified after discussion with the
Company's independent registered public accounting firm and were corrected
after the September 1, 2006 release of the Company's earnings for the fourth
quarter and year ended June 30, 2006. The provision for impairment of
securities available-for-sale resulted in a reduction of net income totaling
$219,827.
Real Estate Owned. Real estate owned includes real estate held for sale
and real estate acquired in the settlement of loans, which, is recorded at the
lower of the remaining loan balance or estimated fair value less the estimated
costs to sell the asset. Any write down at the time of foreclosure is charged
against the allowance for loan losses. Subsequently, net expenses related to
holding the property and declines in the market value are charged against
income. At June 30, 2006, five properties were held as real estate owned with
a total value of $497,000. At June 30, 2005, nine properties were held as
real estate owned with a total value of $340,000.
Allowance for Loan Losses
Management recognizes that loan losses may occur over the life of a loan
and that the allowance for loan losses must be maintained at a level necessary
to absorb specific losses on impaired loans and probable losses inherent in
the loan portfolio.
The Savings Bank's Asset Classification Committee assesses the allowance
for loan losses on a quarterly basis. The Committee analyzes several
different factors including delinquency, charge-off rate and the changing risk
profile of the Company's loan portfolio, as well as local economic conditions
such as unemployment rates, bankruptcies and vacancy rates of business and
residential properties.
Management believes that the accounting estimate related to the allowance
for loan losses is a critical accounting estimate because it is highly
susceptible to change from period to period. This may require management to
make assumptions about losses on loans; and the impact of a sudden large loss
18
could deplete the allowance and potentially require increased provisions to
replenish the allowance, which would negatively affect earnings.
The allowance for loan losses is evaluated on a regular basis by
management and is based on management's periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are classified as either
doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted cash
flows (or collateral value or observable market price) of the impaired loan is
lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.
The allowance is increased by the provision for loan losses, which is
charged against current period operating results and decreased by the amount
of actual loan charge-offs, net of recoveries.
The Savings Bank had an allowance for loan losses at June 30, 2006 and
2005 of $2.5 million and $2.9 million, respectively. The Savings Bank began
experiencing an increase in problem loans during fiscal year 2005. This
increase required a significant increase in the allowance for loan losses. At
June 30, 2004 the allowance for loan losses was $1.2 million, or .7%, of gross
loans compared to $2.9 million, or 1.7%, of gross loans at June 30, 2005. The
allowance for loan losses was $2.5 million, or 1.7%, of gross loans at June
30, 2006.
Management believes that the allowance for loan losses was adequate at
June 30, 2006 to absorb the known and inherent risks of loss in the loan
portfolio at that date. While management believes the estimates and
assumptions used in its determination of the adequacy of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provisions that may be required will not adversely impact our financial
condition and results of operations. In addition, the determination of the
amount of the Savings Bank's allowance for loan losses is subject to review by
bank regulators, as part of the routine examination process, which may result
in the establishment of additional provision based upon their judgment of
information available to them at the time of their examination. Any material
increase in the allowance may adversely affect the Savings Bank's financial
condition and earnings.
19
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated.
At June 30,
-------------------
2006 2005
------ ------
(Dollars in thousands)
Allowance at beginning of period $2,851 $1,240
------ ------
Provision for loan losses 1,520 2,333
------ ------
Recoveries:
Residential real estate 5 1
Commercial real estate - 9
Consumer 48 62
Commercial business 50 15
------ ------
Total recoveries 103 87
------ ------
Charge-offs:
Residential real estate 26 110
Commercial real estate 88 77
Consumer 223 415
Commercial business 1,663 207
------ ------
Total charge-offs 2,000 809
------ ------
Net charge-offs 1,897 722
------ ------
Allowance at end of period $2,474 $2,851
====== ======
Ratio of allowance to total loans
Outstanding at the end of the period 1.67% 1.74%
Ratio of net charge-offs to average loans
Outstanding during the period 1.29% 0.44%
20
Allowance for Loan Losses by Category
At June 30, 2006
------------------------------------------------------------
2006 2005
---------------------------- -----------------------------
Percent Percent Percent Percent
Of of Gross of of Gross
Allowance Loans in Allowance Loans in
to Gross Category to Gross Category
Loans in to Gross Loans in to Gross
Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------
(Dollars in Thousands)
Real estate --
mortgage:
Residential $ 222 0.27% 55.59% $ 217 0.24% 54.36%
Commercial 726 1.96 24.99 759 1.83 25.28
Land 25 0.31 5.36 26 0.28 5.76
Second mortgage
loans 31 0.86 2.47 32 0.76 2.54
Consumer 82 0.95 5.84 177 1.82 5.93
Commercial
business 1,388 16.27 5.75 1,640 16.30 6.13
------ ------ ------ ------
Total
allowance
for loan
losses $2,474 1.67 100.00% $2,851 1.74% 100.00%
====== ====== ====== ======
Securities Activity
Savings and loan associations have authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various Federal agencies and of state and municipal governments, deposits at
the FHLB-Des Moines, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. Savings institutions
are also required to maintain minimum levels of liquid assets which vary from
time to time. See "REGULATION OF FIRST HOME -- Federal Home Loan Bank
System." The Savings Bank may decide to increase its liquidity above the
required levels depending upon the availability of funds and comparative
yields on securities in relation to return on loans.
Routine short-term investment decisions, which are reported monthly to
the Board of Directors, are made by the President and Chief Executive Officer
and Chief Financial Officer, who act within policies established by the Board.
Those securities include federally insured certificates of deposit, FHLB term
time obligations, bankers acceptances, treasury obligations, U.S. Government
agency obligations, mortgage-backed securities, bank qualifying municipal tax
exempt bonds, and corporate bonds. Securities not within the parameters of
the policies require prior Board approval. Securities are purchased for
investment purposes. The goals of the Savings Bank's investment policy are to
select securities based on safety first, flexibility second and
diversification third. In addition, as a result of the concern with interest
rate risk exposure, there has been a focus on short-term investments. At June
30, 2006, the Company's and the Savings Bank's securities portfolio totaled
$41.7 million (of which $20.9 million were available for sale) and consisted
primarily of federal agency obligations securities, federal agency
mortgage-backed securities, common and preferred stocks, and municipal bonds.
For further information concerning the Savings Bank's securities portfolio,
see Note 2 of the Notes to the Consolidated Financial Statements included in
the Annual Report.
21
Securities Analysis
The following table sets forth the Company's and the Savings Bank's
securities portfolio at carrying value at the dates indicated. Securities that
are held-to-maturity are shown at amortized cost, and securities that are
available-for-sale are shown at the current market value.
At June 30,
-------------------------------------------
2006 2005
-------------------- --------------------
Percent Percent
Book of Book of
Value(1) Portfolio Value(1) Portfolio
-------- --------- -------- ---------
(Dollars in thousands)
Debt securities:
United States Government
and Federal agencies
obligations $23,564 56.50% $26,426 58.72%
Obligations of state and
political subdivisions 3,782 9.07 3,431 7.62
------- ------ ------- ------
Federal agency mortgage-
backed securities 10,451 25.06 10,792 23.98
------- ------ ------- ------
Total debt securities 37,797 90.63 40,649 90.32
------- ------ ------- ------
Equity securities:
FHLB stock 1,612 3.87 1,904 4.23
Other (2) 2,297 5.50 2,454 5.45
------- ------ ------- ------
Total equity securities 3,909 9.37 4,358 9.68
------- ------ ------- ------
Total investment securities $41,706 100.00% $45,007 100.00%
======= ====== ======= ======
------------
(1) The market value of the Company's and the Savings Bank's securities
portfolio amounted to $41.3 million and $44.9 million at June 30, 2006
and 2005, respectively. At June 30, 2006, the market value of the
principal component of the Company's and the Savings Bank securities
portfolio which were obligations of U.S. government and federal agencies
was $33.6 million.
(2) Other equity securities at June 30, 2006 was comprised of Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") preferred stock totaling $1.8 million and preferred
stock totaling $204,000 in other financial institutions in Missouri.
22
The following table sets forth the maturities and weighted average yields
of the debt securities (not including federal agency mortgage-backed
securities) in the Company's and the Savings Bank's investment securities
portfolio at June 30, 2006.
After One After Five
Year Years
One Year Through Through After Ten
or Less Five Years Ten Years Years
--------------- --------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
United States
Government and
Federal
agencies
obligations $6,851 3.74% $15,213 3.88% $ 500 4.50% $1,000 5.00%
Obligations of
state and
political
subdivisions 569 3.73 2,174 3.81 835 4.21 204 5.50
------ ------- ------ ------
Total $7,420 3.74 $17,387 3.87 $1,335 4.32 $1,204 5.08
====== ======= ====== ======
At June 30, 2006, the Savings Bank held no security which had an
aggregate book value in excess of 10% of the Company's stockholders' equity.
To supplement lending activities in periods of deposit growth and/or
declining loan demand, the Savings Bank has invested in residential mortgage-
backed securities. Although such securities are held for investment, they can
serve as collateral for borrowings and, through repayments, as a source of
liquidity. For information regarding the carrying and market values of the
Savings Bank's mortgage-backed securities portfolio, see Note 2 of the Notes
to Consolidated Financial Statements included in the Annual Report. The
Savings Bank has invested in federal agency securities issued by FHLMC, FNMA
and Government National Mortgage Association ("GNMA"). As of June 30, 2006,
23.1% of the outstanding balance of the mortgage-backed securities had
adjustable rates of interest that adjust within the next two years. As of
June 30, 2006, the Savings Bank's portfolio included $10.5 million of
mortgage-backed securities purchased as investments to supplement the Savings
Bank's mortgage lending activities.
The FHLMC, FNMA and GNMA certificates are modified pass-through mortgage-
backed securities that represent undivided interests in underlying pools of
fixed-rate, or certain types of adjustable-rate, one-to-four family
residential mortgages issued by these government-sponsored entities. As a
result, the interest rate risk characteristics of the underlying pool of
mortgages, such as fixed- or adjustable-rate, as well as prepayment risk, are
passed on to the certificate holder. FHLMC and FNMA provide the certificate
holder a guarantee of timely payments of interest and ultimate collection of
principal, whether or not they have been collected. GNMA's guarantee to the
holder of timely payments of principal and interest is backed by the full
faith and credit of the U.S. government. Mortgage-backed securities generally
yield less than the loans that underlie such securities, because of the cost
of payment guarantees or credit enhancements that reduce credit risk. In
addition, mortgage-backed securities are
23
more liquid than individual mortgage loans and may be used to collateralize
obligations of the Savings Bank.
The Savings Bank has incorporated into its investment policy the
regulatory requirements set forth in the OTS Thrift Bulletin 52, which
addresses the selection of securities dealers, securities policies, unsuitable
investment practices and mortgage derivative products. At June 30, 2006, the
Savings Bank owned no mortgage derivative products.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major source of the
Savings Bank's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
Deposit Accounts. Deposits are attracted from within the Savings Bank's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market accounts, regular savings accounts, certificates of deposit and
retirement savings plans. Deposit account terms vary according to the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. In determining the terms of its deposit
accounts, the Savings Bank considers the rates offered by its competition,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns. The Savings Bank generally reviews its
deposit mix and pricing at least weekly, and adjusts it as necessitated by
liquidity needs, the gap position and competition.
The Savings Bank experienced significant decreases in regular savings
accounts and interest-bearing checking accounts during the year ended June 30,
2006. During the majority of the fiscal year ended June 30, 2006, the rates
paid by the Savings Bank were below the rates offered by competitors as the
Savings Bank managed its deposits consistent with the reduction in its assets.
Beginning in September 2006, rates on the Savings Bank's deposit accounts were
increased to be at the median or higher end of the rates paid by area
financial institutions.
24
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 2006.
Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
-------- ----- ----------------------- ------- ------- ----------
(Dollars in
thousands)
0.00% None Non-interest bearing $ - $12,745 7.11%
1.01% None NOW accounts 25 34,879 19.47
2.37% None Super Saver accounts 1 23,420 13.08
1.50% None Savings accounts - 16,886 9.43
Certificates of deposit
-----------------------
3.09% 3 months Fixed term, fixed rate 500 1,293 0.72
4.25% 6 months Fixed term, fixed rate 500 12,904 7.20
3.54% 12 months Fixed term, fixed rate 500 18,848 10.52
3.86% 18 months Fixed term, fixed rate 500 1,359 0.76
3.55% 24 months Fixed term, fixed rate 500 3,033 1.69
3.40% 30 months Fixed term, fixed rate 500 956 0.53
3.25% 36 months Fixed term, fixed rate 500 1,329 0.74
3.66% 48 months Fixed term, fixed rate 500 769 0.43
3.98% 60 months Fixed term, fixed rate 500 3,168 1.77
4.02% 72 months Fixed term, fixed rate 500 10 0.01
5.22% 120 months Fixed term, fixed rate 500 21 0.01
various Various Fixed term, adjustable rate 500 23,274 12.99
various Various Jumbo certificates 100,000 24,247 13.54
-------- ------
$179,141 100.00%
======== ======
25
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of June 30, 2006.
Jumbo certificates of deposit require minimum deposits of $100,000 and rates
paid on such accounts are negotiable.
Jumbo
Certificates
Maturity Period Of Deposit
------------------------------------ ------------
(In thousands)
Three months or less $ 5,143
After three through six months 5,937
After six through twelve months 5,806
After twelve months 7,361
-------
Total $24,247
=======
Time Deposits by Rates
The following table sets forth the time deposits in the Savings Bank
classified by rates as of the dates indicated.
At June 30,
----------------------
2006 2005
------- -------
(In thousands)
0.00 - 1.49% $ 18 $ 916
1.50 - 2.49% 1,217 29,595
2.50 - 3.49% 9,610 36,780
3.50 - 4.49% 37,985 18,957
4.50 - 5.49% 42,145 2,566
5.50 - 6.49% 236 492
6.50 - 7.49% - 325
Over 7.49% - -
------- -------
Total $91,211 $89,631
======= =======
26
The following table sets forth the amount and maturities of time deposits at June 30, 2006.
Amount Due
------------------------------------------------------
More More More
than than than Percent
One Year 2 Years 3 Years of Total
One Year thru thru thru After 4 Certificate
Or less 2 Years 3 Years 4 Years Years Total Accounts
-------- -------- ------- ------- ------- ------- -----------
(In thousands)
0.00 - 1.49% $ 18 $ - $ - $ - $ - $ 18 0.02%
1.50 - 2.49% 1,129 88 - - - 1,217 1.33
2.50 - 3.49% 7,445 1,101 867 191 6 9,610 10.54
3.50 - 4.49% 32,443 4,039 789 668 46 37,985 41.64
4.50 - 5.49% 19,436 8,428 8,450 5,447 384 42,145 46.21
5.50 - 6.49% - 61 103 72 - 236 0.26
6.50 - 7.49% - - - - - - -
Over 7.49% - - - - - - -
------- ------- ------- ------ ---- ------- ------
Total $60,471 $13,717 $10,209 $6,378 $436 $91,211 100.00%
======= ======= ======= ====== ==== ======= ======
27
Deposit Flow
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Savings Bank at the dates
indicated.
At June 30,
-----------------------------------------------------------
2006 2005
----------------------------- ----------------------------
Percent Percent
Of Increase Of Increase
Amount Total (Decrease) Amount Total (Decrease)
------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
Non-interest
bearing $ 12,745 7.11% $ 929 $ 11,816 6.31% $ 1,854
NOW checking 34,879 19.47 (3,359) 38,238 20.43 1,047
Regular savings
accounts 23,420 13.08 (6,454) 29,874 15.96 13,122
Super Saver
accounts 16,886 9.43 (698) 17,584 9.40 (21,261)
Fixed-rate
certificates
which mature (1):
Within 1 year 51,186 28.57 2,825 48,361 25.85 (10,041)
After 1 year,
but within
2 years 5,520 3.08 1,158 4,362 2.33 (980)
After 2 years,
but within
5 years 3,294 1.84 (1,857) 5,151 2.75 (241)
Adjustable-rate
certificates 31,211 17.42 (546) 31,757 16.97 (3,604)
-------- ------ ------- -------- ------ --------
Total
certificates 91,211 50.91 1,580 89,631 47.90 (14,866)
-------- ------ ------- -------- ------ --------
Total $179,141 100.00 $(8,002) $187,143 100.00% $(20,104)
======== ====== ======= ======== ====== ========
-----------
(1) At June 30, 2006 and 2005, jumbo certificates of deposit amounted to
$24.2 million and $24.4 million, respectively, and IRAs amounted to $24.7
million and $25.1 million at those dates, respectively.
The following table sets forth the savings activities of the Savings Bank
for the periods indicated.
Years Ended June 30,
----------------------
2006 2005
-------- --------
(In thousands)
Beginning balance $187,143 $207,247
-------- --------
Net increase (decrease)
before interest credited (12,245) (23,188)
Interest credited 4,243 3,084
-------- --------
Net increase/(decrease) in
savings deposits (8,002) (20,104)
-------- --------
Ending balance $179,141 $187,143
======== ========
28
In the unlikely event the Savings Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Savings Bank. Substantially all of the
Savings Bank's depositors are residents of the State of Missouri.
Borrowings. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. The Savings Bank also relies on advances from the FHLB-Des Moines
to supply funds and to act as a source of liquidity, if needed. The FHLB-Des
Moines has served as the Savings Bank's primary borrowing source. Advances
from the FHLB-Des Moines are typically secured by the Savings Bank's first
mortgage loans. These advances require monthly payments of interest only with
principal due at maturity and have fixed rates. These advances were obtained
in response to the Savings Bank's previous strong loan demand and limited
deposit growth experienced during fiscal years 2001 and 2000. At June 30,
2006, the Savings Bank had $22.0 million in advances from the FHLB-Des Moines.
The following tables set forth certain information concerning the Savings
Bank's borrowings at the dates and for the periods indicated.
At June 30,
---------------------
2006 2005
------ ------
Weighted average rate paid on
FHLB advances 5.74% 5.50%
Years Ended June 30,
---------------------
2006 2005
------ ------
(Dollars in thousands)
Maximum amounts of FHLB advances
Outstanding at any month end $28,394 $29,121
Approximate average FHLB advances
Outstanding 27,653 29,111
Approximate weighted average rate
paid on FHLB advances 5.59% 5.59%
The FHLB-Des Moines functions as a central reserve bank providing credit
for savings and loan associations and other member financial institutions. As
a member, the Savings Bank is required to own capital stock in the FHLB-Des
Moines and is authorized to apply for advances on the security of such stock
and certain of its mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States) provided
certain standards related to creditworthiness have been met. Advances are
made pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's retained earnings or on the FHLB's assessment of the
institution's creditworthiness. The FHLB-Des Moines determines specific lines
of credit for each member institution. Because of their prepayment penalties,
it is not currently economical to prepay any of these advances prior to
maturity.
Subsidiary Activities
Fybar Service Corporation ("Fybar") is a Missouri corporation
wholly-owned by the Savings Bank. Fybar owns five rental properties. One is
an office building in Mountain Grove, Missouri called "The Shannon Centre"
which is
29
adjacent to the Savings Bank's drive-in and is currently 71% occupied. The
second is a single family residence in Gainesville, Missouri which is
currently occupied. The third property is a commercial building in Mountain
Grove, Missouri which is currently fully occupied. The fourth is a single
family residence in Mountain Grove, Missouri which is currently occupied. The
fifth is a commercial building in Sparta, Missouri which is fully occupied.
Fybar serves as Trustee on all the Savings Bank's deeds of trust, is a
registered agent and receives limited income from credit life and accident and
health policies written in conjunction with the Savings Bank's loans.
At June 30, 2006, the Savings Bank had an investment in Fybar of
$576,000.
First Home Investments, Inc. is a wholly owned subsidiary of the Savings
Bank that offers fixed and variable annuities as well as mutual funds to it
customers and members of the general public. First Home Investments, Inc.
also processes stock and bond trades and provides credit life, disability and
health insurance services to the Savings Bank's customers as well as group and
individual coverages.
REGULATION OF FIRST HOME
As a Missouri-chartered and federally insured savings and loan
association, First Home is subject to extensive regulation. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. The Savings Bank is regularly examined by
its state and federal regulators and files periodic reports concerning the
Savings Bank's activities and financial condition. The Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent by federal and state laws, especially in such matters as the ownership
of savings accounts and the form and content of the Savings Bank's mortgage
documents.
Missouri Savings and Loan Law
General. As a Missouri-chartered savings and loan association, First
Home derives its authority from, and is governed by, the provisions of the
Missouri Savings and Loan Law ("Missouri Law") and regulations of the Missouri
Division of Finance ("Division"). The Director of the Missouri Division of
Finance ("Director") proposes regulations which must then be approved,
amended, modified or disapproved by the State Savings and Loan Commission
("Commission"). Missouri Law and the resulting regulations are administered
by the Director.
Investments and Accounts. Missouri Law and regulations impose
restrictions on the types of investments and loans that may be made by a
Missouri-chartered institution, generally bringing these restrictions into
parity with the regulation of federally chartered institutions. The manner of
establishing accounts and evidencing the same is prescribed, as are the
obligations of the institution with respect to withdrawals from accounts and
redemption of accounts. The Director may also impose or grant the same
restrictions, duties and powers concerning deposits as are applicable to
federal institutions under federal rules and regulations.
Branch Offices. Under Missouri Law, no institution may establish a
branch office or agency without the prior written approval of the Director.
The Director reviews the proposed location, the functions to be performed at
the office, the estimated volume of business, the estimated annual expense of
the office and the mode of payments. Decisions of the Director may be
appealed to the Commission. The relocation or closing of any office is
subject to additional regulation and in certain circumstances may require
prior approval.
