SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
UNDER SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934
First Bancshares, Inc.
----------------------
(Name of Issuer)
First Bancshares, Inc.
----------------------------------
(Name of Person(s) Filing Statement)
Common Stock, Par Value $.01 Per Share
-----------------------------
(Title of Class of Securities)
318687 10 0
------------------------------------
(CUSIP Number of Class of Securities)
Ronald J. Walters
First Bancshares, Inc.
142 E. First Street
Mountain Grove, Missouri 65711
(417) 926-5151
-----------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of Persons Filing Statement)
With a copy to:
John F. Breyer, Jr.
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, Virginia 22102
(703) 883-1100
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the
Securities Exchange Act of 1934 (the "Act").
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. [X]
Check the following box if the filing is a final amendment reporting the
results of the transaction: [ ]
CALCULATION OF FILING FEE
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Transaction Valuation(*) Amount of Filing Fee**
------------------------ ----------------------
$2,514,456 $98.83
* Estimated maximum price to be paid in lieu of issuance of fractional shares
of common stock to persons who would hold less than one whole share of common
stock of record after the proposed reverse stock split and based on an amount
per share equal to the product obtained by multiplying (A) $21.00 by (B) the
total number of shares of common stock (119,736 shares) owned by all such
stockholders of record immediately prior to the reverse stock split.
** Determined pursuant to Rule 0-11(b)(1) as $2,514,546 multiplied by
..00003930
[ ]Check Box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount previously paid: (3) Filing Party:
(2) Form or Registration No.: (4) Date Filed:
INTRODUCTION
First Bancshares, Inc. a Missouri Corporation ("First Bancshares") is
proposing that First Bancshares's stockholders adopt amendments to the amended
and restated articles of incorporation of First Bancshares that will result in
a reverse/forward stock split transaction. If the split transaction is
completed our stockholders of record who hold only fractional shares after
giving effect to the 1-for-1,000 reverse stock split will receive a payment of
$21.00 per share for each pre-split share. If the split transaction is
completed, stockholders of record with fewer than 1,000 shares prior to the
reverse stock split will have no interest in First Bancshares and will become
entitled only to a cash payment for their shares. Based upon an analysis of
the stockholder base as of July 2, 2007, First Bancshares expects to pay
approximately $2.5 million to its stockholders in the aggregate in the reverse
stock split. Based upon recent trading activity, First Bancshares believes
that the amount payable to non-continuing stockholders will change, and the
cost of the transaction could increase significantly as a result of further
trading activity in its shares between the date hereof and the effective date
of the split transaction. After First Bancshares completes the reverse stock
split and identifies those stockholders entitled to payment for their
pre-split shares, it will complete a forward stock split in which each share
of common stock will be converted into 1,000 shares of common stock
post-split. As a result, stockholders of record who hold 1,000 or more shares
prior to the split transaction will ultimately hold the same number of shares
following the split transaction. The effect of the split transaction will be
to reduce the number of stockholders of record to less than 300, which will
allow First Bancshares to suspend its reporting obligations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
This Rule 13e-3 Transaction Statement on Schedule 13E-3 is being filed by
First Bancshares pursuant to Section 13(e) of the Exchange Act and Rule 13e-3
thereunder.
This Schedule 13E-3 is being filed with the Securities and Exchange Commission
and includes a preliminary proxy statement filed by First Bancshares pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended,
pursuant to which the holders of the common stock of First Bancshares will be
given notice of the annual meeting at which they will be asked to approve the
reverse and forward stock splits, and to transact any other business properly
brought before the annual meeting.
The information contained in the proxy statement is hereby expressly
incorporated herein by reference and the responses to each item are qualified
in their entirety by reference to the information contained in the proxy
statement. As of the date hereof, the proxy statement is in preliminary form
and is subject to completion or amendment. This Schedule 13E-3 will be further
amended to reflect such completion or amendment of the proxy statement.
All parenthetical references under the various Items contained in this
Schedule 13E-3 are references to the corresponding Items contained in
Regulation M-A under the Exchange Act.
2
TRANSACTION STATEMENT
ITEM 1. Summary Term Sheet.
(Reg. M-A 1001)
The information set forth in the proxy statement under the caption "SUMMARY
TERM SHEET" is hereby incorporated by reference.
ITEM 2. Subject Company Information.
(Reg. M-A 1002)
(a) The information set forth in the proxy statement under the caption
"SUMMARY TERM SHEET" is hereby incorporated herein by reference.
(b) The information set forth in the proxy statement under the caption
"ABOUT THE ANNUAL MEETING -- Record Date; Voting Power" is hereby incorporated
herein by reference.
(c) The information set forth in the proxy statement under the caption
"MARKET PRICE OF FIRST BANCSHARES COMMON STOCK AND DIVIDEND INFORMATION" is
hereby incorporated herein by reference.
(d) The information set forth in the proxy statement under the caption
"MARKET PRICE OF FIRST BANCSHARES COMMON STOCK AND DIVIDEND INFORMATION" is
hereby incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in the proxy statement under the caption
"COMMON STOCK PURCHASE INFORMATION" is hereby incorporated herein by
reference.
ITEM 3. Identity and Background of Filing Person.
(Reg. M-A 1003(a) through (c))
(a)-(c) The information set forth in the proxy statement under the caption
"SUMMARY TERM SHEET" and "Questions and Answers about the Split Transaction
and the Annual Meeting" is hereby incorporated herein by reference.
The (i) name, (ii) current principal occupation or employment, and the name
and principal business of any corporation or other organization in which the
employment or occupation is conducted, and (iii) material occupations,
positions, offices or employment during the past five years, of each of the
Directors of First Bancshares is incorporated by reference to "ELECTION OF
DIRECTORS" in the proxy statement. Each such person is a United States
citizen. Unless otherwise noted, the principal address of each person
identified in that section of the proxy statement is 142 E. First Street,
Mountain Grove, Missouri 65711.
3
The principal business addresses of the businesses for whom such Directors
have worked during the last five years, other than those Directors employed by
the Company, are as follows:
Directors Business Address of Employer
--------------------------------------------------------
Billy E. Hixon Retired since July 4, 2002
John G. Moody Wright County Missouri
P. O. Box 439
Mansfield, MO 65704
D. Mitch Ashlock First Federal Savings and Loan
Association
100 E. Park Street
Olathe, KS 66061
Thomas M. Sutherland Sutherland's
302 East South Street
Ozark, MO 65721
Harold F. Glass Millington, Glass & Love
1736 E. Sunshine, Suite 405
Springfield, MO 65804
Information, including business experience, concerning the Executive Officers
of the Company and First Home Savings Bank who are not also Directors of the
Company is incorporated by reference to "ELECTION OF DIRECTORS -- Executive
Officers" in the proxy statement. Each of such Executive Officers is a United
States citizen. Their principal business address is 142 E. First Street,
Mountain Grove, Missouri, 65711.
Neither First Bancshares, First Home Savings Bank, nor, to our knowledge, any
of the Directors or Executive Officers has been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or has been
a party to any judicial or administrative proceeding (except for matters that
were dismissed without sanction or settlement) that resulted in a judgment,
decree or final order enjoining future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
ITEM 4. Terms of Transaction.
(Reg. M-A 1004(a) and (c) through (f))
(a) The information set forth in the proxy statement under the captions
"SUMMARY TERM SHEET," "THE SPLIT TRANSACTION -- SPECIAL FACTORS -- Overview of
the Split Transaction," "-- Background of the Split Transaction," "-- Reasons
for the Split Transaction," "-- Fairness of the Split Transaction," "-- Board
of Directors Recommendation," "-- Effects of the Split Transaction on
Affiliates," "-- Effects of the Split Transaction on First Bancshares," "--
Interests of Certain Persons in the Split Transaction," "-- Accounting
Treatment," "-- Federal Income Tax Consequences" and "ABOUT THE ANNUAL MEETING
-- Vote Required for Approval" is hereby incorporated herein by reference.
(b) Securities held by directors, officers or affiliates holding fewer than
1,000 shares will be repurchased pursuant to the transaction upon the same
terms as all other stockholders holding fewer than 1,000 shares.
4
(c) The information set forth in the proxy statement under the caption "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Fairness of the Split Transaction," "-
- Structure of the Split Transaction," and "-- Effects of the Split
Transaction on Affiliates."
(d) The information set forth in the proxy statement under the caption "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Dissenters' Rights" is hereby
incorporated herein by reference.
(e) The information set forth in the proxy statement under the caption "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Fairness of the Split Transaction -
Procedural Fairness" is hereby incorporated herein by reference.
(f) Not applicable.
ITEM 5. Past Contacts, Transaction, Negotiations and Agreements.
(Reg. M-A 1005(a) through (c) and (e))
(a) The information set forth in the proxy statement under the caption
"ELECTION OF DIRECTORS," is hereby incorporated herein by reference.
(b) Not applicable.
(c) The information set forth in the proxy statement under the caption "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Background of the Split Transaction"
is hereby incorporated herein by reference.
(e) Certain of the Directors and Executive Officers hold stock options for
shares of the Company's common stock. Information concerning these stock
options is incorporated by reference to "ELECTION OF DIRECTORS -- Security
Ownership of Certain Beneficial Owners and Management" in the proxy statement.
ITEM 6. Purposes of the Transaction and Plans or Proposals.
(Reg. M-A 1006(b) and (c)(1)-(8))
(b) The fractional shares acquired in the reverse stock split will be retired
and returned to the status of authorized but unissued shares of Company Common
Stock.
(c) (1)-(8) The information set forth in the proxy statement under the
captions "THE SPLIT TRANSACTION -- SPECIAL FACTORS -- Background of the Split
Transaction" and "-- Effects of the Split Transaction on First Bancshares."
ITEM 7. Purposes, Alternatives, Reasons and Effects.
(Reg. M-A 1013)
(a)-(c) The information set forth in the proxy statement under the captions
"THE SPLIT TRANSACTION -- SPECIAL FACTORS -- Background of the Split
Transaction," "-- Reasons for the Split Transaction," "-- Fairness of the
Split Transaction," "-- Structure of the Split Transaction" "-- Board of
Directors Recommendation," is hereby incorporated herein by reference.
5
(d) The information set forth in the proxy statement under the captions "THE
SPLIT TRANSACTION -- Fairness of the Split Transaction," "-- Effects of the
Split Transaction on Affiliates" "-- Effects of the Split Transaction on First
Bancshares" and "-- Material Federal Income Tax Consequences" is hereby
incorporated herein by reference. The Split Transaction will have no effect on
First Home Savings Bank other than the payment of a dividend of not more than
$5.0 million to First Bancshares in connection with the payment to
shareholders who own less than 1,000 shares. First Home Savings Bank expects
that it will remain "well capitalized" for regulatory purposes subsequent to
the payment of the dividend.
ITEM 8. Fairness of the Transaction.
(Reg. M-A 1014)
(a)-(b) The information set forth in the proxy statement under the captions
"THE SPLIT TRANSACTION -- Background of the Split Transaction," "-- Reasons
for the Split Transaction," "-- Fairness of the Split Transaction," "--
Substantive Fairness," "-- Procedural Fairness," "-- Valuation and Fairness
Opinions of Index Capital" and "-- Board of Directors Recommendation," is
hereby incorporated herein by reference.
(c) The information set forth in the proxy statement under the captions
"ABOUT THE ANNUAL MEETING -- Record Date; Voting Power" and "THE SPLIT
TRANSACTION -- SPECIAL FACTORS -- Procedural Fairness," is hereby incorporated
herein by reference.
(d)-(f) The information set forth in the proxy statement under the captions
"THE SPLIT TRANSACTION -- SPECIAL FACTORS -- Background of the Split
Transaction" is hereby incorporated herein by reference.
ITEM 9. Reports, Opinions, Appraisals and Negotiations.
(Reg. M-A 1015)
(a)-(c) The information set forth in the proxy statement under the captions
"THE SPLIT TRANSACTION -- SPECIAL FACTORS Valuation and Fairness Opinions of
Index Capital" is hereby incorporated herein by reference.
Appendix B to the proxy statement is hereby incorporated in its entirety
herein by reference.
Exhibits
--------
Ex 99.1 Valuation Opinion and Report provided by Index Capital, LLC dated
September 19, 2007
Ex 99.2 Fairness Opinion provided by Index Capital, LLC dated November 5,
2007
Ex 99.3 Valuation Opinion and Report provided by Index Capital, LLC dated
February 8, 2008
Ex 99.4 Stinson, Morrison Hecker LLP Memorandum, "Possible Structures for
Taking a Corporation Private" dated May 21, 2007
Ex 99.5 Stinson, Morrison Hecker LLP Memorandum, "Summary of July 3, 2007
Meeting and Summary Action Items" dated July 6, 2007
6
ITEM 10. Source and Amount of Funds or Other Consideration.
(Reg. M-A 1007)
(a) The information set forth in the proxy statement under the captions "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Financing of the Split Transaction" is
hereby incorporated herein by reference.
(b) Not applicable.
(c) The information set forth in the proxy statement under the caption "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Fees and Expenses" is hereby
incorporated herein by reference.
(d) Not applicable.
ITEM 11. Interest in Securities of the Subject Company.
(Reg. M-A 1008)
(a) The information set forth in the proxy statement under the caption
"ELECTION OF DIRECTORS -- Security Ownership of Certain Beneficial Owners and
Management" is hereby incorporated herein by reference.
(b) The information set forth in the proxy statement under the caption
"COMMON STOCK PURCHASE INFORMATION" is hereby incorporated herein by
reference.
ITEM 12. The Solicitation or Recommendation.
(Reg. M-A 1012(d) and (e))
(d) The information set forth in the proxy statement under the caption
"ABOUT THE ANNUAL MEETING -- Vote Required for Approval," is hereby
incorporated herein by reference.
(e) The information set forth in the proxy statement under the caption "THE
SPLIT TRANSACTION -- SPECIAL FACTORS -- Board of Directors Recommendation" is
hereby incorporated herein by reference.
ITEM 13. Financial Statements.
(Reg. M-A 1010(a) and (b))
(a) The information set forth in the proxy statement under the captions
"SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA" and "INFORMATION
INCORPORATED BY REFERENCE" is hereby incorporated herein by reference.
(b) The information set forth in the proxy statement under the caption
"SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA" is hereby incorporated
herein by reference.
7
ITEM 14. Persons/Assets, Retained, Employed, Compensated or Used.
(Reg. M-A 1009)
(a)-(b) The information set forth in the proxy statement under the captions
"ABOUT THE ANNUAL MEETING -- Solicitation of Proxies; Expenses of
Solicitation" is hereby incorporated herein by reference.
ITEM 15. Additional Information.
(Reg. M-A 1011(b))
(b) The information set forth in the proxy statement, including all
appendices attached thereto, is hereby incorporated herein by reference.
ITEM 16. Exhibits.
(Reg. M-A 1016(a) through (d), (f) and (g))
(a) Preliminary Proxy Statement, together with the proxy card.*
(b) Not applicable.
(c)(1) Valuation Opinion and Report provided by Index Capital, LLC dated
September 19, 2007
(c)(2) Fairness Opinion provided by Index Capital LLC, dated November 5,
2007
(c)(3) Valuation Opinion and Report provided by Index Capital, LLC dated
February 8, 2008
(c)(4) Fairness Opinion provided by Index Capital LLC, dated February 8,
2008**
(d) Certain of the Directors and Executive Officers hold stock options for
shares of the Company's common stock. Information concerning these stock
options is incorporated by reference to "ELECTION OF DIRECTORS -- Security
Ownership of Certain Beneficial Owners and Management" in the proxy statement.
(f) Statement describing Security Holders' Dissenters' Rights***
(g) Not applicable.
Ex 99.1 Valuation Opinion and Report provided by Index Capital, LLC dated
September 19, 2007
Ex 99.2 Fairness Opinion provided by Index Capital, LLC dated November 5,
2007
Ex 99.3 Valuation Opinion and Report provided by Index Capital, LLC dated
February 8, 2008
Ex 99.4 Stinson, Morrison Hecker LLP Memorandum, "Possible Structures for
Taking a Corporation Private" dated May 21, 2007
Ex 99.5 Stinson, Morrison Hecker LLP Memorandum, "Summary of July 3, 2007
Meeting and Summary Action Items" dated July 6, 2007
--------------
* Incorporated by reference to the Company's Schedule 14A, filed with the
SEC on February 22, 2008
** Incorporated by reference to Appendix B of Exhibit (a).
*** Incorporated by reference to the information set forth in the section
entitled "THE SPLIT TRANSACTION -- SPECIAL FACTORS -- Dissenters' Rights"
in Exhibit (a)
8
SIGNATURES
After due inquiry and to the best of my knowledge and belief, the undersigned
certify that the information set forth in this statement is true, complete and
correct.
Dated: February 22, 2008
FIRST BANCSHARES, INC.
/s/Daniel P. Katzfey
By: --------------------------------------
Daniel P. Katzfey
President, and Chief Executive Officer
9
Exhibit Index
(a) Preliminary Proxy Statement, together with the proxy card.*
(b) Not applicable.
(c)(1) Valuation Opinion and Report provided by Index Capital, LLC dated
September 19, 2007
(c)(2) Fairness Opinion provided by Index Capital LLC, dated November 5,
2007
(c)(3) Valuation Opinion and Report provided by Index Capital, LLC dated
February 8, 2008
(c)(4) Fairness Opinion provided by Index Capital LLC, dated February 8,
2008**
(d) Not applicable.
(f) Statement describing Security Holders' Appraisal Rights***
(g) Not applicable.
Ex 99.1 Valuation Opinion and Report provided by Index Capital, LLC dated
September 19, 2007
Ex 99.2 Fairness Opinion provided by Index Capital, LLC dated November 5,
2007
Ex 99.3 Valuation Opinion and Report provided by Index Capital, LLC dated
February 8, 2008
Ex 99.4 Stinson, Morrison Hecker LLP Memorandum, "Possible Structures for
Taking a Corporation Private" dated May 21, 2007
Ex 99.5 Stinson, Morrison Hecker LLP Memorandum, "Summary of July 3, 2007
Meeting and Summary Action Items" dated July 6, 2007
--------------------
* Incorporated by reference to the Company's Schedule 14A, filed with the
SEC on February 22, 2008.
** Incorporated by reference to Appendix B of Exhibit (a).
*** Incorporated by reference to the information set forth in the section
entitled "THE SPLIT TRANSACTION -- SPECIAL FACTORS -- Dissenters' Rights"
in Exhibit (a)
Exhibit 99.1
Valuation Opinion and Report provided
by Index Capital, LLC dated September 19, 2007
VALUATION OF THE BUSINESS ENTERPRISE
known as:
FIRST BANCSHARES, INC.
Mountain Grove, Missouri
as of
June 30, 2007
Appraiser:
David L. O'Toole
President & Managing Member
Index Capital, LLC
September 19, 2007
The undersigned certifies the following:
The home offices of First Bancshares, Inc. and its principal subsidiary
First Home Savings Bank, the subjects of this valuation, were visited by
the appraiser on September 11, 2007 in conjunction with the assignment.
Branch facilities located in the communities of Mountain Grove, Ava,
Gainsville, Theodosia, Kissee Mills, Rockaway Beach and Springfield were
also observed on the same day;
The undersigned has no present or contemplated future interest in any of
the entities being valued or a personal interest or bias with respect to
the parties involved, or any officers, directors or shareholders;
The data contained herein by reference or otherwise was obtained from
sources believed to be reliable and all facts known to the undersigned
that have bearing on the value of the entities have been considered and
no facts of importance have been intentionally omitted;
The undersigned individual's compensation for this report is in no way
contingent upon the value estimates contained in this report, nor is it
contingent upon any event other than the delivery of this report; and
This appraisal report has been made in conformity with the Codes of
Ethics and Standards of Practice recommended by the major professional
appraisal and financial analysis organizations.
/s/David L. O'Toole
----------------------------
David L. O'Toole
President/Managing Member
CONFIDENTIAL OPINION LETTER
September 19, 2007
Board of Directors
First Bancshares, Inc.
142 E. First Street
Mountain Grove, MO 65711
Members of the Board:
At your request, we have prepared a valuation report of the voting common
stock in the business enterprise known as First Bancshares, Inc. and its
subsidiaries as of the close of business on June 30, 2007 (the valuation
date). It is our understanding that this valuation will be used to determine
the feasibility of a going private transaction and may be invalid if used for
any other purpose or valuation date.
Based on the definitions, limiting conditions, financial data, information,
analyses, management representations, and related assumptions presented in the
report to follow, it is our opinion that as of June 30, 2007 the market value
of a majority voting common share in the business enterprise known as First
Bancshares, Inc. for the purpose set forth herein, may be reasonably
represented as:
$22.50 per share (rounded)
(Based on 1,550,815 shares outstanding)
A copy of the report, along with the source data from which it was prepared,
will be retained in our files for a period of three years and is available for
your review upon request.
Very truly yours,
/s/Index Capital, LLC
Index Capital, LLC
TABLE OF CONTENTS
-----------------
Title Page
Certification
Opinion Letter
Table of Contents
Page No.
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INTRODUCTION
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Purpose of the Valuation 1
Definitions 1
Fair Market Value 1
Business Enterprise Value 1
Majority Interest 1
Control Premium 1
Minority Interest 1
Marketability Discount 1
Information and Data 2
Estimated of Market Value 3
Valuation Fee 3
Sale or Purchase 3
Valuation Date 3
Legal or Specialized Expertise 3
Confidentiality/Advertising 4
Hazardous Substances 4
Unexpected Conditions 4
Court Testimony 5
Independence 5
Format of Report 5
DESCRIPTION & FINANCIAL SUMMARY
-------------------------------
First Bancshares, Inc. 6
First Home Savings Bank 9
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
Overview 20
VALUATION SUMMARY
-----------------
Overview 24
Recent Stock Transactions 24
Valuation Date 25
Valuation Approaches 25
Valuation Methods Considered 25
Valuation Methodology 26
Valuation Issues 26
Tangible Book Value Method 28
Results 28
Guideline Company Method 29
Overview 29
Selection of Publicly Traded Thrifts 30
Selection of Market Multiples 30
TABLE OF CONTENTS
-----------------
Results 31
Merger & Acquisitions Method 33
Result 34
Discounted Future Returns Approach 35
Selection of Benefits to be Discounted 35
Selection of a Discount Rate 35
Forecast 37
Results 38
Valuation Summary 40
Valuation Conclusion 41
ADDENDA
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Exhibit I Historical Balance Sheets and Income Statements - First
Bancshares, Inc.
Exhibit II Descriptions - Selected Publicly Traded Holding Companies
Exhibit III Company Profile/Appraiser Qualifications
I N T R O D U C T I O N
INTRODUCTION
------------
The valuation presented in this report was made in order to estimate the
market value of the business enterprise known as First Bancshares, Inc.
(hereinafter also referred to as ("FBSI or the Company") and its thrift
subsidiary First Home Savings Bank (hereinafter also referred to as the
"Bank") as of June 30, 2007 (the valuation date). It is our understanding
that the opinion of market value expressed in this report will serve as a
basis for determining the feasibility of a going private transaction and may
be invalid if used for any other purpose.
Definitions
For the purpose of this valuation, the following definitions are relevant:
Fair Market Value - The price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under
any compulsion to buy and the latter is not under any compulsion to sell,
and both parties are able, as well as willing to trade and are well
informed about the asset and the market for such asset.
Business Enterprise Value - A business enterprise is considered to be a
combination of all tangible and intangible elements associated with a
going concern. The market value of a business enterprise is expressed
net of all stated liabilities. Thus, the term is synonymous with the
market value of the stockholders' equity on a majority/control basis.
Majority Interest - Any number of shares owned, either directly or
indirectly or beneficially, that when exercised, can influence the
selection of the entity's management group, the direction of existing or
future operations (sale, divestiture, or acquisition) and the declaration
of dividends, etc. Generally, this interest constitutes more than a 50%
ownership interest.
Control Premium - The additional value inherent in a majority/control
interest, as contrasted to a minority interest that reflects its power of
control.
Minority Interest - Any number of shares that is something less than a
controlling interest in a company and does not represent a swing block of
shares. Generally, any number of shares less than 50% of the total
represents minority shares, by definition.
Marketability Discount - A discount from the concluded value of the
equity interest to recognize the absence of liquidity in the instance of
a minority interest, or the flotation costs that would be incurred to
sell the ongoing business enterprise by a majority/control group.
The buyer, under fair market value, is a "financial" and not a "strategic"
buyer. This excludes the buyer who, because of other business activities,
brings some
1
INTRODUCTION
------------
"value-adding" benefits which will enhance the company being valued and/or the
buyer's other activities.
Information and Data
In the preparation of this valuation, management: (i) provided information
concerning the operational and financial performance of FBSI, such as audited
and internally prepared financial statements, SEC Form 10-KSB, Consolidated
Reports of Income, OTS 2007 Thrift Financial Reports and related supplementary
schedules, corporate documents, and internally prepared schedules as
requested; and (ii) discussed the aforementioned documents and addressed
numerous questions posed during our investigation relating to the present
condition and future direction of the organization. Moreover, other data
contained herein by reference or otherwise was obtained from sources believed
to be reliable. Inasmuch as the above data and information were obtained from
management, or other reputable sources that were represented to Index Capital,
LLC as being knowledgeable and truthful, we have accepted this information as
being accurate and reliable; and therefore, we have not independently verified
the information provided, nor have we prepared an independent review or other
analysis of the quality of FBSI's asset portfolio. To the extent that such
data or client supplied information may be found at a later date to have been
inaccurate or misrepresented, we accept: (i) no liability for the
consequences such inaccuracy or misrepresentation may have on our value
conclusion expressed herein or the utilization of our conclusion in any
actions taken by management, boards of directors, or stockholders, nor (ii)
any responsibility to update any valuation conclusions to reflect the impact
that more accurate data may, or may not have, on our opinion. It should be
noted that during the course of this engagement no matters came to our
attention, which would cause us to doubt the accuracy of the information
provided.