30
Merger or Consolidation. Missouri Law permits the merger or
consolidation of savings institutions, subject to the approval by the
Director, when the Director finds that such merger or consolidation is
equitable to the members or account holders of the institutions and will not
impair the usefulness and success of other properly conducted institutions in
the community. Mergers or consolidations of mutual institutions must also be
approved by a majority of the members of each institution. Stock institutions
must obtain shareholder approval pursuant to the Missouri statutes relating to
general and business corporations.
Holding Companies. Missouri Law requires a savings and loan holding
company and its subsidiaries to register with the Director within 60 days of
becoming a savings and loan holding company. Following registration it is
subject to examination by the Division and thereafter must file certain
reports with the Director. A savings and loan holding company may acquire
control of an institution of another savings and loan holding company upon
application and prior written approval of the Director. The Director, in
reviewing the application, must determine if such acquisition is consistent
with the interests of maintaining a sound financial system and that the
acquisition does not afford a basis for supervisory objection.
Examination. Periodic reports to the Division must be made by each
Missouri-chartered institution. The Division conducts and supervises the
examination of state-chartered institutions.
Supervision. The Director has general supervisory authority over
Missouri-chartered institutions and upon the Director's finding that an
institution is violating the provisions of its articles of incorporation, its
bylaws or any law of the state, or is conducting business in an unsafe or
injurious manner, the Director may order the institution to discontinue such
violation or practice, and to conform with all the requirements of law. The
Director may demand and take possession of the institution, if the institution
fails to comply with the Director's order, if the Director determines that the
institution is insolvent, in an unsafe condition or conducting business in an
unsafe manner, or if the institution refuses to submit to examination or
inspection by the Division.
Federal Regulation of Savings Banks
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. Among other functions, the OTS issues and enforces regulations
affecting federally-insured savings associations and regularly examines these
institutions.
The OTS has extensive authority over the operations of all insured
savings associations. As part of this authority, First Home is required to
file periodic reports with the OTS District Director and is subject to
periodic examinations by the OTS and the FDIC. The OTS and FDIC have
extensive discretion in their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in these policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company.
The OTS has established a schedule for the assessment of fees upon all
savings associations to fund the operations of the OTS. A schedule of fees
has also been established for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid
on a semi-annual basis, is determined based upon the savings association's
total assets, including consolidated subsidiaries, as reported in the
association's
31
latest quarterly thrift financial report. For the first half of 2006, the
Savings Bank's assessment under the semi-annual assessment procedure was
$33,000. Based on the current assessment rates published by the OTS and First
Home's total assets of approximately $235.6 million at March 31, 2006, First
Home will be required to pay a semi-annual assessment of approximately $33,000
for the second half of calendar year 2006.
Federal law provides that savings institutions are generally subject to
the national bank limit on loans to one borrower. A savings institution may
not make a loan or extend credit to a single or related group of borrowers in
excess of 15% of its unimpaired capital and surplus. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if secured by
specified readily marketable collateral. At June 30, 2006, the Savings Bank's
limit on loans to one borrower was $4.0 million. At June 30, 2006, the
Savings Bank's largest loan commitment to a related group of borrowers was
eight loans totaling $3.9 million, which were all fully funded. These loans
are performing according to their original terms.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution that fails to comply with these standards must
submit a compliance plan.
Federal Deposit Insurance Reform Act of 2005. The Federal Deposit
Insurance Reform Act of 2005 ("Reform Act") was signed into law on February 8,
2006 and amended current laws regarding the federal deposit insurance system.
Pursuant to the Reform Act, the FDIC merged the Bank Insurance Fund and the
Savings Association Insurance Fund into one deposit insurance fund, the DIF,
on March 31, 2006. The new legislation also abolished the prior minimum 1.25%
reserve ratio and the mandatory assessments when the ratio falls below 1.25%.
Under the Reform Act, the FDIC, at the beginning of each year, has the
flexibility to adjust the DIF's reserve ratio between 1.15% and 1.50%
depending upon a variety of factors, including projected losses, economic
considerations and assessment rates.
Pursuant to the Reform Act, effective April 1, 2006, deposit insurance
coverage limits were increased from $100,000 to $250,000 for certain types of
Individual Retirement Accounts, 401(k) plans and other retirement savings
accounts, including Keogh accounts and "457 plan" accounts, among others. The
current $100,000 limit continues to apply to individual accounts and municipal
deposits; however, the Reform Act authorizes the FDIC to review all levels of
insurance coverage every five years beginning in 2011, and index such
insurance coverage to inflation. Additionally, under the Reform Act,
undercapitalized financial institutions are restricted from accepting employee
benefit plan deposits. Certain one-time deposit premium assessment credits
are also authorized under the Reform Act, and regulations related to the
allotment of such credits have recently been issued by the FDIC. To date,
however, the credit program has not been finalized and the credits will not be
rebated but instead may be applied against premiums at any time, subject to
limited exceptions.
The Reform Act also provides that the FDIC must promulgate final
regulations implementing the Reform Act no later than 270 days after its
enactment, or by November 5, 2006. Because the FDIC has not promulgated these
final regulations, it is difficult to predict the effect, if any, such
regulations will have on the Savings Bank's operations.
32
Insurance of Accounts and Regulation by the FDIC. The Savings Bank is a
member of the DIF, which is administered by the FDIC. The FDIC insures
deposits up to the applicable limits and this insurance is backed by the full
faith and credit of the United States government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations
of and to require reporting by FDIC-insured institutions. It also may
prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
institutions, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk- based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premiums while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premiums. Risk classification
of all insured institutions is made by the FDIC for each semi-annual
assessment period. The Reform Act authorizes the FDIC to revise its current
risk-based system, subject to public notice and comment, although no deadline
was given by Congress for the creation or implementation of such regulations.
DIF-insured institutions are required to pay a Financing Corporation
(FICO) assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. For the quarter ended June 30, 2006, the FICO
assessment was equal to 1.28 basis points for each $100 in domestic deposits.
These assessments, which may be revised based upon the level of DIF deposits,
will continue until the bonds mature in the years 2017 through 2019.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.
First Home, as a member of the FHLB-Des Moines, is required to acquire
and hold shares of capital stock in the FHLB-Des Moines equal to the greater
of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Des Moines. First Home complied with this requirement with an investment
in FHLB-Des Moines stock of $1.6 million at June 30, 2006.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Des Moines. At
June 30, 2006, the Savings Bank had $22.0 million of advances from the
FHLB-Des Moines.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
33
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid in the past and could
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future.
Prompt Corrective Action. The OTS is required to take certain
supervisory actions against undercapitalized savings associations, the
severity of which depends upon the institution's degree of undercapital-
ization. Generally, an institution that has a ratio of total capital to
risk-weighted assets of less than 8%, a ratio of Tier I (core) capital to
risk-weighted assets of less than 4%, or a ratio of core capital to total
assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution
that has a total risk-based capital ratio less than 6%, a Tier I capital ratio
of less than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and an institution that has a tangible
capital to assets ratio equal to or less than 1.5% is deemed to be "critically
undercapitalized."
At June 30, 2006, First Home was a "well capitalized" institution under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Savings Bank fails to meet any standard prescribed by the Guidelines, ot may
require the Savings Bank to submit an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these
safety and soundness standards which would require submission of a plan of
compliance.
Qualified Thrift Lender Test. All savings associations, including First
Home, are required to meet a qualified thrift lender test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio asset, as defined by regulation, in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Code. Under either test, such assets primarily consist of residential
housing related loans and investments. At June 30, 2006, First Home met the
test and its qualified thrift lender percentage was 62.6%.
Any savings association that fails to meet the qualified thrift lender
test must convert to a national bank charter. Recent legislation has expanded
the extent to which education loans, credit card loans and small business
loans may be considered "qualified thrift investments." As of June 30, 2006,
the Savings Bank met the qualified thrift lender test.
Capital Requirements. The OTS's capital regulations require federal
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an
8% risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
34
capital standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS system) and, together with the risk-based capital
standard itself, a 4% Tier I risk-based capital standard. The OTS regulations
also require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard requires federal savings institutions to
maintain Tier I (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the
risks believed inherent in the type of asset. Core (Tier I) capital is defined
as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At June 30, 2006, the Bank met each of these capital
requirements.
The following table presents the Savings Bank's capital levels as of June
30, 2006.
At June 30, 2006
----------------------
Percent of
Amount Assets
------ ----------
(Dollars in thousands)
Tangible capital $22,706 10.0%
Minimum required tangible capital 3,385 1.5
------- ----
Excess $19,321 8.5%
======= ====
Core capital $22,706 10.0%
Minimum required core capital 9,026 4.0
------- ----
Excess $13,680 6.0%
======= ====
Risk-based capital $24,428 17.5%
Minimum risk-based capital requirement 11,190 8.0
------- ----
Excess $13,238 9.5%
======= ====
Limitations on Capital Distributions. OTS regulations impose various
restrictions on savings institutions with respect to their ability to make
35
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.
Generally, savings institutions, such as the Savings Bank, that before
and after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for
the year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision
by the OTS may have its dividend authority restricted by the OTS. The Savings
Bank may pay dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the OTS prior to such distribution unless they are a
subsidiary of a holding company or would not remain well-capitalized following
the distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution
or propose to exceed these net income limitations, must obtain OTS approval
prior to making such distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 2006, the Savings
Bank's largest loan outstanding to any one borrower, including related
entities, was $3.9 million. At June 30, 2006, that borrower had eight
separate loans secured by nine different pieces of real estate. These loans
were performing in accordance with their terms at that date.
Activities of Savings Associations and Their Subsidiaries. When a
savings association establishes or acquires a subsidiary or elects to conduct
any new activity through a subsidiary that the associations controls, the
savings association shall notify the FDIC and the OTS 30 days in advance and
provide the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Accounting and Regulatory Standards. An OTS policy statement applicable
to all savings associations clarifies and re-emphasizes that the investment
activities of a savings association must be in compliance with approved and
documented investment policies and strategies, and must be accounted for in
accordance with generally accepted accounting principles (GAAP). Under the
policy statement, management must support its classification of an accounting
for loans and securities (i.e., whether held for investment, sale or trading)
36
with appropriate documentation. First Home is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles by the
OTS, to require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders prescribed
by the OTS.
Investment Portfolio Policy. OTS supervisory policy requires that
securities owned by thrift institutions must be classified and reported in
accordance with GAAP which establishes three classifications of investment
securities: held-to-maturity, trading and available-for-sale. Trading
securities are acquired principally for the purpose of near term sales. Such
securities are reported at fair value and unrealized gains and losses are
included in income.
Securities which are designated as held-to-maturity are designated as
such because the investor has the ability to hold these securities to
maturity. Such securities are reported at amortized cost.
All other securities are designated as available-for-sale, a designation
which provides the investor with certain flexibility in managing its
investment portfolio. Such securities are reported at fair value; net
unrealized gains and losses are excluded from income and reported net of
applicable income taxes as a separate component of stockholders' equity. The
Savings Bank has adopted a reporting policy that complies with these OTS
requirements.
Transactions with Affiliates. The Savings Bank's authority to engage in
transactions with "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve
Board's Regulation W. The term "affiliates" for these purposes generally means
any company that controls or is under common control with an institution. The
Company and its non-savings institution subsidiaries would be affiliates of
the Savings Bank. In general, transactions with affiliates must be on terms
that are as favorable to the institution as comparable transactions with
non-affiliates. In addition, certain types of transactions are restricted to
an aggregate percentage of the institution's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
an institution. In addition, savings institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for
bank holding companies and no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") generally prohibits
a company from making loans to its executive officers and directors. However,
that act contains a specific exception for loans by a depository institution
to its executive officers and directors in compliance with federal banking
laws. Under such laws, the Savings Bank's authority to extend credit to
executive officers, directors and 10% stockholders ("insiders"), as well as
entities such person's control is limited. The law restricts both the
individual and aggregate amount of loans the Savings Bank may make to insiders
based, in part, on the Savings Bank's capital position and requires certain
Board approval procedures to be followed. Such loans must be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. There are additional restrictions applicable
to loans to executive officers.
37
Privacy Standards. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), which was enacted in 1999, modernized the
financial services industry by establishing a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms and other financial service providers. The Savings Bank is subject to
OTS regulations implementing the privacy protection provisions of the GLBA.
These regulations require the Savings Bank to disclose its privacy policy,
including identifying with whom it shares "non-public personal information,"
to customers at the time of establishing the customer relationship and
annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") on
October 26, 2001 in response to the terrorist events of September 11, 2001.
The USA Patriot Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. In 2006, Congress re-enacted certain expiring
provisions of the USA Patriot Act.
REGULATION OF FIRST BANCSHARES
General
First Bancshares is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is registered with
the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements. The Company is required to file certain reports with,
and otherwise comply with the regulations of, the OTS and the Securities and
Exchange Commission. As a subsidiary of a savings and loan holding company,
the Savings Bank is subject to certain restrictions in its dealings with the
Company and with other companies affiliated with the Company and also is
subject to regulatory requirements and provisions as federal institutions.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance funds, the convenience
and the needs of the community and competitive factors.
Activities Restrictions. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions. The Company and
its non-savings institution subsidiaries are subject to statutory and
regulatory restrictions on their business activities specified by federal
regulations, which include performing services and holding properties used by
a savings institution subsidiary, activities authorized for savings and loan
holding companies as of March 5, 1987, and non-banking activities permissible
for bank holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the GLBA.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 was signed
into law by President Bush on July 30, 2002 in response to public concerns
regarding corporate accountability in connection with recent accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase
38
corporate responsibility, to provide for enhanced penalties for accounting
and auditing improprieties at publicly traded companies and to protect
investors by improving the accuracy and reliability of corporate disclosures
pursuant to the securities laws. The Sarbanes-Oxley Act generally applies
to all companies that file or are required to file periodic reports with the
SEC, under the Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.
Qualified Thrift Lender Test
If the Savings Bank fails the qualified thrift lender test, within one
year the Company must register as a bank holding company, and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "Regulation of First Home -- Qualified Thrift Lender Test" for
information regarding the Savings Bank's qualified thrift lender test.
TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their income on a
fiscal year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Corporation.
Bad Debt Reserve. Historically, savings institutions such as the Savings
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on the Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to the Savings Bank's loss experience, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
In August 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection
Act of 1996." The rules eliminate the 8% of taxable income method for
deducting additions to the tax bad debt reserves for all thrifts for tax years
beginning after December 31, 1995. These rules also require that all
institutions recapture all or a portion of their bad debt reserves added since
the base year (last taxable year beginning before January 1, 1988). For
taxable years beginning after December 31, 1995, the Savings Bank's bad debt
deduction will be determined under the experience method using a formula based
on actual bad debt experience over a period of years or, if the Savings Bank
is a "large" association (assets in excess of $500 million) on the basis of
net charge-offs
39
during the taxable year. The unrecaptured base year reserves will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provisions of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Savings Bank's taxable income. Nondividend
distributions include distributions in excess of the Savings Bank's current
and accumulated earnings and profits, distributions in redemption of stock,
and distributions in partial or complete liquidation. However, dividends paid
out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Savings Bank's bad debt reserve. Thus, any
dividends to the Corporations that would reduce amounts appropriated to the
Savings Bank's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Savings Bank. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by the Savings Bank. The
Savings Bank does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceed its AMTI (determined without regard to this
preference and prior to reduction for net operating losses).
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Savings Bank as a
member of the same affiliated group of corporations. The corporate dividends-
received deduction is generally 70% in the case of dividends received from
unaffiliated corporations with which the Corporation and the Savings Bank will
not file a consolidated tax return, except that if the Corporation or the
Savings Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
Other Federal Tax Matter. Other changes in the federal tax system could
also affect the business of the Savings Bank. These changes include
limitations on the deduction for personal interest paid or accrued by
individual taxpayers, limitations on the deductibility of losses attributable
to investment in certain passive activities and limitations on the
deductibility of contributions to individual retirement accounts. The Savings
Bank does not believe these changes will have a material effect on its
operations.
There have not been any IRS audits of the Savings Bank's Federal income
tax returns during the past five years.
40
Missouri Taxation
Missouri-based thrift institutions, such as the Savings Bank, are subject
to a special financial institutions tax, based on net income without regard to
net operating loss carryforwards, at the rate of 7% of net income. This tax
is in lieu of certain other state taxes on thrift institutions, on their
property, capital or income, except taxes on tangible personal property owned
by the Savings Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales taxes and use taxes. In addition, First Home is
entitled to credit against this tax all taxes paid to the State of Missouri or
any political subdivision except taxes on tangible personal property owned by
the Savings Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales and use taxes, and taxes imposed by the Missouri
Financial Institutions Tax Law. Missouri thrift institutions are not subject
to the regular state corporate income tax.
There have not been any audits of the Savings Bank's state income tax
returns during the past five years.
For additional information regarding taxation, see Note 4 of the Notes to
the Consolidated Financial Statements included in the Annual Report.
Competition
The Savings Bank has been, and continues to be, a community-oriented
savings institution offering a variety of financial resources to meet the
needs of Wright, Webster, Douglas, Ozark, Christian, Stone and Taney counties,
Missouri. The Savings Bank also transacts a significant amount of business in
Texas and Greene counties, Missouri. The Savings Bank's deposit gathering and
lending activities are concentrated in these market areas. At June 30, 2006,
the Savings Bank's offices were located in Mountain Grove, Marshfield, Ava,
Gainesville, Sparta, Theodosia, Crane, Galena, Kissee Mills and Rockaway
Beach, Missouri. A loan production office was located in Springfield,
Missouri. This office was converted to a full service branch in July 2006.
The Savings Bank is the only thrift institution located in Wright County,
Missouri. The Savings Bank faces strong competition in the attraction of
savings deposits and in the origination of loans. Its most direct competition
for savings deposits and loans has historically come from other thrift
institutions and from commercial banks, small loan companies and credit unions
located in its primary market area, some with a state-wide or regional
presence. The Savings Bank also competes with securities firms, money market
funds and mutual funds in raising deposits. Many of these institutions are
substantially larger and have greater financial resources than the Savings
Bank.
The competitive factors among financial institutions can be classified
into two categories; competitive rates and competitive services. Interest
rates are widely advertised and thus competitive, especially in the area of
time deposits. From a service standpoint, financial institutions compete
against each other in types and quality of services. The Savings Bank is
generally competitive with other financial institutions in its area with
respect to interest rates paid on time and savings deposits, fees charged on
deposit accounts, and interest rates charged on loans. With respect to
services, the Savings Bank offers a customer service oriented atmosphere
which management believes is better suited to its customers' needs than that
which is offered by other institutions in the local market.
41
The Savings Bank also believes it benefits from its community orientation
as well as its relatively high core deposit base.
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company and the Savings Bank.
Name Age(1) Position
---- ------ --------
James W. Duncan 49 President and Chief Executive Officer
of the Company and the Savings Bank
Charles W. Schumacher(2) 53 President and Chief Executive Officer
of the Company and the Savings Bank
Stephen H. Romines (3) 61 Interim President and Chief Executive
Officer of the Company and the
Savings Bank
Susan J. Uchtman (4) 43 Chief Financial Officer of the Company
and the Savings Bank
-------------
(1) As of June 30, 2006.
(2) Mr. Schumacher resigned as Chairman of the Board, director, President, and
Chief Executive Officer of the Company and the Savings Bank effective
September 7, 2005.
(3) In connection with Mr. Schumacher's resignation, Mr. Romines was appointed
by the Board to serve as Interim President and Chief Executive Officer of
the Company and the Savings Bank until a qualified replacement for Mr.
Schumacher was found. Mr. Duncan replaced Mr. Romines as President and
Chief Executive Officer of the Company and the Savings Bank effective
December 19, 2005.
(4) Mrs. Uchtman stepped down from her positions as the Chief Financial
Officer of the Corporation and the Savings Bank effective September 18,
2006.
The principal occupation of each executive officer of the Company is set
forth below. All of the officers listed above have held positions with or
been employed by the Company for at least five years unless otherwise stated.
All executive officers reside in the Savings Bank's primary trade area in
Missouri, unless otherwise stated. There are no family relationships among or
between the executive officers, unless otherwise stated.
James W. Duncan joined the Company and Savings Bank as President and
Chief Executive Officer effective December 16, 2005. Previously, Mr. Duncan
was the Executive Vice President and Chairman of the Loan Department at
Southern Missouri Bank and Trust Company in Poplar Bluff, Missouri from 1999-
2005.
Charles W. Schumacher joined the Savings Bank in 2000 as the Senior Vice
President and became President of the Savings Bank in January 2002 and
President and CEO of First Bancshares on June 30, 2004. Previously, Mr.
Schumacher was the Executive Vice President and CEO of Northwoods State Bank
in Iowa from 1992-2000. Effective September 7, 2005, Mr. Schumacher resigned
as President and CEO, of First Bancshares, Inc., President and Chief Executive
Officer, of First Home Savings Bank.
Stephen H. Romines served as interim President and Chief Executive
Officer of the Company and the Saving Bank from September 7, 2005 until
December 19, 2005. Mr. Romines retired as a director emeritus of the Company
42
effective December 19, 2005. Prior to that, Mr. Romines had served as
President and Chief Executive Officer of First Bancshares, Inc. until 2004 and
President and CEO of the Savings Bank until 2002.
Susan J. Uchtman was employed by First Home since June of 1994. Prior to
that, Mrs. Uchtman, a CPA, was employed by Kirkpatrick Phillips & Miller,
CPAs, P.C., the Company's former independent auditors, from September 1985
through May 1994.
Personnel
As of June 30, 2006, the Savings Bank had 100 full-time employees and six
part-time employees. The Savings Bank believes that employees play a vital`
role in the success of a service company and that the Savings Bank's
relationship with its employees is good. The employees are not represented by
a collective bargaining unit.
Item 2. Description of Property
The following table sets forth information regarding the Savings Bank's
offices as of June 30, 2006.