2
INTRODUCTION
------------
Estimate of Market Value
The estimate of market value presented herein is the appraiser's opinion based
on careful consideration of the information obtained during the investigation.
Our conclusions are based on the implicit assumption that management will
continue to maintain the character and integrity of FBSI and the Bank, or
collectively the affiliated entities, in a manner consistent with their
representations. Fair market value is not intended to be derived from a pro
forma sale of the Company.
Valuation Fee
The fee for this valuation assignment is not contingent upon the value
expressed herein or any other event other than the delivery of this report.
Sale or Purchase
All opinions of market value are presented as Index Capital, LLC's considered
opinion based on the facts and data appearing in the report. We assume no
responsibility for changes in value, market conditions or the ability of the
owners to locate a purchaser at the value expressed herein.
Valuation Date
The valuation date to which the conclusions and opinions expressed in this
report apply is June 30, 2007, as set forth in the opinion letter. The dollar
amount of any value reported is based on the purchasing power of the U.S.
dollar and certain prevailing conditions in the capital and securities markets
as of the valuation date. In this regard, we assume no responsibility for
economic, financial, or physical factors occurring subsequent to the valuation
date that may or may not affect the opinions reported herein.
Legal, Fairness or Specialized Expertise
No opinion is intended to be expressed for matters, which require legal or
specialized expertise, investigation, or knowledge beyond that customarily
employed by appraisers. This report does not address issues of tax law,
regulatory agency compliance, or any other such matters unless specifically
identified in the
3
INTRODUCTION
------------
body of the report. Additionally the report does not intend to address the
"fairness" of any specific going private transaction contemplated by the board
of directors.
Confidentiality/Advertising
This report, supporting notes, and analyses are confidential. Neither all nor
any part of the contents of this appraisal shall be copied or disclosed to any
third party, or conveyed to the public, either orally or in writing, through
advertising, public relations, news release, sales literature, or in any other
manner without the prior written consent and approval of authorized
representatives from First Bancshares, Inc. and Index Capital, LLC.
Hazardous Substances
Hazardous substances, if present within a facility, can introduce an actual or
potential liability that will adversely affect the marketability and value of
the business enterprise. Such liability may be in the form of immediate
recognition of existing environmental conditions. Future liability could stem
from the release of various contaminants, such as asbestos fibers, or toxic
vapors from urea formaldehyde foam insulation, or through aging or building
renovations, and/or construction materials utilized by FBSI to modernize its
facilities. In the development of our valuation opinion, no consideration has
been given to such potential existing or future liability or its impact on
value. The professional staff of Index Capital, LLC is not qualified to
perform such an investigation to determine the possible presence of toxic
materials requiring either immediate or future remediation.
Unexpected Conditions
We assume there are no hidden or unexpected conditions of the property or
subject Bank and Company, not specifically disclosed by management that would
adversely affect the value of FBSI and its subsidiaries.
4
INTRODUCTION
------------
Court Testimony
Testimony or attendance in court or any other administrative or judicial
proceeding by reason of this valuation shall not be required unless
arrangements have previously been made with Index Capital, LLC.
Independence
Neither the appraiser involved in this engagement nor the firm Index Capital,
LLC has either a present or contemplated future investment in FBSI or its
subsidiaries.
Format of the Report
This report will present: (i) description and financial summary for the
Company and the Bank; (ii) a brief economic outlook for the economy in general
and the thrift industry in particular; and (iii) a discussion of the valuation
methods employed in the development of the market value estimates.
The appraisal included discussions with President/CEO - Dan Katzfey, CFO - Ron
Walters, SVP Operations - Adrian Rushing and a review of material provided and
questions posed during our investigation. Additionally, we prepared an
analysis of historical performance, current operations, and future prospects
as were deemed appropriate under the circumstances.
5
D E S C R I P T I O N
and
F I N A N C I A L S U M M A R Y
FIRST BANCSHARES, INC.
----------------------
Background
First Bancshares, Inc. a Missouri corporation is a registered unitary savings
and loan holding company. As of the valuation date, FBSI owned 100 percent of
the outstanding common stock of First Home Savings Bank and its subsidiaries,
and 100 percent of the stock in SCMG, Inc. FBSI is subject to supervision by
the Board of Governors of the Federal Reserve System and was formed in
September 1993.
Our review of the financial statements reveals that the Company's value is
primarily dependent upon the activities of its thrift subsidiary First Home
Savings Bank therefore the majority of the detailed information set forth in
this report applies to FBSI and First Home Savings Bank.
Ownership
FBSI is a public company traded on the NASDAQ stock exchange. Approximately
1,599 shares on average have traded during the 52 week period prior to the
valuation. The price of those trades has ranged from a high of $17.99 per
share to a low of $15.10 per share. The trading price as of the valuation
date was $16.37 resulting in market capitalization of $25.4 million. For
additional information on trading activity see the Valuation Section of this
report.
Litigation
The Company and its subsidiaries are involved in several litigation matters
however, according to management they are not material and the organization
has adequate insurance in the event of a negative outcome.
Unconsolidated Subsidiaries
The Company and Bank have no unconsolidated subsidiaries that have a material
impact on value or require further consideration in this report.
6
FIRST BANCSHARES, INC.
----------------------
Company Financial Statements
The follow table presents a summary parent company only balance sheet for the
FBSI as of the valuation date.
BALANCE SHEET - June 30, 2007
Assets:
Cash & cash equivalents $ 166,673
Securities available for sale 248,000
Investment in subsidiaries 24,974,967
Net property and equipment 1,839,812
Deferred income tax benefit 106,098
Other assets 97,610
-----------
Total $27,433,160
===========
Liabilities & Equity:
Notes Payable $ 947,765
Other Liabilities 17,302
Stockholders' Equity 26,468,093
-----------
Total $27,433,160
===========
The Company accounts for its investments in subsidiaries under the equity
method of accounting for this statement. Property and equipment is presented
net of accumulated depreciation. Historically, the Company has been involved
in the ownership of real estate for investment purposes. According to
management, they have been gradually divesting of these investments and will
continue this program. Also according to management, the fair market value of
the investment real estate is somewhat higher than the carrying value but not
significant enough to affect the organization's overall fair value. The June
30, 2007 balance sheet included cash $156,673, certificates of deposit
$10,000, common stocks in other financial institutions $248,000 and other
assets totaling $203,708.
The Company's liabilities as of June 30, 2007 consist of notes payable related
to the owned real estate and other liabilities totaling $965,067. Total
equity capital was $26,468,093 resulting in book value per share of $17.07,
based on 1,550,815 shares outstanding. The Company's debt-to-equity ratio as
of June 30, 2007 was
7
FIRST BANCSHARES, INC.
----------------------
approximately 3.6 percent and $124,166 in dividends were paid to shareholders
in the fiscal year ended June 30, 2007. The Company repurchased 1,665 shares
of its stock in FY 2007 for $27,454 under a stock repurchase plan that was
later terminated.
Summary
First Bancshares, Inc., the subject of this valuation, has consolidated assets
of $241 million, total customer deposits of $190 million and more than $26
million of capital. The Company is under no restrictive regulatory agreements
however its primary subsidiary First Home Savings Bank is under a Memorandum
of Understanding with the Office of Thrift Supervision. The Memorandum and
the operating performance of the Bank are discussed in the following section
of this report. The financial condition of the holding company appears strong
and its future outlook is positive.
8
FIRST HOME SAVINGS BANK
-----------------------
General
First Home Savings Bank, a Missouri-chartered, federally insured stock savings
and loan association, is engaged in thrift banking in South Central Missouri.
It serves its clientele from the main location at 142 E. First Street,
Mountain Grove, Missouri and through eleven full-service branch offices and
one loan production office in eight counties. Following is a market share and
demographic profile illustration using information from the most recent dates
that comparative deposit and population data is publicly available:
First Home Savings Bank
Demographic Profile
Market: County
Missouri (MO)
Company Deposit Percent of Percent of Total Population
Number Deposits Market State National Population Change
Market of in Market Share Franchise Franchise 2007 2000-2007
County Rank Branches ($000) (%) (%) (%) (Actual) (%)
Wright 1 1 62,235.00 24.15 34.67 34.67 18,104.00 0.83
Douglas 3 1 30,278.00 21.03 16.87 16.87 13,668.00 4.46
Webster 6 1 23,461.00 5.64 13.07 13.07 35,097.00 13.05
Ozark 2 2 23,264.00 20.23 12.96 12.96 9,723.00 1.90
Stone 6 2 21,437.00 6.48 11.94 11.94 31,265.00 9.10
Taney 13 2 11,135.00 1.67 6.20 6.20 45,153.00 13.73
Christian 13 1 7,680.00 0.99 4.28 4.28 72,466.00 33.49
Greene 31 1 12.00 0.00 0.01 0.01 259,829.00 8.09
MO Totals 11 179,502.00 100.00 100.00 485,305.00
Weighted Average:
Missouri Franchise 6.36
Aggregate: Entire
State of Missouri 5,911,718.00 5.66
Aggregate: National 306,348,230.00 8.86
Projected Median HH
Population HH Income
Change Income Change
2007-2012 2007 2000-2007
County (%) ($) (%)
Wright 0.34 29,819.00 21.01
Douglas 2.92 30,581.00 18.76
Webster 9.03 38,905.00 21.20
Ozark 1.30 30,730.00 19.06
Stone 5.69 39,384.00 20.87
Taney 9.53 38,400.00 24.24
Christian 23.18 48,040.00 24.99
Greene 5.67 42,545.00 24.55
MO Totals
Weighted Average:
Missouri Franchise 4.22 33,708.00 20.76
Aggregate: Entire
State of Missouri 4.09 47,568.00 25.16
Aggregate: National 6.26 53,154.00 26.06
Source: SNL Financial
FHSB provides a full range of community banking services as follows: (i)
accepting demand, savings and time deposits; (ii) making residential mortgage
loans, commercial real estate loans, land loans, second mortgage loans,
consumer loans; and commercial business loans; (iii) issuing cashiers' checks
and money orders; (iv) selling travelers' checks; and (v) providing
bank-by-mail, night depository, ATM, safe deposit boxes and other customary
community banking services. FHSB does not have trust powers. It is regulated
by the Missouri Division of Finance and the Office of Thrift Supervision. Its
deposits are insured by the Federal Deposit Insurance Corporation.
Employees
As of June 30, 2007, FHSB employed on a full-time equivalent basis 92 persons.
None of these employees are represented by a union or covered under a
collective bargaining agreement and employee relations are considered to be
excellent.
9
FIRST HOME SAVINGS BANK
-----------------------
Loan Portfolio
As of June 30, 2007, FHSB's loan portfolio was structured as presented in the
following table:
FIRST HOME SAVINGS BANK LOAN PORTFOLIO
Amount Percent
Mortgage Loans (000's) of Total
-------------- -------- --------
Construction Loans on:
1-4 Family Dwelling Units $ 6,611 4.1%
Multifamily Dwelling Units 233 0.1%
Nonresidential Property 4,115 2.5%
Permanent Mortgages on:
1-4 Family Dwelling Units 82,851 50.9%
Multifamily Dwelling Units 238 0.1%
Nonresidential Property (Except Land) 38,804 23.9%
Land 9,123 5.7%
-------- -----
Subtotal 141,975 87.3%
-------- -----
Non-Mortgage Loans
------------------
Commercial and Industrial 8,864 5.4%
Consumer 11,875 7.3%
-------- -----
Subtotal 20,739 12.7%
-------- -----
Total (Gross Loans) $162,714 100.0%
======== =====
Source: 2007 Thrift Financial Report Schedule SC - Consolidated Statement of
Condition
Note: Percentages include rounding.
As can be seen from the table above, 87.3 percent of the Bank's loans were
mortgage loans and 12.7 percent of the loans were non-mortgage loans.
Residential loans (1-4 Family, Construction and Permanent) make up the bulk of
the mortgage loan portfolio at 55.0 percent, with Nonresidential Property
(Construction and Permanent) at 26.4 percent and land at 5.7 percent.
Commercial and Industrial and Consumer loans accounted for 5.4 percent and 7.3
percent of total loans, respectively. FHSB's loan concentration is in the
residential real state sector as you would expect for a federally regulated
savings and loan.
10
FIRST HOME SAVINGS BANK
-----------------------
On the valuation date, the allowance for loan losses totaled $2,693,000
(rounded), 1.67 percent of gross loans. The reserve is considered adequate by
management and supported by an internal loan loss analysis.
Markets and Competition
The following table presents the top ranked financial institutions in each
Missouri County where FHSB has full service branch offices.
First Home Savings Bank
Deposit Market Share
Wright, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 First Home Savings Bank Thrift 1 62,235 24.15 66,286 25.70
2 3 Town & Country Bancshares Inc (MO) Bank 1 32,468 12.60 31,817 12.34
3 4 Bk of Mansfield Hldg Co. (MO) Bank 2 28,946 11.23 28,282 10.97
4 2 Sun Financial Corporation (MO) Bank 2 28,220 10.95 35,821 13.89
5 5 Ozark Bancorp Inc. (MO) Thrift 2 26,473 10.27 26,354 10.22
6 6 Bank of America Corp. (NC) Bank 1 26,026 10.10 25,195 9.77
7 8 Ozarks Heritage Financial Grp (MO) Bank 1 25,406 9.86 20,560 7.97
8 7 U.S. Bancorp (MN) Bank 1 24,200 9.39 23,580 9.14
9 9 Cmnty Bcshs of West Plains Inc (MO) Bank 1 3,771 1.46 0 0.00
Total For Institutions In Market 12 257,745 257,895
Douglas, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Town & Country Bancshares Inc (MO) Bank 2 55,557 38.59 52,919 39.82
2 2 Century Bancshares Inc. (MO) Bank 1 36,035 25.03 35,494 26.71
3 3 First Home Savings Bank Thrift 1 30,278 21.03 29,432 22.14
4 4 Great Southern Bancorp Inc. (MO) Bank 1 22,114 15.36 15,061 11.33
Total For Institutions In Market 5 143,984 132,906
Webster, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Marshfield Investment Co. (MO) Bank 2 103,008 24.77 95,159 24.30
2 2 Cottonrudy Investment Company (MO) Bank 2 94,958 22.83 94,411 24.11
3 3 Southern MO Bancshares Inc. (MO) Bank 1 65,621 15.78 65,518 16.73
4 4 CBR Bancshares Corp (MO) Bank 1 41,940 10.09 36,847 9.41
5 5 Central Bancompany Inc. (MO) Bank 1 28,245 6.79 26,346 6.73
6 6 First Home Savings Bank Thrift 1 23,461 5.64 24,761 6.32
7 8 Liberty Bancshares Inc (MO) Bank 1 22,562 5.43 15,534 3.97
8 7 Peoples Service Company (MO) Bank 2 21,483 5.17 18,084 4.62
9 9 U.S. Bancorp (MN) Bank 1 8,221 1.98 9,289 2.37
10 10 Bk of Mansfield Hldg Co. (MO) Bank 1 6,346 1.53 5,585 1.43
Total For Institutions In Market 13 415,845 391,534
11
FIRST HOME SAVINGS BANK
-----------------------
Ozark, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Century Bancshares Inc. (MO) Bank 3 91,709 79.77 87,591 78.41
2 2 First Home Savings Bank Thrift 2 23,264 20.23 24,111 21.59
Total For Institutions In Market 5 114,973 111,702
Stone, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Marshfield Investment Co. (MO) Bank 3 110,798 33.49 95,894 32.33
2 2 Stone Cnty Natl Bkshrs Inc. (MO) Bank 5 74,755 22.59 64,590 21.77
3 3 U.S. Bancorp (MN) Bank 1 34,556 10.44 32,650 11.01
4 4 Bank of America Corp. (NC) Bank 1 28,879 8.73 25,626 8.64
5 7 Peoples Service Company (MO) Bank 1 21,805 6.59 17,629 5.94
6 5 First Home Savings Bank Thrift 2 21,437 6.48 25,260 8.52
7 6 Central Bancompany Inc. (MO) Bank 1 21,098 6.38 20,506 6.91
8 8 Great Southern Bancorp Inc. (MO) Bank 2 17,532 5.30 14,474 4.88
9 NA Table Rock Bancshares Corp (MO) Bank 1 0 0.00 NA NA
Total For Institutions In Market 17 330,860 296,629
Taney, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Central Bancompany Inc. (MO) Bank 6 191,076 28.71 185,139 30.66
2 2 Branson Bancshares Inc (MO) Bank 3 84,571 12.71 65,079 10.78
3 3 Bank of America Corp. (NC) Bank 2 66,471 9.99 63,313 10.48
4 4 M & L Holding Company (MO) Bank 3 59,542 8.95 61,329 10.16
5 6 Peoples Service Company (MO) Bank 2 59,355 8.92 55,632 9.21
6 5 Regions Financial Corp. (AL) Bank 3 52,871 7.94 60,231 9.97
7 7 Great Southern Bancorp Inc. (MO) Bank 2 47,374 7.12 39,131 6.48
8 8 U.S. Bancorp (MN) Bank 2 23,119 3.47 23,384 3.87
9 11 Marshfield Investment Co. (MO) Bank 1 17,186 2.58 12,806 2.12
10 10 Commerce Bancshares Inc. (MO) Bank 1 16,861 2.53 13,286 2.20
13 12 First Home Savings Bank Thrift 2 11,135 1.67 10,012 1.66
Total For Institutions In Market 31 665,546 603,898
Christian, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Ozark Bank (MO) Bank 4 164,161 21.23 162,177 24.94
2 3 Peoples Service Company (MO) Bank 7 139,740 18.07 84,582 13.01
3 2 Central Bancompany Inc. (MO) Bank 4 123,342 15.95 101,590 15.62
4 4 Southwest Missouri Bcshs Inc (MO) Bank 2 62,328 8.06 53,154 8.17
5 5 Commerce Bancshares Inc. (MO) Bank 2 53,194 6.88 49,634 7.63
6 6 Great Southern Bancorp Inc. (MO) Bank 4 51,605 6.67 39,945 6.14
7 7 Ozarks Heritage Financial Grp (MO) Bank 1 38,899 5.03 37,882 5.83
8 8 Regions Financial Corp. (AL) Bank 2 32,945 4.26 34,042 5.24
9 9 First Miami Bancshares Inc. (OK) Bank 1 26,711 3.45 27,522 4.23
10 10 Marshfield Investment Co. (MO) Bank 1 26,240 3.39 21,717 3.34
13 13 First Home Savings Bank Thrift 1 7,680 0.99 7,404 1.14
Total For Institutions In Market 34 773,292 650,251
12
FIRST HOME SAVINGS BANK
-----------------------
Greene, MO
2006 2006 2005 2005
2006 Total Total Total Total
Number Deposits Market Deposits Market
2006 2005 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Great Southern Bancorp Inc. (MO) Bank 19 1,347,454 23.90 1,160,165 22.94
2 4 Bank of America Corp. (NC) Bank 7 614,748 10.91 433,220 8.57
3 3 BancorpSouth Inc. (MS) Bank 6 580,209 10.29 555,886 10.99
4 2 Commerce Bancshares Inc. (MO) Bank 8 575,059 10.20 557,084 11.02
5 5 Central Bancompany Inc. (MO) Bank 9 428,063 7.59 404,459 8.00
6 6 Guaranty Federal Bcshs Inc. (MO) Bank 6 305,156 5.41 293,265 5.80
7 8 Liberty Bancshares Inc (MO) Bank 4 263,692 4.68 214,839 4.25
8 9 Citizens National Bncp Inc. (MO) Bank 4 226,582 4.02 200,156 3.96
9 7 U.S. Bancorp (MN) Bank 9 225,511 4.00 284,337 5.62
10 10 Mid-Missouri Bancshares Inc. (MO) Bank 3 146,322 2.60 129,482 2.56
31 30 First Home Savings Bank Thrift 1 12 0.00 0 0.00
Total For Institutions In Market 121 5,636,779 5,056,289
Note: Non-Retail Branches not included
Source: SNL Financial
In view of the data presented, FHSB's markets can best be described as
moderately competitive with FHSB's market share ranging from a low of 0.00
percent in Greene County to a high of 24.15 percent in Wright County. There
are clearly opportunities for deposit growth available in every market served
by FHSB. The data used for this comparison was the most recent comparative
deposit data available from sources that make the information available to the
public.
Regulatory Affairs
The following comments were extracted from the 2007 Securities and Exchange
Commission Form 10-KSB (Draft Copy):
"During the quarter ended December 31, 2006, the Savings Bank entered
into a memorandum of understanding ("MOU") with the Office of Thrift
Supervision (the "OTS"). The MOU resulted from issues noted during the
examination of the Savings Bank conducted by the OTS, the report on
which was dated in July 2006, and included deficiencies in the lending
policies and procedures, recent operating losses, and the need to
revise both the business plan and the budget to enhance profitability.
The Board of Directors and the officers of the Savings Bank established
a schedule, during which the issues noted in the MOU, with one
exception, have been addressed and resolved, in a manner consistent
with the requirements set forth by the OTS. The remaining item is the
development of a three-year business plan, for which an extension to
October 31, 2007 was requested and granted by the OTS. During July
2007, the OTS performed an on-site review of the progress made on
resolving the issues discussed in the MOU".
13
FIRST HOME SAVINGS BANK
-----------------------
Our discussions with current management indicated that the problems that gave
rise to the MOU were created by previous management personnel. As of the date
of the valuation, the weaknesses in lending policies, practices and procedures
have substantially been corrected. Operating performance has improved and the
future outlook for the institution is good.
Financial Review
On the following pages we have performed a review of the financial performance
of the Bank and compared its performance with its peers. The information and
data used for the peer group comparison, balance sheet analysis and income
statement analysis consisted of: (1)First Bancshares, Inc. 2007 (Draft) Annual
Report; (2) First Bancshares, Inc. SEC Form 10-KSB (Draft) for 2007; (3)
Office of Thrift Supervision 2007 Thrift Financial Report and related
supplementary schedules for the 5 years ended in June 30, 2007; (4) SNL
Financial's Datasource; and (5) other internal financial records.
Exhibit I in the Addenda to this report contains historical balance sheets,
historical income statements and supplementary performance data that was
compiled from the aforementioned records and used for the following
discussion.
Peer Group Comparison
The table on the following page presents a peer group analysis for FBSI using
two different peer groups. In the first comparison, ten publicly-owned
thrifts with total assets similar to FBSI and from the Midwest Region of the
United States were chosen and in the second comparison, we used the six
publicly-owned thrifts that will be utilized in the Market Approach/Guideline
Valuation Method later in the Valuation Section of this report. The peer
group information is provided by SNL Financial and may not match entirely the
Company's audited financial statements due to report timing, report amendments
or differences in average balance calculations. The information is however
deemed reliable for this comparison and provides an accurate view of trends
and performance results.
14
FIRST HOME SAVINGS BANK
-----------------------
First Bancshares, Inc.
Peer Analysis
Similar Sized Public Company Thrifts
Effi- NCO/
Total Interest ciency Equity NPAs/ AVG Reserves
Period Assets ROAA ROAE Margin Ratio /Assets Assets Loans Loan
Company Name State Ticker Ended ($000) (%) (%) (%) (%) (%) (%) (%) (%)
----- ------ ------ ------ ---- ---- ------- ------- ------- ------- ------ -------
First Franklin
Corporation OH FFHS 6/30/2007 322,861 0.27 3.39 2.06 87.16 7.91 1.31 0.06 0.58
Cheviot
Financial
Corp. OH CHEV 6/30/2007 316,475 0.42 1.82 2.80 78.64 22.04 0.46 0.05 0.29
First BancTrust
Corporation IL FBTC 6/30/2007 300,938 0.35 3.96 2.81 83.70 8.16 0.72 0.47 1.01
Jacksonville
Bancorp, Inc. IL JXSB 6/30/2007 274,892 0.22 2.79 2.60 90.16 6.69 0.46 0.08 1.12
Kentucky First
Federal Bancorp KY KFFB 6/30/2007 268,857 0.30 1.29 2.20 76.15 18.23 NA NA NA
First Federal of
N. Michigan
Bancorp MI FFNM 6/30/2007 264,118 0.11 0.91 3.16 86.44 11.58 1.68 0.08 1.06
Central Federal
Corporation OH CFBK 6/30/2007 259,920 0.15 1.21 3.25 89.08 10.58 0.17 0.05 1.07
Blue River
Bancshares,
Inc. IN BRBI 6/30/2007 236,585 0.20 2.46 3.99 78.62 6.06 2.05 0.45 1.02
Park Bancorp,
Inc. IL PFED 6/30/2007 218,321 0.00 -0.02 2.73 102.40 14.29 1.27 0.74 0.40
FFD Financial
Corporation OH FFDF 6/30/2007 172,994 0.98 8.97 4.06 61.30 10.48 NA NA NA
Average: 263,596 0.30 2.68 2.97 83.37 11.60 1.02 0.25 0.82
Median: 266,488 0.24 2.14 2.81 85.07 10.53 1.00 0.08 1.02
First Bancshares,
Inc. MO FBSI 6/30/2007 241,331 0.12 1.03 3.01 94.65 10.97 1.47 0.14 1.59
Thrifts Used in Market Valuation Approach
NASB Financial
Inc. MO NASB 6/30/2007 1,535,846 1.15 11.51 2.86 54.57 9.71 0.63 0.09 0.57
Pulaski Financial
Corp. MO PULB 6/30/2007 1,135,660 0.92 11.69 2.96 56.03 7.06 0.96 0.13 0.99
First Federal
Bancshares of
AR AR FFBH 6/30/2007 820,491 0.57 6.24 3.16 70.00 9.08 3.61 0.19 0.66
Liberty Bancorp
Inc. MO LBCP 6/30/2007 328,780 0.61 3.95 3.59 67.59 14.90 1.07 0.01 1.10
Lexington B&L
Financial
Corp. MO LXMO 6/30/2007 133,430 0.72 6.48 3.07 66.54 11.50 0.78 0.05 1.13
CCSB Financial
Corp. MO CCFC 6/30/2007 98,590 (0.08)(0.61) 3.07 106.09 13.22 0.72 0.01 0.53
Average: 675,466 0.65 6.54 3.12 70.14 10.91 1.30 0.08 0.83
Median: 604,590 0.71 7.04 3.01 65.04 10.88 0.88 0.09 0.83
First Bancshares
Inc. MO FBSI 6/30/2007 241,331 0.12 1.03 3.01 94.65 10.97 1.47 0.14 1.59
Source: SNL Financial
In the first table, FBSI compares considerably below the regional thrifts of
similar size in its return on average assets (0.12) versus a median of (0.24),
return on average equity (1.03) versus a median of (2.14). FBSI's net
interest margin of (3.01) versus a median of (2.81) for the peer group
indicates a favorable comparison. The most dramatic difference in this
comparison involves the efficiency ratios (94.65 for FBSI vs. 85.07 for the
peer group). Both FBSI and the peer group median efficiency ratios are higher
than they should be contributing to sub-par operating performance for the
peers as well as FBSI. Non-performing assets, net charge-offs to average
assets and the reserve for loan losses to average loans are all higher than
the peer group. As discussed previously, FBSI is coming off two years of
performance problems caused by poor lending policies and practices.