Net
Book
Value Land Building
Year as of Owned/ Owned/ Square
Location County Opened 6/30/06 Leased Leased Footage
----------------------- --------- ------------ ------------ ----------- ----------- ------------
(Dollars
Main Office in thousands)
-----------
142 East First Street Wright 1911 $ 1,275 Owned Owned 10,700
Mountain Grove, MO 65711
Branch Offices
--------------
1208 N. Jefferson Street Douglas 1978 313 Owned Owned 3,500
Ava, MO 65608
103 South Clay Street Webster 1974 336 Owned Owned 4,200
Marshfield, MO 65706
203 Elm Street Ozark 1992 572 Owned Owned 3,600
Gainesville, MO 65655
7164 Highway 14 East Christian 1995 227 Owned Owned 3,000
Sparta, MO 65753
Business Highway 160 Ozark 1997 43 Leased Leased 1,200
Theodosia, MO 65761
123 Main Street Stone 1998 226 Owned Owned 3,800
Crane, MO 65633
(table continued on following page)
43
Net
Book
Value Land Building
Year as of Owned/ Owned/ Square
Location County Opened 6/30/06 Leased Leased Footage
----------------------- --------- ------------ ------------ ----------- ----------- ------------
(Dollars
in thousands)
South Side of Square Stone 1998 57 Owned Owned 1,600
Galena, MO 65656
20377 US Highway 160 Taney 2000 863 Owned Owned 2,250
Forsyth, MO 65653
2536 State Highway 176 Taney 2000 446 Owned Owned 2,500
Rockaway Beach, MO 65740
Drive-in Facilities
-------------------
Route 60 and Oakland Wright 1986 146 Owned Owned 1,200
Mountain Grove, MO 65711
223 West Washington Webster 1993 166 Owned Owned 1,100
Marshfield, MO 65706
Loan Production Offices
-----------------------
3050 South National Greene 2006 2 Leased Leased 200
Springfield, MO 65804
Item 3. Legal Proceedings
--------------------------
From time to time, the Company and the Savings Bank may be involved in
various legal proceedings that are incidental to their business. In the
opinion of management, neither the Corporation nor the Bank is a party to any
current legal proceedings that are material to the financial condition of the
Company or the Savings Bank, either individually or in the aggregate.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small
------------------------------------------------------------------------
Business Issuer Purchases of Equity Securities
----------------------------------------------
The information contained in the section captioned "Common Stock
Information" in the Annual Report to Stockholders attached to this Form 10-KSB
as Exhibit 13 is incorporated herein by reference. In addition, the "Equity
Compensation Plan Information" contained in Part III, Item 11 of this Form
10-KSB is incorporated herein by reference.
44
Share Repurchase Activity
The Company continues to repurchase its common stock consistent with
Board approved stock repurchase plans. The Company completed ten separate
stock repurchase programs between March 9, 1994 and May 28, 2004. In
connection with those repurchase programs, a total of 1,248,803 shares of
stock were acquired at a total cost of $17.2 million. On May 28, 2004, an 11th
repurchase program of 164,336 shares was initiated. As of June 30, 2006,
93,753 shares had been repurchased at a cost of $1.9 million with an average
cost per share of $20.11. As of June 30, 2006, 70,583 shares were available
for future purchase under the 11th repurchase program.
The table below sets forth information regarding the Company's
repurchases of its common stock during the fourth quarter of fiscal 2006.
Maximum
Total Number Number of
of Shares Shares that
Purchased as May Yet Be
Total Number Average Part of Purchased
of Shares Price Paid Publicly Under the
Period Purchased per Share Announced Plan Plan
------------------------------------------------------------------------------
April 1 - 30, 2006 - - - 70,713
May 1 - 31, 2006 - - - 70,713
June 1 - 30, 2006 130 $ 16.73 130 70,583
----------- ----------- ----------- -----------
Total 130 $ 16.73 130 70,583
----------- ----------- ----------- -----------
Item 6. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
-----------------------------
Independent Auditors Reports *
(a) Consolidated Statements of Financial Condition as of June 30, 2006
and 2005*
(b) Consolidated Statements of Income for the Years Ended June 30, 2006
and 2005*
(c) Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2006 and 2005*
(d) Consolidated Statements of Cash Flows for the Years Ended June 30,
2006 and 2005*
(e) Notes to Consolidated Financial Statements*
* Contained in the Annual Report to Stockholders attached to this Form 10-
KSB as Exhibit 13, which is incorporated herein by reference. All
schedules have been omitted as the required information is either
inapplicable or contained in the Consolidated Financial Statements or
related Notes contained in the Annual Report to Stockholders.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
On April 26, 2006, the Registrant's Audit Committee determined that the
firm of Kirkpatrick, Phillips & Miller, CPAs, P.C., Springfield, Missouri,
would no longer serve as the Registrant's certifying accountants. The
decision
45
to change accountants was made by the Audit Committee of the Board of
Directors in consultation with management.
The report of Kirkpatrick, Phillips & Miller, CPAs, P.C. on the
Registrant's financial statements for the 2005 fiscal year did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope, or accounting principles.
During the Registrant's 2005 fiscal year and subsequent interim periods
preceding the date of termination of the engagement of Kirkpatrick, Phillips &
Miller, CPAs, P.C., the Registrant was not in disagreement with Kirkpatrick,
Phillips & Miller, CPAs, P.C. on any matter of accounting principles and
practices, financial statement disclosure, or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of Kirkpatrick,
Phillips & Miller, CPAs, P.C., would have caused Kirkpatrick, Phillips &
Miller, CPAs, P.C. to make reference to the subject matter of the disagreement
in connection with its report.
Additionally, during the 2005 year and for the subsequent interim period
preceding the date the Registrant determined to terminate Kirkpatrick,
Phillips & Miller, CPAs, P.C., there were no reportable matters as defined in
Regulation S-B Item 304(a)(1)(iv).
The Registrant requested that Kirkpatrick, Phillips & Miller, CPAs, P.C.
furnish the Registrant with a letter, as promptly as possible, addressed to
the Securities and Exchange Commission, stating whether they agree with the
statements made in this Item 8, and if not, stating the respects in which they
do not agree. The required letter from Kirkpatrick, Phillips & Miller, CPAs,
P.C. with respect to the above statements made by the Registrant is filed as
and exhibit to the Current Report on Form 8-K filed by the Registrant on May
2, 2006.
On April 26, 2006, the Registrant's Audit Committee voted to engage
McGladrey & Pullen, LLP, Kansas City, Missouri, as the Registrant's certifying
accountants for the fiscal year ending June 30, 2006 subject to McGladrey &
Pullen's acceptance of this engagement. On April 26, 2006, McGladrey &
Pullen, LLP contacted the Registrant accepting the engagement. The Registrant
has not consulted with McGladrey & Pullen, LLP during the most recent fiscal
year nor during any subsequent interim period prior to its appointment as
auditor for the fiscal 2006 audit regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the
type of audit opinion that might be rendered on the Registrant's financial
statements.
Item 8A. Controls and Procedures
---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation
of the Company's disclosure controls and procedures (as defined in Section
12(a)-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried
out as of June 30, 2006 under the supervision and with the participation of
the Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management. The Company's Chief
Executive Officer and Chief Financial Officer concluded that as of June 30,
2006 the Company's disclosure controls and procedures were not effective in
ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms because of the material weakness described below.
46
There have been no changes in the Company's internal control over
financial reporting during the fourth quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
A material weakness is a significant deficiency (within the meaning of
PCAOB Auditing Standard No. 2), or a combination of significant deficiencies,
that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by management or employees in the
normal course of performing their assigned functions.
As of June 30, 2006, the Company did not identify or record certain
transactions related to the other than temporary impairment of two equity
securities. These transactions were identified after discussion with the
Company's independent registered public accounting firm and were corrected
after the release of the Company's earnings for the fourth quarter and year
ended June 30, 2006.
Because of the material weakness described above, based on its
assessment, management believes that, as of June 30, 2006, the Company did not
maintain effective internal control over financial reporting based on the
criteria established in Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
To remediate the material weakness in the Company's internal control over
financial reporting described above, the Company will, on a quarterly basis,
quantify the impairment of their debt and equity securities and evaluate the
near term prospects of the issuer in relation to the severity, duration and
materiality of the unrealized losses and its significance to the operating
results of the Company.
(b) Changes in Internal Controls: There have been no changes in the
Company's internal control over financial reporting (as defined in Rule
13a-15(f) of the Act) that occurred during the quarter ended June 30, 2006,
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures
and internal control over financial reporting will prevent all error and all
fraud. A control procedure, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error
or fraud may occur and not be detected.
Item 8B. Other Information
---------------------------
Not applicable.
47
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
For information concerning Directors of the Company, see the section
captioned "Proposal I -- Election of Directors" included in the Proxy
Statement, a copy of which will be filed with the SEC no later than 120 days
after the Company's fiscal year end and is incorporated herein by reference.
For information concerning Executive Officers of the Company, see the
section captioned "-- Executive Officers" in Part I of this Form 10-KSB, which
is incorporated herein by this reference.
Compliance with Section 16(a) of the Exchange Act
The information contained in the section captioned "Compliance with
Section 16(a) of the Exchange Act" is included in the Proxy Statement and is
incorporated herein by reference.
Audit Committee and Audit Committee Financial Expert
----------------------------------------------------
The Audit Committee consists of Directors Moore, Moody and Hixon. The
Board of Directors has determined Director Hixon qualifies as the "audit
committee financial expert," as defined by the SEC. The Board believes that
the current members of the Audit Committee are qualified to serve based on
their experience and background.
Code of Ethics
--------------
First Bancshares, Inc. has adopted a Code of Ethics that applies to First
Bancshares' directors, executive officers and all other employees, which is
included as Exhibit 14 to this Form 10-KSB. A copy of First Bancshares' Code
of Ethics is available to any person without charge, upon written request made
to the Corporate Secretary at PO Box 777, Mountain Grove, Missouri 65711.
Item 10. Executive Compensation
--------------------------------
The information contained under the section captioned "Directors'
Compensation" and "Executive Compensation" included in the Proxy Statement, a
copy of which will be filed with the SEC no later than 120 days after the
Company's fiscal year end, are incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Equity Compensation Plan Information. The following table summarizes
share and exercise price information about the Company's equity compensation
plans as of June 30, 2006.
48
(c)
Number of
Securities
(a) (b) Remaining
Available for
Number of Future Issuance
Securities to Weighted- Under Equity
be Issued Upon Average Plans
Exercise of Exercise Price Compensation
Outstanding of Outstanding (Excluding
Options, Options, Securities
Warrants and Warrants and Reflected in
Plan Category Rights Rights Column (a))
------------- ------ ------ -----------
Equity Compensation Plans
approved by security holders:
Option Plan 48,000 $17.46 52,000
Restricted stock plan - - 50,000
Equity Compensation Plans not
approved by security holders: - - -
------------------------------------------------------------------------------
Total 48,000 $17.46 102,000
==============================================================================
(a) Security Ownership of Certain Beneficial Owners
The information contained in the section captioned "Voting
Securities and Security Ownership of Certain Beneficial Owners and
Management" is included in the Proxy Statement, a copy of which
will be filed with the SEC no later than 120 days after the
Company's fiscal year end, is incorporated herein by reference.
(b) Security Ownership of Management
The information contained in the sections captioned "Voting
Securities and Security Ownership of Certain Beneficial Owners and
Management" and "Proposal I - Election of Directors" is included in
the Proxy Statement and are incorporated herein by reference.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which
may at a subsequent date result in a change in control of the
Company.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
The information contained in the section captioned " Transactions with
Management" is included in the Proxy Statement, a copy of which will be filed
with the SEC no later than 120 days after the Company's fiscal year end, is
incorporated herein by reference.
49
Item 13. Exhibits
------------------
(a) Exhibits
3.1 Articles of Incorporation of First Bancshares, Inc.(1)
3.2 Bylaws of First Bancshares, Inc.(1)
4.1 Specimen stock certificate of First Bancshares (1)
10.1 First Home Savings Bank 1994 Employee Stock Ownership
Plan(1)
10.2 First Bancshares, Inc. 1993 Stock Option Plan (2)10.3
First Home Savings Bank Management Recognition and
Development Plan (2)
10.4 Employment Agreement with Charles W. Schumacher (3)
10.5 First Bancshares, Inc. 2004 Management Recognition
Plan (4)
10.6 First Bancshares, Inc. 2004 Stock Option Plan (4)
10.7 Form of Incentive Stock Option Agreement (5)
10.8 Form of Non-Qualified Stock Option Agreement (5)
10.9 First Bancshares, Inc. 2004 Management Recognition
Plan (4)
10.10 Severance Agreement between First Bancshares, Inc. and
First Home Savings Bank and Charles W. Schumacher (6)
10.11 Employment Agreement with James W. Duncan (7)
13. 2006 Annual Report to Stockholders (Except for the
portions of the 2006 Stockholder Report that are
expressly incorporated by reference in this Annual
Report on Form 10-KSB, the 2006 Stockholder Report of
the Company shall not be deemed filed as a part
hereof.)
14. Code of Ethics
21. Subsidiaries of the Registrant
23.1 Auditors' Consent
23.2 Auditors' Consent
31. Rule 13a-14(a) Certification (Chief Executive Officer
and Interim Interim Chief Financial Officer)
32 Section 1350 Certifications
-------------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 File No. 33-69886.
(2) Incorporated by reference to the Company's 1994 Annual Meeting Proxy
Statement dated September 14, 1994.
(3) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended June 30, 2001. An updated Employment Agreement with Mr.
Schumacher was entered into in November 2004 and terminated in June
2005.
(4) Incorporated by reference to the Company's 2004 Annual Meeting Proxy
Statement dated September 15, 2004.
(5) Filed as an exhibit to the Current Report on Form 8-K dated February 22,
2006 and incorporated herein by reference.
(6) Filed as an exhibit to the Current Report on Form 8-K dated October 31,
2005.
(7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended December 31, 2005.
Item 14. Principal Accountant Fees and Services.
The information contained under the section captioned "Auditors"
included in the Proxy Statement, a copy of which will be filed with the SEC
no later than 120 days after the Company's fiscal year end, is incorporated
herein by reference.
50
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST BANCSHARES, INC.
Date: October 13, 2006 By: /s/James W. Duncan
------------------------
James W. Duncan
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/James W. Duncan October 13, 2006
----------------------------------
James W. Duncan
President, Chief Executive Officer
and Interim Chief Financial Officer
By: /s/Harold F. Glass October 13, 2006
----------------------------------
Harold F. Glass
Director
By: /s/Thomas M. Sutherland October 13, 2006
----------------------------------
Thomas M. Sutherland
Director
By: /s/John G. Moody October 13, 2006
----------------------------------
John G. Moody
Director
By: /s/Dr. James F. Moore October 13, 2006
----------------------------------
Dr. James F. Moore
Director
By: /s/Billy E. Hixon October 13, 2006
----------------------------------
Billy E. Hixon
Director
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
-------------- -------------------
13 2006 Stockholder Report. Except for the portions of the 2006
Stockholder Report that are expressly incorporated by
reference in this Annual Report on Form 10-KSB, the 2006
Stockholder Report of the Company shall not be deemed filed as
a part hereof.
14 Code of Ethics
21 Subsidiaries of the Registrant
23.1 Consent of Auditors
23.2 Consent of Auditors
31 Rule 13a - 14(a) Certification (Chief Executive Officer and
Interim Chief Financial Officer)
32 Rule 1350 Certification
Exhibit 13
Annual Report to Stockholders
First Bancshares, Inc.
2006 Annual Report
First Home Savings Bank
A wholly owned subsidiary of First Bancshares, Inc.
www.fhsb.com
TABLE OF CONTENTS
Page
----
Letter to Shareholders ......................................... 1
Business of the Company ........................................ 2
Selected Consolidated Financial Information .................... 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 5
McGladrey & Pullen, LLP Independent Auditors' report ........... 22
Kirkpatrick, Phillips & Miller, CPAs, P.C. Independent
Auditors' report ............................................ 23
Consolidated Financial Statements .............................. 24
Notes to Consolidated Financial Statements ..................... 29
Common Stock Information ....................................... 57
Directors and Executive Officers ............................... 58
Corporate Information .......................................... 59
Dear Fellow Shareholder:
The past year has brought many changes to First Bancshares, Inc. Despite a
disappointing 2006, we are firmly committed to executing new strategies to
improve the Company's performance during the year ahead. We are in the
process of assembling a new management team. Our subsidiary financial
institution, First Home Savings Bank, has added a number of new employees in
our lending department who we believe will assist us in executing our lending
strategy, improving our asset quality and assist us in monitoring our asset
quality. As part of that quality control we have centralized our loan
processing and internal credit review.
One of the unresolved issues at this time last year was the appointment of a
new president and chief executive officer. During that period, and to assist
the Company in its search, Stephen H. Romines, who retired as President and
Chief Executive Officer in 2004, returned to serve as Interim President and
Chief Executive Officer. In December 2006 I was appointed President and Chief
Executive Officer by the Board of Directors.
The expansion of our operation into Springfield, Missouri, is an example of
our efforts to seek out growth opportunities. The Springfield market should
further increase our ability to serve our customers as well as allow for the
opportunity to develop new lending and deposit relationships.
The continued support and loyalty of our shareholders, employees and customers
is one of our most valuable assets. We are committed to providing superior
quality and customer service to achieve a higher level of convenience and
customer satisfaction. As we address the issues which adversely impacted our
financial results in fiscal year 2006, we appreciate your support. Although
significant challenges remain, we remain focused on executing and developing
strategies to improve the Company's financial performance and to identify
weaknesses.
I am proud to be part of the First Bancshares and First Home Savings Bank
team, and I am optimistic about our future. Thank you for your continued
support.
Sincerely,
/s/James W. Duncan
James W. Duncan
President and Chief Executive Officer
Business of the Company
First Bancshares, Inc. ("Company"), a Missouri corporation, was incorporated
on September 30, 1993 for the purpose of becoming the holding company for
First Home Savings Bank ("First Home" or the "Savings Bank") upon the
conversion of First Home from a Missouri mutual to a Missouri stock savings
and loan association. That conversion was completed on December 22, 1993. At
June 30, 2006, the Company had total consolidated assets of $228.4 million and
consolidated stockholders' equity of $26.3 million.
The Company is not engaged in any significant business activity other than
holding the stock of First Home. Accordingly, the information set forth in
this report, including the consolidated financial statements and related data,
applies primarily to First Home.
First Home is a Missouri-chartered, federally-insured stock savings bank
organized in 1911. The Savings Bank is regulated by the Missouri Division of
Finance and the Office of Thrift Supervision ("OTS"). Its deposits are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation. First Home also is a
member of the Federal Home Loan Bank ("FHLB") System.
First Home conducts its business from its home office in Mountain Grove and
ten full service branch facilities in Marshfield, Ava, Gainesville, Sparta,
Theodosia, Crane, Galena, Kissee Mills, and Rockaway Beach, Missouri. In July
2006, a full service branch was opened in Springfield, Missouri. First Home
provides its customers with a full array of community banking services and is
primarily engaged in the business of attracting deposits from, and making
loans to, the general public. First Home emphasizes the origination of
one-to-four family residential mortgage loans along with multi-family
residential, consumer, commercial and home equity loans. First Home also
invests in mortgage-backed U. S. Government and agency securities and other
assets.
At June 30, 2006, First Home's total gross loans were $148.4 million, or 65.0%
of total consolidated assets, including residential mortgage loans of $82.5
million, or 55.6% of total gross loans and other mortgage loans of $48.7
million, or 32.8% of total gross loans. Of the mortgage loans, over 95.0% are
adjustable-rate loans.
2
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth certain information concerning the consolidated
financial position and operating results of the Company as of and for the
dates indicated. The Company is primarily in the business of directing,
planning and coordinating the business activities of First Home. The
consolidated data is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and its
subsidiaries presented herein.
At June 30,
-------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $228,395 $244,007 $264,978 $268,542 $258,242
Loans receivable, net 141,987 158,143 166,259 176,707 188,951
Cash, interest-bearing
deposits and securities 69,007 68,600 81,971 75,349 58,294
Customer deposits 179,141 187,143 207,247 211,664 202,450
Borrowed funds 22,000 28,394 29,121 29,352 29,779
Stockholders' equity 26,291 26,817 27,296 26,404 24,763
Years Ended June 30,
-------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands, except per share information)
OPERATING DATA:
Interest income $12,913 $13,265 $13,735 $15,486 $15,955
Interest expense 5,987 5,091 5,727 7,098 8,729
------- ------- ------- ------- -------
Net interest income 6,926 8,174 8,008 8,388 7,226
Provision for loan losses 1,520 2,333 340 427 374
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 5,406 5,841 7,668 7,961 6,852
Impairment of and gains/
(losses) on securities (421) (4) 178 27 -
Noninterest income, excluding
gains/(losses) on securities 1,902 2,911 2,310 1,877 1,328
Noninterest expense 7,151 7,415 6,744 6,357 5,541
------- ------- ------- ------- -------
Income (loss) before taxes (264) 1,333 3,412 3,508 2,639
Income taxes (91) 16 1,065 1,264 980
------- ------- ------- ------- -------
Net income (loss) $ (173) $ 1,317 $ 2,347 $ 2,244 $ 1,659
======= ======= ======= ======= =======
Basic earnings (loss) per share $ (0.11) $ 0.83 $ 1.42 $ 1.37 $ 0.96
======= ======= ======= ======= =======
Diluted earnings(loss) per share $ (0.11) $ 0.83 $ 1.42 $ 1.35 $ 0.94
======= ======= ======= ======= =======
Dividends per share $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
======= ======= ======= ======= =======
3
At or For the Years Ended June 30,
----------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets NA% 0.51% 0.87% 0.85% 0.68%
Return on average equity NA 4.60 8.49 8.68 6.60
Average equity to average assets 11.52 11.10 10.22 9.77 10.36
Interest rate spread for period 2.96 3.31 3.05 3.13 2.81
Net interest margin for period 3.21 3.48 3.22 3.37 3.16
Noninterest expense to average
assets 2.99 2.88 2.49 2.41 2.28
Average interest-earning assets
to interest-bearing liabilities 109.00 108.00 107.00 109.00 109.00
Allowance for loan losses to
total loans at end of period 1.67 1.74 0.73 0.63 0.46
Net charge-offs to average loans
outstanding during the period 1.29 0.44 0.14 0.09 0.10
Ratio of non-performing assets to
total assets .59 2.21 1.02 1.34 1.17
Ratio of loan loss reserves to
non-performing assets 184.52 52.93 45.98 41.66 42.06
Dividend payout ratio NA 19.28 11.27 11.68 16.67
At June 30,
----------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Loans outstanding 3,644 4,263 4,771 5,296 5,839
Deposit accounts 24,724 25,021 25,419 25,565 25,081
Full service offices 10 10 10 10 10
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements, the accompanying Notes to Consolidated Financial Statements and
the other sections contained in this report.
Management's Discussion and Analysis ("MD&A") and other portions of this
report contain certain "forward-looking statements" concerning the future
operations of the Company. Management desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is including this statement for the express purpose of availing the Company of
the protections of such safe harbor with respect to all "forward-looking
statements" contained in our Annual Report. We have used "forward-looking
statements" to describe future plans and strategies, including our
expectations of the Company's future financial results. Management's ability
to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, the ability of the Company to control costs and expenses,
the ability of the Company to efficiently incorporate acquisitions into its
operations, competitive products and pricing, loan delinquency rates, results
of lending activities and loan loss experience, and changes in federal and
state regulation. These factors should be considered in evaluating the
"forward-looking statements," and undue reliance should not be placed on such
statements.
Operating Strategy
The primary goals of management are to minimize risk, improve profitability
and promote growth of the Company. Operating results depend primarily on net
interest income, which is the difference between the income earned on
interest-earning assets, such as loans and securities, and the cost of
interest-bearing liabilities, consisting of deposits and borrowings. Net
income is also affected by, among other things, provisions for loan losses and
operating expenses. Operating results are also significantly affected by
general economic and competitive conditions, primarily changes in market
interest rates, governmental legislation and policies concerning monetary and
fiscal affairs and housing, as well as financial institutions and the
attendant actions of the regulatory authorities. Management's strategy is to
strengthen First Home's presence in, and expand the boundaries of, its primary
market area.
Management has implemented various general strategies designed to continue
profitability while maintaining safety and soundness. Primary among those
strategies are emphasizing, if possible, one-to-four family lending,
maintaining asset quality and managing interest-rate risk. It is anticipated,
subject to market conditions, that no changes will be made in these
strategies.
Lending. Historically, First Home predominantly originated one-to-four family
residential loans. One-to-four family residential loans were 73% of the
mortgage loans originated during fiscal year 2006, 63% of the mortgage loans
originated during fiscal 2005 and 62% of the mortgage loans originated during
fiscal 2004. At June 30, 2006, residential mortgage loans as a percent of the
Savings Bank's total loan portfolio remained constant with fiscal 2005 at
approximately 55%. First Home has gradually increased its commercial loan
originations within its traditional lending territory over the past five years
from 20% of loan originations at June 30, 2001 to 27% at June 30, 2006.
It is anticipated that this trend will continue for the foreseeable future as
the Savings Bank enters new markets and develops new products.
5
Asset Quality. Asset quality remains a significant concern of management and
the board of directors of First Home. The Savings Bank's asset quality is
monitored and measured using various benchmarks. The two key items are
non-performing loans and classified loans. Past due loans (i.e. loans 30 days
or more delinquent) at June 30, 2006 were 3.71% of the total loan portfolio
and included 1.91% of total residential loans, 6.78% of total commercial real
estate loans, 4.33% of total commercial business loans and 3.54% of total
consumer loans.
The table below reflects the increasing risk classification of the Savings
Bank's loan portfolio based upon the significant increase in its classified
loans, which are loans that are internally identified as having greater credit
risk and require additional monitoring. These classified loans increased $2.2
million, or 36%, from June 30, 2005. This increase is a result of stricter
internal policies relating to the identification and monitoring of its problem
loans as well as the problems experienced in the commercial, commercial
business and consumer loan portfolios.
Asset quality: (in thousands)
At or for the
Year Ended June 30,
---------------------
2006 2005
------ ------
Past due over 90 days $ 3 $ 148
Non-accrual loans 841 2,854
Real estate owned 497 340
Impaired loans not past due
or past due less than 60 days - 2,044
------ ------
Total non-performing assets $1,341 $5,386
====== ======
Net charge-offs $1,897 $ 722
Provision for loan losses $1,520 $2,332
Classified loans $8,300 $6,100
The Savings Bank's non-performing loans (which are included in classified
loans), consist of non-accrual loans, past due loans over 90 days and impaired
loans not past due or past due less than 60 days which have declined from the
year ended June 30, 2005 primarily as a result of payoffs and charge-offs of
impaired loans (which includes non-accrual loans) identified in 2005. The
Savings Bank's provision for the year ended June 30, 2006 has declined from
the year ended June 30, 2005 but remains at a historically higher level as a
result of the increase in the Company's classified loans at June 30, 2006.
In addition to the classified loans, the Savings Bank has identified an
additional $7.1 million of credits at June 30, 2006 on its internal watch list
including $5.1 million, $700,000, $1.0 million and $300,000 of commercial real
estate, commercial business, one-to-four family and consumer loans,
respectively. Management has identified these loans as high risk credits and
any deterioration in their financial condition could increase the classified
loan totals.
6
Managing Interest-Rate Risk. First Home has relied primarily on adjustable
interest rate loans to minimize the inherent risks of interest rate changes.
In order to compete in the current interest rate environment, First Home has
begun offering long-term fixed rate mortgages to borrowers with good credit
quality. With the aim of mitigating risk on these long-term fixed rate
products, management monitors the number, outstanding balance and other
amounts related to these loans to determine when changes should be made to the
terms of the loans offered. Management also investigates the use of funding
through FHLB advances with terms that correspond with the terms of the loan
products.
Critical Accounting Policies. The Company uses estimates and assumptions in
its financial statements in accordance with generally accepted accounting
principles. Material or critical estimates that are susceptible to
significant change include the determination of the allowance for loan losses
and the associated provision for loan losses, as well as the estimation of
fair value for a number of the Company's assets.
Allowance for Loan Losses. Management recognizes that loan losses may occur
over the life of a loan and that the allowance for loan losses must be
maintained at a level necessary to absorb specific losses on impaired loans
and probable losses inherent in the loan portfolio. The Savings Bank's Asset
Classification Committee assesses the allowance for loan losses on a quarterly
basis. The Committee analyzes several different factors including
delinquency, charge-off rates and the changing risk profile of the Company's
loan portfolio, as well as local economic conditions such as unemployment
rates, bankruptcies and vacancy rates of business and residential properties.
Management believes that the accounting estimate related to the allowance for
loan losses is a critical accounting estimate because it is highly susceptible
to change from period to period. This may require management to make
assumptions about losses on loans; and the impact of a sudden large loss could
deplete the allowance and potentially require increased provisions to
replenish the allowance, which would negatively affect earnings.
The allowance for loan losses is evaluated on a regular basis by management
and is based on management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.
The allowance is increased by the provision for loan losses, which is charged
against current period operating results and decreased by the amount of actual
loan charge-offs, net of recoveries.
7
Estimation of Fair Value. The estimation of fair value is significant to a
number of the Company's assets, including securities and real estate owned.
These are all recorded at either fair value or at the lower of cost or fair
value. Declines in fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other-than-temporary are
reflected in earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. Furthermore, accounting
principles generally accepted in the United States require disclosure of the
fair value of financial instruments as a part of the notes to the consolidated
financial statements. Fair values are volatile and may be influenced by a
number of factors, including market interest rates, prepayment speeds,
discount rates and the shape of yield curves.
Comparison of Financial Condition at June 30, 2006 and June 30, 2005
General. The most significant change in the Company's financial condition
during the year ended June 30, 2006 was a decrease in net loans receivable of
$16.2 million. The corresponding offset was a reduction in customer deposits
of $8.0 million and FHLB advances of $6.4 million. The low fixed rate terms
on single family mortgage loans offered by secondary market loan originators
and, to some extent, terms offered by other financial institutions on
commercial loans, continued to cause Savings Bank customers to refinance
through other sources. The Savings Bank maintained rates paid on customer
deposits at a level lower than its competitors which was the primary cause of
the deposit decrease.
Total Assets. Total assets decreased $15.6 million, or 6.4%, to $228.4
million at June 30, 2006 from $244.0 million. The decrease was attributable
to a $16.2 million decrease in loans receivable.
Cash and Cash Equivalents. Cash and cash equivalents was $23.5 million at
June 30, 2006 compared to $20.6 million at June 30, 2005, an increase of $2.9
million, or 14.1%. The increase was the result of loan prepayments offset by
a decrease in customer deposits and payment on FHLB advances.
Certificates of Deposit. Certificates of deposit purchased as investments
increased $852,000 to $3.8 million at June 30, 2006 from $3.0 million at June
30, 2005. The balance held in certificates of deposit purchased was increased
to enhance earnings on excess funds.
Securities. Securities decreased $3.0 million to $40.1 million at June 30,
2006 from $43.1 million at June 30, 2005. Funds from sales, maturities, early
call redemptions and prepayments on securities were reinvested or placed in
overnight funds with the FHLB.
8
Loans Receivable. Net loans receivable decreased from $158.1 million at June
30, 2005 to $142.0 million at June 30, 2006. The $16.1 million, or 10.2%,
decrease was the result of loan payments and payoffs exceeding loan
originations. The continued relatively low mortgage interest rate environment
caused some of the Savings Bank's customers to seek long-term fixed rate
products that First Home did not offer at other financial institutions. The
Savings Bank had a $47.0 million decrease in loans over the last four years,
most of which were residential mortgage loans. At June 30, 2002 residential
mortgage loans totaled $114.1 million compared to $82.5 million at June 30,
2006, a decrease of $31.6 million. This decline has caused a change in the
Savings Bank's loan composition and a decrease in residential mortgage loans
as a percent of the total loans, from 59.14% to 55.59% at those respective
dates. There have been numerous loan problems within the commercial loan
portfolio, both from the credit quality standpoint and monitoring procedures.
The credit quality problems are reflected in the classified loan totals (see
"Asset Quality" above). Management is addressing the problems in monitoring by
collecting and analyzing financial information on large loans to commercial
borrowers. The Savings Bank also is working on documenting the repayment
capacity of each borrower as well as the identifying the secondary source of
repayment. Management has put in place a loan approval process including a
standard loan presentation format, individual lending authority and a tiered
loan committee approval process. In addition, on March 31, 2006 management
implemented quarterly watch list write-ups to report what has occurred since
the last review as well as what is required to be able to remove the loans
from the watch list or identify a workout plan.
Nonaccrual Loans. Nonaccrual loans decreased from $2.9 million at June 30,
2005 to $841,000 at June 30, 2006. The balance of nonaccrual loans at June
30, 2005 consisted primarily of commercial loans to one borrower and related
companies that have filed for protection under Chapter 11 bankruptcy. These
loans were charged off or refinanced under the bankruptcy plan during fiscal
2006.
Non-performing Assets. Non-performing assets decreased $4.1 million from
$5.4 million at June 30, 2005 to $1.3 million at June 30, 2006. At June 30,
2006, the ratio of non-performing assets to total assets was .59% compared to
2.21% at June 30, 2005. The Savings Bank's non-performing loans consist of
non-accrual loans, past due loans over 90 days and impaired loans not past due
or past due less than 60 days which have declined from the year ended June 30,
2005 primarily as a result of payoffs and charge-offs of impaired loans (which
includes non-accrual loans) identified in 2005. The decrease in non-
performing assets does not indicate an improvement in the quality of the
Savings Bank's loan portfolio as evidenced by classified loans increasing $2.2
million from $6.1 million at June 30, 2005 to $8.3 million, at June 30, 2006.
This increase is a result of stricter internal policies relating to the
identification and monitoring of its problem loans as well as the problems
experienced in the commercial, commercial business and consumer loan
portfolios.
In addition to the classified loans, the Savings Bank has identified an
additional $7.1 million of credits at June 30, 2006 on its internal watch list
including $5.1 million, $700,000, $1.0 million and $300,000 of commercial real
estate, commercial business, one-to-four family and consumer loans,
respectively. Management has identified these loans as high risk credits and
any deterioration in their financial condition could increase the classified
loan totals.
9
Customer Deposits and Borrowings. Customer deposits decreased $8.0 million,
or 4.3%, to $179.1 million at June 30, 2006 from $187.1 million at June 30,
2005. Money market accounts decreased $6.5 million, checking accounts
decreased $2.4 million and savings decreased $699,000. These decreases were
somewhat offset by an increase in certificates of deposit totaling $1.6
million. During the majority of the fiscal year ended June 30, 2006, the
rates paid by the Savings Bank were below the rates offered by competitors as
the Savings Bank managed its deposits consistent with the reduction in its
assets. In addition, FHLB advances were paid off during this period resulting
in a decrease of $6.4 million.
Stockholders' Equity. Stockholders' equity was $26.3 million at June 30, 2006
compared to $26.8 million at June 30, 2005. The $527,000 decrease was the
result of a net loss of $173,000, payment of dividends of $248,000, or $0.16
per share, and a $102,000 addition to unrealized losses on securities. At
June 30, 2006, shares of stock outstanding were 1,552,480 compared to
1,552,010 shares outstanding at June 30, 2005. The increase in the Company's
outstanding shares is the result of the exercise of employee stock options,
which was offset by the Company's stock repurchases. The book value per share
decreased to $16.93 at June 30, 2006 from $17.28 at June 30, 2005.
Comparison of Operating Results for the Years Ended June 30, 2006 and June 30,
2005
Net Income. Net income decreased $1.5 million to a net loss of $173,000 for
the fiscal year ended June 30, 2006 from $1.3 million net income for the
fiscal year ended June 30, 2005. The decrease was attributable to a $1.4
million decrease in noninterest income and a $1.2 million decrease in net
interest income. The decrease in net interest income was the result of a
$895,000 increase in interest expense combined with a $353,000 decrease in
interest income. Partially offsetting these items was a $813,000 decrease in
the provision for loan losses and a $264,000 decrease in noninterest expense.
Net Interest Income. Net interest income decreased $1.2 million, or 15.3%, to
$6.9 million for the fiscal year ended June 30, 2006 from $8.1 million for the
fiscal year ended June 30, 2005. Total interest expense increased $895,000
primarily because interest expense on customer deposits increased. A decrease
in interest income of $353,000 was attributable to a reduction in income from
loans receivable partially offset by increases in income from securities and
other interest-earnings assets.
Interest Income. Interest income decreased $353,000, or 2.7%, to $12.9
million for the fiscal year ended June 30, 2006, from $13.3 million for the
fiscal year ended June 30, 2005. The majority of the change was a decrease in
interest income from loans receivable of $900,000, or 8.0%, to $10.4 million
for the fiscal year ended June 30, 2006 from $11.3 million for the fiscal year
ended June 30, 2005. The primary factor for the decrease in interest income
from loans was the average balance of net loans outstanding decreasing $15.7
million, or 9.6%, to $147.5 million for the fiscal year ended June 30, 2006
from $163.3 million for the fiscal year ended June 30, 2005. Total
originations of mortgage loans were $38.2 million, while repayments on
mortgage loans were $50.8 million. This net reduction in the balance of loans
outstanding was offset slightly by an increase in the average rate on those
loans to 7.06% for fiscal 2006 from 6.93% for fiscal 2005.
Interest income from securities increased $287,000, or 19.0% to $1.8 million
for the year ended June 30, 2006 from $1.5 million for the year ended June 30,
2005. The increase was the result of a higher rate earned on securities and a
higher average balance invested.
10
Interest income from other interest-earning assets (primarily overnight funds)
increased $261,000, or 58.4%, to $707,000 for the fiscal year ended June 30,
2006 from $446,000 for the fiscal year ended June 30, 2005. The increase is
attributable to an increase in the average rate from 1.78% for the year ended
June 30, 2005 to 3.57% for the year ended June 30, 2006.
Interest Expense. Interest expense for the fiscal year ended June 30, 2006
increased $895,000, or 17.6%, to $6.0 million from $5.1 million for the fiscal
year ended June 30, 2005. The average rate paid on customer deposits
increased from 1.84% for the fiscal year ended June 30, 2005 to 2.60% for the
fiscal year ended June 30, 2006. That increase was offset by a $17.9 million
decrease in the average balance of interest-bearing customer deposits, which
resulted in a $975,000, or 28.2%, increase in interest expense on customer
deposits for the fiscal year ended June 30, 2006. The increase in the average
cost of deposits was the result of increased short-term interest rates during
fiscal 2006, maturities of lower costing time deposits and a slight change in
the deposit mix toward higher costing time deposits.
Interest expense on borrowed funds of $1.6 million for the fiscal year ended
June 30, 2006 decreased $80,000, or 4.9%, as principal reductions were made on
FHLB advances and several advances were paid in full.
Provision for Loan Losses. The provision for loan losses decreased $813,000,
or 34.8%, to $1.5 million for the fiscal year ended June 30, 2006 from $2.3
million for the fiscal year ended June 30, 2005. The Savings Bank began
experiencing an increase in problem loans during fiscal year 2005. This
increase required a significant increase in the allowance for loan losses. At
June 30, 2004 the allowance for loan losses was $1.2 million, or .73%, of
gross loans compared to $2.9 million, or 1.74%, of gross loans at June 30,
2005. The allowance for loan losses was $2.5 million, or 1.67%, of gross
loans at June 30, 2006. Loan charge-offs, net of recoveries, of First Home
originated loans were $1.9 million for the fiscal year ended June 30, 2006
compared to $722,000 for the fiscal year ended June 30, 2005. The increase in
net loan losses was the result of loans reported as impaired (which includes
nonaccrual loans) at June 30, 2005 being paid-off or becoming identified as
uncollectible and charged off during fiscal year 2006.
Noninterest Income. Noninterest income decreased $1.4 million, or 49.1%, to
$1.5 million for the fiscal year ended June 30, 2006 compared to $2.9 million
for the fiscal year ended June 30, 2005. Income from bank-owned life
insurance decreased $804,000, or 78.7%. In September 2004, the Savings Bank
recorded income from proceeds as a result of the death of an insured covered
under policies purchased in June 2003.
Losses of $380,000 on property and equipment and real estate owned during the
fiscal year ended June 30, 2006 were the result of a write down of $235,000 on
land originally purchased for a prospective branch location to its estimated
fair value, a loss of $99,000 on the sale of commercial investment property, a
$24,000 loss on the disposal of material remaining from a previous branch
building project, and a $22,000 net loss on the sale of foreclosed property.
In comparison during the fiscal year ended June 30, 2005, the loss of $41,000
on sale of property and equipment and real estate owned was primarily related
to net losses on the sales of foreclosed property.
11
Losses on the sale of securities were $161,000 for the fiscal year ended June
30, 2006 compared to $4,000 for fiscal 2005. In order to better position
future earnings, the Savings Bank sold $6.8 million of securities at a loss of
$161,000. The proceeds from the sale will be reinvested in higher yielding
securities. For the fiscal year ended June 30, 2005, several low balance
securities were sold at a loss of $4,000. During the fiscal year ended June
30, 2006, the Company recognized an other-than-temporary impairment of
$260,000 on a Freddie Mac preferred stock and a Fannie Mae preferred stock
that had declined in value. The securities are investment grade securities
that are held in the Company's available-for-sale portfolio. The other-than-
temporary impairment on the securities was based on the facts and
circumstances surrounding each of the securities at the time, including the
duration and amount of the unrealized loss, as well as the prospect for the
recovery of market value within a reasonable period of time.
Service charges and other fee income increased $89,000, or 5.0%, to $1.9
million for the fiscal year ended June 30, 2006 from $1.8 million for the
fiscal year ended June 30, 2005. The increase was primarily from processing
income related to debit card transactions.
Other noninterest income increased $46,000 to $193,000 for the fiscal year
ended June 30, 2006 as a result of increased commission income from a third
party brokerage arrangement through the Savings Bank's subsidiary, First Home
Investments, Inc.
Noninterest Expense. Noninterest expense decreased $264,000, or 3.6%, to $7.2
million for the fiscal year ended June 30, 2006 from $7.4 million for the
fiscal year ended June 30, 2005.
Compensation and employee benefits increased $322,000, or 8.8%, to $4.0
million for the fiscal year ended June 30, 2006 from $3.7 million for the
fiscal year ended June 30, 2005. Group health insurance costs increased
$151,000, or 24.7%, in fiscal 2006 as a result of the change to a fully
insured health insurance plan as opposed to a partially self funded plan in
fiscal 2005. The change was made to eliminate the risk of additional expense
related to numerous and/or serious claims under the partially self funded plan
that had occurred in years prior to fiscal 2005. In addition, retirement
plan expenses increased $106,000 during fiscal 2006 as contributions were
required to fund the Savings Bank's defined benefit plan. This plan was
frozen in March 2006 based on analysis of the benefits provided under the plan
versus the cost to maintain funding. Additional increases, to a lesser
extent, were a result of annual pay rate increases and a lower allocation of
compensation and employee benefits to capitalized loan costs.
Occupancy and equipment expense for the fiscal year ended June 30, 2006
decreased $58,000, or 5.0%, to $1.1 million. The decrease was attributable to
reductions in depreciation expense as a result of more assets becoming fully
depreciated and lower maintenance costs.