Consequently, it is not surprising that they compare unfavorably with other
institutions that have not experienced the same issues.
An even greater differential results with the institutions selected in the
second part of the table. FBSI is dramatically below the peer group median
for return on
15
FIRST HOME SAVINGS BANK
-----------------------
average assets (0.71) and return on average equity (7.04). Net interest
margin 3.01) is the same as that reported for FBSI. In each comparison, the
peer group institutions are very similar in capitalization with FBSI. In the
Valuation Section we provide additional peer group analysis with the second
group of institutions.
Balance Sheet Analysis
As of June 30, 2007, FBSI's total consolidated assets were approximately $241
million which represents an increase of $13 million or 5.66 percent from June
30, 2006. The increase is due primarily to additional interest bearing
deposits. From our discussions with management they attribute the majority of
this change to a new high interest money market savings deposit account that
the institution began offering during the fiscal year. Repurchase agreements
aggregating $2.1 million contribute to the increase in balance sheet totals.
The additional deposits and repurchase agreements were used to fund an
increase in net loans of $17 million or 11.93 percent during the year. As of
June 30, 2007, loans to total assets were approximately 67 percent compared to
63 percent the previous year end. The loans to deposits ratio ended the year
at 85 percent indicating the institution continues to have adequate loan
capacity for future loan growth when quality lending opportunities arise.
Capital adequacy provides a basic measure of the financial strength of a
financial institution. Financial stability is often evaluated by a review of
capital ratios. FBSI's common equity capital to asset ratio as of June 30,
2007 was 10.97 percent and the Tier 1 risk-weighted capital was 15.90 percent.
Both of these ratios are well above minimum regulatory requirements and levels
required to be determined as "Well-Capitalized" under prompt corrective action
provisions. FBSI has a modest level of intangibles on its balance sheet that
when deducted from common equity does not result in a material change in
tangible capital ratios.
The fair value of FBSI's investment securities portfolio as of June 30, 2007
is $42,107,000, less than amortized cost by approximately $582,000. Other
liquid assets reported by the Company at June 30, 2007 consist of Federal Home
Loan Bank
16
FIRST HOME SAVINGS BANK
-----------------------
stock $1,614,000 and cash and cash equivalents of $21,777,000. Cash
value of bank-owned life insurance policies as of June 30, 2007 totaled
$7,507,000.
Although improvement is reported by management and noted in operating
performance, asset quality continues a concern of management. As noted in the
peer group comparisons, non-performing loans remain somewhat higher than
peers. Management indicated that the problem loans have been identified and
action plans are in place to monitor and ensure improvement in this group of
assets.
Income Statement Analysis
Profitability ratios provide a measure of how effectively FBSI has managed its
assets and liabilities. The return on average assets (ROAA) is frequently
used as the leading performance ratio in the financial institutions industry.
The table below presents the average assets and net income data along with the
ROAA ratios reported for the last five fiscal years ending June 30.
NET INCOME AVERAGE ASSETS ROAA
YEAR ($000's) ($000's) (%)
---- ---------- -------------- ----
2007 $ 272 $235,122 0.12
2006 (173) 238,882 (0.07)
2005 1,317 257,891 0.51
2004 2,347 270,396 0.87
2003 2,244 264,443 0.85
FBSI's earnings are considerably below peer group averages for the fiscal year
ended June 30, 2007 as indicated in the peer group comparisons. The
institution lost money in the previous year. The reasons for this condition
have been discussed previously in this report and management believes that
with the changes they have made, earnings are improving again. Historical
returns on equity generally reflect the same patterns and progress. Net
interest margins have steadily declined for the past three fiscal years
reflecting the overall interest rate
17
FIRST HOME SAVINGS BANK
-----------------------
environment during the periods measured. Presently, FBSI's net interest
margins are in line with peer group averages and should continue to improve
with the recent loan growth noted above. Non-interest income is within
expected ranges however non-interest expense compared to average assets has
increased significantly and is the major contributor to the unsatisfactory
efficiency ratios discussed earlier. Employee turnover, professional fees
associated with regulatory issues and start-up expenses for the Springfield
branch office has been excessive.
The provision for loan losses decreased significantly in fiscal 2007 to
$426,000 from a high of $2,333,000 in 2005 followed by $1,520,000 in 2006. As
discussed previously management indicates that the problem loans have been
identified and either charged-off or sufficiently reserved for at this time.
Summary
FBSI is a meaningful and trusted institution in the communities it serves.
Earnings have suffered for more than two years from bad lending practices and
policies. After significant management restructuring, introduction of certain
new products and services and compliance with a regulatory directives, it
appears that the institution is again headed for better times. FBSI's
position from a financial performance perspective is still out of line with
other similar institutions but improving. It is reasonable to expect
continued improvement and a return to the performance levels of fiscal years
2003 and 2004 in the foreseeable future. For a projection of future earnings
performance, see the Valuation Section of this report.
18
E C O N O M I C
and
I N D U S T R Y O U T L O O K
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
Revenue Ruling 59-60 requires consideration of "the economic outlook in
general and the condition of the specific industry in particular." In this
analysis we have examined the general economic and thrift industry climate as
of June 30, and for the first six months of 2007.
The following economic and thrift outlook was compiled using sources such as
the Federal Reserve Bank, Bureau of Economic Analysis, U.S. Department of
Labor, Office of Thrift Supervision and Federal Deposit Insurance Corporation.
Real gross domestic product increased at an annual rate of 4.0 percent in the
second quarter of 2007, preceded by a rate of 0.6 percent in the first quarter
of 2007. The acceleration in the second quarter primarily reflected positive
contributions from personal consumption expenditures for services, net
exports, non-residential structures, in addition to federal, state and local
government spending. Corporate profits during the second quarter increased
4.5 percent from the same quarter a year ago and unemployment remained at 4.5
percent. The jobless rate has ranged from 4.4 - 4.6 percent since September
2006
Consumer prices as measured by the Consumer Price Index have grown at an
annual rate of 4.5 percent during the first six months of 2007. This compares
to 2.5 percent for all of 2006. The index for energy increased 2.9 percent in
2006 and is up 21.3 percent on an annual basis for 2007, causing most of the
overall increase in the Consumer Price Index. The seasonally adjusted rates
of productivity for the second quarter of 2007 were 3.5 percent in the
business sector and 2.4 percent in the non-farm business sector.
Manufacturing productivity grew at a rate of 1.8 percent during the quarter.
According to the Federal Reserve Board, economic activity in the St. Louis and
Kansas City Districts was moderate, Cleveland, Chicago and Minneapolis were
expanding at a modest rate, Boston and Atlanta reported mixed activity and the
economies in Philadelphia, Richmond, Dallas and San Francisco continued to
grow during the second quarter of 2007. Some Districts described employment
conditions as tight but most reported that wage increases were moderate or
steady.
20
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
While there are obviously parts of the country with economic challenges, the
continued growth in the gross domestic product, low unemployment and modest
increases in consumer prices would indicate the overall National economy as of
June 30, 2007 remains strong.
On a regional basis, according to the Federal Reserve Board, the Tenth
District economy expanded at a moderate pace driven by consumer spending,
tourism, and expanding labor markets. Energy activity was strong and
agricultural conditions favorable during this period. Residential and real
estate lending continues its weakness and may well have a more significant
impact on the regional and state economy in future months.
The Federal Reserve Board continued to hold its target for the federal funds
rate at 5.25 percent on June 30, 2007. There seemed to be a mixed view of
what should be done with rates in the foreseeable future. Although long term
inflation continues to be under control, some pressures on current inflation
remain; primarily because energy prices. The sub-prime lending situation and
concern for liquidity in the credit markets caused the Federal Reserve to
reduce its discount rate recently to accommodate borrowings from the major
banks. Reductions in the prime rate of interest followed.
Based on the National and regional economic figures as of the end of the
second quarter of 2007, it can be suggested that the U.S. and Missouri
economies continue to be quite healthy.
The Office of Thrift Supervision reported on August 21, 2007 "that the
nation's thrift industry posted solid earnings and profitability in the second
quarter of 2007 despite the effects of a slowing housing market and
flat-to-inverted yield curve". Some highlights during this period include an
increase in net income of 6.3 percent from the previous quarter, but down 8.6
percent from the second quarter a year ago. Profitability for the quarter was
1.97 percent, measured as an annual return on average assets. Capital levels
were at record high levels. Problem loans
21
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
continue to increase to 0.95 percent for the quarter end compared to 0.80
percent in the prior quarter and 0.62 percent one year earlier.
Net interest margins in the industry were relatively unchanged from the prior
quarter and down slightly from the comparable quarter a year earlier.
Overall, refinancing and mortgage origination volumes were strong.
Originations were up 14 percent from the second quarter one year earlier. It
appears that the combination of solid earnings and capital levels position the
industry well in the event of a slowing of the housing market and/or the
overall economy. In general, the state of the thrift industry in the US and
in Missouri is good and the outlook for the balance of 2007 and beyond looks
promising.
22
V A L U A T I O N S U M M A R Y
VALUATION SUMMARY
-----------------
Overview
In order to develop an opinion concerning the market value of the common stock
in the business enterprise known as First Bancshares, Inc., as the valuation
date, it was necessary to assume that: (i) no changes occur in operating
philosophy or financial strategy; (ii) there is no deviation in the geographic
markets in which FBSI competes; (iii) there are no major additions or
deletions to the services or products that are currently provided; and (iv)
there will be no change to the business approach or management philosophy. In
this regard, the valuation implicitly reflects FBSI's operations in a manner
consistent with prior periods.
Recent Minority Stock Transactions
The following table contains the stock price, number of shares traded and
price to book value for the twenty-six weeks preceding the valuation date.
Although weekly activity is relatively low, FBSI's stock is traded on an open
exchange and these prices are representative of the market price for a
minority share. There is not sufficient trading volume for this period of
time to rely on for the determination of going concern value.
First Bancshares, Inc. (NASDAQ: FBSI)
Historical Stock Price & Volume
Price Percent Price Percent
Week Per Shares of Book Week Per Shares of Book
Ended Share Traded Value Ended Share Traded Value
----- ----- ------ ------- ----- ----- ------ -------
06/29/2007 16.50 1,400 96.1 03/30/2007 17.00 100 99.6
06/22/2007 16.15 400 94.1 03/23/2007 17.11 0 100.2
06/15/2007 16.70 0 97.3 03/16/2007 16.50 1,000 96.7
06/08/2007 16.80 1,000 97.8 03/09/2007 16.83 100 98.6
06/01/2007 16.89 1,200 98.4 03/02/2007 16.80 2,354 98.4
05/25/2007 16.50 1,400 96.1 02/23/2007 17.23 0 100.9
05/18/2007 16.09 2,821 93.7 02/16/2007 16.50 329 96.7
05/11/2007 15.75 2,400 91.7 02/09/2007 17.20 0 100.8
05/04/2007 15.30 500 89.1 02/02/2007 17.25 0 101.1
04/27/2007 15.90 0 92.6 01/26/2007 17.35 0 101.8
04/20/2007 15.85 7,286 92.9 01/19/2007 17.35 3,600 101.8
04/13/2007 16.67 400 97.7 01/12/2007 17.14 130 100.5
04/05/2007 16.75 190 98.1 01/05/2007 17.18 692 100.8
Source: SNL Financial
24
VALUATION SUMMARY
-----------------
Valuation Date
The valuation will utilize: (i) June 30, 2007 financial results; and (ii)
certain market-based multiples and discount rates which generally reflect
prevailing conditions in the public securities and capital markets as of the
valuation date.
Valuation Approaches
Asset-Based Approach - This approach assumes that an asset's value is
indicated by the cost of reproducing or replacing the asset, less an
allowance for physical deterioration and obsolescence. For business
valuations, the approach generally applies when the assets of the
business are substantial. The approach may not be relevant in valuing
operating companies/banks (except where the liquidation value produces a
higher value than the income or market approach), and should not be used
alone in this case.
Market Approach - The market approach is based upon the premise that
arm's length transactions of similar property provide empirical evidence
as to the value of a property. The theory of using the market approach
is based upon the economic principle of substitution; i.e., a buyer would
not pay more than he would pay for an equally desirable alternative. In
addition, Revenue Ruling 59-60 suggests that the "best measure may be
found in the prices at which the stocks of companies engaged in the same
or a similar line of business are selling in a free and open market."
Income Based Approach - The basic concept of the income approach is to
forecast the future economic income associated with an investment and
discount the forecasted benefit stream to a present value using a
discount rate appropriate for the expected risk of the prospective
economic benefit stream. The income approach is based upon the economic
principle of anticipation; i.e., the value is based upon the present
value of the economic benefit stream discounted back using an appropriate
discount rate for the expected risk.
Valuation Methods Considered
The valuation methods on the following page were considered for this appraisal
and those utilized are indicated as "Applied". These methods relate to the
aforementioned approaches which are standard within the valuation industry.
Each of the following methods was considered and those selected for use in
this report are discussed individually in the appropriate sections of the
report.
25
VALUATION SUMMARY
-----------------
Tangible Book Value Method Applied
Economic Book Value Method Rejected
Guideline Public Company Method Applied
Merger & Acquisitions Method Applied
Discounted Future Returns Method Applied
Dividend Paying Capacity Rejected
Liquidation Method Rejected
Single-Period Capitalization Method Rejected
Valuation Methodology
In order to estimate the market value of the common equity of First
Bancshares, Inc., it was necessary to:
* Establish a value for FBSI under each previously identified method on
a majority/control basis.
* Develop a final value for FBSI by weighting the results from each
method in accordance with its relative significance to a prudent
investor.
* Apply a marketability discount when and if appropriate.
Valuation Issues
The issues inherent in this valuation are presented and discussed individually
below:
1) Majority Interest Basis - The valuation of FBSI reflects a
majority/control position because the purpose of the valuation is
for a going private transaction which necessitates the acquisition
of or reclassification of the stock based on a going concern value.
2) Premium for Majority - Mergerstat Review - 2006, which is an annual
publication that provides comprehensive statistics on mergers,
acquisitions and divestitures for over fifty industries, reported in
the most recent issue that the average premium for a controlling
interest in the banking and finance industry in 2006 was 36.6% while
the five-year average was 30.2%. Historically, depending on the
industry, premiums have ranged as high as 100%. However, in
developing our valuation we used a 33% premium for control due to
FBSI's financial condition and market position.
26
VALUATION SUMMARY
-----------------
It should be noted that the selected control premium will be applied
to minority market based multiples to convert these indices to the
control basis for the valuation.
3) Minority Interest Discount - As discussed in item 1 above, the
valuation of a share in FBSI has been made on a majority basis.
Therefore the application of a minority interest discount is
unnecessary.
4) Marketability Discount - In order to develop a valuation of a
majority/control ownership position, a marketability discount
represents the "flotation costs" associated with the outright sale
of the business enterprise including but not limited to legal and
accounting fees, printing expenses for offering documents,
under-writing fees, etc. Published studies in recent years indicate
that, depending on the size of the offering, flotation costs can
range between 2.0% and 15.0%. We have used a 2.0% marketability
discount for this valuation.
Refer to the following pages for the valuation calculations for FBSI using
each of the aforementioned valuation methods.
27
VALUATION SUMMARY
-----------------
Tangible Book Value Method
--------------------------
Overview
The Asset Based Approach includes two types of adjusted book value methods;
i.e., the Tangible Book Value Method and the Economic Book Value Method. We
have selected and applied the Tangible Book Value Method for this valuation.
It involves consideration of the underlying assets less stated liabilities to
derive the value of stockholders' equity and then eliminates any goodwill
and/or intangible assets for a resulting value.
Result - Tangible Book Value Method
In order to derive a preliminary value using the tangible book value method,
the steps generally are as follows: (i) adjust all tangible assets to fair
market value in continued use; (ii) adjust all liabilities to fair market
value in continued use; (iii) add control premium or minority discount (if
applicable); and (iv) deduct discount for lack of marketability (if
applicable). For this appraisal, the underlying assets and liabilities of
FBSI (excluding intangible assets) were considered to be at fair market value
as reported in the audited financial statements as of the valuation date. Any
assets or liabilities in the financial statements that have not been adjusted
to fair value are deemed not material and therefore are considered in this
valuation at their carrying values on the financial statements. Marketability
discounts are applied in the Valuation Summary section of the report.
Tangible Book Value Method - FBSI
Stockholders' Less
Institution Date Equity Intangible Assets Result
----------- ---- ------------- ----------------- ------
First Bancshares, Inc. 6/30/07 $26,468,000 $285,000 $26,183,000
28
VALUATION SUMMARY
-----------------
Guideline Company Method
------------------------
Overview
Included in the Market Approach to a business valuation is the Guideline
Company Method. The Guideline Company Method is predicated on the theory that
the market value of a company can be estimated based on the price investors
are paying for the stocks of similar publicly-traded companies.
The market value of publicly-traded companies can be calculated by multiplying
the current price at which the stock is being traded by the number of shares
outstanding. This calculation represents the value of the aggregate minority
interest in the company, i.e., the value of the company from the perspective
of the many investors who own shares of stock but who do not have the power to
direct, or redirect, strategies employed to maximize shareholders' value.
The development of a Guideline Company based valuation for this appraisal
requires the selection of publicly-traded financial institutions from which to
develop meaningful valuation criteria. The identification of thrift
institutions directly similar to FBSI was difficult due to FBSI's': (i)
geographic concentration in rural South Central Missouri versus the more urban
and geographically diverse operations of certain of the selected thrift
holding companies, (ii) financial structure and moderate size versus certain
of the selected thrift holding companies; and (iii) management philosophies
such as staffing, lending, and loan reserve practices and policies.
The foregoing notwithstanding, we have selected and presented on the following
page other thrift institutions whose stock prices would reflect: (i) their
geographic location in or near Missouri; (ii) the outlook for the region's
economy; and (iii) the type of customer, i.e., real-estate, commercial,
agricultural, and industrial concerns, served by the selected groups.
29
VALUATION SUMMARY
-----------------
Selection of Publicly Traded Companies
COMPANY NAME LOCATION SYMBOL EXCHANGE
------------ -------- ------ --------
NASD Financial, Inc. Grandview, MO NASB NASDAQ
Pulaski Financial Saint Louis, MO PULB NASDAQ
First Federal Bancshares Harrison, AR FFBH NASDAQ
Liberty Bancorp Liberty, MO LBCP NASDAQ
Lexington B&L Financial Lexington, MO LXMO Pink
CCSB Financial Corp Liberty, MO CCFC OTCBB
Descriptions of the above thrifts are presented in Exhibit II in the Addenda
section of this report. The following schedules present selected financial
performance and market-based transaction data for these companies as of June
30, 2007 or for a trailing twelve month period as reported by SNL Financial.
Banking Financial Performance
LTM LTM
Equity/ NPAs/ LTM LTM LTM EPS Book
Financial Total Assets Assets Effic. ROAA ROAE Growth Value
Company State Ticker Sector Date Assets$M) (%) (%) Ratio (%) (%) (%) (%) Growth
------------- ------ ------ ------ -------- -------- ------ ------ -------- ---- ---- ------ ------
NASB Financial
Inc. MO NASB Thrift 6/30/2007 1,535,846 9.71 0.63 54.57 1.15 11.51 (16.1) 2.62
Pulaski
Financial
Corp. MO PULB Thrift 6/30/2007 1,135,660 7.06 0.96 56.03 0.92 11.69 (3.2) 7.77
First Federal
Bancshares of
AR AR FFBH Thrift 6/30/2007 820,491 9.08 3.61 70.00 0.57 6.24 (38.6) (2.54)
Liberty Bancorp
Inc. MO LBCP Thrift 6/30/2007 328,780 14.90 1.07 67.59 0.61 3.95 39.3 129.37
Lexington B&L
Financial
Corp. MO LXMO Thrift 6/30/2007 133,430 11.50 0.78 66.54 0.72 6.48 NA 3.32
CCSB Financial
Corp. MO CCFC Thrift 6/30/2007 98,590 13.22 0.72 106.09 (0.08)(0.61) NM 2.08
First Bancshares
Inc. MO FBSI Thrift 6/30/2007 241,331 10.97 NA 94.65 0.12 1.03 NM 0.83
Source: SNL Financial
Banking Market Performance
Price/ Price/ Current
Market Pricing Price/ Tang LTM EPS Dividend
Company State Ticker Sector Exchange Value Price As Of Book (%) Book (%) (x) Yield (%)
------------- ------- ------ ------ -------- ------ ------ ------- ------- ------- ------- --------
NASB Financial
Inc. MO NASB Thrift NASDAQ 240.2(M) 30.48 9/14/2007 162.0 165.2 14.2 2.95
Pulaski Financial
Corp. MO PULB Thrift NASDAQ 132.9(M) 13.38 9/14/2007 166.4 176.3 14.9 2.69
First Federal
Bancshares of
AR AR FFBH Thrift NASDAQ 88.7(M) 18.23 9/14/2007 118.9 118.9 18.8 3.51
Liberty Bancorp
Inc. MO LBCP Thrift NASDAQ 50.7(M) 10.65 9/14/2007 103.5 103.5 27.3 0.94
Lexington B&L
Financial Corp. MO LXMO Thrift Pink 16.1(M) 25.50 9/14/2007 105.2 110.9 NA 1.18
CCSB Financial
Corp. MO CCFC Thrift OTCBB 11.8(M) 14.15 9/14/2007 90.7 90.7 NM 0.00
Source: SNL Financial Average 124.5 127.6 15.0
Median 122.4 124.6 16.9
Selection of Market Multiples
It can be seen from the previous Tables that: (i) the return on average
assets (ROAA) ratios for the selected companies range from a low of (0.08
percent) (CCFC)
30
VALUATION SUMMARY
-----------------
to a high of 1.15 percent (NASB); (ii) the return on average equity ratios
(ROAE) range from a low of (O.61 percent) (CCFC) to a high of 11.69 percent
(PULB); (iii) the current minority price-to-earnings multiples range from a
low of 14.2 (NASB) to a high of 27.3 (LBCP), excluding companies with losses;
(iv) the current minority price-to-book multiples range from a low of 0.9
(CCSB) to a high of 1.7 (PULB) and; (vi) the current minority
price-to-tangible book multiples range from a low of O.9 (CCSB) to a high of
1.8 (PULB).
FBSI's performance ratios as of June 30, 2007, versus the selected holding
companies compare generally unfavorably. Efficiency ratios, return on average
assets and return on average equity are below the selected group medians as
discussed earlier in this report. Due to managerial problems encountered at
FSBI during fiscal year 2006 and the first half of fiscal year 2007, the
organization had to absorb significant loan losses and other costs that
significantly affected performance. Considering this situation as well as
other factors, we have: (i) selected; (a) the median minority
price-to-earnings multiple of 16.9 (rounded); (b) the median minority
price-to-book multiple of 1.22 (rounded) and (c) the median minority
price-to-tangible book multiple of 1.24 (rounded); (ii) applied a control
premium of 33.0 percent to the selected minority multiples to convert these
indices to a control basis as discussed previously in the Valuation Section;
and (iii) weighted the results primarily in favor of the price-to-book and
price-to-tangible book results to reflect their relative significance to a
prudent investor. The low weighting assigned to the price-to-earnings result
is appropriate considering the decline in earnings caused by the problems
encountered by the institution's previous mismanagement.
Result - Guideline Company Method
The table on the following page presents the valuation results from this
method including notes describing the calculations.
31
VALUATION SUMMARY
-----------------
Guideline Company Method - FBSI
Technique Value Multiple Results Weight Result
--------- ----- -------- ------- ------ ------
Price-to-
Earnings 272,000 (1) 22.5 (2) 6,120,000 0.10 (3) 612,000
Price-to
Book 26,468,000 (4) 1.62 (5) 42,878,000 0.45 (3) 19,295,000
Price-to-
Tangible
Book 26,183,000 (4) 1.65 (5) 43,202,000 0.45 (3) 19,441,000
Value $39,348,000
===========
Rounded $39,348,000
(1) Net Income after taxes as of June 30, 2007.