Other credit losses and related expenses for the fiscal year ended June 30,
2005 were $590,000 with no corresponding expense for fiscal 2006. Of this
amount, $440,000 represented the amount paid on the letters of credit issued
on behalf of the Savings Bank's largest substandard borrower and $150,000
accrued for estimated costs for attorney's fees and litigation expenses. This
claim went to arbitration during fiscal 2006 and was settled with no
additional expense.
The outsourcing of check imaging, customer deposit statement preparation and
mailing increased customer deposit account processing fees by $50,000. This
process was moved back in-house in late fiscal 2006, which will allow the use
of images for check clearing and reporting to customers at the Savings Bank's
facilities without the costs of transporting the actual checks to a processing
center.
12
Deposit insurance premiums decreased $5,000 as a result of a lower balance in
customer deposits. Other noninterest expense increased $11,000, or 0.79%,
primarily related to increased consulting expense. In October 2005, the Bank
retained an outside consultant to perform an extensive review of the largest
loans and report on underwriting and monitoring procedures.
Income Taxes. Income tax expense for the fiscal year ended June 30, 2006
decreased $107,000 to a tax savings of $91,000 for the fiscal year ended June
30, 2006 from $16,000 for fiscal 2005.
Net Interest Margin. Net interest margin for the fiscal year ended June 30,
2006 was 3.21% compared to 3.48% for the fiscal year ended June 30, 2005. The
decrease was the result of the decrease in the average balance of loans
outstanding combined with the increased cost of customer deposits offset
slightly by the increase in the yield on investments and other interest
earnings assets.
Average Balances, Interest and Average Yields/Costs
The earnings of the Savings Bank depend largely on the spread between the
yield on interest-earning assets (primarily loans and securities) and the cost
of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Savings Bank's interest-earning
assets and interest-bearing liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities.
13
Years Ended June 30,
----------------------------------------------------------
2006 2005
----------------------------- ---------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance(2) Dividends Cost Balance(2) Dividends Cost
---------- --------- ----- ---------- --------- -----
(Dollars in thousands)
Interest-earning
assets:
Loans(1) $147,536 $ 10,413 7.06% $163,273 $ 11,313 6.93%
Securities 48,463 1,793 3.70 46,363 1,506 3.25
Other 19,762 706 3.57 25,048 446 1.78
Total interest- -------- -------- -------- --------
earning assets 215,761 12,912 5.98 234,684 13,265 5.65
Non-interest earning
assets
Office properties
and equipment, net 5,779 5,853
Real estate, net 2,766 2,844
Other non-interest
earning assets 14,576 14,510
-------- --------
Total assets $238,882 $257,891
======== ========
Interest-bearing
liabilities:
Passbook accounts $ 16,828 231 1.37 $ 17,541 142 0.81
NOW and Super Saver
accounts 62,558 856 1.37 74,594 641 0.86
Certificates of
deposit 90,756 3,343 3.68 95,885 2,672 2.79
-------- -------- -------- --------
Total deposits 170,142 4,430 2.60 188,020 3,455 1.84
Other interest-
bearing
liabilities 27,849 1,556 5.59 29,261 1,636 5.59
-------- -------- -------- --------
Total interest-
bearing
liabilities 197,991 5,986 3.02 217,281 5,091 2.34
Non-interest bearing
liabilities:
Other liabilities 13,363 11,997
-------- --------
Total liabilities 211,354 229,278
Stockholders' equity 27,528 28,613
Total liabilities
and stockholders' -------- --------
equity $238,882 $257,891
======== ========
Net interest income $ 6,926 $ 8,174
======= =======
Interest rate spread 2.96% 3.31%
Net interest margin 3.21% 3.48%
Ratio of average
interest-earning
assets to average
interest- bearing
liabilities 109% 108%
------------------
(1) Average balances include nonaccrual loans and loans 90 days or more
past due. The corresponding interest up to the date of nonaccrual
status has been included in the "Interest and Dividends" column.
(2) Average balances for a period have been calculated using the average
monthly balances for the respective year.
14
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods and
at the date indicated, the weighted average yields earned on the Company's and
First Home's assets, the weighted average interest rates paid on First Home's
liabilities, together with the net yield on interest-earning assets.
At June
30, Years Ended June 30
------- -------------------
2006 2006 2005
------- ------ ------
Weighted average yield
on loan portfolio 6.90% 7.06% 6.93%
Weighted average yield
on securities 4.21 3.70 3.25
Weighted average yield on other
interest-earning assets 4.68 3.57 1.78
Weighted average yield
on all interest-earning assets 6.13 5.98 5.65
Weighted average rate
paid on total deposits 3.07 2.60 1.84
Weighted average rate
paid on FHLB advances 5.72 5.59 5.59
Weighted average rate paid on
all interest-bearing liabilities 3.38 3.02 2.34
Interest rate spread (spread
between weighted average rate on
all interest-earning assets and
all interest-bearing liabilities) 2.75 2.96 3.31
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning assets) N/A 3.21 3.48
15
Rate/Volume Analysis
The following table presents certain information regarding changes in interest
income and interest expense of the Company and Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided with respect to (i) effects on interest
income and interest expense attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income and interest
expense attributable to changes in rate (changes in rate multiplied by prior
volume); (iii) the net changes (the sum of the previous columns). The
effects on interest income and interest expense attributable to changes in
both rate and volume are allocated to the change in volume variance and the
change in the rate variance on a pro rated basis.
Years Ended June 30, Years Ended June 30,
2006 Compared to 2005 2005 Compared to 2004
Increase/(Decrease) Increase/(Decrease)
Due to Due to
----------------------- --------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest-earning assets:
Loans (1) $(1,116) $ 216 $ (900) $ (478) $(174) $(652)
Securities 84 203 287 (171) 70 (101)
Other (69) 329 260 (6) 290 284
Total net change in income ------- ------ ------- ------ ----- -----
interest-earnings assets (1,101) 748 (353) (655) 186 (469)
------- ------ ------- ------ ----- -----
Interest-bearing liabilities:
Interest-bearing deposits (288) 1,263 975 (289) (331) (620)
FHLB advances (79) (1) (80) 1 (16) (15)
Total net change in expense
on Interest-bearing ------- ------ ------- ------ ----- -----
deposits (367) 1,262 895 (288) (347) (635)
------- ------ ------- ------ ----- -----
Net change in net interest
income $ (734) $ (514) $(1,248) $ (367) $ 533 $ 166
======= ====== ======= ====== ===== =====
(1) Includes interest on loans 90 days or more past due not on nonaccrual
status.
16
Liquidity and Capital Resources
First Home's primary sources of funds are deposits, proceeds from principal
and interest payments on loans, securities, net operating income and FHLB
advances. While maturities and scheduled amortization of loans and securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activity of First Home is the origination of mortgage
loans. Mortgage loans originated by First Home have remained consistent at
$38.2 million and $37.8 million for the years ended June 30, 2006 and 2005,
respectively. Other investing activities include the purchase of securities,
which totaled $15.3 million and $11.7 million for the years ended June 30,
2006 and 2005, respectively. These activities were funded primarily by
principal repayments on loans, securities, and deposit growth.
OTS regulations require First Home to maintain an adequate level of liquidity
to ensure the availability of sufficient funds to support loan growth and
deposit withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. First Home's sources of funds include deposits,
principal and interest payments from loans, securities and FHLB advances.
During fiscal years 2006 and 2005, First Home used its sources of funds
primarily to purchase securities, fund loan commitments and to pay maturing
savings certificates and deposit withdrawals. At June 30, 2006, First Home
had approved loan commitments totaling $1.9 million and undisbursed loans in
process totaling $4.2 million.
Liquid funds necessary for the normal daily operations of First Home are
maintained in two working checking accounts, a daily time account with the
FHLB - Des Moines and a repurchase agreement account at a regional bank. It
is the Savings Bank's current policy to maintain adequate collected balances
in those checking accounts to meet daily operating expenses, customer
withdrawals, and fund loan demand. Funds received from daily operating
activities are deposited, on a daily basis, in one of the working checking
accounts and transferred, when appropriate, to the daily time account, the
repurchase agreement account, used to purchase investments or reduce FHLB
advances to enhance net interest income.
At June 30, 2006, certificates of deposit amounted to $91.2 million, or 50.9%,
of First Home's total deposits, including $60.5 million which are scheduled to
mature by June 30, 2007. Historically, First Home has been able to retain a
significant amount of its deposits as they mature. Management of First Home
believes it has adequate resources to fund all loan commitments by savings
deposits and FHLB advances and that it can adjust the offering rates of
savings certificates to retain deposits in changing interest rate
environments.
OTS regulations require First Home to maintain specific amounts of capital.
As of June 30, 2006, First Home was in compliance with all current regulatory
capital requirements with tangible, core and risk-based capital ratios of
10.1%, 10.1% and 17.5%, respectively. These ratios exceed the 1.5%, 4.0% and
8.0% tangible, core and risk-based capital ratios required by OTS regulations.
In addition, the OTS amended its capital regulations that require savings
institutions to maintain specified amounts of regulatory capital based on the
estimated effects of changes in market rates and that could further increase
the amount of regulatory capital required to be maintained by the Savings
Bank.
17
Capital
Consistent with our goal to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity capital was $26.3 million
at June 30, 2006, or 11.51%, of total assets on that date. As of June 30,
2006, we exceeded all regulatory capital requirements. Our regulatory capital
ratios at June 30, 2006 were as follows: Tier 1 (core) capital 10.06%; Tier 1
risk-based capital 16.23%; and total risk-based capital 17.46%. The
regulatory capital requirements to be considered well capitalized are 5%, 6%
and 10%, respectively.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business in order to meet the financing needs of our
customers. These financial instruments generally include commitments to
originate mortgage, commercial and consumer loans, and involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The Company's maximum exposure to credit
loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. Since some commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments. Collateral
is not required to support commitments.
Undisbursed balances of loans closed include funds not disbursed but committed
for construction projects. Unused lines of credit include funds not
disbursed, but committed to, home equity, commercial and consumer lines of
credit.
Commercial letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above and is required in instances where we deem it
necessary.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risks as of June 30, 2006:
Commitments to originate loans
(In thousands)
Fixed rate $ 1,859
Adjustable rate
Undisbursed balance of loans closed 4,153
Unused lines of credit 3,688
Commercial standby letters of credit 1,607
-------
Total $11,307
=======
18
Accounting Policies
Various elements of the Company's accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. In particular, management has identified several
accounting policies that, as a result of the judgments, estimates and
assumptions inherent in those policies, are critical to an understanding of
the financial statements of the Company. These policies relate to the
methodology for the recognition of interest income, determination of the
provision and allowance for loan and lease losses and the valuation of real
estate held for sale. These policies and the judgments, estimates and
assumptions are described in greater detail in this Management's Discussion
and Analysis of Financial Condition and Results of Operations section and in
the section entitled "New accounting standards" contained in Note 1 of the
Notes to Consolidated Financial Statements. Management believes that the
judgments, estimates and assumptions used in the preparation of the financial
statements are appropriate based on the factual circumstances at the time.
However, because of the sensitivity of the financial statements to these
critical accounting policies, the use of other judgments, estimates and
assumptions could result in material differences in the results of operations
or financial condition.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of
financial position and operating results in terms of historical dollars,
without considering the changes in relative purchasing power of money over
time due to inflation. The primary impact of inflation on operations of First
Home is reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services. During
the current interest rate environment, management believes that the liquidity
and the maturity structure of First Home's assets and liabilities are critical
to the maintenance of acceptable profitability.
19
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity of Net Portfolio Value. The following table sets
forth the change in the Savings Bank's net portfolio value at June 30, 2006,
based on Office of Thrift Supervision ("OTS") models, and to a lesser extent,
internal assumptions that would occur upon an immediate change in interest
rates with no effect given to any steps that management might take to
counteract that change. Net portfolio value is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
calculation is intended to illustrate the change in net portfolio value that
will occur upon an immediate change in interest rates of at least 200 basis
points with no effect given to any steps that management might take to counter
the effect of that interest rate movement.
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
-------------------------- -------------------------
Basis Point ("bp") Dollar Dollar Percent Net Portfolio
Change in Rates Amount Change(1) Change Value Ratio(2) Change(3)
----------------- ------ ---------- ----- -------------- ---------
(Dollars in thousands)
300 bp $ 30,532 $ (3,979) (12)% 13.25% (138) bp
200 32,257 (2,254) (7) 13.87 (76)
100 33,664 (847) (2) 14.36 (27)
- 34,511 - 14.63 -
(100) 34,144 (367) (1) 14.43 (19)
(200) 32,824 (1,688) (5) 13.89 (74)
(1) Represents the increase (decrease) of the estimated net portfolio
value at the indicated change in interest rates compared to the net
portfolio value assuming no change in interest rates.
(2) Calculated as the estimated net portfolio value divided by the
portfolio value of total assets.
(3) Calculated as the increase (decrease) of the net portfolio value
ratio assuming the indicated change in interest rates over the
estimated net portfolio value ratio assuming no change in interest
rates.
The above table illustrates, for example, that at June 30, 2006 an
instantaneous 200 basis point increase in market interest rates would decrease
the Savings Bank's net portfolio value by approximately $2.3 million, or 7%,
and an instantaneous 200 basis point decrease in market interest rates would
decrease the Savings Bank's net portfolio value by $1.7 million, or 5%.
The following summarizes key exposure measures for the dates indicated. They
measure the change in net portfolio value ratio for a 200 basis point adverse
change in interest rates.
June 30, March 31, June 30,
2006 2006 2005
------- -------- -------
Pre-shock net portfolio
Value ratio 14.63% 14.11% 13.89%
Post-shock net portfolio
Value ratio 13.87% 12.53% 12.56%
Decline in net portfolio
Value ratio 76 bp 158 bp 133 bp
20
The calculated risk exposure measures indicate the Savings Bank's interest
rate risk at June 30, 2006 has increased from the previous year end, in that
the "shock" increase in market rates would have a relatively small negative
effect on net portfolio value.
The OTS uses certain assumptions in assessing the interest rate risk of thrift
institutions. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others. As with any method of
measuring interest rate risk, certain shortcomings are inherent in the method
of analysis presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or period to repricing,
they may react in different degrees to changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market interest rates. Additionally,
certain assets, such as adjustable rate mortgage loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates of
deposit could deviate significantly from those assumed in calculating the
table.
21
Report of Independent Registered Public Accounting Firm
To the Board of Directors
First Bancshares, Inc.
Mountain Grove, Missouri
We have audited the accompanying consolidated statement of financial condition
of First Bancshares, Inc. and subsidiaries as of June 30, 2006 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of First
Bancshares, Inc. and subsidiaries for the year ended June 30, 2005 were
audited by other auditors whose report, dated August 16, 2005, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 2006 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancshares, Inc. and subsidiaries as of June 30, 2006, and the results of
their operations and their cash flows for the year then ended in conformity
with U. S. generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
Kansas City, Missouri
October 13, 2006
22
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and Stockholders
First Bancshares, Inc. and Subsidiaries
Mountain Grove, Missouri
We have audited the accompanying consolidated statement of financial condition
of First Bancshares, Inc. and Subsidiaries as of June 30, 2005 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Bancshares, Inc. and Subsidiaries as of June 30, 2005, and the results of
their operations and their cash flows for the year then ended in conformity
with U. S. generally accepted accounting principles.
/s/Kirkpatrick Phillips & Miller, CPAs, P.C.
August 16, 2005
Springfield, Missouri
23
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
June 30, 2006 and 2005
2006 2005
------------ ------------
ASSETS
------
Cash and cash equivalents $ 23,473,645 $ 20,617,471
Certificates of deposit purchased 3,826,847 2,975,128
Securities available-for-sale 20,883,868 18,945,893
Securities held-to-maturity 19,209,895 24,156,614
Federal Home Loan Bank stock, at cost 1,611,800 1,904,300
Loans receivable, net 141,986,975 158,142,705
Accrued interest receivable 1,177,502 1,335,956
Prepaid expenses 292,024 291,718
Property and equipment 8,028,309 8,335,725
Real estate owned 496,721 339,946
Intangible assets 335,699 385,814
Deferred tax asset, net 718,472 718,784
Income taxes recoverable 316,756 20,512
Bank-owned life insurance 5,705,493 5,488,380
Other assets 330,597 347,972
------------ ------------
Total assets $228,394,603 $244,006,918
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $179,141,140 $187,142,706
Advances from Federal Home Loan Bank 22,000,000 28,394,299
Borrowed funds - 679,737
Accrued expenses 962,894 972,847
------------ ------------
Total liabilities 202,104,034 217,189,589
------------ ------------
Commitments and contingencies (Note 13)
Preferred stock, $.01 par value; 2,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 8,000,000
shares authorized, issued 2,895,036 in 2006
and 2,893,036 in 2005, outstanding
1,552,480 in 2006 and 1,552,010 in 2005 28,950 28,930
Paid-in capital 17,851,736 17,829,014
Retained earnings - substantially restricted 27,703,268 28,124,572
Treasury stock, at cost - 1,342,556 shares in
2006 and 1,341,026 shares in 2005 (19,085,173) (19,059,171)
Accumulated other comprehensive income (loss) (208,212) (106,016)
------------ ------------
Total stockholders' equity 26,290,569 26,817,329
------------ ------------
Total liabilities and stockholders' equity $228,394,603 $244,006,918
============ ============
See notes to the consolidated financial statements
24
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended June 30, 2006 and 2005
2006 2005
----------- -----------
Interest Income:
Loans receivable $10,412,821 $11,312,977
Securities 1,793,140 1,506,388
Other interest-earning assets 706,582 445,966
----------- -----------
Total interest income 12,912,543 13,265,331
----------- -----------
Interest Expense:
Deposits 4,430,111 3,455,303
Borrowed funds 1,556,494 1,636,419
----------- -----------
Total interest expense 5,986,605 5,091,722
----------- -----------
Net interest income 6,925,938 8,173,609
Provision for loan losses 1,520,083 2,332,920
----------- -----------
Net interest income after
provision for loan losses 5,405,855 5,840,689
----------- -----------
Noninterest Income:
Service charges and other fee income 1,873,041 1,784,037
Gain (loss) on sale of securities (161,299) (4,102)
Loss on sale of property and equipment
and real estate owned (380,040) (40,851)
Provision for impairment of securities
available-for-sale (260,260) -
Income from bank-owned life insurance 217,113 1,021,569
Other 192,665 146,626
----------- -----------
Total noninterest income 1,481,220 2,907,279
----------- -----------
Noninterest Expense:
Compensation and employee benefits 3,993,840 3,672,255
Occupancy and equipment 1,104,746 1,162,941
Other credit losses and related expenses - 589,708
Professional fees 268,458 262,199
Customer deposit account processing fees 289,184 239,666
Deposit insurance premiums 24,185 29,342
Other 1,470,725 1,459,252
----------- -----------
Total noninterest expense 7,151,138 7,415,363
----------- -----------
Income (loss) before income taxes (264,063) 1,332,605
Income taxes (91,236) 15,672
----------- -----------
Net income (loss) $ (172,827) $ 1,316,933
=========== ===========
Basic earnings (loss) per share $ (0.11) $ 0.83
=========== ===========
Diluted earnings (loss) per share $ (0.11) $ 0.83
=========== ===========
See notes to the consolidated financial statements
25
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Years Ended June 30, 2006 and 2005
Common Other Total
Stock Compre- Stock-
----------------- Paid-in Retained Treasury hensive holders'
Shares Amount Capital Earnings Stock Income (Loss) Equity
------ ------ --------- ---------- --------- ------------ ----------
Balances at June 30,
2004 1,627,819 $28,910 $17,801,316 $ 27,061,158 $(17,460,644) $(134,497) $27,296,243
-----------
Comprehensive Income:
Net Income - - - 1,316,933 - - 1,316,933
Other comprehensive
income, net of tax:
Change in unrealized
gain(loss) on
securities available-
for-sale, net of
deferred income
taxes of $15,209 - - - - - 25,897 25,897
Less: reclassification
adjustment, net of
deferred income taxes
of $1,518 - - - - - 2,584 2,584
Total Comprehensive -----------
Income 1,345,414
Proceeds from exercise -----------
of stock options 2,000 20 19,730 - - - 19,750
Tax Benefit from stock
options exercised - - 7,968 - - - 7,968
Cash dividends ($.16
per share) - - - (253,519) - - (253,519)
Purchase of treasury
stock at cost (77,809) - - - (1,598,527) - (1,598,527)
--------- ------- ----------- ----------- ------------ --------- -----------
Balances at June 30,
2005 1,552,010 28,930 17,829,014 28,124,572 (19,059,171) (106,016) 26,817,329
-----------
Comprehensive Income:
Net Income (loss) - - - (172,827) - - (172,827)
Other comprehensive
income, net of tax:
Change in unrealized
gain(loss) on
securities
available-for-sale,
net of deferred
income taxes of
$(215,490) - - - - - (367,778) (367,778)
Less: reclassification
adjustment, net of
deferred income taxes
of $155,977 - - - - - 265,582 265,582
Total Comprehensive -----------
Income (loss) (275,023)
Proceeds from exercise -----------
of stock options 2,000 20 15,480 - - - 15,500
Tax Benefit from stock
options exercised - - 7,242 - - - 7,242
Cash dividends ($.16
per share) - - - (248,477) - - (248,477)
Purchase of treasury
stock at cost (1,530) - - - (26,002) - (26,002)
--------- ------- ----------- ----------- ------------ --------- -----------
Balances at June 30,
2006 1,552,480 $28,950 $17,851,736 $27,703,268 $(19,085,173) $(208,212) $26,290,569
========= ======= =========== =========== ============ ========= ===========
See notes to the consolidated financial statements
26
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended June 30, 2006 and 2005
2006 2005
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (172,827) $1,316,933
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 648,371 709,176
Amortization 70,411 68,004
Premiums and discounts on securities 48,836 51,356
(Gain)/loss on sale of securities 161,299 4,102
Provision for impairment of securities 260,260 -
Provision for loan losses 1,520,083 2,332,920
Deferred income taxes 59,826 (633,718)
Loss on sale of property and equipment and
real estate owned 380,040 40,851
Gain from death benefit of bank-owned life
insurance - (807,193)
Increase in cash surrender value on bank-
owned life insurance (217,113) (214,376)
Net change in operating accounts:
Accrued interest receivable and other
assets 201,303 104,873
Deferred loan costs 17,480 (23,180)
Accrued expenses (355,003) 13,984
----------- ----------
Net cash from operating activities 2,622,966 2,963,732
----------- ----------
Cash flows from investing activities:
Purchase of securities available-for-sale (13,281,210) (10,534,568)
Purchase of securities held-to-maturity (2,000,000) (1,139,828)
Proceeds from sale of securities
available-for-sale 6,845,018 271,745
Proceeds from maturities of securities
available-for-sale 3,920,093 2,267,705
Proceeds from maturities of securities
held-to-maturity 6,894,219 9,919,225
Proceeds from redemption of Federal Home
Loan Bank Stock 292,500 -
Net change in certificates of deposit (851,719) 423,546
Net change in loans receivable 14,299,031 5,052,822
Purchases of property and equipment (1,212,728) (799,607)
Proceeds from sale of property and equipment 228,088 85,760
Proceeds from pay out of death benefit on
bank-owned life insurance - 1,295,944
Proceeds from payments on note receivable 3,253 2,363
Net proceeds from sale of real estate owned 431,244 530,197
----------- ----------
Net cash from investing activities 15,567,789 7,375,304
----------- ----------
27
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- - - - - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2006 and 2005
2006 2005
----------- -----------
Cash flows from financing activities:
Net change in deposits $(8,001,566) $(20,103,826)
Payments on borrowed funds (7,074,036) (1,431,705)
Proceeds from borrowed funds - 875,000
Proceeds from issuance of common stock 15,500 19,750
Cash dividends paid (248,477) (253,519)
Purchase of treasury stock (26,002) (1,598,527)
----------- -----------
Net cash (used in) financing activities (15,334,581) (22,492,827)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,856,174 (12,153,791)
Cash and cash equivalents -
beginning of period 20,617,471 32,771,262
----------- -----------
Cash and cash equivalents -
end of period $23,473,645 $20,617,471
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest on deposits and
other borrowings $ 5,867,445 $ 5,104,758
Income taxes 137,109 664,318
Supplemental schedule of non-cash investing
and financing activities:
Loans transferred to real estate
acquired in settlement of loans $ 322,666 $ 753,766
Land transferred to other real estate owned 285,000 -
See notes to consolidated financial statements
28
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Nature of business - First Bancshares, Inc., a Missouri
corporation ("Company"), was organized on September 30, 1993 for
the purpose of becoming a unitary savings and loan holding company
for First Home Savings Bank ("Savings Bank"). The
Savings Bank is primarily engaged in providing a full range of
banking and mortgage services to individual and corporate
customers in southern Missouri. The Company and Savings Bank are
also subject to the regulation of certain federal and state
agencies and undergo periodic examinations by those regulatory
authorities.