(2) Minority price-to-earnings multiple of 16.9 (rounded), adjusted for a
control premium of 33.0%, or 16.9 x 1.33 = 22.5 (rounded).
(3) Relative weight assigned to each of the guideline company approach
techniques reflects their relative significance to a prudent investor.
(4) Total stockholders' equity on June 30, 2007 $26,468,000, less
intangibles of 285,000 = $26,183,000.
(5) Minority price-to-book multiple of 1.22 (rounded), adjusted for a
control premium of 33.0%, or 1.22 x 1.33 = 1.62 (rounded) and minority
price-to-tangible book multiple of 1.24 adjusted for a control premium
resulting in 1.65 multiple.
323
VALUATION SUMMARY
-----------------
Merger & Acquisitions Method
----------------------------
Overview
The development of a valuation conclusion based upon the Merger & Acquisitions
Method under the Market Approach requires the selection of a representative
number of transactions from a reliable transactional data base. Using the SNL
Financial data base (the most prominent data base for financial institutions
transactions in the US), we have selected all sale transactions that occurred
in the past year involving (1) thrift institutions with total equity of less
than $50 million and (2) thrift transactions involving thrifts within the
state of Missouri, regardless of size.
Comparable Deal Analysis
Market : Region
Financial Item : Total Equity
Number of deals : 10
Announced since : 8/21/2005
Buyer Target Target Date Deal
Target Assets Assets Equity Announ- Value
Buyer Name State Ticker Name State Ticker ($000) ($000) ($000) ced ($M)
----------- ------ ------ ------ ----- ------ ------ ------ ------ -------- -----
First Mutual
of Richmond,
Inc. IN NA Mutual OH NA 730,895 112,697 10,780 4/5/2007 19.8
Bancorp,
Inc.
Heartland
Bancorp, Inc. IL NA BankPlus, IL BPLS 926,580 288,747 24,296 3/16/2007 33.6
FSB
La Porte
Bancorp, Inc. IN NA City Savings IN CSFC 266,560 137,023 12,703 3/8/2007 19.8
Financial
Corp.
Heartland
Bancorp, Inc. IL NA First IL FFBI 915,707 339,823 21,920 11/3/2006 30.3
Federal
Bancshares,
Inc.
Great River
Holding
Company MN NA First MN NA 137,331 150,057 13,664 5/21/2006 20.3
Federal
Bancorp-
oration
First Place
Financial
Corp. OH FPFC Northern OH NLVS 2,626,531 340,807 43,490 1/27/2006 72.4
Savings
& Loan
Company
Marquette
National
Corporation IL MNAT Hemlock IL HMKF 1,383,618 292,330 17,080 12/29/2005 49.0
Federal
Financial
Corp.
MainSource
Financial
Group Inc. IN MSFG HFS Bank, IN HFSK 1,639,510 237,979 20,626 10/26/2005 36.1
FSB
MainSource
Financial
Group Inc. IN MSFG Peoples OH POHF 1,540,312 199,881 24,925 9/28/2005 41.9
Ohio
Financial
Corp.
MainSource
Financial
Group Inc. IN MSFG Union IN UCBC 1,540,312 264,291 33,835 8/23/2005 56.3
Community
Bancorp
Average: 1,170,736 236,364 22,332 38.0
Median: 1,155,099 251,135 21,273 34.9
Brooke
Corporation KS BXXX Genera- MO NA 170,642 65,171 8,812 1/23/2006 10.1
tions
Bank
Pulaski
Financial
Corp. MO PULB CWE MO NA 787,729 45,458 4,357 10/25/2005 7.6
Bancorp,
Inc.
Average: 479,186 55,315 6,585 8.9
Median: 479,186 55,315 6,585 8.9
Price/ Price/ Price/LTM Premium/
Book Tang.Book Earnings Stock Price
(%) (%) (x) (%)
------ --------- ---------- -----------
First Mutual
of Richmond,
Inc. 165.0 165.0 20.0 NA
Heartland
Bancorp,
Inc. 144.2 144.2 22.4 58.09
La Porte
Bancorp,
Inc. 151.5 151.5 50.0 58.14
Heartland
Bancorp,
Inc. 123.6 132.8 48.9 1.10
Great River
Holding
Company 148.6 148.6 25.1 NA
First Place
Financial
Corp. 166.1 166.1 25.3 46.88
Marquette
National
Corporation 239.4 256.7 14.8 105.56
MainSource
Financial
Group Inc. 175.1 175.1 23.3 54.80
MainSource
Financial
Group Inc. 163.7 163.7 23.3 45.45
MainSource
Financial
Group Inc. 156.6 170.1 31.4 56.35
Average: 163.4 167.4 28.5 53.30
Median: 160.2 164.4 24.2 55.58
Brooke
Corporation 114.6 114.6 16.1 NA
Pulaski
Financial
Corp. 175.2 175.2 30.7 NA
Average: 144.9 144.9 23.4
Median: 144.9 144.9 23.4
Source: SNL Financial
From a review of the aforementioned merger and acquisition transactions we
found that the median price to book value multiple for the transactions
involving thrifts selected for the analysis was 1.60 (rounded) and 1.45
(rounded) for the transactions involving Missouri based institutions. The
price to tangible book
33
VALUATION SUMMARY
-----------------
multiples were 1.64 (rounded) and 1.45 (rounded) indicating a general lack of
goodwill or intangible assets on the books of the target institutions.
Likewise the transactions indicated a median price to income multiple of 24.2
and 23.4 respectfully. These transactions represent sales of a
majority/control interest.
Result - Merger & Acquisition Method
Although the specifics of selected market transactions are often not known,
the valuation ratios and pricing information is quite reliable due to standard
thrift industry financial reporting. Information on buyer and seller as well
as substantive details regarding consideration paid and terms of the deal is
normally available. Our interpretation of the data provided for the
transactions listed in the aforementioned table is strong evidence of current
market pricing for thrift transactions. The median multiples from the
regional transactions were approximately ten percent higher than the in-state
transaction median. Due to the fact that FBSI may be in the early stages of
turnaround and reported performance is less than stellar, we have selected the
median multiples from the in-state transactions for use in this approach. The
results are presented in the following table:
Merger & Acquisitions Method - FBSI
Technique Value Multiple Results Weight Result
--------- ----- -------- ------- ------ ------
Price-to-
Earnings 272,000 (1) 23.4 (2) 6,365,000 0.10 (3) 637,000
Price-to
Book 26,468,000 (4) 1.4 37,055,000 0.45 (3) 16,675,000
Price-to-
Tangible
Book 26,183,000 (5) 1.4 (5) 36,656,000 0.45 (3) 16,495,000
Value $33,807,000
===========
Rounded $33,800,000
(1) Net Income after taxes as of June 30, 2007.
(2) Majority multiples of from in-state transactional data.
(3) Relative weight assigned to each of the results reflects their relative
significance to a prudent investor.
(4) June 30, 2007 book value as reported in the financial statements.
(5) June 30, 2007 tangible book value calculated from the reported amounts.
34
VALUATION SUMMARY
-----------------
Discounted Future Returns Method
--------------------------------
Overview
As would be expected, the development of a valuation conclusion based upon
future returns requires: (i) the selection of a measure of an investor's
returns or future benefits (e.g. net income, cash flow, or dividends); (ii)
the selection of an appropriate discount rate, including consideration of the
benefit stream to be discounted, and the business and financial risk inherent
in an investment in FBSI and (iii) the forecast of the future benefits to be
discounted.
Selection of Benefits to be Discounted
In our valuation we have selected net income as the benefit stream which can
most accurately assess the value of FBSI. Our selection is based upon: (i)
the difficulties in accurately quantifying and projecting cash flow in a
financial institution; and (ii) the discretionary nature of FBSI's dividend
policy; and (iii) regulatory restrictions on dividend payments in the thrift
industry.
Selection of a Discount Rate
The selection of a discount rate is dependent upon: (i) the rate that could
be realized from risk-free investments such as United States Treasury
securities; (ii) the additional premium investors require to compensate for
market risk; (iii) the risk unique to an investment in FBSI, compared to
market risk; and (iv) any adjustments necessary to compensate for the
selection of the benefit stream.
The first step in the determination of an appropriate discount rate is the
analysis of risk-free rates. The table below presents yields on United States
Treasury securities as of the June 30, 2007 valuation date.
INSTRUMENT RATE
U.S. Treasury (%)
------------- ----
1 -Year 4.91
5 -Year 4.92
10 -Year 5.03
20 -Year 5.21
35
VALUATION SUMMARY
-----------------
In this valuation, we have selected the 20-year treasury rate of 5.21% as our
risk-free rate. This selection is based upon the long-term nature of an
investment in FBSI and the determination of the risk premium described below:
Ibbotson Associates has calculated a relationship between the overall risk of
the stock market and the risk of owning stock in the banking and thrift
industries. This relationship (commonly referred to as Beta) provides a
method of calculation for the risk premium associated with each industry. In
addition, each of these figures has been adjusted to eliminate the effect of
financial leverage. In this valuation, we have utilized the industry median
un-levered beta to calculate the risk premium for the banking and finance
industry.
The final element of the risk premium is the risk associated with the market
as a whole. From 1926 through 2006, investors have received a premium of
approximately 8.0% on average for an investment in common stocks. We believe
a market risk premium of 8.0% is appropriate for this valuation.
The calculation of the risk premium for FBSI can now be developed by
multiplying the un-levered beta by the market risk premium and adding the
risk-free rate. The calculations are presented below.
Composite
Segment Un-levered Beta Market Risk Risk Premium Weight Result
------- --------------- ----------- ------------ ------ ------
602 0.6 8.00 4.80 1.0 4.80
Total Risk Premium 4.80
====
Based upon the above data, we believe a market risk premium of 4.80% is
appropriate for this valuation.
As noted in the Guideline Company Method, the publicly traded thrifts selected
were in some instances larger and had more diverse operations than FBSI. In
assessing the company specific risk of FBSI, we have considered: (i) the
volatility of
36
VALUATION SUMMARY
-----------------
earnings; (ii) the size and geographic scope of the institution; and (iii) the
level of capital compared with the other institutions. Adjustment for these
factors requires an additional premium of 3.0% to compensate for risks unique
to FBSI.
The final element of the discount rate is an adjustment for the benefit stream
being discounted. The risk-free rate and risk premiums have been calculated
based upon actual returns to investors, or cash flow returns. In discounting
net income, an additional premium is required to account for the fact that not
all of a bank's income can be paid to investors. Our assessment of FBSI,
including its dividend policy, returns based upon reinvested net income, and
growth potential indicate that an additional premium of 2.0% is needed to
compensate for the use of net income as a benefit stream.
A summary of all the elements of the discount rate are presented below.
Risk Free Rate 5.21%
Market Risk Rate 4.80%
Company Risk Rate 3.00%
Net Income Adjustment 2.00%
-----
Net Income Discount Rate 15.01%
Rounded 15.00%
=====
On the following pages we have calculated the value of FBSI using the
Discounted Future Returns Method.
Forecast
In order to develop the valuation using the Discounted Future Returns Method
it was necessary to forecast projected total assets and net income for five
years (FY2008 - FY2012). The forecast presented below assumes: (i) total
assets, standing at $241,331,000 at June 30, 2007, will increase to
$332,094,000 at fiscal year-end 2012, an annual growth rate of five percent in
year one, six percent in years two and three and eight percent in years four
and five; and (ii) net income as a percent of total average assets, standing
at 0.12% at June 30, 2007, will increase
37
VALUATION SUMMARY
-----------------
to 0.50 percent in 2008, 0.75 percent in fiscal years 2009 and 2010, and 1.00
percent in fiscal years 2011 and 2012.
Five-Year Forecast as of June 30
Projected
----------------------------------------------
Actual For the fiscal year ending June 30
------ ----------------------------------------------
2007 2008 2009 2010 2011 2012
------ ------ ------ ------ ------ ------
Total Assets
($ 000's) $241,331 $253,358 $268,601 $284,717 $307,495 $332,094
Total Average
Assets ($ 000's) 235,122 247,364 260,999 276,659 296,106 319,795
Return on Assets
(%) 0.12% 0.50% 0.75% 0.75% 1.00% 1.00%
Net Income
($ 000's) 272 1,237 1,957 2,075 2,961 3,198
Discount Rate (%) 15.00% 15.00% 15.00% 15.00% 15.00%
Periodic Discount
Rate (%) 0.86957 0.75614 0.65752 0.57175 0.49718
Present Value - Net
Income ($ 000's) 1,075 1,480 1,364 1,693 1,590
Cumulative PV- Net
Income ($ 000's) 1,075 2,555 3,919 5,612 7,202
Rounded $7,202
======
Result Discounted Future Returns Method
In order to derive a preliminary value using the Discounted Future Returns
Method, the present value of net income was calculated above. As can be seen
from the table, the sum of discounted net income indicates a value of
$7,202,000 (rounded). However, to complete this approach it is also necessary
to recognize the net income streams beyond year five (residual net income).
The value of net income beyond year five was calculated using the Gordon
formula V= [I (1+g)]/(r-g)]. In this formula, V = the indicated value, I =
the income one year beyond year five, r = the discount rate, and g = the real
growth rate of the income
38
VALUATION SUMMARY
-----------------
stream. Assuming an 8.0% long-term real growth rate, the value is calculated
as $49,340,000 (rounded) or (3,198,000 x 1.08 = $3,454,000/7.0%). This
represents the value of residual net income. Discounting this value from
year five to its current value using the year five discount factor derived
earlier (0.49718 x $49,340,000), we arrive at a value of $24,531,000
(rounded).
To derive an estimated value of FBSI using the discounted future returns
approach, it is necessary to add the present value of the five-year net income
stream plus the present value of the residual net income. The calculation is
presented below:
Discounted Future Returns Method - FBSI
Sum of Present Value of Net Income Rounded $ 7,202,000
Present Value - Residual Net Income Rounded 24,531,000
-----------
Indicated Value - Income Approach (Control Basis) Rounded $31,733,000
===========
In order to establish the business enterprise value of FBSI on a majority
basis, it is necessary to weight each valuation method in accordance with its
relative significance to a prudent investor.
As previously stated, the Tangible Book Value Method does not incorporate the
value of goodwill and therefore is not considered in reaching our valuation
conclusion. On the other hand, the Guideline Company Method reflects the
attitudes of many investors toward the past performance and future prospects
of holding companies engaged in the thrift industry in locations with similar
economic conditions to those of FBSI. The Merger & Acquisitions Method
reflects actual market transaction values for control sales. Finally, the
Discounted Future Returns Method is based on forecasts of the earnings power
relative to income and expenses. In view of the foregoing, we believe that a
prudent investor on June 30, 2007 would give more weight to the Guideline
Company and Merger & Acquisitions Methods versus the Discounted Future Returns
Method due to the recent earnings problems encountered at FBSI and the
prospects for correcting them, the diversity of locations, and FBSI's size.
Consequently, we have assigned zero weighting to
39
VALUATION SUMMARY
-----------------
the Tangible Book Value Method, weighted the Guideline Company and Merger &
Acquisitions Methods by 40 percent each leaving the Discounted Future Returns
Method with a 20 percent weighting. The calculations are presented as
follows:
Valuation Conclusion - FBSI
Indicated Value %
Approach (Control Basis) Weight Result
-------- --------------- ------ ------
Tangible Book Value Method $26,183,000 0.00 $ 0
Guideline Company Method 39,348,000 40.00 15,739,000
Merger & Acquisitions Method 33,800,000 40.00 13,520,000
Discounted Future Returns 31,733,000 20.00 6,347,000
-----------
35,606,000
Valuation (Rounded) $35,600,000
===========
The concluded value represents a multiple 1.36 times June 30, 2007 tangible
book value and 1.35 times FSBI's total capital. It approximates 130.9 times
the institutions fiscal year 2007 reported earnings and 28.8 times fiscal year
2008 projected earnings.
Valuation Summary
The final step in the valuation process includes the consideration of a
marketability discount. As mentioned previously in the report, it is often
appropriate to include a discount for lack of marketability. In the case of a
majority valuation this simply adjusts for the flotation costs associated with
a sale. The following table sets forth this calculation resulting in the
concluded value for the business enterprise known as First Bancshares, Inc:
Indicated Value - First Bancshares, Inc.
Stockholders' Equity (Control Basis) $35,600,000
Less: Marketability Discount (2%) (712,000)
-----------
Concluded Value: 34,888,000
Rounded $34,900,000
===========
40
VALUATION SUMMARY
-----------------
Valuation Conclusion
Therefore, based on the definitions, limiting conditions, financial data,
analyses, management representations, and related assumptions summarized in
the fore-going report, it is our opinion that, as of June 30, 2007, the
enterprise value of FBSI was approximately $34,900,000 (rounded) and the
market value per common share, based on one million five hundred fifty
thousand eight hundred fifteen (1,550,815) shares outstanding as of the
valuation date on a majority basis can be reasonably represented as:
TWENTY TWO DOLLARS AND FIFTY CENTS (PER SHARE)
$ 22.50 (rounded)
Any questions regarding this report or information contained should be
directed to David L. O'Toole, Index Capital, LLC, 6240 W, 135th Street,
Overland Park, Kansas 66215.
41
A D D E N D A
EXHIBIT I
FIRST BANCSHARES, INC.
HISTORICAL BALANCE SHEETS & INCOME STATEMENTS
First Bancshares, Inc.
Consolidated Balance Sheets
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
------- ------- ------- ------- -------
Assets ($000)
Cash and cash
equivalents $ 28,096 $ 36,170 $ 23,592 $ 27,301 $ 21,777
Securities available-
for-sale 14,273 10,952 18,946 20,884 31,321
Securities held to
maturity 31,079 32,946 24,157 19,210 10,786
Federal Home Loan Bank
stock 1,901 1,904 1,904 1,612 1,614
-------- -------- -------- -------- --------
Total cash &
securities 75,349 81,972 68,599 69,007 65,498
Gross loans 177,851 167,499 160,994 144,461 161,693
Loan loss reserve (1,144) (1,240) (2,851) (2,474) (2,700)
-------- -------- -------- -------- --------
Total net loans 176,707 166,259 158,143 141,987 158,993
Real estate owned and
held for investment 282 174 340 497 294
Intangible assets 549 481 386 336 285
Property and equipment,
net 8,341 8,404 8,336 8,028 7,507
Bank-owned life insurance 5,500 5,763 5,488 5,705 5,920
Other assets 1,815 1,925 2,715 2,835 2,834
-------- -------- -------- -------- --------
Total assets $268,543 $264,978 $244,007 $228,395 $241,331
======== ======== ======== ======== ========
Liabilities ($000)
Non-interest bearing
deposits $ 8,887 $ 9,962 $ 11,816 $ 12,745 $ 12,716
Interest-bearing
deposits 202,777 197,285 175,327 166,396 177,374
Repurchase agreements - - - - 2,103
Federal Home Loan Bank
advances 29,352 29,571 29,074 22,000 22,000
Other liabilities 1,124 864 972 963 670
-------- -------- -------- -------- --------
Total Liabilities 242,140 237,682 217,189 202,104 214,863
Stockholders Equity ($000)
Common stock 28 29 29 29 29
Paid-in capital 17,522 17,801 17,829 17,852 17,936
Retained earnings 24,977 27,061 28,125 27,703 27,851
Treasury stock, at cost (16,423) (17,461) (19,059) (19,085) (19,113)
Accumulated other
comprehensive income 299 (134) (106) (208) (235)
-------- -------- -------- -------- --------
Total stockholders'
equity 26,403 27,296 26,818 26,291 26,468
-------- -------- -------- -------- --------
Total liabilities
and equity $268,543 $264,978 $244,007 $228,395 $241,331
======== ======== ======== ======== ========
Source: SNL Financial & Company Annual Reports
First Bancshares, Inc.
Supplemental Consolidated Balance Sheet Data
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
--------- --------- --------- -------- --------
Balance Sheet Analysis
Gross loans / total assets 66.23% 63.21% 65.98% 63.25% 67.00%
Loans/ deposits 84.03% 80.82% 86.03% 80.64% 85.06%
Loan loss reserves/ gross
loans 0.64% 0.74% 1.77% 1.71% 1.67%
FTE employees 104 98 94 103 92
Annualized Growth Rates
Asset growth 3.99% -1.33% -7.91% -6.40% 5.66%
Gross loans growth -6.31% -5.82% -3.88% -10.27% 11.93%
Deposit growth 4.55% -2.09% -9.70% -4.28% 6.11%
Average Balances ($000)
Gross loans $184,052 $170,140 $163,273 $147,536 $153,616
Securities & other earning
assets $ 64,901 $ 78,757 $ 71,411 $ 68,225 $ 57,984
Assets $264,443 $270,396 $257,891 $238,882 $235,122
Interest-bearing liabilities $229,441 $232,275 $217,281 $197,991 $212,751
Deposits $207,333 $212,408 $198,667 $179,619 $183,059
Common equity $ 25,843 $ 27,637 $ 28,613 $ 27,528 $ 26,491
Share & Per Share Information
Book value per share $ 16.17 $ 16.77 $ 17.28 $ 16.93 $ 17.07
Tangible book value per
share $ 15.83 $ 16.47 $ 17.03 $ 16.71 $ 16.89
Common dividends declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.08
Dividend payout ratio 11.90% 11.30% 19.30% NM 44.40%
Average diluted shares
outstanding 1,665,240 1,652,751 1,596,368 1,553,010 1,552,000
Common shares outstanding 1,632,627 1,627,819 1,552,010 1,552,480 1,551,000
Market Information & Historical Pricing
Closing price at June 30 $ 17.20 $ 20.00 $ 18.50 $ 16.64 $ 16.50
Price / trailing four quarter
earnings multiple 12.7 14.1 22.3 NM NM
Price to book multiple 106.4 119.3 107.1 98.3 96.7
Prioce to tangible book
multiple 108.6 121.4 108.6 99.6 97.7
Market capitalization ($M) $ 28.1 $ 32.6 $ 28.7 $ 25.8 $ 25.6
Source: SNL Financial & Company Annual Reports
First Bancshares, Inc.
Consolidated Income Statements
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
--------- --------- --------- -------- --------
Data in ($000)
Interest on loans $ 13,751 $ 11,965 $ 11,313 $ 10,413 $10,945
Interest on securities 1,362 1,327 1,211 1,793 1,927
Other interest income 372 443 741 707 853
-------- ------- ------- ------ ------
Total interest income 15,485 13,735 13,265 12,913 13,725
-------- ------- ------- ------ ------
Interest on deposits 5,423 4,075 3,455 4,430 5,946
Other interest expense 1,674 1,652 1,636 1,556 1,408
-------- ------- ------- ------ ------
Total interest expense 7,097 5,727 5,091 5,987 7,354
-------- ------- ------- ------ ------
Net Interest Income 8,388 8,008 8,174 6,926 6,371
-------- ------- ------- ------ ------
Provision for loan losses 427 340 2,333 1,520 426
-------- ------- ------- ------ ------
Service charges and other fees 1,554 1,806 1,784 1,873 1,802
Gain/loss on sale of loans - - - - 140
Gain/loss on sale of securities 27 178 (4) (161) 177
Gain/loss on sale of real estate
owned (16) (33) (41) (380) (213)
Other non-interest Income 340 537 1,168 149 397
-------- ------- ------- ------ ------
Total non-interest income 1,905 2,488 2,907 1,481 2,303
Compensation and benefits 3,691 3,901 3,672 3,994 4,308
Occupancy and equipment 999 1,114 1,163 1,105 1,527
Professional fees 162 179 262 268 554
Other non-interest expense 1,505 1,550 2,318 1,784 1,705
-------- ------- ------- ------ ------
Total non-interest expense 6,357 6,744 7,415 7,151 8,094
-------- ------- ------- ------ ------
Net income before taxes 3,509 3,412 1,333 (264) 154
Provision for taxes 1,265 1,065 16 (91) (118)
-------- ------- ------- ------ ------
Net Income $ 2,244 $ 2,347 $ 1,317 $ (173) $ 272
======== ======= ======= ====== ======
Core Earnings
Net income (loss), reported $ 2,244 $ 2,347 $ 1,317 $ (173) $ 272
Realized gain/loss on
securities 27 178 (4) (422) 177
Non-recurring revenue - - 818 (358) -
Non-recurring expense - - 150 191 -
Provision for taxes (9) (62) (232) 376 (62)
-------- ------- ------- ------ ------
18 116 432 (631) 115
-------- ------- ------- ------ ------
Net income, adjusted $ 2,226 $ 2,231 $ 885 $ 458 $ 157
======== ======= ======= ====== ======
Source: SNL Financial & Company Annual Reports
First Bancshares, Inc.
Supplemental Consolidated Income Statement Data
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
--------- --------- --------- -------- -------
Profitability Ratios (%)
Return on average assets 0.85 0.87 0.51 (0.07) 0.12
Return on average equity 8.68 8.49 4.60 (0.63) 1.03
Return on average tangible equity 9.05 8.82 4.79 (0.52) 1.17
Profit margin 33.87 31.23 6.48 7.68 (0.26)
Net interest margin 3.37 3.22 3.48 3.21 3.01
Yield on interest earning assets 6.22 5.52 5.65 5.98 6.49
Cost of interest-bearing liabilities 3.09 2.47 2.34 3.02 3.50
Interest spread 3.13 3.05 3.31 2.96 2.99
Net interest income/ average
assets 3.17 2.96 3.17 2.90 2.71
Non-interest income/ average
assets 0.72 0.87 0.83 0.96 0.90
Net operating expense/ average
assets 1.66 1.60 1.96 1.94 2.52
Non-interest income/ operating
revenue 18.41 22.67 20.83 24.79 25.03
Overhead ratio 52.23 54.06 61.95 66.81 92.86
Efficiency ratio 61.03 64.47 69.88 75.04 94.65
Yield/ Cost Detail (%)
Yield on loans 7.47 7.03 6.93 7.06 7.06
Yield on securities 3.62 3.07 3.25 3.70 4.66
Yield on other interest earning
assets 0.95 0.59 1.78 3.57 4.68
Yield on interest earning assets 6.22 5.52 5.65 5.98 6.49
Interest cost on certificates
of deposit 3.68 2.98 2.79 3.68 4.09
Interest cost on other deposits 1.60 0.87 0.85 1.37 1.94
Interest cost on interest bearing
deposits 2.72 2.01 1.84 2.60 3.49
Interest cost on debt 5.63 5.65 5.59 5.59 5.67
Cost of interest-bearing
liabilities 3.09 2.47 2.34 3.02 3.50
Core (Normalized) Income
Core income ($000) $ 2,226 $ 2,231 $ 885 $ 458 $ 157
Core earnings per share ($) 1.34 1.35 0.56 0.29 0.10
Diluted EPS before amortization
($) 1.39 1.46 0.86 (0.08) 0.21
Core return on average assets (%) 0.84 0.83 0.34 0.19 0.07
Core return on average equity (%) 8.61 8.07 3.09 1.66 0.59
Source: SNL Financial & Company Annual Reports
EXHIBIT II
DESCRIPTIONS - SELECTED PUBLICLY TRADED
THRIFT HOLDING COMPANIES
NASB Financial, Inc. (NASDAQ: NASB)
Company Description
NASB Financial, Inc. is a unitary thrift holding company for North American
Savings Bank, F.S.B. ("North American" or the "Bank"). North American
operates six offices in greater Kansas City, Missouri and others in
Harrisonville, St. Joseph, and Excelsior Springs, Missouri. The Bank also has
loan origination offices in Lee's Summit and Springfield, Missouri as well as
Overland Park, Kansas
Pulaski Financial Corp. (NASDAQ: PULB)
Company Description
Pulaski Financial Corp., operating in its 85th year through its subsidiary,
Pulaski Bank, serves customers throughout the St. Louis metropolitan area.
The bank offers a full line of quality retail-banking products through ten
full-service branch offices in St. Louis and three loan production offices in
Kansas City and the Illinois portion of the St. Louis metroplex. The
company's website can be accessed at www. pulaskibankstl.com.
First Federal Bancshares of Arkansas, Inc. (NASDAQ: FFBH)
Company Description
First Federal Bank is a community bank serving consumers and businesses with a
full range of checking, savings, investment and loan products and services.
The Bank, founded in 1934, conducts business from 18 full-service branch
locations, one stand-alone loan production office, and 29 ATMs located in
Northcentral and Northwest Arkansas.
Liberty Bancorp, Inc. (NASDAQ: LBCP)
Company Description
Liberty Bancorp, Inc. through its subsidiary, BankLiberty, offers banking and
related financial services to both individual and commercial customers. The
Bank is headquartered in Liberty, Missouri, with branches in Kansas City,
Plattsburg, Platte City and Independence.
Lexington B&L Financial Corp. (Pink: LXMO)
Company Description
The Company, a Missouri corporation, is the holding company for B & L Bank
(B&L), a Federal savings bank, and B & L Mortgage, Inc. (MTG), which
originates and sells loans primarily in the secondary market. MTG correctly
retains no servicing rights on loans originated. The Company, through its
subsidiaries, provides a variety of financial services to individual and
corporate customers including checking, money market and savings accounts and
certificates of deposit. Its primary lending products are one- to four-family
residential mortgage, commercial, agriculture and consumer loans.
CCSB Financial Corp. (OTCBB: CCFC)
Company Description
CCSB Financial Corp. (the "Company"), a Delaware corporation, was incorporated
in September 2002 it facilitate the conversion of Clay County Savings and Loan
Association form a mutual savings association to a stock savings bank (the
"Conversion"). The Company does not engage in any significant business other
than serving as the holding company for Clay County Savings Bank (the "Bank")
following the conversion. The Company's assets consist of the Company's
investment in the Bank, deposits in the Bank, a participation in a loan with
the Bank, and the Company's loan to the employee stock ownership plan of the
Bank. The Company's executive office is located at 1178 West Kansas, Liberty,
Missouri 64068. As per link
http:/www.claycountysavings.com/CCSB%20Financial%20Corp.htm.
EXHIBIT III
COMPANY PROFILE - INDEX CAPITAL, LLC
APPRAISER QUALIFICATIONS
COMPANY PROFILE - INDEX CAPITAL, LLC
COMPANY PROFILE - INDEX CAPITAL, LLC
------------------------------------
Index Capital provides comprehensive investment banking services to financial
institutions and their shareholders. Our understanding of financial
institutions, our commitment to long-term client relationships and our
sensitivity to confidentiality ensure a successful transaction with every
assignment. We provide a variety of services in the following areas:
* Buy-side M & A assignments
* Sell-side M & A assignments
* Branch acquisition & divestiture
* Branch divestiture analysis
* Bank charter transactions
* Restructurings
* Strategic ownership planning
* Management consulting
* Buy-outs
* Regulatory applications
* Fairness opinions & valuations
Buying or selling a financial institution is a very complex decision. We can
assist with this decision and develop the proper approach to make it happen.
We also provide services for secondary transactions including minority stock
transactions, ESOP formations, and recapitalizations. Our extensive
experience with financial institutions brings with it the knowledge of
structuring transactions, valuations and pricing, financing alternatives,
strategies prior to or after the completion of a transaction, appropriate
regulatory approval processes, and the assurance of confidentiality.
Our professionals have been involved with the formation of more than 250
holding companies, more than 15 newly chartered banks, served as board members
and turn-around consultants, prepared stock valuations for hundreds of banks
and holding companies and served as experts on numerous banking litigation
matters.
APPRAISER QUALIFICATIONS
------------------------
Mr. O'Toole currently serves as Managing Member and President of INDEX
CAPITAL, LLC. In this capacity he represents clients in assessing corporate
development opportunities, structuring merger, acquisition and divestiture
transactions, resolving complex due diligence and organizational issues,
preparing enterprise valuations and developing and executing shareholder exit
strategies.
Mr. O'Toole has over 30 years of experience in all aspects of accounting,
management, tax, financial advisory, valuation and investment banking with
financial institutions and closely held businesses. During Mr. O'Toole's
career, he has periodically served as an interim CEO or board member to banks
and companies in turn-around situations.
In 1995, Mr. O'Toole acquired a financial advisory and business valuation firm
with offices in Kansas City and Houston. Mr. O'Toole served as Chairman and
CEO of the firm until its business was merged with another company in December
2000. In 1977, Mr. O'Toole co-founded and, for 17 years, served in several
capacities including President of GRA, Inc., a nationally recognized Kansas
City based bank accounting, consulting and management advisory service firm.
Additionally, Mr. O'Toole was Managing Director of GRA, Thompson, White & Co.,
P.A., a related entity that provided accounting, tax, valuation and regulatory
services to more than 400 financial institutions.
Mr. O'Toole received his Bachelor of Science degree in Business and Accounting
from Fort Hays State University in 1973. In addition to his formal education,
Mr. O'Toole has attended accounting/management classes offered by the major
accounting associations and numerous professional development seminars
sponsored by various professional organizations and associations.
Mr. O'Toole has served on the Board of Directors of several banks and private
companies, including a three year term as advisory director on the Continental
Airlines, Inc. travel agency advisory board. He is currently a member of the
Kansas City Chapter of the Association for Corporate Growth and a founding
board
member of CrossPoint Bank in Overland Park, Kansas. Mr. O'Toole was also a
faculty member for three years at the Mid-South School of Banking in Memphis,
Tennessee where he taught bank valuations and a member of TEC for nine years.
Exhibit 99.2
Fairness Opinion provided by Index Capital, LLC dated November 5, 2007
PRIVATE & CONFIDENTIAL
November 5, 2007
Board of Directors
First Bancshares, Inc.
142 E. First Street
Mountain Grove, MO 65711-1742
Members of the Board:
You have asked us to render our opinion as to the fairness, from a
financial point of view, to holders of the outstanding shares of common stock
of First Bancshares, Inc. ("First Bancshares") of the cash consideration to be
paid to certain holders of First Bancshares's common stock in connection with
a proposed going-private transaction (the "Split Transaction"). The Split
Transaction is for the purpose of reducing the number of shareholders to below
300 (which will allow First Bancshares to terminate its registration with the
SEC), and does not constitute a sale of First Bancshares. First Bancshares's
principal asset is 100% of the common stock of First Home Savings Bank,
domiciled in Mountain Grove, Missouri. Our opinion is issued based on
financial information as of June 30, 2007 for First Home Savings Bank and
First Bancshares.
Index Capital, LLC, as part of its investment banking business, is
regularly engaged in performing financial analyses of financial institutions
and their securities in connection with mergers and acquisitions,
divestitures, corporate transactions, valuations, and for other purposes. We
have acted as financial advisor to First Bancshares in connection with the
redemption of shares to be conducted pursuant to the Split Transaction. Index
Capital provided First Bancshares with valuation calculations as of June 30,
2007. Nevertheless, Index Capital is independent of the parties to the Split
Transaction. We expect to receive compensation for our services in connection
with the Split Transaction, which is not contingent upon the opinion expressed
herein. First Bancshares also has agreed to reimburse our reasonable expenses
and to indemnify us against certain liabilities arising out of our engagement,
including liabilities under federal securities laws.
You have advised us that First Bancshares will engage in a reverse stock
split. In connection with such reverse stock split, and as permitted under
Missouri law, each record stockholder owning a fractional share following the
reverse stock split will receive payment from First Bancshares in an amount
equal to $22.50 for each pre-split share comprising the fractional
share of First Bancshares common stock owned by such holder (the "Redemption
Price"). Our approach to the assignment was to consider the following
factors:
* To review of the financial performance of First Bancshares and the
value of its stock;
* To review the current and historical market prices of comparable
financial institution holding companies;
* To review the investment characteristics of First Bancshares's common
stock;
* To make an evaluation of the impact of the Split Transaction on the
expected return to the current shareholders;
* To consider all other factors considered necessary to render this
opinion.
In the course of performing our assignment it was necessary for us to
review and analyze certain information pertaining to First Bancshares and
First Home Savings Bank. The following data was reviewed in connection with
the assignment:
i. First Bancshares's annual reports to stockholders and its
financial statements as filed on form 10-KSB for each of the
five fiscal years ended June 30, 2007;
ii. First Bancshares's Form 10-KSB for the years ended June 30,
2006 and June 30, 2007 and form 10QSB for the quarter ended
September 30, 2007;
iii. First Bancshares's federal, state and other tax returns as
filed with the various taxing authorities;
iv. Office of Thrift Supervision 2007 Thrift Financial Reports for
First Home Savings Bank;
v. First Bancshares's articles of incorporation and bylaws;
vi. Certain information provided by First Bancshares regarding the
historical trading activity of First Bancshares's common
stock;
vii. Certain reported financial terms of selected recent
transactions which we deemed to be relevant;
viii. Publicly available banking and thrift financial information
regarding First Bancshares;
ix. Discussions with First Bancshares's management regarding the
background of the Split Transaction and certain financial
forecasts relating to the business, earnings, cash flows,
assets and business prospects of First Bancshares; and
x. Other studies, analyses and investigations, particularly of
the banking and thrift industry, and such other information as
we deemed appropriate.
Index Capital reviewed portions of the Proxy Statement for the special
stockholder meeting of First Bancshares and discussed the same with management
and counsel for First Bancshares.
2
For purposes of this opinion, we have assumed and relied on, without
independent verification, the accuracy and completeness of the financial,
accounting, business, legal, tax, and other information discussed with or
furnished to us by First Bancshares and the materials otherwise made available
to us, including information from published sources, and we have not
independently verified such data. With respect to the financial information,
including any financial forecasts provided by First Bancshares's management
and information relating to certain strategic, financial and operational
benefits anticipated by First Bancshares's management from the Split
Transaction, we have assumed they reflect the best currently available
estimates and good faith judgment of the management of First Bancshares. We
express no view as to such forecasts or projected information. We have also
assumed that all government, regulatory and other consents necessary for the
consummation of the Split Transaction will be obtained without any adverse
affect on First Bancshares or the benefits of the Split Transaction expected
by First Bancshares's management. We express no opinion on matters of a
legal, regulatory, tax or accounting nature or the ability of the Split
Transaction to be consummated.
We have not made, obtained, or been provided with (i) any independent
appraisals or valuation of the assets or liabilities, and potential and/or
contingent liabilities of, First Bancshares or (ii) any independent analysis
or valuation of the rights of stockholders, creditors, or any other holders of
claims or rights against First Bancshares or any of its affiliates. We are
not experts in the evaluation of allowances for loan and lease losses and have
not independently verified such allowances, and we have relied on and assumed
that the aggregate allowances for loan and lease losses set forth on the
balance sheets of First Bancshares are adequate to cover losses and fully
comply with sound banking practices as of its respective date. We have
further relied on the assurances of the management of First Bancshares that
they are not aware of any facts that would make any information reviewed by us
inaccurate or misleading. No opinion is expressed as to whether any
alternative transaction might be more favorable to First Bancshares. We
express no opinion as to First Bancshares's future business, assets,
liabilities, operations or prospects. We were not requested to, and did not;
solicit any expressions of interest from any other parties with respect to the
actions contemplated in connection with the Split Transaction.
Our opinion is based on the market, economic and other relevant
considerations as they exist and have been evaluated by us on the date hereof.
We have assumed that there has been no material change in First Bancshares's
assets, financial condition, results of operations, business or prospects
since the date of the most recent financial statements made available to us.
This opinion does not address the underlying business decision of First
Bancshares to engage in the Split Transaction. It should be understood that
subsequent developments may affect this opinion, and we do not have any
obligation to revise or reaffirm this opinion. In addition, we express no
opinion or recommendation as to how the stockholders or creditors of or any
claimants against First Bancshares or any of its affiliates should view or
regard the Split Transaction. Our opinion is rendered in regard to the
Redemption Price and does not take into account or give effect to any
adjustment to the Redemption Price that may occur subsequent to the date
hereof. This opinion does not address the prices at which the common stock of
First
3
Bancshares has traded in the past or may trade after the date hereof or after
the consummation of the Split Transaction.
This opinion may not be disclosed, communicated, reproduced,
disseminated, quoted or referred to at any time (in whole or part), to any
third part or in any manner or for any purpose whatsoever without our prior
written consent, which consent shall not be unreasonably withheld, based upon
review by us of the content of any such public reference, which shall be
satisfactory to us in our reasonable judgment, and which review shall be
completed by us as soon as practicable, although this opinion may be included
in its entirety in the proxy statement of First Bancshares used to solicit
stockholder approval of the Split Transaction so long as any description of or
reference to us or this opinion and the related analysis in such filing is in
a form acceptable to us and our counsel. It is understood that this letter is
addressed and directed to the Board of Directors of First Bancshares in its
consideration of the Split Transaction and is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote with respect to the Split Transaction.
Subject to the foregoing, and based upon our experience as investment
bankers, our activities described above, and other matters as we deemed
relevant, we are of the opinion that as of the date hereof the Redemption
Price for the common stock to be paid in the Split Transaction is fair, from a
financial point of view, to the holders of First Bancshares's common stock.
Thank you for this opportunity to be of service to First Bancshares.
Sincerely yours,
INDEX CAPITAL, LLC
By /s/David L. O'Toole
-----------------------
David L. O'Toole
President
4
Exhibit 99.3
Valuation Opinion and Report provided
by Index Capital, LLC dated February 8, 2008
VALUATION OF THE BUSINESS ENTERPRISE
known as:
FIRST BANCSHARES, INC.
Mountain Grove, Missouri
as of
December 31, 2007
Appraiser:
David L. O'Toole
President & Managing Member
Index Capital, LLC
February 8, 2008
The undersigned certifies the following:
The home offices of First Bancshares, Inc. and its principal subsidiary
First Home Savings Bank, the subjects of this valuation, were visited by
the appraiser in conjunction with the assignment. Branch facilities
located in the communities of Mountain Grove, Ava, Gainsville, Theodosia,
Kissee Mills, Rockaway Beach and Springfield were also observed on the
same day;
The undersigned has no present or contemplated future interest in any of
the entities being valued or a personal interest or bias with respect to
the parties involved, or any officers, directors or shareholders;
The data contained herein by reference or otherwise was obtained from
sources believed to be reliable and all facts known to the undersigned
that have bearing on the value of the entities have been considered and
no facts of importance have been intentionally omitted;
The undersigned individual's compensation for this report is in no way
contingent upon the value estimates contained in this report, nor is it
contingent upon any event other than the delivery of this report; and
This appraisal report has been made in conformity with the Codes of
Ethics and Standards of Practice recommended by the major professional
appraisal and financial analysis organizations.
/s/David L. O'Toole
-----------------------
David L. O'Toole
President/Managing Member
CONFIDENTIAL OPINION LETTER
February 8, 2008
Board of Directors
First Bancshares, Inc.
142 E. First Street
Mountain Grove, MO 65711
Members of the Board:
At your request, we have prepared a valuation report of the voting common
stock in the business enterprise known as First Bancshares, Inc. and its
subsidiaries as of the close of business on December 31, 2007 (the valuation
date). It is our understanding that this valuation will be used in connection
with a going private transaction and may be invalid if used for any other
purpose or valuation date.
Based on the definitions, limiting conditions, financial data, information,
analyses, management representations, and related assumptions presented in the
report to follow, it is our opinion that as of December 31, 2007 the market
value of a majority voting common share in the business enterprise known as
First Bancshares, Inc. for the purpose set forth herein, may be reasonably
represented as:
$21.00 per share (rounded)
(Based on 1,550,815 shares outstanding)
A copy of the report, along with the source data from which it was prepared,
will be retained in our files for a period of three years and is available for
your review upon request.
Very truly yours,
/s/Index Capital, LLC
Index Capital, LLC
TABLE OF CONTENTS
-----------------
Title Page
Certification
Opinion Letter
Table of Contents
Page No.
--------
INTRODUCTION
------------
Purpose of the Valuation 1
Definitions 1
Fair Market Value 1
Business Enterprise Value 1
Majority Interest 1
Control Premium 1
Minority Interest 1
Marketability Discount 1
Information and Data 2
Estimated of Market Value 3
Valuation Fee 3
Sale or Purchase 3
Valuation Date 3
Legal or Specialized Expertise 3
Confidentiality/Advertising 4
Hazardous Substances 4
Unexpected Conditions 4
Court Testimony 5
Independence 5
Format of Report 5
DESCRIPTION & FINANCIAL SUMMARY
-------------------------------
First Bancshares, Inc. 6
First Home Savings Bank 9
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
Overview 20
VALUATION SUMMARY
-----------------
Overview 24
Recent Stock Transactions 24
Valuation Date 25
Valuation Approaches 25
Valuation Methods Considered 25
Valuation Methodology 26
Valuation Issues 26
Tangible Book Value Method 28
Results 28
Guideline Company Method 29
Overview 29
Selection of Publicly Traded Thrifts 30
Selection of Market Multiples 30
Results 31
TABLE OF CONTENTS
-----------------
Merger & Acquisitions Method 33
Result 34
Discounted Future Returns Approach 35
Selection of Benefits to be Discounted 35
Selection of a Discount Rate 35
Forecast 37
Results 38
Valuation Summary 40
Valuation Conclusion 40
ADDENDA
-------
Exhibit I Historical Balance Sheets and Income Statements - First
Bancshares, Inc.
Exhibit II Descriptions - Selected Publicly Traded Holding Companies
Exhibit III Company Profile/Appraiser Qualifications
I N T R O D U C T I O N
INTRODUCTION
------------
The valuation presented in this report was made in order to estimate the
market value of the business enterprise known as First Bancshares, Inc.
(hereinafter also referred to as ("FBSI or the Company") and its thrift
subsidiary First Home Savings Bank (hereinafter also referred to as the
"Bank") as of December 31, 2007 (the valuation date). It is our understanding
that the opinion of market value expressed in this report will serve as a
basis for a going private transaction and may be invalid if used for any other
purpose.
Definitions
For the purpose of this valuation, the following definitions are relevant:
Fair Market Value - The price at which an asset would change hands
between a willing buyer and a willing seller when the former is not under
any compulsion to buy and the latter is not under any compulsion to sell,
and both parties are able, as well as willing to trade and are well
informed about the asset and the market for such asset.
Business Enterprise Value - A business enterprise is considered to be a
combination of all tangible and intangible elements associated with a
going concern. The market value of a business enterprise is expressed
net of all stated liabilities. Thus, the term is synonymous with the
market value of the stockholders' equity on a majority/control basis.
Majority Interest - Any number of shares owned, either directly or
indirectly or beneficially, that when exercised, can influence the
selection of the entity's management group, the direction of existing or
future operations (sale, divestiture, or acquisition) and the declaration
of dividends, etc. Generally, this interest constitutes more than a 50%
ownership interest.
Control Premium - The additional value inherent in a majority/control
interest, as contrasted to a minority interest that reflects its power of
control.
Minority Interest - Any number of shares that is something less than a
controlling interest in a company and does not represent a swing block of
shares. Generally, any number of shares less than 50% of the total
represents minority shares, by definition.
Marketability Discount - A discount from the concluded value of the
equity interest to recognize the absence of liquidity in the instance of
a minority interest, or the flotation costs that would be incurred to
sell the ongoing business enterprise by a majority/control group.
1
INTRODUCTION
------------
The buyer, under fair market value, is a "financial" and not a "strategic"
buyer. This excludes the buyer who, because of other business activities,
brings some "value-adding" benefits which will enhance the company being
valued and/or the buyer's other activities.
Information and Data
In the preparation of this valuation, management: (i) provided information
concerning the operational and financial performance of FBSI, such as audited
and internally prepared financial statements, SEC Form 10-KSB, Consolidated
Reports of Income, OTS 2007 Thrift Financial Reports and related supplementary
schedules, corporate documents, and internally prepared schedules as
requested; and (ii) discussed the aforementioned documents and addressed
numerous questions posed during our investigation relating to the present
condition and future direction of the organization. Moreover, other data
contained herein by reference or otherwise was obtained from sources believed
to be reliable. Inasmuch as the above data and information were obtained from
management, or other reputable sources that were represented to Index Capital,
LLC as being knowledgeable and truthful, we have accepted this information as
being accurate and reliable; and therefore, we have not independently verified
the information provided, nor have we prepared an independent review or other
analysis of the quality of FBSI's asset portfolio. To the extent that such
data or client supplied information may be found at a later date to have been
inaccurate or misrepresented, we accept: (i) no liability for the
consequences such inaccuracy or misrepresentation may have on our value
conclusion expressed herein or the utilization of our conclusion in any
actions taken by management, boards of directors, or stockholders, nor (ii)
any responsibility to update any valuation conclusions to reflect the impact
that more accurate data may, or may not have, on our opinion. It should be
noted that during the course of this engagement no matters came to our
attention, which would cause us to doubt the accuracy of the information
provided.
2
INTRODUCTION
------------
Estimate of Market Value
The estimate of market value presented herein is the appraiser's opinion based
on careful consideration of the information obtained during the investigation.
Our conclusions are based on the implicit assumption that management will
continue to maintain the character and integrity of FBSI and the Bank, or
collectively the affiliated entities, in a manner consistent with their
representations. Fair market value is not intended to be derived from a pro
forma sale of the Company.
Valuation Fee
The fee for this valuation assignment is not contingent upon the value
expressed herein or any other event other than the delivery of this report.
Sale or Purchase
All opinions of market value are presented as Index Capital, LLC's considered
opinion based on the facts and data appearing in the report. We assume no
responsibility for changes in value, market conditions or the ability of the
owners to locate a purchaser at the value expressed herein.
Valuation Date
The valuation date to which the conclusions and opinions expressed in this
report apply is December 31, 2007, as set forth in the opinion letter. The
dollar amount of any value reported is based on the purchasing power of the
U.S. dollar and certain prevailing conditions in the capital and securities
markets as of the valuation date. In this regard, we assume no responsibility
for economic, financial, or physical factors occurring subsequent to the
valuation date that may or may not affect the opinions reported herein.
Legal, Fairness or Specialized Expertise
No opinion is intended to be expressed for matters, which require legal or
specialized expertise, investigation, or knowledge beyond that customarily
employed by appraisers. This report does not address issues of tax law,
regulatory agency compliance, or any other such matters unless specifically
identified in the body of the report.
3
INTRODUCTION
------------
Confidentiality/Advertising
This report, supporting notes, and analyses are confidential. Neither all nor
any part of the contents of this appraisal shall be copied or disclosed to any
third party, or conveyed to the public, either orally or in writing, through
advertising, public relations, news release, sales literature, or in any other
manner without the prior written consent and approval of authorized
representatives from First Bancshares, Inc. and Index Capital, LLC.
Hazardous Substances
Hazardous substances, if present within a facility, can introduce an actual or
potential liability that will adversely affect the marketability and value of
the business enterprise. Such liability may be in the form of immediate
recognition of existing environmental conditions. Future liability could stem
from the release of various contaminants, such as asbestos fibers, or toxic
vapors from urea formaldehyde foam insulation, or through aging or building
renovations, and/or construction materials utilized by FBSI to modernize its
facilities. In the development of our valuation opinion, no consideration has
been given to such potential existing or future liability or its impact on
value. The professional staff of Index Capital, LLC is not qualified to
perform such an investigation to determine the possible presence of toxic
materials requiring either immediate or future remediation.