Principles of consolidation - The accompanying consolidated
financial statements include the accounts of the Company, and its
wholly-owned subsidiaries, the Savings Bank and SCMG, Inc.
(formerly South Central Missouri Title, Inc.) and the wholly-
owned subsidiaries of the Savings Bank, Fybar Service Corporation
and First Home Investments. In consolidation, all significant
intercompany balances and transactions have been eliminated.
Estimates - In preparing the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as
of the date of the balance sheet and reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term
relate to the determination of the fair value of financial
instruments and the allowance for loan losses.
Segment reporting - An operating segment is defined as a component
of a business for which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and evaluate
performance. The Company has one operating segment, community
banking.
Consolidated statements of cash flows - For purposes of the
consolidated statements of cash flows, cash consists of cash on
hand and deposits with other financial institutions.
Cash equivalents include highly-liquid instruments with an
original maturity of three months or less.
29
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Securities - Securities which are designated as held-to-maturity
are designated as such because the Company has the ability and
intent to hold these securities to maturity. Such securities are
reported at amortized cost.
All other securities are designated as available-for-sale, a
designation which provides the company with certain flexibility in
managing its investment portfolio. Such securities are reported
at fair value; net unrealized gains and losses are excluded from
income and reported net of applicable income taxes as a separate
component of stockholders' equity.
Gains or losses on sales of securities are recognized in
operations at the time of sale and are determined by the
difference between the net sales proceeds and the cost of
the securities using the specific identification method, adjusted
for any unamortized premiums or discounts. Premiums or discounts
are amortized or accreted to income using the interest method over
the period to maturity.
Declines in fair value of individual securities below their
amortized cost that are determined to be other than temporary
result in write-downs of the individual securities to their fair
value with the resulting write-downs included in current
earnings as realized losses. Management considers independent
price quotations, projected target prices of investment analysis
within the short term, the financial condition of the issuer when
determining other-than-temporary losses, the length of time and
the extent to which the fair value has been less than cost, and
the intent and ability of the Company to retain its investment in
the issues for a period of time sufficient to allow for any
anticipated recovery in fair value.
Federal Home Loan Bank stock - The Savings Bank, as a member of
the Federal Home Loan Bank ("FHLB") system, is required to
maintain an investment in capital stock of the FHLB of Des Moines.
No ready market exists for this stock and it has no quoted market
value. The stock is subject to repurchase by the FHLB at par and
is reported at cost.
Loans receivable - Loans receivable are stated at their principal
amount outstanding, net of deferred loan origination and
commitment fees and certain net direct costs, which are recognized
over the contractual life of the loan as an adjustment of the
loan's yield. Interest income on loans is recognized on an
accrual basis.
The accrual of interest on impaired loans is discontinued when it
is determined that the payment of interest or principal is
doubtful of collection, or when interest or principal is past due
90 days or more. The interest on these loans is accounted for
on the cash-basis method, until qualifying for return to accrual.
Any accrued but uncollected interest previously recorded on such
loans is generally reversed in the current period and interest
income is subsequently recognized upon collection. Loans are
returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are reasonably assured.
30
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Loan origination fees and certain direct loan origination costs
are deferred and recognized in interest income over the
contractual lives of the related loans using the interest method.
When a loan is paid-off, the unamortized balance of these
deferred fees and costs is recognized in income.
Allowance for loan losses - The allowance for loan losses is
established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are
charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based on management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information
becomes available.
The allowance consists of specific, general and unallocated
components. The specific component relates to loans that are
classified as either doubtful, substandard or special mention.
For such loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
31
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A loan is considered impaired when, based on current information
and events, it is probable that the Savings Bank will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include
payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all
of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and real estate
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Savings Bank does not
separately identify individual consumer loans for impairment
disclosures.
Property and equipment and related depreciation - Property and
equipment has been stated at cost. Property and equipment
depreciation has been principally computed by applying the
following methods and estimated lives:
Category Estimated Life Method
-------------------------- -------------- -------------
Automobiles 5 Years Straight-line
Office furniture, fixtures
and equipment 3-10 Years Straight-line
Buildings 15-40 Years Straight-line
Investment real estate 15-40 Years Straight-line
Maintenance and repairs are charged to expense. Improvements
which extend the lives of the respective assets are capitalized.
When property or equipment is sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the
respective accounts and the resulting gain or loss is reflected in
income.
Intangible assets - The intangible asset relates to customer
relationships that were acquired in connection with the
acquisition of two branches. The premium paid by the Savings Bank
for the branches is being amortized on a straight-line basis over
15 years.
Bank-owned life insurance - Bank-owned life insurance is carried at
its cash surrender value. Changes in cash surrender value are
recorded in non-interest income.
32
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Income taxes - Deferred taxes are determined using the liability
(or balance sheet) method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Real estate owned - Includes real estate held for sale and real
estate acquired in the settlement of loans, which, is recorded at
the lower of the remaining loan balance or estimated fair value
less the estimated costs to sell the asset. Any write down at
the time of foreclosure is charged against the allowance for loan
losses. Subsequently, net expenses related to holding the
property and declines in the market value are charged against
income.
Earnings per share - Basic earnings per share excludes dilution
and is computed by dividing net income available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or resulted
in the issuance of common stock that would share in the earnings
of the Company. Dilutive potential common shares are added to
weighted average shares used to compute basic earnings per share.
The number of shares that would be issued from the exercise of
stock options has been reduced by the number of shares that could
have been purchased from the proceeds at the average market price
of the Company's stock.
Comprehensive income - Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in
net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income,
are components of comprehensive income.
Employee stock options - During the years ended June 30, 2006 and
2005 the Company had a stock-based employee compensation plan,
which is described more fully in Note 10, Employee Benefit Plans.
The Company accounted for the plan under the recognition and
measurement provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
33
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Pro forma information regarding net income is required by
Statement of Financial Accounting Standards ("SFAS") No. 123, and
has been determined as if the Company had accounted for its
employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the
date of grant using a fair value option pricing model.
The effect of applying the fair value method required by SFAS No.
123 to the Company's stock option awards results in net income and
earnings per share that are not materially different from amounts
reported in the consolidated statements of income, therefore a
table reconciling net income and earnings per share as reported
and on a pro forma basis has not been presented.
Revenue recognition - Deposit account transaction fees and other
ancillary non-interest income related to the Savings Bank's
deposit and lending activities are accrued as services are
performed.
New accounting standards - In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123(R),
"Share-Based Payment." This Statement revises SFAS Statement No.
123, "Accounting for Stock-Based Compensation," amends SFAS No.
95, "Statement of Cash Flows," and supersedes APB Opinion No. 25.
SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted stock plans,
performance-based stock awards, stock appreciation rights and
employee stock purchase plans. It requires that all stock-based
compensation now be measured at fair value and recognized as
expense in the income statement. This Statement also clarifies and
expands guidance on measuring fair value of stock compensation,
requires estimation of forfeitures when determining expense, and
requires that excess tax benefits be shown as financing cash
inflows versus a reduction of taxes paid in the statement of cash
flows. Various other changes are also required. This Statement
is effective beginning July 1, 2006, for the Company. The Company
does not expect that the adoption of this Statement will have a
material impact on its financial position, results of operation
and cash flows.
In May 2005, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 154, "Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20 and FASB Statement No. 3." Among
other things, SFAS No. 154 requires that a voluntary change in
accounting principle be applied retroactively with all prior
period financial statements presented on the new accounting
principle, unless it is impractical to do so. SFAS No. 154 also
provides that (1) a change in method of depreciating or amortizing
a long-lived nonfinancial asset be accounted for as a change in
estimate (prospectively) that was effected by a change in
accounting principle, and (2) correction of errors in previously
issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005.
The Company does not anticipate this statement will have a
material effect on its financial statements.
34
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-----------------------------------------------------
In February 2006, FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments", which permits, but does not
require, fair value accounting for any hybrid financial
instrument that contains an embedded derivative that would
otherwise require bifurcation in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The statement also subjects beneficial interests in securitized
financial assets to the requirements of SFAS No. 133. For the
Company, this statement is effective for all financial instruments
acquired, issued, or subject to remeasurement after the beginning
of its fiscal year that begins after September 15, 2006, with
earlier adoption permitted. The Company does not anticipate this
statement will have a material effect on its financial statements.
In March 2006, the FASB issued SFAS No. 156, "Accounting for
Servicing of Financial Assets, an amendment of FASB Statement No.
140." The statement amends SFAS No. 140 by (1) requiring the
separate accounting for servicing assets and servicing
liabilities, which arise from the sale of financial assets; (2)
requiring all separately recognized serving assets and servicing
liabilities to be initially measured at fair value, if
practicable; and (3) permitting an entity to choose between
an amortization method or a fair value method for subsequent
measurement for each class of separately recognized servicing
assets and servicing liabilities. This Statement is effective for
fiscal years beginning after September 15, 2006, with earlier
adoption permitted. The Company does not anticipate this statement
will have a material effect on its financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN
48"), "Accounting for Uncertainty in Income Taxes." This
interpretation applies to all tax positions accounted for in
accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 clarifies the application of SFAS No. 109 by defining the
criteria that an individual tax position must meet in order for
the position to be recognized within the financial statements and
provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure
and transition for tax positions. This interpretation is effective
for fiscal years beginning after December 15, 2006, with earlier
adoption permitted. The Company does not anticipate this
statement will have a material effect on its financial statements.
Reclassifications - Certain accounts in the prior-years'
consolidated financial statements have been reclassified for
comparative purposes to conform to the presentation in the
current-year consolidated financial statements. There were no
changes to previously reported stockholders' equity or net income.
35
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(2) SECURITIES
----------
A summary of the securities available-for-sale at June 30, 2006 is
as follows:
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
----------- ----- ------ -----------
United States Government
and Federal agency
obligations $ 8,931,356 $ - $(117,635) $ 8,813,721
Obligations of states and
political subdivisions 1,325,000 - (6,574) 1,318,426
Mutual funds 26,236 - - 26,236
Federal agency mortgage
back securities 8,663,462 1,309 (210,286) 8,454,485
Common and preferred stocks 2,267,000 4,000 - 2,271,000
----------- ------ --------- -----------
Total $21,213,054 $5,309 $(334,495) $20,883,868
=========== ====== ========= ===========
A summary of securities held-to-maturity at June 30, 2006 is as
follows:
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
----------- ----- ------ -----------
United States Government and
Federal agency obligations $14,750,000 $ - $(231,352) $14,518,648
Obligations of states and
political subdivisions 2,463,702 4,964 (22,212) 2,446,454
Federal agency mortgage
back securities 1,996,193 617 (152,100) 1,844,710
----------- ------ --------- -----------
Total $19,209,895 $5,581 $(405,664) $18,809,812
=========== ====== ========= ===========
36
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(2) SECURITIES (CONTINUED)
---------------------
The amortized cost and estimated market value of debt securities
at June 30, 2006, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Available for Sale
-------------------------
Amortized Estimated
Cost Fair Value
----------- -----------
Due in one year or less $ 4,022,092 $ 3,979,561
Due after one year through five years 6,124,264 6,043,675
Due after five years through ten years 110,000 108,911
----------- -----------
Subtotal 10,256,356 10,132,147
Mutual funds 26,236 26,236
Federal agency mortgage back securities 8,663,462 8,454,485
Common and preferred stocks 2,267,000 2,271,000
----------- -----------
Total $21,213,054 $20,883,868
=========== ===========
Held to Maturity
-------------------------
Amortized Estimated
Cost Fair Value
----------- -----------
Due in one year or less $ 3,440,060 $ 3,410,818
Due after one year through five years 11,234,649 11,090,962
Due after five years through ten years 1,334,756 1,314,844
Due after ten years 1,204,237 1,148,478
----------- -----------
Subtotal 17,213,702 16,965,102
Federal agency mortgage back securities 1,996,193 1,844,710
----------- -----------
Total $19,209,895 $18,809,812
=========== ===========
37
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(2) SECURITIES (CONTINUED)
---------------------
A summary of the securities available-for-sale at June 30, 2005 is
as follows:
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
----------- ----- ------ -----------
United States Government and
Federal agency obligations $ 8,258,419 $ 6,441 $ (86,561) $ 8,178,299
Obligations of states and
political subdivisions 340,000 3,079 (1,620) 341,459
Mutual funds 26,236 - - 26,236
Federal agency mortgage
back securities 7,962,936 31,172 (22,009) 7,972,099
Common and preferred stocks 2,527,260 12,000 (111,460) 2,427,800
----------- ------- --------- -----------
Total $19,114,851 $52,692 $(221,650) $18,945,893
=========== ======= ========= ===========
A summary of securities held-to-maturity at June 30, 2005 is as
follows:
Gross Unrealized Estimated
Amortized ---------------- Fair
Cost Gains Losses Value
----------- ----- ------ -----------
United States Government and
Federal agency obligations $18,247,274 $ 155 $(127,999) $18,119,430
Obligations of states and
political subdivisions 3,089,722 44,265 (6,168) 3,127,819
Federal agency mortgage
back securities 2,819,618 3,529 (54,301) 2,768,846
----------- ------- --------- -----------
Total $24,156,614 $47,949 $(188,468) $24,016,095
=========== ======= ========= ===========
38
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2006 and 2005
(2) SECURITIES (CONTINUED)
---------------------
The following table presents the fair value and gross unrealized
losses of the Company's securities with unrealized losses that are
not deemed to be other-than-temporarily impaired, aggregated by
category and length of time that individual securities have been
in a continuous unrealized loss position, at June 30, 2006.
Available For Sale
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------ ----------------------- ------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value (Losses) Fair Value (Losses) Fair Value Losses
----------- ---------- ---------- ---------- ----------- ----------
United States
Government and
Federal agency
obligations $ 6,862,156 $ (69,923) $1,951,565 $ (47,712) $ 8,813,721 $ (117,635)
Obligations of states
and political
subdivisions 1,189,867 (5,133) 128,559 (1,441) 1,318,426 (6,574)
Federal agency
mortgage backed
securities 6,083,340 (135,652) 1,383,049 (74,634) 7,466,389 (210,286)
----------- ---------- ---------- ---------- ----------- -----------
Total temporarily
impaired securities $14,135,363 $ (210,708) $3,463,173 $ (123,787) $17,598,536 $ (334,495)
=========== ========== ========== ========== =========== ==========
Held to Maturity
------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------ ----------------------- ------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value (Losses) Fair Value (Losses) Fair Value Losses
----------- ---------- ---------- ---------- ----------- ----------
United States
Government and
Federal agency
obligations $ 2,429,690 $ (70,310) $12,088,958 $ (161,042) $14,518,648 $ (231,352)
Obligations of states
and political
subdivisions 1,304,336 (15,725) 387,750 (6,487) 1,692,086 (22,212)
Federal agency
mortgage backed
securities 286,241 (9,366) 1,524,847 (142,734) 1,811,088 (152,100)
----------- ---------- ----------- ---------- ----------- -----------
Total temporarily
impaired securities $ 4,020,267 $ (95,401) $14,001,555 $ (310,263) $18,021,822 $ (405,664)
=========== ========== =========== ========== =========== ===========
The unrealized losses associated with the Company's debt
securities are not considered to be other-than-temporarily
impaired because their unrealized losses are related to changes
in interest rates and not from the deterioration in the
creditworthiness of the issuer and, as such, are considered by the
Company to be temporary. In addition, the Company has the
ability and intent to hold these investments for a period of time
sufficient to allow for an anticipated recovery.
39
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - - - - - - - - - - - - - - -
Years Ended June 30, 2006 and 2005
(2) SECURITIES (CONTINUED)
---------------------
The Company's investments in common and preferred stocks consist
primarily of two stocks. The Company evaluated the near-term
prospects of the issuer in relation to the severity and duration
of their unrealized losses and determined the unrealized losses
related to these two stocks were other-than-temporary.
Accordingly, an impairment loss of $260,260 was charged to expense
and the cost basis of the securities was reduced by the same
amount.
The following table presents proceeds from sales of securities and
the gross realized securities gains and losses.
June 30,
-----------------------
2006 2005
---------- ----------
Proceeds from sales $6,845,018 $ 271,745
========== ==========
Realized gains $ - $ -
Realized (losses) (161,299) (4,102)
---------- ----------
Net realized (losses) $ (161,299) $ (4,102)
========== ==========
The book value of securities pledged as collateral, to secure
public deposits was $259,853 at June 30, 2006 and $259,819 at June
30, 2005.
(3) LOANS RECEIVABLE
----------------
Loans receivable at June 30 consist of the following:
2006 2005
------------ ------------
Residential real estate $ 82,519,285 $ 89,220,396
Commercial real estate 37,096,966 41,491,575
Land 7,949,085 9,450,129
Loans to depositors, secured by
savings accounts 1,708,700 1,709,487
Consumer and automobile loans 6,755,244 7,877,448
Second mortgage loans 3,658,886 4,160,390
Commercial loans 8,532,078 10,046,951
Overdrafts 210,298 160,436
------------ ------------
Total gross loans 148,430,542 164,116,812
Allowance for loan losses (2,474,439) (2,850,704)
Loans in process (4,152,747) (3,324,502)
Unamortized deferred loan costs, net
of origination fees 183,619 201,099
------------ ------------
Net loans receivable $141,986,975 $158,142,705
============ ============
40
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended June 30, 2006 and 2005
(3) LOANS RECEIVABLE (CONTINUED)
---------------------------
Activity in the allowance for loan losses is summarized as follows
for the years ended June 30:
2006 2005
----------- ----------
Balance at beginning of year $ 2,850,704 $1,239,618
Provision charged to income 1,520,083 2,332,920
Charge-offs (1,999,592) (808,799)
Recoveries 103,244 86,965
----------- ----------
Balance at end of year $ 2,474,439 $2,850,704
=========== ==========
The Savings Bank primarily grants loans to customers throughout
southern Missouri. The loans are typically secured by real estate
or personal property.
Loans receivable at June 30, 2006 and 2005 that are past 90 days
due or nonaccrual consist of the following:
2006 2005
----------- ----------
Past due 90 days or more and still
accruing $ 2,913 $ 148,408
Nonaccrual 841,367 2,854,263
----------- ----------
$ 844,280 $3,002,671
=========== ==========
The following is a summary of information pertaining to impaired
loans:
June 30,
2006 2005
----------- ----------
Total impaired loans $ 844,280 $5,044,244
=========== ==========
Total impaired loans without reserve $ 40,509 $ 445,940
=========== ==========
Total impaired loans with reserve $ 803,771 $4,598,304
=========== ==========
Valuation allowance related to
impaired loans $ 126,252 $1,853,713
=========== ==========
Years Ended June 30,
2006 2005
----------- ----------
Average investment in
impaired loans $ 2,496,402 $4,461,607
=========== ==========
Interest income recognized
on impaired loans $ 140,270 $ 165,186
=========== ==========
Interest income recognized on
a cash basis on impaired loans $ 136,599 $ 158,065
=========== ==========
41
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(4) PROPERTY AND EQUIPMENT
----------------------
Property and equipment at June 30 consists of the following:
2006
------------------------------------
Accum.