Unexpected Conditions
We assume there are no hidden or unexpected conditions of the property or
subject Bank and Company, not specifically disclosed by management that would
adversely affect the value of FBSI and its subsidiaries.
4
INTRODUCTION
------------
Court Testimony
Testimony or attendance in court or any other administrative or judicial
proceeding by reason of this valuation shall not be required unless
arrangements have previously been made with Index Capital, LLC.
Independence
Neither the appraiser involved in this engagement nor the firm Index Capital,
LLC has either a present or contemplated future investment in FBSI or its
subsidiaries.
Format of the Report
This report will present: (i) description and financial summary for the
Company and the Bank; (ii) a brief economic outlook for the economy in general
and the thrift industry in particular; and (iii) a discussion of the valuation
methods employed in the development of the market value estimates.
The appraisal included discussions with President/CEO - Dan Katzfey, CFO - Ron
Walters, SVP Operations - Adrian Rushing and a review of material provided and
questions posed during our investigation. Additionally, we prepared an
analysis of historical performance, current operations, and future prospects
as were deemed appropriate under the circumstances.
5
D E S C R I P T I O N
and
F I N A N C I A L S U M M A R Y
FIRST BANCSHARES, INC.
----------------------
Background
First Bancshares, Inc. a Missouri corporation is a registered unitary savings
and loan holding company. As of the valuation date, FBSI owned 100 percent of
the outstanding common stock of First Home Savings Bank and its subsidiaries,
and 100 percent of the stock in SCMG, Inc. FBSI is subject to supervision by
the Board of Governors of the Federal Reserve System and was formed in
September 1993.
Our review of the financial statements reveals that the Company's value is
primarily dependent upon the activities of its thrift subsidiary First Home
Savings Bank therefore the majority of the detailed information set forth in
this report applies to FBSI and First Home Savings Bank.
Ownership
FBSI is a public company traded on the NASDAQ stock exchange. Approximately
1,402 shares on average have traded during the 52 week period prior to the
valuation. The price of those trades has ranged from a high of $17.50 per
share to a low of $15.15 per share. The trading price as of the valuation
date was $16.97 resulting in market capitalization of $26.3 million. For
additional information on trading activity see the Valuation Section of this
report.
Litigation
The Company and its subsidiaries are involved in several litigation matters
however, according to management they are not material and the organization
has adequate insurance in the event of a negative outcome.
Unconsolidated Subsidiaries
The Company and Bank have no unconsolidated subsidiaries that have a material
impact on value or require further consideration in this report.
6
FIRST BANCSHARES, INC.
----------------------
Company Financial Statements
The follow table presents a summary parent company only balance sheet for the
FBSI as of the valuation date.
BALANCE SHEET - December 31, 2007
Assets:
Cash & cash equivalents $ 63,826
Securities available for sale 248,000
Investment in subsidiaries 25,964,589
Net property and equipment 1,543,119
Deferred income tax benefit 81,893
Other assets 26,873
-----------
Total $27,928,300
===========
Liabilities & Equity:
Notes Payable $ 642,397
Other Liabilities 47,532
Stockholders' Equity 27,238,371
-----------
Total $27,928,300
===========
The Company accounts for its investments in subsidiaries under the equity
method of accounting for this statement. Property and equipment is presented
net of accumulated depreciation. Historically, the Company has been involved
in the ownership of real estate for investment purposes. According to
management, they have been gradually divesting of these investments and will
continue this program. Also according to management, the fair market value of
the investment real estate is somewhat higher than the carrying value but not
significant enough to affect the organization's overall fair value. The
December 31, 2007 balance sheet included cash $53,826, certificates of deposit
$10,000, common stocks in other financial institutions $248,000 and other
assets totaling $108,766.
The Company's liabilities as of December 31, 2007 consist of notes payable
related to the owned real estate and other liabilities totaling $642,397.
Total equity capital was $27,238,371 resulting in book value per share of
$17.56, based on 1,550,815 shares outstanding. The Company's debt-to-equity
ratio as of
7
FIRST BANCSHARES, INC.
----------------------
December 31, 2007 was approximately 2.4 percent and no dividends were paid to
shareholders in the fiscal year beginning July 1, 2007. The Company
repurchased 1,665 shares of its stock in FY 2007 for $27,454 under a stock
repurchase plan that was later terminated.
Summary
First Bancshares, Inc., the subject of this valuation, has consolidated assets
of $243 million, total customer deposits of $191 million and more than $27
million of capital. The Company is under no restrictive regulatory agreements
however its primary subsidiary First Home Savings Bank is under a Memorandum
of Understanding with the Office of Thrift Supervision. The Memorandum and
the operating performance of the Bank are discussed in the following section
of this report. The financial condition of the holding company appears strong
and its future outlook is positive.
8
FIRST HOME SAVINGS BANK
-----------------------
General
First Home Savings Bank, a Missouri-chartered, federally insured stock savings
and loan association, is engaged in thrift banking in South Central Missouri.
It serves its clientele from the main location at 142 E. First Street,
Mountain Grove, Missouri and through eleven full-service branch offices and
one loan production office in eight counties. Following is a market share and
demographic profile illustration using information from the most recent dates
that comparative deposit and population data is publicly available:
First Home Savings Bank
Demographic Profile
Market: County
Missouri (MO)
Company Deposit Percent of Percent of Total Population
Number Deposits Market State National Population Change
Market of in Market Share Franchise Franchise 2007 2000-2007
County Rank Branches ($000) (%) (%) (%) (Actual) (%)
Wright 1 1 62,235.00 24.15 34.67 34.67 18,104.00 0.83
Douglas 3 1 30,278.00 21.03 16.87 16.87 13,668.00 4.46
Webster 6 1 23,461.00 5.64 13.07 13.07 35,097.00 13.05
Ozark 2 2 23,264.00 20.23 12.96 12.96 9,723.00 1.90
Stone 6 2 21,437.00 6.48 11.94 11.94 31,265.00 9.10
Taney 13 2 11,135.00 1.67 6.20 6.20 45,153.00 13.73
Christian 13 1 7,680.00 0.99 4.28 4.28 72,466.00 33.49
Greene 31 1 12.00 0.00 0.01 0.01 259,829.00 8.09
MO Totals 11 179,502.00 100.00 100.00 485,305.00
Weighted Average:
Missouri Franchise 6.36
Aggregate: Entire
State of Missouri 5,911,718.00 5.66
Aggregate: National 306,348,230.00 8.86
Projected Median HH
Population HH Income
Change Income Change
2007-2012 2007 2000-2007
(%) ($) (%)
County
Wright 0.34 29,819.00 21.01
Douglas 2.92 30,581.00 18.76
Webster 9.03 38,905.00 21.20
Ozark 1.30 30,730.00 19.06
Stone 5.69 39,384.00 20.87
Taney 9.53 38,400.00 24.24
Christian 23.18 48,040.00 24.99
Greene 5.67 42,545.00 24.55
MO Totals
Weighted Average:
Missouri Franchise 4.22 33,708.00 20.76
Aggregate: Entire
State of Missouri 4.09 47,568.00 25.16
Aggregate: National 6.26 53,154.00 26.06
Source: SNL Financial
FHSB provides a full range of community banking services as follows: (i)
accepting demand, savings and time deposits; (ii) making residential mortgage
loans, commercial real estate loans, land loans, second mortgage loans,
consumer loans; and commercial business loans; (iii) issuing cashiers' checks
and money orders; (iv) selling travelers' checks; and (v) providing
bank-by-mail, night depository, ATM, safe deposit boxes and other customary
community banking services. FHSB does not have trust powers. It is regulated
by the Missouri Division of Finance and the Office of Thrift Supervision. Its
deposits are insured by the Federal Deposit Insurance Corporation.
Employees
As of December 31, 2007, FHSB employed on a full-time equivalent basis 90
persons. None of these employees are represented by a union or covered under
a collective bargaining agreement and employee relations are considered to be
excellent.
9
FIRST HOME SAVINGS BANK
-----------------------
Loan Portfolio
As of December 31, 2007, FHSB's loan portfolio was structured as presented in
the following table:
FIRST HOME SAVINGS BANK LOAN PORTFOLIO
Amount Percent
Mortgage Loans (000's) of Total
-------------- ------- --------
Construction Loans on:
1-4 Family Dwelling Units $ 3,773 2.3%
Multifamily Dwelling Units 316 0.2%
Nonresidential Property 6,144 3.8%
Permanent Mortgages on:
1-4 Family Dwelling Units 78,483 48.3%
Multifamily Dwelling Units 231 0.1%
Nonresidential Property (Except Land) 42,778 26.3%
Land 10,181 6.3%
-------- -----
Subtotal 141,906 87.3%
-------- -----
Non-Mortgage Loans
------------------
Commercial and Industrial 9,182 5.7%
Consumer 11,371 7.0%
-------- -----
Subtotal 20,553 12.7%
-------- -----
Total (Gross Loans) $162,459 100.0%
======== ======
Source: 2007 Thrift Financial Report Schedule SC - Consolidated Statement of
Condition
Note: Percentages include rounding.
As can be seen from the table above, 87.3 percent of the Bank's loans were
mortgage loans and 12.7 percent of the loans were non-mortgage loans.
Residential loans (1-4 Family, Construction and Permanent) make up the bulk of
the mortgage loan portfolio at 50.6 percent, with Nonresidential Property
(Construction and Permanent) at 26.3 percent and land at 6.3 percent.
Commercial and Industrial and Consumer loans accounted for 5.7 percent and 7.0
percent of total loans, respectively. FHSB's loan concentration is in the
residential real state sector as you would expect for a federally regulated
savings and loan.
10
FIRST HOME SAVINGS BANK
-----------------------
On the valuation date, the allowance for loan losses totaled $2,200,000
(rounded), 1.35 percent of gross loans. The reserve is considered adequate by
management and supported by an internal loan loss analysis.
Markets and Competition
The following table presents the top ranked financial institutions in each
Missouri County where FHSB has full service branch offices.
First Home Savings Bank
Deposit Market Share
Wright, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 First Home Savings Bank (MO) Thrift 1 59,142 20.55 62,235 24.15
2 4 Sun Financial Corporation (MO) Bank 2 46,673 16.22 28,220 10.95
3 2 Town & Country Bancshares Inc (MO) Bank 1 34,792 12.09 32,468 12.60
4 3 Bk of Mansfield Hldg Co. (MO) Bank 2 31,957 11.11 28,946 11.23
5 7 Ozarks Heritage Financial Grp (MO) Bank 1 28,761 10.00 25,406 9.86
6 5 Ozark Bancorp Inc. (MO) Thrift 2 27,707 9.63 26,473 10.27
7 6 Bank of America Corp. (NC) Bank 1 24,456 8.50 26,026 10.10
8 8 U.S. Bancorp (MN) Bank 1 22,575 7.85 24,200 9.39
9 9 Cmnty Bcshs of West Plains Inc (MO) Bank 1 11,684 4.06 3,771 1.46
Total For Institutions In Market 12 287,747 257,745
Douglas, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Town & Country Bancshares Inc (MO) Bank 2 50,130 34.53 55,557 38.59
2 2 Century Bancshares Inc. (MO) Bank 1 37,225 25.64 36,035 25.03
3 3 First Home Savings Bank (MO) Thrift 1 32,482 22.37 30,278 21.03
4 4 Great Southern Bancorp Inc. (MO) Bank 1 25,341 17.46 22,114 15.36
Total For Institutions In Market 5 145,178 143,984
Ozark, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Century Bancshares Inc. (MO) Bank 3 99,042 79.46 91,709 79.77
2 2 First Home Savings Bank (MO) Thrift 2 25,607 20.54 23,264 20.23
Total For Institutions In Market 5 124,649 114,973
11
FIRST HOME SAVINGS BANK
-----------------------
Webster, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Marshfield Investment Co. (MO) Bank 2 104,098 23.70 103,008 24.77
2 2 Cottonrudy Investment Company (MO) Bank 2 96,281 21.92 94,958 22.83
3 3 Southern MO Bancshares Inc. (MO) Bank 2 71,525 16.28 65,621 15.78
4 4 CBR Bancshares Corp (MO) Bank 1 46,203 10.52 41,940 10.09
5 5 Central Bancompany Inc. (MO) Bank 1 29,304 6.67 28,245 6.79
6 7 Liberty Bancshares Inc (MO) Bank 1 28,036 6.38 22,562 5.43
7 6 First Home Savings Bank (MO) Thrift 1 23,152 5.27 23,461 5.64
8 8 Peoples Service Company (MO) Bank 2 20,782 4.73 21,483 5.17
9 9 U.S. Bancorp (MN) Bank 1 12,793 2.91 8,221 1.98
10 10 Bk of Mansfield Hldg Co. (MO) Bank 1 7,042 1.60 6,346 1.53
Total For Institutions In Market 14 439,216 415,845
Stone, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Marshfield Investment Co. (MO) Bank 3 115,835 33.00 110,798 33.49
2 2 Stone Cnty Natl Bkshrs Inc. (MO) Bank 5 80,559 22.95 74,755 22.59
3 3 U.S. Bancorp (MN) Bank 1 36,722 10.46 34,556 10.44
4 4 Bank of America Corp. (NC) Bank 1 26,977 7.69 28,879 8.73
5 6 First Home Savings Bank (MO) Thrift 2 22,107 6.30 21,437 6.48
6 7 Central Bancompany Inc. (MO) Bank 1 20,442 5.82 21,098 6.38
7 5 Peoples Service Company (MO) Bank 1 18,762 5.35 21,805 6.59
8 8 Great Southern Bancorp Inc. (MO) Bank 2 18,508 5.27 17,532 5.30
9 9 Table Rock Bancshares Corp (MO) Bank 1 11,105 3.16 0 0.00
Total For Institutions In Market 17 351,017 330,860
Taney, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Central Bancompany Inc. (MO) Bank 5 210,964 28.55 191,076 28.71
2 2 Branson Bancshares Inc (MO) Bank 3 101,051 13.68 84,571 12.71
3 3 Bank of America Corp. (NC) Bank 2 64,704 8.76 66,471 9.99
4 5 Peoples Service Company (MO) Bank 2 62,039 8.40 59,355 8.92
5 4 M & L Holding Company (MO) Bank 3 61,787 8.36 59,542 8.95
6 6 Regions Financial Corp. (AL) Bank 3 55,260 7.48 52,871 7.94
7 7 Great Southern Bancorp Inc. (MO) Bank 2 52,857 7.15 47,374 7.12
8 12 Liberty Bancshares Inc (MO) Bank 1 28,081 3.80 13,959 2.10
9 8 U.S. Bancorp (MN) Bank 2 22,063 2.99 23,119 3.47
10 9 Marshfield Investment Co. (MO) Bank 1 18,997 2.57 17,186 2.58
13 13 First Home Savings Bank (MO) Thrift 2 12,856 1.74 11,135 1.67
Total For Institutions In Market 30 738,924 665,546
12
FIRST HOME SAVINGS BANK
-----------------------
Christian, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 2 Peoples Service Company (MO) Bank 7 161,785 18.93 139,740 18.07
2 1 Ozark Bank (MO) Bank 4 155,091 18.15 164,161 21.23
3 3 Central Bancompany Inc. (MO) Bank 4 139,154 16.28 123,342 15.95
4 4 Southwest Missouri Bcshs Inc (MO) Bank 1 64,627 7.56 62,328 8.06
5 6 Great Southern Bancorp Inc. (MO) Bank 4 59,578 6.97 51,605 6.67
6 5 Commerce Bancshares Inc. (MO) Bank 2 56,473 6.61 53,194 6.88
7 7 Ozarks Heritage Financial Grp (MO) Bank 1 40,986 4.80 38,899 5.03
8 8 Regions Financial Corp. (AL) Bank 2 33,521 3.92 32,945 4.26
9 11 Liberty Bancshares Inc (MO) Bank 1 31,336 3.67 21,647 2.80
10 10 Marshfield Investment Co. (MO) Bank 1 29,388 3.44 26,240 3.39
14 13 First Home Savings Bank (MO) Thrift 1 8,898 1.04 7,680 0.99
Total For Institutions In Market 33 854,587 773,292
Greene, MO
2007 2007 2006 2006
2007 Total Total Total Total
Number Deposits Market Deposits Market
2007 2006 of in Share in Share
Rank Rank Institution (ST) Type Branches Market (%) Market (%)
1 1 Great Southern Bancorp Inc. (MO) Bank 19 1,425,059 24.56 1,347,454 23.90
2 4 Commerce Bancshares Inc. (MO) Bank 8 603,556 10.40 575,059 10.20
3 3 BancorpSouth Inc. (MS) Bank 6 574,973 9.91 580,209 10.29
4 5 Central Bancompany Inc. (MO) Bank 9 453,966 7.82 428,063 7.59
5 2 Bank of America Corp. (NC) Bank 7 422,841 7.29 614,748 10.91
6 6 Guaranty Federal Bcshs Inc. (MO) Bank 6 375,807 6.48 305,156 5.41
7 7 Liberty Bancshares Inc (MO) Bank 5 281,217 4.85 263,692 4.68
8 8 Citizens National Bncp Inc. (MO) Bank 4 253,605 4.37 226,582 4.02
9 9 U.S. Bancorp (MN) Bank 9 227,665 3.92 225,511 4.00
10 10 Mid-Missouri Bancshares Inc. (MO) Bank 3 205,979 3.55 146,322 2.60
31 31 First Home Savings Bank (MO) Thrift 1 6,035 0.10 12 0.00
Total For Institutions In Market 121 5,801,926 5,636,779
Note: Non-Retail Branches not included
Source: SNL Financial
In view of the data presented, FHSB's markets can best be described as
moderately competitive with FHSB's market share ranging from a low of 0.10
percent in Greene County to a high of 22.37 percent in Douglas County. There
are clearly opportunities for deposit growth available in every market served
by FHSB. The data used for this comparison was the most recent comparative
deposit data available from sources that make the information available to the
public.
Regulatory Affairs
The following comments were extracted from the 2007 Securities and Exchange
Commission Form 10-KSB (Draft Copy):
13
FIRST HOME SAVINGS BANK
-----------------------
"During the quarter ended December 31, 2006, the Savings Bank entered
into a memorandum of understanding ("MOU") with the Office of Thrift
Supervision (the "OTS"). The MOU resulted from issues noted during the
examination of the Savings Bank conducted by the OTS, the report on
which was dated in July 2006, and included deficiencies in the lending
policies and procedures, recent operating losses, and the need to
revise both the business plan and the budget to enhance profitability.
The Board of Directors and the officers of the Savings Bank established
a schedule, during which the issues noted in the MOU, with one
exception, have been addressed and resolved, in a manner consistent
with the requirements set forth by the OTS. The remaining item is the
development of a three-year business plan, for which an extension to
October 31, 2007 was requested and granted by the OTS. During July
2007, the OTS performed an on-site review of the progress made on
resolving the issues discussed in the MOU".
Our discussions with current management indicated that the problems that gave
rise to the MOU were created by previous management personnel. As of the date
of the valuation, the weaknesses in lending policies, practices and procedures
have substantially been corrected. Operating performance has improved and the
future outlook for the institution is good.
Financial Review
On the following pages we have performed a review of the financial performance
of the Bank and compared its performance with its peers. The information and
data used for the peer group comparison, balance sheet analysis and income
statement analysis consisted of: (1) First Bancshares, Inc. 2007 Annual
Report; (2) First Bancshares, Inc. SEC Form 10-KSB for 2007; (3) Office of
Thrift Supervision 2007 Thrift Financial Report and related supplementary
schedules for the 5 years ended in June 30, 2007 and six months ended December
31, 2007; (4) SNL Financial's Datasource; and (5) other internal financial
records.
Exhibit I in the Addenda to this report contains historical balance sheets,
historical income statements and supplementary performance data that was
compiled from the aforementioned records and used for the following
discussion.
14
FIRST HOME SAVINGS BANK
-----------------------
Peer Group Comparison
The following table presents a peer group analysis for FBSI using two
different peer groups. In the first comparison, ten publicly-owned thrifts
with total assets similar to FBSI and from the Midwest Region of the United
States were chosen and in the second comparison, we used the six
publicly-owned thrifts that will be utilized in the Market Approach/Guideline
Valuation Method later in the Valuation Section of this report. The peer
group information is provided by SNL Financial and may not match entirely the
Company's audited financial statements due to report timing, report amendments
or differences in average balance calculations. The information is however
deemed reliable for this comparison and provides an accurate view of trends
and performance results.
First Bancshares, Inc.
Peer Analysis
Similar Sized Public Company Thrifts
Effi- NCO/
Total Interest ciency Equity NPAs/ AVG Reserves
Period Assets ROAA ROAE Margin Ratio /Assets Assets Loans Loan
Company Name State Ticker Ended ($000) (%) (%) (%) (%) (%) (%) (%) (%)
----- ------ ------ ------ ---- ---- ------- ------- ------- ------- ------ -------
First Franklin
Corporation OH FFHS 9/30/2007 320,330 0.28 3.51 1.99 89.17 8.01 1.31 0.06 0.47
Cheviot
Financial Corp. OH CHEV 12/31/2007 319,060 0.29 1.32 2.77 82.80 21.29 0.37 0.14 0.20
First BancTrust
Corporation IL FBTC 9/30/2007 302,858 0.40 4.61 2.86 81.41 8.73 0.72 0.47 1.01
Jacksonville
Bancorp, Inc. IL JXSB 12/31/2007 288,500 0.23 2.87 2.54 89.88 7.83 0.40 0.02 1.03
Kentucky First
Federal
Bancorp KY KFFB 12/31/2007 266,111 0.30 1.31 2.10 75.39 22.85 0.27 0.00 0.43
First Federal of
N. Michigan
Bancorp MI FFNM 9/30/2007 262,524 -0.04 -1.16 3.11 92.24 12.89 1.56 0.11 1.05
Central Federal
Corporation OH CFBK 9/30/2007 271,258 -0.09 -0.80 3.17 90.51 9.98 0.11 0.00 1.15
Blue River
Bancshares,
Inc. IN BRBI 9/30/2007 241,113 0.52 6.74 3.99 78.37 7.66 2.05 0.45 1.02
Park Bancorp,
Inc. IL PFED 9/30/2007 219,469 0.12 0.88 2.71 103.61 13.92 1.46 0.00 0.40
FFD Financial
Corporation OH FFDF 12/31/2007 176,241 0.90 8.61 4.06 61.84 10.44 0.41 0.07 0.60
Average: 266,746 0.29 2.79 2.93 84.52 12.36 0.87 0.13 0.74
Median: 268,685 0.28 2.10 2.82 85.99 10.21 0.57 0.07 0.81
First
Bancshares,
Inc. MO FBSI 12/31/2007 243,446 0.21 1.91 2.90 91.19 11.19 1.36 0.14 1.37
Thrifts Used in Market Valuation Approach
NASB Financial
Inc. MO NASB 9/30/2007 1,506,483 1.00 9.98 2.85 57.08 9.92 0.65 0.11 0.61
Pulaski
Financial
Corp. MO PULB 12/31/2007 1,250,907 0.84 11.17 2.97 57.68 6.68 0.89 0.14 0.99
First Federal
Bancshares of
AR AR FFBH 12/31/2007 791,978 0.32 3.53 2.98 72.37 9.30 5.23 0.21 0.86
Liberty Bancorp
Inc. MO LBCP 12/31/2007 339,112 0.60 3.89 3.47 67.48 14.07 1.53 (0.12) 1.28
Lexington B&L
Financial
Corp. MO LXMO 9/30/2007 135,204 0.71 6.31 3.05 66.99 11.50 0.73 0.06 1.22
CCSB Financial
Corp. MO CCFC 12/31/2007 95,864 0.05 0.36 3.16 104.48 13.67 0.42 0.00 0.55
Average: 686,591 0.59 5.87 3.08 71.01 10.86 1.58 0.07 0.92
Median: 565,545 0.66 5.10 3.02 67.24 10.71 0.81 0.09 0.93
First
Bancshares
Inc. MO FBSI 12/31/2007 243,446 0.21 1.91 2.99 1.19 11.19 1.36 0.14 1.37
In the first table, FBSI compares considerably below the regional thrifts of
similar size in its return on average assets (0.21) versus a median of (0.28),
return on average equity (1.91) versus a median of (2.10). FBSI's net
interest margin of (2.90) versus a median of (2.82) for the peer group
indicates a favorable comparison. The most dramatic difference in this
comparison involves the efficiency ratios (91.19 for FBSI vs. 85.99 for the
peer group). Both FBSI and the peer group median efficiency ratios are higher
than they should be contributing to
15
FIRST HOME SAVINGS BANK
-----------------------
sub-par operating performance for the peers as well as FBSI. Non-performing
assets, net charge-offs to average assets and the reserve for loan losses to
average loans are all higher than the peer group. As discussed previously,
FBSI is coming off two years of performance problems caused by poor lending
policies and practices. Consequently, it is not surprising that they compare
unfavorably with other institutions that have not experienced the same issues.
An even greater differential results with the institutions selected in the
second part of the table. FBSI is dramatically below the peer group median
for return on average assets (0.66) and return on average equity (5.10). Net
interest margin (3.02) for the peer group is slightly higher than that
reported for FBSI. In each comparison, the peer group institutions are very
similar in capitalization with FBSI. In the Valuation Section we provide
additional peer group analysis with the second group of institutions.
Balance Sheet Analysis
As of December 31, 2007, FBSI's total consolidated assets were approximately
$243 million which represents an increase of 1.75 percent from June 30, 2007.