Category Cost Deprec. Net
------------------ ----------- ---------- -----------
Land $ 635,204 $ - $ 635,204
Buildings 5,490,973 1,886,564 3,604,409
Office furniture,
fixtures and
equipment 3,470,018 2,004,932 1,465,086
Automobiles 160,557 100,848 59,709
Investment real
estate 2,896,736 632,835 2,263,901
----------- ---------- -----------
Total $12,653,488 $4,625,179 $ 8,028,309
=========== ========== ===========
2005
------------------------------------
Accum.
Category Cost Deprec. Net
------------------ ----------- ---------- -----------
Land $ 1,002,784 $ - $ 1,002,784
Buildings 5,476,960 1,714,923 3,762,037
Office furniture,
fixtures and
equipment 2,923,194 1,964,221 958,973
Automobiles 158,770 132,340 26,430
Investment real
estate 3,173,604 588,103 2,585,501
----------- ---------- -----------
Total $12,735,312 $4,399,587 $ 8,335,725
=========== ========== ===========
Depreciation charges to operations for the years ended June 30, 2006
and 2005 were $648,371 and $709,176, respectively.
In June 2006, the Savings Bank assumed the lease for a new branch
location. The remaining term of this lease is nine years. The monthly
rent under this lease is subject to annual adjustments based on the
annual change in a base index. Minimum future lease payments for
leased facilities for the next five years are as follows:
2007 $ 84,768
2008 84,768
2009 84,768
2010 84,768
2011 84,768
Thereafter 332,008
---------
$ 755,848
=========
42
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(5) INTANGIBLE ASSET
----------------
A summary of the intangible asset at June 30 is as follows:
2006 2005
----------- -----------
Premium on branch acquisition $ 1,020,216 $ 1,020,216
Accumulated amortization (684,517) (634,402)
----------- -----------
Net premium on branch acquisition $ 335,699 $ 385,814
=========== ===========
Amortization expense relating to this premium was $50,115 in 2006
and 2005.
Estimated amortization expense is as follows for the years ending
June 30:
2007 $ 50,115
2008 50,115
2009 50,115
2010 50,115
2011 50,115
Thereafter 85,124
-----------
$ 335,699
===========
(6) CUSTOMER DEPOSITS
-----------------
A summary of deposit accounts at June 30 is as follows:
2006 2005
------------- -------------
Noninterest-bearing checking $ 12,745,481 $ 11,815,549
Interest-bearing checking 34,879,468 38,237,541
Super Saver money market 23,420,108 29,873,995
Savings 16,885,789 17,584,391
Certificates of Deposit 91,210,294 89,631,230
------------- -------------
Total $ 179,141,140 $ 187,142,706
============= =============
The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was $24,246,422 and $24,409,250
at June 30, 2006 and 2005, respectively.
At June 30, 2006, scheduled maturities of certificates of deposit
are as follows:
2007 $ 60,470,128
2008 13,716,641
2009 10,209,873
2010 6,377,886
2011 435,766
-------------
$ 91,210,294
=============
43
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
------------------------------------
The advances listed below were obtained from the FHLB of Des
Moines. The advances are secured by FHLB stock and qualifying
one-to-four family mortgage loans. Advances from the FHLB at June
30 are summarized as follows:
Weighted Weighted
Average Average
2006 Rate 2005 Rate
------------ ---- ----------- ----
Term Advances:
Long-term; fixed-rate;
callable quarterly $ 22,000,000 5.74 % $28,000,000 5.48%
Amortizing Advances:
Long-term; fixed-rate;
noncallable - - 394,299 7.42
------------ -----------
Total $ 22,000,000 5.74 % $28,394,299 5.50%
============ ===========
As of June 30, 2006 the fixed-rate term advances shown above shall
be subject to a prepayment fee equal to 100 percent of the present
value of the monthly lost cash flow to the FHLB based upon the
difference between the contract rate on the advance and the rate
on an alternative qualifying investment of the same remaining
maturity. Advances may be prepaid without a prepayment fee if the
rate on an advance being prepaid is equal to or below the current
rate for an alternative qualifying investment of the same
remaining maturity.
Maturities of FHLB advances are as follows:
Aggregate
Annual
Year Ended June 30 Maturities
-------------------- ------------
2007 $ -
2008 -
2009 -
2010 -
2011 22,000,000
------------
$ 22,000,000
============
44
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(8) BORROWED FUNDS
--------------
Borrowed Funds consist of the following:
2005
-----------
Prime minus .5%; Midwest Independent
Bank; $1,000,000 line of credit; secured
by Bank stock; interest payable semi-
annually; due on demand or March, 2006 $ 625,000
Other 54,737
-----------
$ 679,737
===========
At June 30, 2006, the Savings Bank had irrevocable letters of
credit issued on its behalf from the FHLB totaling $3,500,000.
The letters of credit expire August 2006 through July 2007.
(9) INCOME TAXES
------------
The provision for income tax expense for the years ended June 30
is as follows:
2006 2005
------------- -------------
Current $ (151,062) $ 649,390
Deferred 59,826 (633,718)
------------- -------------
Total $ (91,236) $ 15,672
============= =============
The provision for income taxes differs from that computed at the
statutory corporate rate, 34%, for the years ended June 30 as
follows:
2006 2005
------------- -------------
Tax at statutory rate $ (89,780) $ 453,086
Increase (decrease) in taxes
resulting from:
State taxes, net of federal
benefit (4,166) 91,902
Tax-exempt income (40,462) (41,044)
Bank-owned life insurance (73,818) (347,333)
Tax credits - (45,511)
Dividends received deduction (33,097) (33,520)
Change in valuation allowance 96,296 -
Net effect of other book/tax
differences 53,791 (61,908)
------------- -------------
Provision for income taxes $ (91,236) $ 15,672
============= =============
45
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(9) INCOME TAXES (CONTINUED)
-----------------------
The components of deferred tax assets and liabilities as of June
30, 2006 and 2005 consisted of:
2006 2005
------------ ------------
Deferred tax assets:
Reserve for loan losses $ 915,542 $ 1,048,824
Investment impairment 96,296 -
Health insurance plan reserves
not currently deductible 2,699 36,620
Book amortization in excess of tax
amortization 52,461 51,574
Compensated employee absences 50,357 50,505
Accrued expenses not currently
deductible - 55,500
State net operating loss carryforwards 40,018 27,016
Net unrealized loss on available for
sale securities 121,798 62,285
Other - 2,776
------------ ------------
1,279,171 1,335,100
Valuation allowance (96,296) -
------------ ------------
Total net deferred tax assets $ 1,182,875 $ 1,335,100
============ ============
Deferred tax liabilities:
Premises and equipment $ (262,053) $ (402,155)
FHLB stock dividends (60,936) (60,936)
Prepaid expenses (70,298) (71,202)
Unamortized deferred loan costs,
net of fees (71,116) (82,023)
------------ ------------
Total gross deferred tax liabilities (464,403) (616,316)
------------ ------------
Total net deferred tax assets $ 718,472 $ 718,784
============ ============
In accordance with SFAS No. 109, a deferred tax liability has not
been recognized for tax basis bad debt reserves of approximately
$2,190,825 of the Savings Bank that arose in tax years that began
prior to December 31, 1987. At June 30, 2006 the amount of the
deferred tax liability that had not been recognized was
approximately $811,000. This deferred tax liability could be
recognized if, in the future, there is a change in federal tax
law, the Savings Bank fails to meet the definition of a "qualified
savings institution," as defined by the Internal Revenue Code,
certain distributions are made with respect to the stock of the
Savings Bank, or the bad debt reserves are used for any purpose
other than absorbing bad debts.
During the year ended June 30, 2006, the Savings Bank recorded a
valuation allowance of $96,296 on the deferred tax assets to
reduce the total to an amount that management believes will
ultimately be realized. Realization of deferred tax assets is
dependent upon sufficient future taxable income during the period
that deductible temporary differences and carryforwards are
expected to be available to reduce taxable income. There was no
other activity in the valuation allowance account during 2006 or
2005.
46
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(10) EMPLOYEE BENEFIT PLANS
----------------------
The Savings Bank participates in a multiple-employer defined
benefit pension plan covering substantially all employees.
Separate actuarial valuations are not available for each
participating employer, nor are plan assets segregated. Pension
expense for the years ended June 30, 2006 and 2005 was
approximately $404,000 and $298,000, respectively.
The First Home Savings Bank Employee Stock Ownership and 401(k)
Plan covers all employees that are age 21 and have completed six
months of service. The Company may make discretionary
contributions in the form of Company common stock or cash. The
Company did not incur any expense related to the ESOP and 401(k)
plan in 2005 and incurred expense of $8,113 in 2006.
The Company has elected to follow APB No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Company's 2004 Stock Option and Incentive Plan has authorized
the grant of options to certain officers, employees and directors
for up to 100,000 shares of the Company's common stock. All
options granted have 10 year terms and vest and become exercisable
ratably over five years following the date of grant. The plan was
approved by shareholders in October 2004.
The Company's 2004 Management Recognition Plan has authorized the
award of shares to certain officers, employees and directors for
up to 50,000 shares of the Company's common stock. All shares
awarded will have a restricted period to be determined by the
Corporation's Compensation Committee. The restricted period shall
not be less than three years if the award is time based, or not
less than one year if performance based. The plan was approved by
shareholders in October 2004.
47
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(10) EMPLOYEE BENEFIT PLANS (CONTINUED)
---------------------------------
A summary of the Company's stock option activity, and related
information for the years ended June 30 follows:
2006 2005
-------------------- -------------------
Weighted Weighted
Average Average
Options Price Options Price
---------- -------- --------- --------
Outstanding -
beginning of year 2,000 $ 7.75 6,000 $ 9.17
Granted 48,000 17.46 - -
Exercised (2,000) 7.75 (2,000) 9.875
Forfeited - - (2,000) 9.875
---------- ---------
Outstanding -
end of year 48,000 17.46 2,000 7.75
========== =========
Exercisable at end
of year 5,000 $ 17.79 2,000 $ 7.75
========== =========
The following table summarizes information about stock options
outstanding at June 30, 2006:
Number Number Remaining
Exercise Outstanding at Exercisable at Contractual
Price June 30 June 30 Life (Months)
------------ -------------- -------------- -------------
$ 17.79 30,000 5,000 114
17.50 3,000 - 116
16.78 15,000 - 120
(11) EARNINGS PER SHARE
------------------
The following information shows the amounts used in computing
earnings per share and the effect on income and the weighted
average number of shares of dilutive potential common stock. The
amounts in the income columns represent the numerator and the
amounts in the shares columns represent the denominator.
Years Ended June 30,
--------------------------------------------------------
2006 2005
-------------------------- ---------------------------
Per Per
Share Share
Income Shares Amt Income Shares Amt
--------- --------- ------ ---------- --------- -----
Basic EPS:
Income available
to common
stockholders $(172,827) 1,553,010 $(0.11) $1,316,933 1,595,139 $0.83
====== =====
Effect of
dilutive
securities - - - 1,229
--------- --------- ---------- ---------
Diluted EPS:
Income available
to stockholders
plus stock
options $(172,827) 1,553,010 $(0.11) $1,316,933 1,596,368 $0.83
========= ========= ====== ========== ========= =====
48
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(12) RELATED PARTY TRANSACTIONS
--------------------------
Certain employees, officers and directors are engaged in
transactions with the Savings Bank in the ordinary course of
business. It is the Savings Bank's policy that all related party
transactions are conducted at "arm's length" and all loans and
commitments included in such transactions are made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other customers. A summary of the changes in
outstanding loans to employees, officers and directors for the
year ended June 30 is as follows:
2006
--------------
Beginning balances $ 950,393
Originations and advances 289,170
Principal repayments (652,083)
--------------
Ending balances $ 587,480
==============
The Company has two directors that perform legal services on
behalf of the Savings Bank. The services primarily relate to
foreclosures and bankruptcies. During the years ended June 30,
2006 and 2005, the Savings Bank paid $56,713 and $37,481,
respectively, for legal services performed by these directors.
(13) COMMITMENTS AND CONTINGENCIES
-----------------------------
In the ordinary course of business, the Savings Bank has various
outstanding commitments that are not reflected in the accompanying
consolidated financial statements. The principal commitments of
the Savings Bank are as follows:
Letters of Credit - Outstanding standby letters of credit were
approximately $1,607,000 and $1,598,000 at June 30, 2006 and
2005, respectively.
Loan Commitments - The Savings Bank had outstanding firm
commitments to originate fixed interest rate loans in the amount
of $1,859,000 at June 30, 2006 and fixed interest rate loans of
$25,000 and variable interest rate loans of $1,278,000 at June
30, 2005.
Lines of Credit - The unused portion of lines of credit was
approximately $3,688,000 and $3,135,000 at June 30, 2006 and
2005, respectively.
Loans in Process - The Savings Bank had recorded loans in process
representing the undisbursed portion of loans in the amount of
$4,152,747 and $3,324,502 at June 30, 2006 and 2005,
respectively. These amounts were recorded as loans receivable,
with a corresponding reduction for such loans in process as
reflected in Note 3, Loans Receivable.
49
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
----------------------------------------
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts
receivable, crops, livestock, inventory, property and equipment,
residential and commercial real estate as well as income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial paper,
bond financing and similar transactions. Most guarantees have one
year terms. Guarantees that extend longer than one year are
approximately $410,880. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral held varies as
specified above and is required in instances which the Company
deems necessary. At June 30, 2006, approximately 44% of the
standby letters of credit were collateralized. No amounts were
recorded as liabilities at June 30, 2006 or 2005.
(14) CONCENTRATION OF CREDIT RISK
----------------------------
The Savings Bank maintains its primary bank accounts with
institutions in Missouri and Iowa. On June 30, 2006, the
individual balances of these accounts exceeded standard insurance
limits established by the Federal Deposit Insurance Corporation.
The Savings Bank has not experienced any losses in such accounts.
(15) REGULATORY CAPITAL REQUIREMENTS
-------------------------------
The Savings Bank is subject to various regulatory capital
requirements administered by its primary federal regulator, the
Office of Thrift Supervision ("OTS"). Failure to meet the minimum
regulatory capital requirements can initiate certain mandatory,
and possible additional discretionary actions by regulators that
if undertaken, could have a direct material affect on the Savings
Bank and the consolidated financial statements. Under the
regulatory capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Savings Bank must meet
specific capital guidelines involving quantitative measures of the
Savings Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Savings Bank's capital amounts and classification under the prompt
corrective action guidelines are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
50
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(15) REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
------------------------------------------
Quantitative measures established by regulation to ensure capital
adequacy require the Savings Bank to maintain minimum amounts and
ratios (set forth in the table below) of total risk-based capital
and Tier 1 capital to risk-weighted assets (as defined in the
regulations), Tier 1 capital to adjusted total assets (as
defined), and tangible capital to adjusted total assets (as
defined).
Management believes, as of June 30, 2006, that the Savings Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 2006, the most recent notification from the OTS,
the Savings Bank was categorized as well-capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well-capitalized, the Savings Bank must maintain
minimum total risk- based, Tier 1 risk-based, and core capital
leverage ratios as set forth in the table. There are no
conditions or events since that notification that management
believes have changed the institution's category.
The Savings Bank's actual capital amounts and ratios are also
presented in the table.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ -------- ------- ------- ------
(Dollars in thousands)
As of June 30, 2006:
Total Risk-Based
Capital (to Risk-
Weighted Assets) $24,428 17.46% >$11,190 8.0% >$13,987 10.0%
Core Capital - -
(to Adjusted
Tangible Assets) 22,706 10.06% > 9,026 4.0% > 11,283 5.0%
Tangible Capital - -
(to Adjusted
Tangible Assets) 22,706 10.06% > 3,385 1.5% N/A
Tier 1 Capital -
(to Risk-Weighted
Assets) 22,706 16.23% N/A 8,392 6.0%
As of June 30, 2005:
Total Risk-Based
Capital (to Risk-
Weighted Assets) $25,367 16.54% >$12,271 8.0% >$15,339 10.0%
Core Capital - -
(to Adjusted
Tangible Assets) 23,681 9.85% > 9,617 4.0% > 12,021 5.0%
Tangible Capital - -
(to Adjusted
Tangible Assets) 23,681 9.85% > 3,606 1.5% N/A
Tier 1 Capital -
(to Risk-Weighted
Assets) 23,681 15.44% N/A 9,203 6.0%
51
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(16) COMMON STOCK
------------
As provided in the Company's Articles of Incorporation record
holders of Common Stock who beneficially own, either directly or
indirectly, in excess of 10% of the Company's outstanding shares
are not entitled to any vote with respect to the shares they hold
in excess of the 10% limit.
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Cash and cash equivalents and certificates of deposit - For these
short-term instruments, the carrying amount approximates fair
value.
Available-for-sale and held-to-maturity securities - Fair values
for securities equal quoted market prices, if available. If
quoted market prices are not available, fair values are estimated
based on quoted market prices of similar securities.
Loans receivable - The fair value of loans is estimated by
discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining
maturities. Loans with similar characteristics are
aggregated for purposes of the calculations.
Investment in FHLB stock - Fair value of the Savings Bank's
investment in FHLB stock approximates the carrying value as
no ready market exists for this investment and the stock
could only be sold back to the FHLB.
Accrued Interest - The carrying amounts of accrued interest
approximate their fair value.
Deposits - The fair value of demand deposits, savings accounts and
interest-bearing demand deposits is the amount payable on
demand at the reporting date (i.e., their carrying amount).
The fair value of fixed-maturity time deposits is estimated
using a discounted cash flow calculation that applies the
rates currently offered for deposits of similar remaining
maturities.
FHLB advances - Rates currently available to the Savings Bank for
advances with similar terms and remaining maturities are
used to estimate fair value of existing advances.
Borrowed Funds - The carrying amounts of the Company's borrowings
approximate their fair values.
52
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
(CONTINUED)
-----------
Commitments to extend credit, letters of credit and lines of
credit - The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the
present credit worthiness of the counterparties. For fixed-rate
loan commitments, fair value also considers the difference
between current levels of interest rates and the committed
rates. The fair value of letters of credit and lines of credit
is based on fees currently charged for similar agreements or on
the estimated cost to terminate or otherwise settle the
obligations with the counterparties at the reporting date and
are insignificant.
The following table presents estimated fair values of the
Company's financial instruments. The fair values of certain of
these instruments were calculated by discounting expected cash
flows, which involves uncertainties and significant judgments by
management. Fair value is the estimated amount at which financial
assets or liabilities could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation
sale. Because no market exists for certain of these financial
instruments and because management does not intend to sell these
financial instruments, the Company does not know whether the fair
values shown below represent values at which the respective
financial instruments could be sold individually or in the
aggregate.
June 30, 2006
-------------------------------
Approximate
Carrying Approximate
Amount Fair Value
------------- --------------
Financial assets:
Cash and cash equivalents $ 23,474,000 $ 23,474,000
Certificates of deposit 3,827,000 3,827,000
Available-for-sale securities 20,884,000 20,884,000
Held-to-maturity securities 19,210,000 18,810,000
Investment in FHLB stock 1,612,000 1,612,000
Loans, net of allowance for
loan losses 141,987,000 141,790,000
Accrued interest receivable 1,178,000 1,178,000
Financial liabilities:
Deposits 179,141,000 179,022,000
FHLB advances 22,000,000 22,379,000
Accrued interest payable 358,000 358,000
53
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------------------------
(CONTINUED)
-----------
June 30, 2005
----------------------------
Approximate
Carrying Approximate
Amount Fair Value
------------ ------------
Financial assets:
Cash and cash equivalents $ 20,617,000 $ 20,617,000
Certificates of deposit 2,975,000 2,975,000
Available-for-sale securities 19,946,000 19,946,000
Held-to-maturity securities 24,157,000 24,016,000
Investment in FHLB stock 1,904,000 1,904,000
Loans, net of allowance for
loan losses 158,142,705 160,580,000
Accrued interest receivable 1,335,956 1,336,000
Financial liabilities:
Deposits 187,143,000 186,824,000
FHLB advances 28,394,000 30,390,000
Borrowed funds 680,000 680,000
Accrued interest payable 249,000 249,000
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed statements of financial condition and
condensed statements of income and cash flows for First
Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto.
Condensed Statements of Financial Condition
ASSETS 2006 2005
------ ------------ ------------
Cash $ 332,320 $ 98,349
Certificates of deposit 10,000 10,000
Securities available-for-sale 452,000 460,000
Investment in subsidiaries 24,332,525 25,472,235
Net property and equipment 1,086,207 1,409,777
Due from subsidiary 44,741 21,203
Deferred income tax benefit 19,835 -
Other assets 31,735 35,959
------------ ------------
Total assets $ 26,309,363 $ 27,507,523
============ ============
54
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
----------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
----------------------------
EQUITY
------
Note payable $ - $ 625,000
Accrued expenses 18,794 29,983
Deferred income taxes, net - 35,211
------------- --------------
Total Liabilities 18,794 690,194
Stockholders' equity 26,290,569 26,817,329
------------- --------------
Total liabilities and
stockholders' equity $ 26,309,363 $ 27,507,523
============= ==============
Condensed Statements of Income
2006 2005
------------- --------------
Income:
Equity in earnings of
subsidiaries $ (49,802) $ 1,358,806
Interest and dividend income 25,626 38,582
Gain/(loss) on sale of property
and equipment (123,161) 13,945
Other 21,539 9,693
------------- --------------
Total income (loss) (125,798) 1,421,026
------------- --------------
Expenses:
Professional fees 101,396 104,574
Printing and office supplies 10,842 11,691
Interest 19,580 12,577
Other 72,423 80,779
Income tax (157,212) (105,528)
------------- --------------
Total expenses 47,029 104,093
------------- --------------
Net income (loss) $ (172,827) $ 1,316,933
============= ==============
55
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
-----------------------------------------
Years Ended June 30, 2006 and 2005
(18) PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED)
----------------------------------------------------
Condensed Statements of Cash Flows
2006 2005
------------- -------------
Cash flows from operating
activities:
Net income (loss) $ (172,827) $ 1,316,933
Adjustments to reconcile
net income (loss) to net
cash provided from operating
activities:
Equity in earnings of
subsidiaries 49,802 (1,358,806)
Depreciation expense 49,292 50,382
(Gain)/loss on sale of property
and equipment 123,161 (13,945)
Net change in operating accounts:
Deferred income taxes, net (52,092) (12,539)
Other assets and liabilities (30,503) 14,703
------------- -------------
Net cash (used in) operating
activities (33,167) (3,272)
------------- -------------
Cash flows from investing
activities:
Dividends from subsidiary 1,000,000 -
Purchase of property and
equipment (73,371) (189,195)
Proceeds from sales of property
and equipment 224,488 40,000
Net change in certificates of
deposit - 1,793,358
------------- -------------
Net cash from investing
activities 1,151,117 1,644,163
------------- -------------
Cash flows from financing
activities:
Proceeds from borrowed funds - 875,000
Payments on borrowed funds (625,000) (700,000)
Proceeds from issuance of common
stock 15,500 19,750
Cash dividends paid (248,477) (253,519)
Purchase of treasury stock (26,002) (1,598,527)
------------- -------------
Net cash (used in) financing
activities (883,979) (1,657,296)
------------- -------------
Net increase (decrease) in cash
and cash equivalents 233,971 (16,405)
------------- -------------
Cash and cash equivalents-beginning
of period 98,349 114,754
------------- -------------
Cash and cash equivalents-end of
period $ 332,320 $ 98,349
============= =============
56
COMMON STOCK INFORMATION
The common stock of First Bancshares, Inc. is traded on The Nasdaq Stock
Market LLC under the symbol "FBSI". As of August 31, 2006, there were 537
stockholders and 1,552,480 shares of common stock outstanding. This does not
reflect the number of persons or entities who hold stock in nominee or "street
name."
On August 31 and November 31, 2005 and February 22, May 25 and August 23,
2006, the Company declared a $.04 common stock dividend payable on September
30 and December 30, 2005 and March 31, June 30, and September 29, 2006 to
stockholders of record on September 15 and December 15, 2005 and March 15,
June 15, and September 15, 2006, respectively. Dividend payments by the
Company are dependent primarily on dividends received by the Company from the
Savings Bank. Under Federal regulations, the dollar amount of dividends a
savings and loan association may pay is dependent upon the association's
capital position and recent net income. Generally, if an association
satisfies its regulatory capital requirements, it may make dividend payments
up to the limits prescribed in the OTS regulations. However, institutions
that have converted to stock form of ownership may not declare or pay a
dividend on, or repurchase any of, its common stock if the effect thereof
would cause the regulatory capital of the institution to be reduced below the
amount required for the liquidation account which was established in
accordance with the OTS regulations and the Savings Bank's Plan of Conversion.
In addition, under Missouri law, the Company is generally prohibited from
declaring and paying dividends at a time when the Company's net assets are
less than its stated capital or when the payment of dividends would reduce the
Company's net assets below its stated capital.
The following table sets forth market price and dividend information for the
Company's common stock.
Fiscal 2006 High Low Dividend
----------- ---- --- --------
First Quarter $20.23 $15.95 $.04
Second Quarter $19.39 $15.95 $.04
Third Quarter $18.73 $16.60 $.04
Fourth Quarter $18.18 $16.46 $.04
Fiscal 2005 High Low Dividend
----------- ---- --- --------
First Quarter $22.15 $19.28 $.04
Second Quarter $20.75 $18.25 $.04
Third Quarter $22.75 $20.05 $.04
Fourth Quarter $22.50 $18.50 $.04
58
DIRECTORS AND EXECUTIVE OFFICERS
FIRST BANCSHARES, INC. FIRST HOME SAVINGS BANK
DIRECTORS: DIRECTORS:
Harold F. Glass Harold F. Glass
Partner Partner
Millington, Glass & Love, Millington, Glass & Love,
Attorneys at Law Attorneys at Law
John G. Moody John G. Moody
Judge of the 44th Judge of the 44th
Missouri Judicial Circuit Missouri Judicial Circuit
Dr. James F. Moore Dr. James F. Moore
Retired Director of State Retired Director of State
Fruit Experiment Fruit Experiment
Station of Missouri State University Station of Missouri State University
Billy E. Hixon Billy E. Hixon
Retired partner from regional Retired partner from regional
CPA firm of BKD, LLP CPA firm of BKD, LLP
Thomas M. Sutherland Thomas M. Sutherland
One of the owners and operators One of the owners and operators
of Sutherlands Home Improvement of Sutherlands Home Improvement
Centers group of stores Centers group of stores
OFFICERS: OFFICERS:
James W. Duncan James W. Duncan
President, CEO and Interim President, CEO and Interim
Chief Financial Officer Chief Financial Officer
Sonya Everett Sonya Everett
Secretary and Treasurer Secretary
59
CORPORATE INFORMATION
CORPORATE HEADQUARTERS TRANSFER AGENT
142 East First Street Registrar and Transfer Company
P.O. Box 777 10 Commerce Drive
Mountain Grove, Missouri 65711 Cranford, New Jersey 07016
(800) 866-1340
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP COMMON STOCK
Kansas City, Missouri
Traded on The Nasdaq Stock Market LLC
GENERAL COUNSEL Nasdaq Symbol: FBSI
Harold F. Glass
Springfield, Missouri
SPECIAL COUNSEL
Breyer & Associates PC
McLean, Virginia
------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Thursday, November 9, 2006,
at 2:00 p.m., Central Time, at the Days Inn Conference Room, 300 East 19th
Street, Mountain Grove, Missouri.
------------------------------------------------------------------------------
FORM 10-KSB
A COPY OF THE FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE
RECORD DATE FOR VOTING AT THE ANNUAL MEETING OF STOCKHOLDERS UPON
WRITTEN REQUEST TO THE SECRETARY, FIRST BANCSHARES, INC., P.O. BOX 777,
MOUNTAIN GROVE, MISSOURI 65711.
THE COMPANY'S FORMS 10-KSB, 10-QSB AND OTHER DISCLOSURE DOCUMENTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CAN BE OBTAINED
FROM THE SEC HOME PAGE ON THE WORLD WIDE WEB AT http://www.sec.gov.
60
Exhibit 14
Code of Ethics
FIRST BANCSHARES, INC.
CODE OF ETHICS
The Business of First Bancshares, Inc.
The business of First Bancshares, Inc. and its affiliates includes a full
array of retail banking and related services. During the performance of our
duties, it is necessary to interact with many constituencies. These persons
place their trust in us and accordingly, we have the responsibility to keep
this trust and be in strict compliance with all applicable laws and
regulations.
First Bancshares requires corporate and affiliate directors, officers and
employees to observe a high standard of ethics in business and personal
matters. The following Code of Ethics specifies certain standards for the
guidance of all directors, officers and employees. The Code should be
considered as illustrative, but not regarded as all-inclusive.
Failure to comply with all policies and procedures may result in
termination of employment or service on the Board of Directors. Any questions
regarding proper code of conduct should be referred to an immediate supervisor
or senior management.
Conflict of Interest/Outside Interests
All directors, officers and employees should avoid situations which could
result in, or give the appearance of, a conflict of interest concerning either
First Bancshares or its stockholders, or any affiliate or its customers.
Personal interest which could affect the proper exercise of judgment must be
avoided. In those cases where personal interests do exist, or may appear to
exist, an officer or employee should disqualify himself or herself and permit
other members of our staff to handle the transaction, and a director should
disqualify himself or herself and abstain from discussion and voting on the
matter.
In determining whether a conflict of interest could exist, directors,
officers and employees should remember that the rules also apply to their
spouses and adult children, where appropriate. For example, a conflict of
interest would arise where the spouse of an employee was offered a business
opportunity on account of the employee's position at First Bancshares.
Having a business or other employment outside First Bancshares is
permissible provided that it does not conflict with the director, officer or
employee's duties or the time and attention required of his or her position at
First Bancshares. Also, the business or employment cannot be directly
competitive with First Bancshares.
Acceptance of membership on outside boards involves possible of conflicts
of interest. Directors, officers and employees are encouraged to participate
in civic, charitable and religious organizations; any other such organization,
or position therewith, should be authorized by appropriate management.
Situations which might be in conflict with this policy should be cleared with
senior management.
Confidential Information
The confidential nature of bank accounts and company resources in general
is a fundamental precept in financial services. It is important that our
directors, officers and employees be constantly alert to the responsibility of
maintaining confidentiality.
All information obtained by virtue of employment with or service to First
Bancshares should be held in strictest confidence. This includes financial
and personal information of customers, including fellow employees, as well as
First Bancshares's financial information and information related to its
internal affairs, competitive position, strategic planning and regulatory
actions. Confidential information must not be disclosed to anyone except as
required for business transactions or as required by law. When disclosing
confidential information, do so in a manner that does not risk violating
confidentiality.
Confidential information pertaining to First Bancshares or its customers,
suppliers, stockholders and employees is to be used solely for corporate
purposes and not as a basis for personal gain by directors, officers or
employees.
In certain instances, confidential information could be considered
"insider information" within the meaning of federal and state securities laws.
Disclosure or use of such information for personal gain or for avoiding
personal loss could result in substantial civil and criminal penalties to
individuals who disclose or who use this information. Directors, officers and
employees must be extremely cautious in discussing the corporate affairs of
First Bancshares with customers or outsiders, including with stockholders of
First Bancshares who do not have a right to such information before an
announcement is made to all stockholders of First Bancshares.
Trading in First Bancshares's Stock
Directors, officers and employees are encouraged to participate and
maintain ownership in the stock of First Bancshares. While there are
occasions that dictate the purchase or sale of any investment, active buying
and selling of First Bancshares's common stock in order to make short term
profits is discouraged. The Securities and Exchange Commission has stringent
rules and regulations related to trading securities while in the possession of
material, non-public information.
There may be occasions when you become aware of certain facts related to
First Bancshares such as earnings, expansion plans, a potential acquisition or
other similar situations which may reasonably be expected to be important to
the investing public. Insider information is information that has not been
publicly released and which a reasonable person would consider important in
determining whether to buy, sell or hold securities. Until such information
is disseminated to the general public through a press release or other public
announcement, directors, officers and employees are prohibited from either
purchasing or selling First Bancshares's stock. Violation of this policy
could subject directors, officers or employees to possible action by the
Securities and Exchange Commission, the result of which may include fines
and/or imprisonment. Should any directors, officer or employee desire to
acquire or sell First Bancshares's stock while knowledgeable of information
which has not been released to the public, inquiries for advice should be made
to senior management.
Gifts and Entertainment
In the matter of gifts and gratuities to directors, officers or
employees, circumstances must govern. Substantial gifts and excessive
entertainment offered because of your affiliation with First Bancshares should
be courteously and tactfully declined. Commissions, fees or propositions
involving personal gain to a director, officer or employee in connection with
a transaction are highly improper and in some cases, illegal.
No director, officer or employee or member of his or her immediate family
should give or accept cash, gifts, special accommodations or other favors from
anyone with whom the person is negotiating, soliciting or doing business with
on behalf of First Bancshares. Similarly, officers and employees may not
solicit or accept personal fees, commissions or other forms of remuneration
because of any transaction or business involving First Bancshares.
The preceding prohibitions are not applicable to entertainment or
hospitality of a reasonable value, or gifts (but never cash), which under the
circumstances, are of limited or nominal value. Whenever possible, First
Bancshares should pay the expenses of a director, officer or employee.
Frequent invitations from customers or vendors for meals or entertainment
should be declined or handled with firm insistence that the director, officer
or employee pay for alternate meals. The acceptance of gifts of more than a
nominal value could be considered as an attempt at bribery and could subject
both the giver and the recipient to felony charges as well as the penalties
prescribed under the Bank Bribery Act, 18 U.S.C. Section 215. The Bank
Bribery Act also covers agents or attorneys of a financial institution.
Full and timely disclosure to senior management or the board of directors
must be made with respect to entertainment, hospitality or gifts received.
Any question or doubt as to the appropriateness of their receipt should be
referred to and resolved by senior management on a timely basis. The tactful
communication of the limitations of this policy to the donors of gifts is also
strongly encouraged.
Anti-Trust Rules and Charges and Pricing
Interest rates on deposits and loans, terms of loans, service charges and
other similar matters will be determined solely on the basis of what is in the
best interest of First Bancshares and its customers. Under no circumstances
should any agreements or understandings be established with any other
financial institution concerning such charges. First Bancshares is
individually responsible for its policies and operating procedures.
It is important that no comments be made or actions taken by directors,
officers or employees that could be misinterpreted as an agreement to
cooperate with competitors in following a common course of action as to rates
of interest paid, the terms on which loans are made, hours or the price or
services offered to customers. Situations where discussions with competitors
are permissible are strictly limited to circumstances where action by a
banking group is warranted, such as an extension of a term loan by a group of
banks or a potential bad loan situation where cooperation among lenders is
necessary to assist the borrower in working out financial problems.
Undesirable Business
Directors, officers and employees may not discriminate in the acceptance
of business brought to us by reputable persons. However, it should also be
kept in mind that accounts or loans requested from known controversial or
unsavory persons or firms should generally be declined. Such relationships
could lead to loss and embarrassment for First Bancshares and should be very
carefully considered.
Personal Reputation
Loyalty, fidelity and good morals are assumed qualities of those who
represent First Bancshares but, nevertheless, need to be emphasized. It is
imperative that each individual display conduct at all times so as to reflect
credit on First Bancshares and its directors, officers and employees. A
reputation for good morals, ethics and integrity is within the reach of all,
and officers and employees must remain above reproach throughout their
business career.
Community and Political Activity
As an institution, First Bancshares cannot and should not engage in
politics. Directors, officers and employees, however, are encouraged to stay
well informed on local, state and national affairs and to meet their
responsibility to vote in all elections.
Directors, officers and employees should ensure that their participation
in political activities in no way reflects unfavorably on First Bancshares.
Community and political activities by directors, officers and employees are
encouraged, provided that participation:
* is accomplished in a legal manner;
* does not interfere with work performance for First Bancshares;
* is not deemed to be divisive in the community; and
* occurs in such a manner which clearly indicates that the director,
officer or employee does not speak for First Bancshares.
Before running for an elected political office or accepting an
appointment to a federal, state or local government office, the director,
officer or employee must discuss the position with First Bancshares's Chief
Executive Officer.
Federal law prohibits First Bancshares from making political
contributions to parties or candidates. Loans to political parties or
candidates are also generally prohibited. The use of any corporate funds,
supplies, special services, equipment or labor for political purposes must be
avoided as such use is illegal. Additionally, no reimbursement will be made
to any individual for political contributions or for the cost of attendance at
any political function. Fund-raising efforts for any purpose should be
avoided if there is any possibility of an adverse effect on the reputation of
First Bancshares.
Illegal Activity
Directors, officers and employees are expected to abide by all local,
state and federal laws, regulations and guidelines. Officers or employees
engaged in activities found to be in conflict with and against these laws,
regulations or guidelines will be subject to termination of employment.
Examples of illegal activity include, but are not limited to:
* embezzlement;
* unauthorized sale of information;
* frauds such as forgery, counterfeiting and check kiting;
* unauthorized use of funds, revenues and fees;
* abuse of expense, asset and liability accounts; and
* sexual harassment or discrimination.
In addition, any director, officer or employee who is charged with, or is
entering into a pretrial diversion or similar program for, any crime involving
breach of trust, dishonesty, money laundering, a drug-related offense, a crime
of violence or a felony must immediately notify senior management.
Competition
The competition between First Bancshares and other financial institutions
must always be positive. The best possible service and personal interest in
our customers are much more effective than the criticism of a competitor.
Such criticism is not in keeping with the character of First Bancshares and
should have no place in the conversation of directors, officers and employees.
Special Ethical Obligations of the Chief Executive Officer and Senior
Financial Officers
This section of the Code sets forth certain standards for the guidance of
the Chief Executive Officer, the Chief Financial Officer, the Principal
Accounting Officer, Controller of persons performing similar functions
("Senior Financial Officers").
Honest and Ethical Conduct
Each Senior Financial Officer must act honestly and ethically. Senior
Financial Officers should also promote honest and ethical behavior within
First Bancshares.
Acting honestly and ethically includes the duty to avoid actual or
apparent conflicts of interest, as well as situations which could result in an
actual or apparent conflict of interest. A conflict of interest may arise
when personal or financial interest is adverse to, or appears adverse to, the
interests of First Bancshares. Each Senior Financial Officer should report to
the Audit Committee of the Board of Directors any material transaction or
relationship that reasonably could be expected to result in a conflict of
interest.
In addition to the duty to avoid conflicts of interest, Senior Financial
Officers must treat confidential information properly. All information
obtained by virtue of employment with First Bancshares should be held in
strictest confidence. Confidential information must not be disclosed to
anyone except as required for business transactions or as required by law.
When confidential information is disclosed, it must be done in a manner that
does not risk violating confidentiality.
Preparation of Public Documents
Each Senior Financial Officer must ensure that all public documents and
documents filed with the Securities and Exchange Commission which he or she is
involved in preparing or reviewing contain full, fair, accurate, timely and
understandable disclosure. In order to ensure this, the Senior Financial
Officers must maintain the skills relevant to First Bancshares's needs. The
Senior Financial Officers are also responsible for establishing and
maintaining appropriate disclosure controls and procedures and internal
controls.
Compliance with Laws, Rules and Regulations
Each Senior Financial Officer must comply with all local, state and
federal laws, rules and regulations. Any Senior Financial Officer engaged in
activities found to be in conflict with and against these laws, rules and
regulations will be subject to termination of employment. The Senior
Financial Officers should also cause other officers and employees to comply
with all local, state and federal laws, rules and regulations.
Administration of the Code
Any violation or suspected violation of this Code of Ethics must be
promptly reported to the Audit Committee of the Board of Directors. Violators
of the Code may be subject to disciplinary action, up to and including
termination of employment. Questions regarding the Code and requests for a
waiver from the Code should be brought to the Audit Committee. The Audit
Committee will administer the Code and will make periodic reports to the Board
of Directors, as necessary.
This Code of Ethics shall be publicly available. Changes to, and waivers
from, the section of the Code specifically applicable to Senior Financial
Officers shall also be disclosed to the public as required by law or stock
exchange regulations. Waivers of the Code of directors or executive officers
must be approved by the Board of Directors, and disclosed in a Current Report
on Form 8-K.
Date Approved: August 25, 2004
Exhibit 21
Subsidiaries of the Registrant
Parent
------
First Bancshares, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
--------------- ------------ ----------------------
First Home Savings Bank 100% Missouri
SCMG, Inc. 100% Missouri
(formerly South Central
Missouri Title, Inc.)
Fybar Service Corporation (b) 100% Missouri
First Home Investments, Inc. (b) 100% Missouri
---------------------
(a) The operation of the Company's wholly owned subsidiaries are included in
the Company's Consolidated Financial Statements contained in the Annual
Report attached hereto as Exhibit 13.
(b) Wholly owned subsidiary of First Home Savings Bank.
Exhibit 23.1
Consent of Auditors
McGladrey & Pullen, LLP
Certified Public Accountants
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No.
33-87234) on Form S-8 of First Bancshares, Inc. of our report dated October
13, 2006 relating to our audit of the consolidated financial statements, which
appear in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-KSB of First Bancshares, Inc. for the year ended June
30, 2006.
/s/McGladrey & Pullen, LLP
MCGLADREY & PULLEN, LLP
Kansas City, Missouri
October 13, 2006
Exhibit 23.2
Consent of Auditors
Kirkpatrick, Phillips & Miller, CPAs, P.C.
Springfield, Missouri
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated August 16, 2005 accompanying the Consolidated
Financial Statement incorporated by reference in the Annual Report of First
Bancshares, Inc. on Form 10-KSB for the year ending June 30, 2005. We hereby
consent to the incorporation by reference of said reports in the Registration
Statement of First Bancshares, Inc. on Form S-8 (File No. 33-87234, effective
December 9, 1994).
/s/Kirkpatrick, Phillips & Miller, CPAs, P.C.
Kirkpatrick, Phillips & Miller, CPAs, P.C.
Springfield, Missouri
October 13, 2006
Exhibit 31
Rule 13a - 14(a) Certification
(Chief Executive Officer and Interim Chief Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE AND INTERIM PRINCIPAL FINANCIAL OFFICER
I, James W. Duncan, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of First Bancshares,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the small
business issuer as of, and for, the periods presented in this report.
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business issuer
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b. Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
c. Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's fourth fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability
to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: October 13, 2006 /s/James W. Duncan
--------------------------------------
James W. Duncan
President, Chief Executive Officer and
Interim Chief Financial Officer
Exhibit 32
Section 1350 Certifications
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND INTERIM CHIEF FINANCIAL OFFICER
OF FIRST BANCSHARES, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form
10-KSB, that:
1. the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
Date: October 13, 2006 /s/ James W. Duncan
----------------------------------
James W. Duncan
President, Chief Executive Officer
and Interim Chief Financial Officer