The increase is due primarily to additional interest bearing deposits. From
our discussions with management they attribute the majority of this change to
a new high interest money market savings deposit account that the institution
began offering during the year. Repurchase agreements aggregating $1.1
million were down from the June 30 levels.
The additional deposits were used to fund an increase in investment securities
of $1 million combined with a reduction in loans by $2 million in the same
period. As of December 31, 2007, loans to total assets were approximately 66
percent compared to 67 percent at June 30, 2007. The loans to deposits ratio
ended the period at 84 percent indicating the institution continues to have
adequate loan capacity for future loan growth when quality lending
opportunities arise.
Capital adequacy provides a basic measure of the financial strength of a
financial institution. Financial stability is often evaluated by a review of
capital ratios.
16
FIRST HOME SAVINGS BANK
-----------------------
FBSI's common equity capital to asset ratio as of December 31, 2007 was 11.19
percent and the Tier 1 risk-weighted capital was 15.20 percent. Both of these
ratios are well above minimum regulatory requirements and levels required to
be determined as "Well-Capitalized" under prompt corrective action provisions.
FBSI has a modest level of intangibles on its balance sheet that when deducted
from common equity does not result in a material change in tangible capital
ratios.
The fair value of FBSI's investment securities portfolio as of December 31,
2007 is $42,819,000. Other liquid assets reported by the Company at December
31, 2007 consist of Federal Home Loan Bank stock $1,613,000 and cash and cash
equivalents of $22,808,000. Cash value of bank-owned life insurance policies
as of December 31, 2007 totaled $6,013,000.
Although improvement is reported by management and noted in operating
performance, asset quality continues a concern of management. As noted in the
peer group comparisons, non-performing loans remain somewhat higher than
peers. Management indicated that the problem loans have been identified and
action plans are in place to monitor and ensure improvement in this group of
assets.
Income Statement Analysis
Profitability ratios provide a measure of how effectively FBSI has managed its
assets and liabilities. The return on average assets (ROAA) is frequently
used as the leading performance ratio in the financial institutions industry.
The table below presents the average assets and net income data along with the
ROAA ratios reported for the last five fiscal years ending June 30 and the
last twelve month period ending December 31, 2007.
NET INCOME AVERAGE ASSETS ROAA
YEAR ($000's) ($000's) (%)
------ ---------- -------------- -----
D2007 $ 511 $243,333 0.21
J2007 272 235,122 0.12
J2006 (173) 238,882 (0.07)
J2005 1,317 257,891 0.51
J2004 2,347 270,396 0.87
J2003 2,244 264,443 0.85
17
FIRST HOME SAVINGS BANK
-----------------------
FBSI's earnings are considerably below peer group averages for the LTM year
ended December 31, 2007 as indicated in the peer group comparisons. The
institution lost money in FY 2006. The reasons for this condition have been
discussed previously in this report and management believes that with the
changes they have made, earnings are improving again. Historical returns on
equity generally reflect the same patterns and progress. Net interest margins
have steadily declined for the past three fiscal years reflecting the overall
interest rate environment during the periods measured. Presently, FBSI's net
interest margins are in line with peer group averages and should continue to
improve with additional loan growth. Non-interest income is within expected
ranges however non-interest expense compared to average assets has increased
significantly and is the major contributor to the unsatisfactory efficiency
ratios discussed earlier. Employee turnover, professional fees associated
with regulatory issues and start-up expenses for the Springfield branch office
has been excessive.
The provision for loan losses decreased significantly in fiscal 2007 to
$426,000 from a high of $2,333,000 in 2005 followed by $1,520,000 in 2006. As
discussed previously management indicates that the problem loans have been
identified and either charged-off or sufficiently reserved for at this time.
Summary
FBSI is a meaningful and trusted institution in the communities it serves.
Earnings have suffered for more than two years from bad lending practices and
policies. After significant management restructuring, introduction of certain
new products and services and compliance with a regulatory directives, it
appears that the institution is again headed for better times. FBSI's
position from a financial performance perspective is still out of line with
other similar institutions but improving. It is reasonable to expect
continued improvement and a return to the performance levels of fiscal years
2003 and 2004 in the foreseeable future. For a projection of future earnings
performance, see the Valuation Section of this report.
18
E C O N O M I C
and
I N D U S T R Y O U T L O O K
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
Revenue Ruling 59-60 requires consideration of "the economic outlook in
general and the condition of the specific industry in particular." In this
analysis we have examined the general economic and thrift industry climate as
of December 31, and for the last six months of 2007.
The following economic and thrift outlook was compiled using sources such as
the Federal Reserve Bank, Bureau of Economic Analysis, U.S. Department of
Labor, Office of Thrift Supervision and Federal Deposit Insurance Corporation.
Real gross domestic product increased at an annual rate of 0.6 percent in the
fourth quarter of 2007, preceded by a rate of 4.9 percent in the third quarter
of 2007. The deceleration in the fourth quarter primarily reflected a
downturn in inventory, net exports and federal and state spending. Corporate
profits during the third quarter decreased significantly compared with the
second quarter of the year. Unemployment ended the year at 4.9 percent. The
jobless rate has ranged from 4.4 - 4.9 percent since September 2006
Consumer prices as measured by the Consumer Price Index have grown at an
annual rate of 4.1 percent during 2007. This compares to 2.5 percent for all
of 2006. The index for energy increased 2.9 percent in 2006 and was up 17.4
percent on an annual basis for 2007, causing much of the overall increase in
the Consumer Price Index. The seasonally adjusted rates of productivity for
2007 were 1.6 percent in the business sector and 1.6 percent in the non-farm
business sector. Manufacturing productivity grew at a rate of 2.9 percent
during the year.
According to the Federal Reserve Board, economic activity in the Tenth
District continued to expand modestly in the fourth quarter of 2007 but at a
slower pace than previous reporting periods. Seven of the twelve districts
reported slight increases in activity, two reported mixed conditions and three
indicated a slowing of activity.
While there are obviously parts of the country with severe economic
challenges, the slowing growth in the gross domestic product, low unemployment
and modest
20
ECONOMIC AND INDUSTRY OUTLOOK
-----------------------------
increases in consumer prices would indicate the overall National economy as of
December 31, 2007 is weak.
The Federal Reserve Board had a target for the federal funds rate at 5.25
percent on June 30, 2007. In the second half of the year it reduced this
target three times to 4.25 percent at the end of the year. Although long term
inflation continues to be under control, some pressures on current inflation
remain; primarily because energy prices. The sub-prime lending situation and
concern for liquidity in the credit markets caused the Federal Reserve to
reduce its discount rate even further in January to a level of 3.00%.
Reductions in the prime rate of interest have naturally followed.
The Office of Thrift Supervision reported in its Regional Quarterly that the
pace of economic activity in the Midwest decelerated in the fourth quarter of
2007. As expected, bankers in the region reported slower loan activity and
tighter lending standards. Loan performance in the Midwest region showed an
increasing trend in delinquencies and foreclosures in all loan categories, but
most notably in the subprime loan category where an 18.65 percent increase was
noted as of October 1007. The National rate at the same time was 19.01
percent. The outlook for the housing market remains troubling at this time.
In conclusion, the state of the thrift industry in the US and in Missouri is
currently stable and the outlook for 2008 will depend upon improvement in the
housing markets. Growth has slowed in 2007 and there are risks that it could
slow even further in 2008.
21
V A L U A T I O N S U M M A R Y
VALUATION SUMMARY
-----------------
Overview
In order to develop an opinion concerning the market value of the common stock
in the business enterprise known as First Bancshares, Inc., as the valuation
date, it was necessary to assume that: (i) no changes occur in operating
philosophy or financial strategy; (ii) there is no deviation in the geographic
markets in which FBSI competes; (iii) there are no major additions or
deletions to the services or products that are currently provided; and (iv)
there will be no change to the business approach or management philosophy. In
this regard, the valuation implicitly reflects FBSI's operations in a manner
consistent with prior periods.
Recent Minority Stock Transactions
The following table contains the stock price, number of shares traded and
price to book value for the fifty-two weeks preceding the valuation date.
Although weekly activity is relatively low, FBSI's stock is traded on an open
exchange and these prices are representative of the market price for a
minority share. There is not sufficient trading volume for this period of
time to rely on for the determination of going concern value.
First Bancshares, Inc. (NASDAQ: FBSI)
Historical Values
Week Week
Ending Price Volume Ending Price Volume
-------- ------- -------- -------- ------- --------
12/26/2007 16.97 0 06/27/2007 16.12 301
12/19/2007 16.00 661 06/20/2007 16.37 1,600
12/12/2007 16.68 0 06/13/2007 16.65 1,600
12/05/2007 16.01 300 06/06/2007 16.94 211
11/28/2007 16.00 200 05/30/2007 16.30 4,303
11/21/2007 16.50 0 05/23/2007 16.00 0
11/14/2007 15.65 1,840 05/16/2007 15.48 1,151
11/07/2007 16.60 870 05/09/2007 15.15 1,332
10/31/2007 17.00 100 05/02/2007 15.60 1,700
10/24/2007 16.50 0 04/25/2007 15.86 2,500
10/17/2007 16.61 600 04/18/2007 16.62 7,656
10/10/2007 17.43 700 04/11/2007 16.72 11,294
10/03/2007 16.75 1,822 04/04/2007 16.99 100
09/26/2007 17.00 100 03/28/2007 16.50 1,400
09/19/2007 16.90 100 03/21/2007 16.90 500
09/12/2007 16.75 900 03/14/2007 16.68 760
09/05/2007 16.47 3,700 03/07/2007 17.00 0
08/29/2007 16.25 1,499 02/28/2007 17.21 0
08/22/2007 16.00 300 02/21/2007 17.50 0
08/15/2007 16.12 0 02/14/2007 17.13 6,977
08/08/2007 16.33 500 02/07/2007 17.15 0
08/01/2007 16.30 200 01/31/2007 17.35 0
07/25/2007 16.59 0 01/24/2007 17.35 0
07/18/2007 16.50 3,610 01/17/2007 17.14 303
07/11/2007 16.36 7,705 01/10/2007 17.50 0
07/03/2007 16.25 2,357 01/03/2007 17.39 1,157
Source: SNL Financial
23
VALUATION SUMMARY
-----------------
Valuation Date
The valuation will utilize: (i) December 31, 2007 financial results; and (ii)
certain market-based multiples and discount rates which generally reflect
prevailing conditions in the public securities and capital markets as of the
valuation date.
Valuation Approaches
Asset-Based Approach - This approach assumes that an asset's value is
indicated by the cost of reproducing or replacing the asset, less an
allowance for physical deterioration and obsolescence. For business
valuations, the approach generally applies when the assets of the
business are substantial. The approach may not be relevant in valuing
operating companies/banks (except where the liquidation value produces a
higher value than the income or market approach), and should not be used
alone in this case.
Market Approach - The market approach is based upon the premise that
arm's length transactions of similar property provide empirical evidence
as to the value of a property. The theory of using the market approach
is based upon the economic principle of substitution; i.e., a buyer would
not pay more than he would pay for an equally desirable alternative. In
addition, Revenue Ruling 59-60 suggests that the "best measure may be
found in the prices at which the stocks of companies engaged in the same
or a similar line of business are selling in a free and open market."
Income Based Approach - The basic concept of the income approach is to
forecast the future economic income associated with an investment and
discount the forecasted benefit stream to a present value using a
discount rate appropriate for the expected risk of the prospective
economic benefit stream. The income approach is based upon the economic
principle of anticipation; i.e., the value is based upon the present
value of the economic benefit stream discounted back using an appropriate
discount rate for the expected risk.
Valuation Methods Considered
The valuation methods on the following page were considered for this appraisal
and those utilized are indicated as "Applied". These methods relate to the
aforementioned approaches which are standard within the valuation industry.
24
VALUATION SUMMARY
-----------------
Each of the following methods was considered and those selected for use in
this report are discussed individually in the appropriate sections of the
report.
Tangible Book Value Method Applied
Economic Book Value Method Rejected
Guideline Public Company Method Applied
Merger & Acquisitions Method Applied
Discounted Future Returns Method Applied
Dividend Paying Capacity Rejected
Liquidation Method Rejected
Single-Period Capitalization Method Rejected
Valuation Methodology
In order to estimate the market value of the common equity of First
Bancshares, Inc., it was necessary to:
* Establish a value for FBSI under each previously identified method on
a majority/control basis.
* Develop a final value for FBSI by weighting the results from each
method in accordance with its relative significance to a prudent
investor.
* Apply a marketability discount when and if appropriate.
Valuation Issues
The issues inherent in this valuation are presented and discussed individually
below:
1) Majority Interest Basis - The valuation of FBSI reflects a
majority/control position because the purpose of the valuation is for
a going private transaction which necessitates the acquisition of or
reclassification of the stock based on a going concern value.
2) Premium for Majority - Mergerstat Review - 2006, which is an annual
publication that provides comprehensive statistics on mergers,
acquisitions and divestitures for over fifty industries, reported in
the most recent issue that the average premium for a controlling
interest in the banking and finance industry in 2006 was
25
VALUATION SUMMARY
-----------------
36.6% while the five-year average was 30.2%. Historically, depending
on the industry, premiums have ranged as high as 100%. However, in
developing our valuation we used a 33% premium for control due to
FBSI's financial condition and market position.
It should be noted that the selected control premium will be applied
to minority market based multiples to convert these indices to the
control basis for the valuation.
3) Minority Interest Discount As discussed in item 1 above, the
valuation of a share in FBSI has been made on a majority basis.
Therefore the application of a minority interest discount is
unnecessary.
4) Marketability Discount - In order to develop a valuation of a
majority/control ownership position, a marketability discount
represents the "flotation costs" associated with the outright sale of
the business enterprise including but not limited to legal and
accounting fees, printing expenses for offering documents,
under-writing fees, etc. Published studies in recent years indicate
that, depending on the size of the offering, flotation costs can
range between 2.0% and 15.0%. We have used a 2.0% marketability
discount for this valuation.
Refer to the following pages for the valuation calculations for FBSI using
each of the aforementioned valuation methods.
26
VALUATION SUMMARY
-----------------
Tangible Book Value Method
--------------------------
Overview
The Asset Based Approach includes two types of adjusted book value methods;
i.e., the Tangible Book Value Method and the Economic Book Value Method. We
have selected and applied the Tangible Book Value Method for this valuation.
It involves consideration of the underlying assets less stated liabilities to
derive the value of stockholders' equity and then eliminates any goodwill
and/or intangible assets for a resulting value.
Result - Tangible Book Value Method
In order to derive a preliminary value using the tangible book value method,
the steps generally are as follows: (i) adjust all tangible assets to fair
market value in continued use; (ii) adjust all liabilities to fair market
value in continued use; (iii) add control premium or minority discount (if
applicable); and (iv) deduct discount for lack of marketability (if
applicable). For this appraisal, the underlying assets and liabilities of
FBSI (excluding intangible assets) were considered to be at fair market value
as reported in the audited financial statements as of the valuation date. Any
assets or liabilities in the financial statements that have not been adjusted
to fair value are deemed not material and therefore are considered in this
valuation at their carrying values on the financial statements. Marketability
discounts are considered in the Valuation Summary section of the report.
Tangible Book Value Method - FBSI
Less
Stockholders' Intangible
Institution Date Equity Assets Result
----------- ---- ------------- ---------- ------
First Bancshares, Inc. 12/31/07 $27,252,000 $ 260,000 $26,992,000
27
VALUATION SUMMARY
-----------------
Guideline Company Method
------------------------
Overview
Included in the Market Approach to a business valuation is the Guideline
Company Method. The Guideline Company Method is predicated on the theory that
the market value of a company can be estimated based on the price investors
are paying for the stocks of similar publicly-traded companies.
The market value of publicly-traded companies can be calculated by multiplying
the current price at which the stock is being traded by the number of shares
outstanding. This calculation represents the value of the aggregate minority
interest in the company, i.e., the value of the company from the perspective
of the many investors who own shares of stock but who do not have the power to
direct, or redirect, strategies employed to maximize shareholders' value.
The development of a Guideline Company based valuation for this appraisal
requires the selection of publicly-traded financial institutions from which to
develop meaningful valuation criteria. The identification of thrift
institutions directly similar to FBSI was difficult due to FBSI's': (i)
geographic concentration in rural South Central Missouri versus the more urban
and geographically diverse operations of certain of the selected thrift
holding companies, (ii) financial structure and moderate size versus certain
of the selected thrift holding companies; and (iii) management philosophies
such as staffing, lending, and loan reserve practices and policies.
The foregoing notwithstanding, we have selected and presented on the following
page other thrift institutions whose stock prices would reflect: (i) their
geographic location in or near Missouri; (ii) the outlook for the region's
economy; and (iii) the type of customer, i.e., real-estate, commercial,
agricultural, and industrial concerns, served by the selected groups.
28
VALUATION SUMMARY
-----------------
Selection of Publicly Traded Companies
COMPANY NAME LOCATION SYMBOL EXCHANGE
------------ -------- ------ --------
NASD Financial, Inc. Grandview, MO NASB NASDAQ
Pulaski Financial Saint Louis, MO PULB NASDAQ
First Federal Bancshares Harrison, AR FFBH NASDAQ
Liberty Bancorp Liberty, MO LBCP NASDAQ
Lexington B&L Financial Lexington, MO LXMO Pink
CCSB Financial Corp Liberty, MO CCFC OTCBB
Descriptions of the above thrifts are presented in Exhibit II in the Addenda
section of this report. The following schedules present selected financial
performance and market-based transaction data for these companies as of the
last twelve month periods as indicated, or in the case of the pricing data as
of January 29, 2008 as reported by SNL Financial.
Banking Financial Performance
Equity/ NPAs/ LTM LTM LTM
Financial Total Assets Assets Effic. ROAA ROAE
Company State Ticker Sector Date Assets$M) (%) (%) Ratio (%) (%) (%)
------------- ------ ------ ------ --------- -------- ------ ------ -------- ---- ----
NASB Financial
Inc. MO NASB Thrift 9/30/2007 1,506,483 9.92 0.65 57.08 1.00 9.98
Pulaski
Financial
Corp. MO PULB Thrift 12/31/2007 1,250,907 6.68 0.89 57.68 0.84 11.17
First Federal
Bancshares
of AR AR FFBH Thrift 12/31/2007 791,978 9.30 5.23 72.37 0.32 3.53
Liberty
Bancorp Inc. MO LBCP Thrift 12/31/2007 339,112 14.07 1.53 67.48 0.60 3.89
Lexington B&L
Financial
Corp. MO LXMO Thrift 9/30/2007 135,204 11.50 0.73 66.99 0.71 6.31
CCSB
Financial
Corp. MO CCFC Thrift 12/31/2007 95,864 13.87 0.42 104.48 0.05 0.36
First
Bancshares
Inc. MO FBSI Thrift 12/31/2007 243,446 11.19 1.36 91.19 0.21 1.91
Banking Market Performance
Price/ Price/ Current
Market Pricing Price/ Tang LTM EPS Dividend
Company State Ticker Sector Exchange Value Price As Of Book (%) Book (%) (x) Yield (%)
------------- ------- ------ ------ -------- ------ ------ ------- ------- ------- ------- --------
NASB Financial
Inc. MO NASB Thrift NASDAQ 185.7(M) 26.64 1/29/2008 140.3 143.0 14.2 3.81
Pulaski
Financial
Corp. MO PULB Thrift NASDAQ 120.9(M) 10.47 1/29/2008 125.2 132.2 11.5 2.98
First Federal
Bancshares
of AR AR FFBH Thrift NASDAQ 66.7(M) 13.26 1/29/2008 87.1 87.1 18.9 4.64
Liberty
Bancorp Inc. MO LBCP Thrift NASDAQ 46.1(M) 10.30 1/29/2008 102.0 102.0 24.5 0.96
Lexington B&L
Financial Corp. MO LXMO Thrift Pink 15.2(M) 25.00 1/29/2008 100.9 106.3 16.4 2.40
CCSB Financial
Corp. MO CCFC Thrift OTCBB 11.7(M) 14.16 1/29/2008 90.1 89.9 0.0 0.00
Source: SNL Financial Average 107.6 110.1 17.1
Median 101.5 104.2 16.4
29
VALUATION SUMMARY
-----------------
Selection of Market Multiples
It can be seen from the previous Tables that: (i) the return on average
assets (ROAA) ratios for the selected companies range from a low of (0.05
percent) (CCFC) to a high of 1.00 percent (NASB); (ii) the return on average
equity ratios (ROAE) range from a low of (O.36 percent) (CCFC) to a high of
11.17 percent (PULB); (iii) the current minority price-to-earnings multiples
range from a low of 11.5 (PULB) to a high of 24.5 (LBCP), excluding companies
with losses; (iv) the current minority price-to-book multiples range from a
low of 0.9 (CCSB) to a high of 1.25 (PULB) and; (vi) the current minority
price-to-tangible book multiples range from a low of O.9 (CCSB) to a high of
1.4 (NASB).
FBSI's performance ratios as of December 31, 2007, versus the selected holding
companies compare generally unfavorably. Efficiency ratios, return on average
assets and return on average equity are below the selected group medians as
discussed earlier in this report. Due to managerial problems encountered at
FSBI during fiscal year 2006 and the first half of fiscal year 2007, the
organization had to absorb significant loan losses and other costs that
significantly affected performance. Considering this situation as well as
other factors, we have: (i) selected; (a) the median minority
price-to-earnings multiple of 16.4 (rounded); (b) the median minority
price-to-book multiple of 1.01 (rounded) and (c) the median minority
price-to-tangible book multiple of 1.04 (rounded); (ii) applied a control
premium of 33.0 percent to the selected minority multiples to convert these
indices to a control basis as discussed previously in the Valuation Section;
and (iii) weighted the results primarily in favor of the price-to-book and
price-to-tangible book results to reflect their relative significance to a
prudent investor. The low weighting assigned to the price-to-earnings result
is appropriate considering the decline in earnings caused by the problems
encountered by the institution's previous mismanagement.
Result - Guideline Company Method
The table on the following page presents the valuation results from this
method including notes describing the calculations.
30
VALUATION SUMMARY
-----------------
Guideline Company Method - FBSI
Technique Value Multiple Results Weight Result
--------- ------- -------- ------- ------ ------
Price-to-
Earnings 511,000 (1) 21.8 (2) 11,140,000 0.10 (3) 1,114,000
Price-to Book 27,252,000 (4) 1.34 (5) 36,518,000 0.45 (3) 16,433,000
Price-to-
Tangible Book 26,992,000 (4) 1.38 (5) 37,249,000 0.45 (3) 16,762,000
===========
Rounded $34,309,000
(1) Net Income after taxes for last twelve months ending December 31, 2007.
(2) Minority price-to-earnings multiple of 16.4 (rounded), adjusted for a
control premium of 33.0%, or 16.4 x 1.33 = 21.8 (rounded).
(3) Relative weight assigned to each of the guideline company approach
techniques reflects their relative significance to a prudent investor.
(4) Total stockholders' equity on December 31, 2007 $27,252,000, less
intangibles of 260,000 = $26,992,000.
(5) Minority price-to-book multiple of 1.01 (rounded), adjusted for a control
premium of 33.0%, or 1.01 x 1.33 = 1.34 (rounded) and minority
price-to-tangible book multiple of 1.04 adjusted for a control premium
resulting in 1.38 multiple.
31
VALUATION SUMMARY
-----------------
Merger & Acquisitions Method
----------------------------
Overview
The development of a valuation conclusion based upon the Merger & Acquisitions
Method under the Market Approach requires the selection of a representative
number of transactions from a reliable transactional data base. Using the SNL
Financial data base (the most prominent data base for financial institutions
transactions in the US), we have selected all sale transactions that occurred
in the past year involving (1) thrift institutions with total equity of less
than $50 million and (2) thrift transactions involving thrifts within the
state of Missouri, regardless of size.
Comparable Deal Analysis
Market : Region
Financial Item : Total Equity
Number of deals : 10
Announced since : 8/21/2005
Buyer Target Target Date Deal
Target Assets Assets Equity Announ- Value
Buyer Name State Ticker Name State Ticker ($000) ($000) ($000) ced ($M)
----------- ------ ------ ------ ----- ------ ------ ------ ------ -------- -----
First Mutual
of Richmond,
Inc. IN NA Mutual OH NA 730,895 112,697 10,780 4/5/2007 19.8
Bancorp,
Inc.
Heartland
Bancorp, Inc. IL NA BankPlus, IL BPLS 926,580 288,747 24,296 3/16/2007 33.6
FSB
La Porte
Bancorp, Inc. IN NA City Savings IN CSFC 266,560 137,023 12,703 3/8/2007 19.8
Financial
Corp.
Heartland
Bancorp, Inc. IL NA First IL FFBI 915,707 339,823 21,920 11/3/2006 30.3
Federal
Bancshares,
Inc.
Great River
Holding
Company MN NA First MN NA 137,331 150,057 13,664 5/21/2006 20.3
Federal
Bancorp-
oration
First Place
Financial
Corp. OH FPFC Northern OH NLVS 2,626,531 340,807 43,490 1/27/2006 72.4
Savings
& Loan
Company
Marquette
National
Corporation IL MNAT Hemlock IL HMKF 1,383,618 292,330 17,080 12/29/2005 49.0
Federal
Financial
Corp.
MainSource
Financial
Group Inc. IN MSFG HFS Bank, IN HFSK 1,639,510 237,979 20,626 10/26/2005 36.1
FSB
MainSource
Financial
Group Inc. IN MSFG Peoples OH POHF 1,540,312 199,881 24,925 9/28/2005 41.9
Ohio
Financial
Corp.
MainSource
Financial
Group Inc. IN MSFG Union IN UCBC 1,540,312 264,291 33,835 8/23/2005 56.3
Community
Bancorp
Average: 1,170,736 236,364 22,332 38.0
Median: 1,155,099 251,135 21,273 34.9
Brooke
Corporation KS BXXX Genera- MO NA 170,642 65,171 8,812 1/23/2006 10.1
tions
Bank
Pulaski
Financial
Corp. MO PULB CWE MO NA 787,729 45,458 4,357 10/25/2005 7.6
Bancorp,
Inc.
Average: 479,186 55,315 6,585 8.9
Median: 479,186 55,315 6,585 8.9
Price/ Price/ Price/LTM Premium/
Book Tang.Book Earnings Stock Price
Buyer Name (%) (%) (x) (%)
---------- ------ --------- ---------- -----------
First Mutual
of Richmond,
Inc. 165.0 165.0 20.0 NA
Heartland
Bancorp,
Inc. 144.2 144.2 22.4 58.09
La Porte
Bancorp,
Inc. 151.5 151.5 50.0 58.14
Heartland
Bancorp,
Inc. 123.6 132.8 48.9 1.10
Great River
Holding
Company 148.6 148.6 25.1 NA
First Place
Financial
Corp. 166.1 166.1 25.3 46.88
Marquette
National
Corporation 239.4 256.7 14.8 105.56
MainSource
Financial
Group Inc. 175.1 175.1 23.3 54.80
MainSource
Financial
Group Inc. 163.7 163.7 23.3 45.45
MainSource
Financial
Group Inc. 156.6 170.1 31.4 56.35
Average: 163.4 167.4 28.5 53.30
Median: 160.2 164.4 24.2 55.58
Brooke
Corporation 114.6 114.6 16.1 NA
Pulaski
Financial
Corp. 175.2 175.2 30.7 NA
Average: 144.9 144.9 23.4
Median: 144.9 144.9 23.4
From a review of the aforementioned merger and acquisition transactions we
found that the median price to book value multiple for the transactions
involving thrifts selected for the analysis was 1.60 (rounded) and 1.45
(rounded) for the transactions involving Missouri based institutions. The
price to tangible book
32
VALUATION SUMMARY
-----------------
multiples were 1.64 (rounded) and 1.45 (rounded) indicating a general lack of
goodwill or intangible assets on the books of the target institutions.
Likewise the transactions indicated a median price to income multiple of 24.2
and 23.4 respectfully. These transactions represent sales of a
majority/control interest.
Result - Merger & Acquisition Method
Although the specifics of selected market transactions are often not known,
the valuation ratios and pricing information is quite reliable due to standard
thrift industry financial reporting. Information on buyer and seller as well
as substantive details regarding consideration paid and terms of the deal is
normally available. Our interpretation of the data provided for the
transactions listed in the aforementioned table is strong evidence of current
market pricing for thrift transactions. The median multiples from the
regional transactions were approximately ten percent higher than the in-state
transaction median. Due to the fact that FBSI may be in the early stages of
turnaround and reported performance is less than stellar, we have selected the
median multiples from the in-state transactions for use in this approach. The
results are presented in the following table:
Merger & Acquisitions Method - FBSI
Technique Value Multiple Results Weight Result
--------- ------- -------- --------- -------- --------
Price-to-
Earnings 511,000 (1) 23.4 (2) 11,957,000 0.10 (3) 1,196,000
Price-to Book 27,252,000 (4) 1.4 38,152,000 0.45 (3) 17,168,000
Price-to-
Tangible Book 26,992,000 (5) 1.4 (5) 37,789,000 0.45 (3) 17,005,000
===========
Rounded $35,369,000
(1) Net Income after taxes for last twelve months ending December 31, 2007.
(2) Majority multiples of from in-state transactional data.
(3) Relative weight assigned to each of the results reflects their relative
significance to a prudent investor.
(4) December 31, 2007 book value as reported in the financial statements.
(5) December 31, 2007 tangible book value calculated from the reported
amounts.
33
VALUATION SUMMARY
-----------------
Discounted Future Returns Method
--------------------------------
Overview
As would be expected, the development of a valuation conclusion based upon
future returns requires: (i) the selection of a measure of an investor's
returns or future benefits (e.g. net income, cash flow, or dividends); (ii)
the selection of an appropriate discount rate, including consideration of the
benefit stream to be discounted, and the business and financial risk inherent
in an investment in FBSI and (iii) the forecast of the future benefits to be
discounted.
Selection of Benefits to be Discounted
In our valuation we have selected net income as the benefit stream which can
most accurately assess the value of FBSI. Our selection is based upon: (i)
the difficulties in accurately quantifying and projecting cash flow in a
financial institution; and (ii) the discretionary nature of FBSI's dividend
policy; and (iii) regulatory restrictions on dividend payments in the thrift
industry.
Selection of a Discount Rate
The selection of a discount rate is dependent upon: (i) the rate that could
be realized from risk-free investments such as United States Treasury
securities; (ii) the additional premium investors require to compensate for
market risk; (iii) the risk unique to an investment in FBSI, compared to
market risk; and (iv) any adjustments necessary to compensate for the
selection of the benefit stream.
The first step in the determination of an appropriate discount rate is the
analysis of risk-free rates. The table below presents yields on United States
Treasury securities as of the December 31, 2007 valuation date.
INSTRUMENT RATE
U.S. Treasury (%)
------------- ----
1 - Year 2.30
5 - Year 2.80
10 - Year 3.61
30 - Year 4.29
34
VALUATION SUMMARY
-----------------
In this valuation, we have selected the 30-year treasury rate of 4.26% as our
risk-free rate. This selection is based upon the long-term nature of an
investment in FBSI and the determination of the risk premium described below:
Ibbotson Associates has calculated a relationship between the overall risk of
the stock market and the risk of owning stock in the banking and thrift
industries. This relationship (commonly referred to as Beta) provides a
method of calculation for the risk premium associated with each industry. In
addition, each of these figures has been adjusted to eliminate the effect of
financial leverage. In this valuation, we have utilized the industry median
un-levered beta to calculate the risk premium for the banking and finance
industry.
The final element of the risk premium is the risk associated with the market
as a whole. From 1926 through 2006, investors have received a premium of
approximately 8.0% on average for an investment in common stocks. We believe
a market risk premium of 8.0% is appropriate for this valuation.
The calculation of the risk premium for FBSI can now be developed by
multiplying the un-levered beta by the market risk premium and adding the
risk-free rate. The calculations are presented below.
Composite
Segment Un-levered Beta Market Risk Risk Premium Weight Result
------- --------------- ----------- ------------ ------ ------
602 0.6 8.00 4.80 1.0 4.80
Total Risk Premium 4.80
====
Based upon the above data, we believe a market risk premium of 4.80% is
appropriate for this valuation.
As noted in the Guideline Company Method, the publicly traded thrifts selected
were in some instances larger and had more diverse operations than FBSI. In
assessing the company specific risk of FBSI, we have considered: (i) the
volatility of earnings; (ii) the size and geographic scope of the institution;
and (iii) the level of
35
VALUATION SUMMARY
-----------------
capital compared with the other institutions. Adjustment for these factors
requires an additional premium of 3.0% to compensate for risks unique to FBSI.
The final element of the discount rate is an adjustment for the benefit stream
being discounted. The risk-free rate and risk premiums have been calculated
based upon actual returns to investors, or cash flow returns. In discounting
net income, an additional premium is required to account for the fact that not
all of a bank's income can be paid to investors. Our assessment of FBSI,
including its dividend policy, returns based upon reinvested net income, and
growth potential indicate that an additional premium of 2.5% is needed to
compensate for the use of net income as a benefit stream.
A summary of all the elements of the discount rate are presented below.
Risk Free Rate 4.29%
Market Risk Rate 4.80%
Company Risk Rate 3.00%
Net Income Adjustment 2.50%
-----
Net Income Discount Rate 14.59%
Rounded 15.00%
=====
On the following pages we have calculated the value of FBSI using the
Discounted Future Returns Method.
Forecast
In order to develop the valuation using the Discounted Future Returns Method
it was necessary to forecast projected total assets and net income for five
fiscal years. The forecast presented below assumes: (i) beginning average
assets of $241,331,000 will increase to $306,470,000 at the end of year five,
an annual growth rate of three and one half percent in year one, four percent
in years two and three and five percent in years four and five; and (ii) net
income as a percent of total average assets, standing at 0.21% at December 31,
2007, will increase to
36
VALUATION SUMMARY
-----------------
0.45 percent in year one, 0.75 percent in years two and three and 0.90
percent in years four and five.
Five-Year Forecast - FBSI
Base Projected
------ -------------------------------------------------
Period Year 1 Year 2 Year 3 Year 4 Year 5
------ -------- -------- -------- -------- --------
Total Assets
($ 000's) $241,331 $249,778 $259,769 $272,757 $289,123 $306,470
Total Average
Assets ($ 000's) 235,122 245,554 254,773 266,263 280,940 297,796
Return on Assets
(%) 0.21% 0.45% 0.75% 0.75% 0.90% 0.90%
Net Income
($ 000's) 511 1,105 1,911 1,997 2,528 2,680
Discount Rate (%) 15.00% 15.00% 15.00% 15.00% 15.00%
Periodic Discount
Rate (%) 0.86957 0.75614 0.65752 0.57175 0.49718
Present Value -
Net Income
($ 000's) 961 1,445 1,313 1,446 1,332
Cumulative PV- Net
Income ($ 000's) 961 2,406 3,719 5,165 6,498
Rounded $6,497
======
Result Discounted Future Returns Method
In order to derive a preliminary value using the Discounted Future Returns
Method, the present value of net income was calculated above. As can be seen
from the table, the sum of discounted net income indicates a value of
$6,497,000 (rounded). However, to complete this approach it is also necessary
to recognize the net income streams beyond year five (residual net income).
The value of net income beyond year five was calculated using the Gordon
formula V= [I (1+g)]/(r-g)]. In this formula, V = the indicated value, I =
the income one year beyond year five, r = the discount rate, and g = the real
growth rate of the income
37
VALUATION SUMMARY
-----------------
stream. Assuming an 8.0% long-term real growth rate, the value is calculated
as $41,351,000 (rounded) or (2,680,000 x 1.08 = $2,895,000/7.0%). This
represents the value of residual net income. Discounting this value from
year five to its current value using the year five discount factor derived
earlier (0.49718 x $41,351,000), we arrive at a value of $20,559,000
(rounded).
To derive an estimated value of FBSI using the discounted future returns
approach, it is necessary to add the present value of the five-year net income
stream plus the present value of the residual net income. The calculation is
presented below:
Discounted Future Returns Method - FBSI
Sum of Present Value of Net Income Rounded $ 6,497,000
Present Value - Residual Net Income Rounded 20,559,000
-----------
Indicated Value - Income Approach (Control Basis) Rounded $27,056,000
In order to establish the business enterprise value of FBSI on a majority
basis, it is necessary to weight each valuation method in accordance with its
relative significance to a prudent investor.
As previously stated, the Tangible Book Value Method does not incorporate the
value of goodwill and therefore is not considered in reaching our valuation
conclusion. On the other hand, the Guideline Company Method reflects the
attitudes of many investors toward the past performance and future prospects
of holding companies engaged in the thrift industry in locations with similar
economic conditions to those of FBSI. The Merger & Acquisitions Method
reflects actual market transaction values for control sales. Finally, the
Discounted Future Returns Method is based on forecasts of the earnings power
relative to income and expenses. In view of the foregoing, we believe that a
prudent investor on June 30, 2007 would give more weight to the Guideline
Company and Merger & Acquisitions Methods versus the Discounted Future Returns
Method due to the recent earnings problems encountered at FBSI and the
prospects for correcting them, the diversity of locations, and FBSI's size.
Consequently, we have assigned
38
VALUATION SUMMARY
-----------------
zero weighting to the Tangible Book Value Method, weighted the Guideline
Company and Merger & Acquisitions Methods by 40 percent each leaving the
Discounted Future Returns Method with a 20 percent weighting.
The calculations are presented as follows:
Valuation Conclusion - FBSI
Indicated Value %
Approach (Control Basis) Weight Result
-------- --------------- ------ ------
Tangible Book Value Method $26,992,000 0.00 $ 0
Guideline Company Method 34,309,000 40.00 13,724,000
Merger & Acquisitions Method 35,369,000 40.00 14,148,000
Discounted Future Returns 27,056,000 20.00 5,411,000
-----------
Valuation (Rounded) $33,283,000
Valuation Summary
The final step in the valuation process includes the consideration of a
marketability discount. As mentioned previously in the report, it is often
appropriate to include a discount for lack of marketability. In the case of a
majority valuation this simply adjusts for the flotation costs associated with
a sale. The following table sets forth this calculation resulting in the
concluded value for the business enterprise known as First Bancshares, Inc:
Indicated Value - First Bancshares, Inc.
Stockholders' Equity (Control Basis) $33,283,000
Less: Marketability Discount (2%) (665,000)
-----------
Concluded Value (rounded) $32,600,000
===========
The concluded value represents a multiple 1.21 times December 31, 2007
tangible book value and 1.20 times FSBI's total capital and a 24 percent
premium over the closing price of the stock on December 31, 2007. It
approximates 63.8 times the FBSI's last twelve months earnings and 29.5 times
year one projected earnings.
39
VALUATION SUMMARY
-----------------
Valuation Conclusion
Therefore, based on the definitions, limiting conditions, financial data,
analyses, management representations, and related assumptions summarized in
the fore-going report, it is our opinion that, as of December 31, 2007, the
enterprise value of FBSI was approximately $32,600,000 (rounded) and the
market value per common share, based on one million five hundred fifty
thousand eight hundred fifteen (1,550,815) shares outstanding as of the
valuation date on a majority basis can be reasonably represented as:
TWENTY ONE DOLLARS AND NO CENTS (PER SHARE)
$ 21.00 (rounded)
Any questions regarding this report or information contained should be
directed to David L. O'Toole, Index Capital, LLC, 6240 W, 135th Street,
Overland Park, Kansas 66215.
40
A D D E N D A
EXHIBIT I
FIRST BANCSHARES, INC.
HISTORICAL BALANCE SHEETS & INCOME STATEMENTS
First Bancshares, Inc.
Consolidated Balance Sheets
June 30 Fiscal Year End
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 Dec-07
------- ------- ------- ------- ------- ------
Assets ($000)
Cash and cash equivalents $ 28,096 $ 36,170 $ 23,592 $ 27,301 $ 21,777 $ 22,808
Securities available-for-sale 14,273 10,952 18,946 20,884 31,321 35,515
Securities held to maturity 31,079 32,946 24,157 19,210 10,786 7,304
Federal Home Loan Bank stock 1,901 1,904 1,904 1,612 1,614 1,613
-------- -------- -------- -------- -------- --------
Total cash & securities 75,349 81,972 68,599 69,007 65,498 67,240
Gross loans 177,851 167,499 160,994 144,461 161,693 160,932
Loan loss reserve (1,144) (1,240) (2,851) (2,474) (2,700) (2,200)
-------- -------- -------- -------- -------- --------
Total net loans 176,707 166,259 158,143 141,987 158,993 158,732
Real estate owned and held
for investment 282 174 340 497 294 727
Intangible assets 549 481 386 336 285 261
Property and equipment, net 8,341 8,404 8,336 8,028 7,507 6,969
Bank-owned life insurance 5,500 5,763 5,488 5,705 5,920 6,013
Other assets 1,815 1,925 2,715 2,835 2,834 3,504
-------- -------- -------- -------- -------- --------
Total assets $268,543 $264,978 $244,007 $228,395 $241,331 $243,446
======== ======== ======== ======== ======== ========
Liabilities ($000)
Non-interest bearing deposits $ 8,887 $ 9,962 $ 11,816 $ 12,745 $ 12,716 $ 12,408
Interest-bearing deposits 202,777 197,285 175,327 166,396 177,374 179,583
Repurchase agreements - - - - 2,103 1,136
Federal Home Loan Bank advances 29,352 29,571 29,074 22,000 22,000 22,000
Other liabilities 1,124 864 972 963 670 1,067
-------- -------- -------- -------- -------- --------
Total Liabilities 242,140 237,682 217,189 202,104 214,863 216,194
Stockholders Equity ($000)
Common stock 28 29 29 29 29 29
Paid-in capital 17,522 17,801 17,829 17,852 17,936 17,984
Retained earnings 24,977 27,061 28,125 27,703 27,851 28,163
Treasury stock, at cost (16,423) (17,461) (19,059) (19,085) (19,113) (19,113)
Accumulated other
comprehensive income 299 (134) (106) (208) (235) 189
-------- -------- -------- -------- -------- --------
Total stockholders' equity 26,403 27,296 26,818 26,291 26,468 27,252
-------- -------- -------- -------- -------- --------
Total liabilities and equity $268,543 $264,978 $244,007 $228,395 $241,331 $243,446
======== ======== ======== ======== ======== ========
Source: SNL Financial & Company Annual Reports
First Bancshares, Inc.
Supplemental Consolidated Balance Sheet Data
June 30 Fiscal Year End
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 Dec-07
------- ------- ------- ------- ------- ------
Balance Sheet Analysis
Gross loans / total assets 66.23% 63.21% 65.98% 63.25% 67.00% 66.11%
Loans/ deposits 84.03% 80.82% 86.03% 80.64% 85.06% 83.82%
Loan loss reserves/ gross loans 0.64% 0.74% 1.77% 1.71% 1.67% 1.37%
FTE employees 104 98 94 103 92 90
Annualized Growth Rates
Asset growth 3.99% -1.33% -7.91% -6.40% 5.66% 1.75%
Gross loans growth -6.31% -5.82% -3.88% -10.27% 11.93% -0.47%
Deposit growth 4.55% -2.09% -9.70% -4.28% 6.11% 2.00%
Average Balances ($000)
Gross loans $ 184,052 $ 170,140 $ 163,273 $ 147,536 $ 153,616 $ 161,312
Securities & other earning
assets $ 64,901 $ 78,757 $ 71,411 $ 68,225 $ 57,984 $ 54,077
Assets $ 264,443 $ 270,396 $ 257,891 $ 238,882 $ 235,122 $ 243,742
Interest-bearing liabilities $ 229,441 $ 232,275 $ 217,281 $ 197,991 $ 212,751 $ 202,098
Deposits $ 207,333 $ 212,408 $ 198,667 $ 179,619 $ 183,059 $ 192,385
Common equity $ 25,843 $ 27,637 $ 28,613 $ 27,528 $ 26,491 $ 26,876
Share & Per Share Information
Book value per share $ 16.17 $ 16.77 $ 17.28 $ 16.93 $ 17.07 $ 17.57
Tangible book value per share $ 15.83 $ 16.47 $ 17.03 $ 16.71 $ 16.89 $ 17.40
Common dividends declared $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.08 $ -
Dividend payout ratio 11.90% 11.30% 19.30% NM 44.40% 0.00%
Average diluted shares
outstanding 1,665,240 1,652,751 1,596,368 1,553,010 1,552,000 1,552,000
Common shares outstanding 1,632,627 1,627,819 1,552,010 1,552,480 1,550,815 1,550,815
Market Information & Historical
Pricing
Closing price at June 30/
December 31 $ 17.20 $ 20.00 $ 18.50 $ 16.64 $ 16.50 $ 16.97
Price / trailing four quarter
earnings multiple 12.7 14.1 22.3 NM NM NM
Price to book multiple 106.4 119.3 107.1 98.3 96.7 96.6
Prioce to tangible book
multiple 108.6 121.4 108.6 99.6 97.7 97.5
Market capitalization ($M) $ 28.1 $ 32.6 $ 28.7 $ 25.8 $ 25.6 $ 26.3
Source: SNL Financial & Company Annual Reports
First Bancshares, Inc.
Consolidated Income Statements
June 30 Fiscal Year End
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 Dec-07
------- ------- ------- ------- ------- ------
Data in ($000)
Interest on loans $13,751 $11,965 $11,313 $10,413 $10,945 $5,973
Interest on securities 1,362 1,327 1,211 1,793 1,927 1,199
Other interest income 372 443 741 707 853 381
------- ------- ------- ------- ------- ------
Total interest income 15,485 13,735 13,265 12,913 13,725 7,553
------- ------- ------- ------- ------- ------
Interest on deposits 5,423 4,075 3,455 4,430 5,946 3,393
Other interest expense 1,674 1,652 1,636 1,556 1,408 675
------- ------- ------- ------- ------- ------
Total interest expense 7,097 5,727 5,091 5,987 7,354 4,068
------- ------- ------- ------- ------- ------
Net Interest Income 8,388 8,008 8,174 6,926 6,371 3,485
------- ------- ------- ------- ------- ------
Provision for loan losses 427 340 2,333 1,520 426 153
------- ------- ------- ------- ------- ------
Service charges and other fees 1,554 1,806 1,784 1,873 1,802 1,028
Gain/loss on sale of loans - - - - 140 265
Gain/loss on sale of securities 27 178 (4) (161) 177 -
Gain/loss on sale of real estate
owned (16) (33) (41) (380) (213) 12
Other non-interest Income 340 537 1,168 149 397 160
------- ------- ------- ------- ------- ------
Total non-interest income 1,905 2,488 2,907 1,481 2,303 1,465
Compensation and benefits 3,691 3,901 3,672 3,994 4,308 2,181
Occupancy and equipment 999 1,114 1,163 1,105 1,527 805
Professional fees 162 179 262 268 554 332
Other non-interest expense 1,505 1,550 2,318 1,784 1,705 961
------- ------- ------- ------- ------- ------
Total non-interest expense 6,357 6,744 7,415 7,151 8,094 4,279
------- ------- ------- ------- ------- ------
Net income before taxes 3,509 3,412 1,333 (264) 154 518
Provision for taxes 1,265 1,065 16 (91) (118) 206
------- ------- ------- ------- ------- ------
Net Income $ 2,244 $ 2,347 $ 1,317 $ (173) $ 272 $ 312
======= ======= ======= ======= ======= ======
Core Earnings
Net income (loss), reported $ 2,244 $ 2,347 $ 1,317 $ (173) $ 272 $ 312
Realized gain/loss on
securities 27 178 (4) (422) 177 -
Non-recurring revenue - - 818 (358) - -
Non-recurring expense - - 150 191 - -
Provision for taxes (9) (62) (232) 376 (62) -
------- ------- ------- ------- ------- ------
18 116 432 (631) 115 -
------- ------- ------- ------- ------- ------
Net income, adjusted $ 2,226 $ 2,231 $ 885 $ 458 $ 157 $ 312
======= ======= ======= ======= ======= ======
Source: SNL Financial & Company Annual Reports
First Bancshares, Inc.
Supplemental Consolidated Income Statement Data
June 30 Fiscal Year End
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 Dec-07
------- ------- ------- ------- ------- ------
Profitability Ratios (%)
Return on average assets 0.85 0.87 0.51 (0.07) 0.12 0.26
Return on average equity 8.68 8.49 4.60 (0.63) 1.03 2.32
Return on average tangible equity 9.05 8.82 4.79 (0.52) 1.17 2.47
Profit margin 33.87 31.23 6.48 7.68 (0.26) 10.47
Net interest margin 3.37 3.22 3.48 3.21 3.01 3.29
Yield on interest earning assets 6.22 5.52 5.65 5.98 6.49 7.12
Cost of interest-bearing
liabilities 3.09 2.47 2.34 3.02 3.78 3.76
Interest spread 3.13 3.05 3.31 2.96 2.71 3.36
Net interest income/ average
assets 3.17 2.96 3.17 2.90 2.72 2.86
Non-interest income/ average
assets 0.72 0.87 0.83 0.96 0.91 1.20
Net operating expense/ average
assets 1.66 1.60 1.96 1.94 2.53 2.29
Non-interest income/ operating
revenue 18.41 22.67 20.83 24.79 25.03 29.60
Overhead ratio 52.23 54.06 61.95 66.81 92.89 80.02
Efficiency ratio 61.03 64.47 69.88 75.04 94.67 85.94
Yield/ Cost Detail (%)
Yield on loans 7.47 7.03 6.93 7.06 7.19 7.52
Yield on securities 3.62 3.07 3.25 3.70 4.46 5.65
Yield on other interest earning
assets 0.95 0.59 1.78 3.57 5.33 5.13
Yield on interest earning assets 6.22 5.52 5.65 5.98 6.49 7.12
Interest cost on interest
bearing deposits 2.72 2.01 1.84 2.60 3.49 3.55
Interest cost on debt 5.63 5.65 5.59 5.59 5.67 5.70
Cost of interest-bearing
liabilities 3.09 2.47 2.34 3.02 3.78 3.76
Core (Normalized) Income
Core income ($000) $2,226 $2,231 $ 885 $ 458 $ 157 $ 312
Core earnings per share ($) 1.34 1.35 0.56 0.29 0.10 0.20
Diluted EPS before
amortization ($) 1.39 1.46 0.86 (0.08) 0.21 0.22
Core return on average assets (%) 0.84 0.83 0.34 0.19 0.07 0.26
Core return on average equity (%) 8.61 8.07 3.09 1.66 0.59 2.32
Source: SNL Financial & Company Annual Reports
EXHIBIT II
DESCRIPTIONS - SELECTED PUBLICLY TRADED
THRIFT HOLDING COMPANIES
NASB Financial, Inc. (NASDAQ: NASB)
Company Description
NASB Financial, Inc. is a unitary thrift holding company for North American
Savings Bank, F.S.B. ("North American" or the "Bank"). North American
operates six offices in greater Kansas City, Missouri and others in
Harrisonville, St. Joseph, and Excelsior Springs, Missouri. The Bank also has
loan origination offices in Lee's Summit and Springfield, Missouri as well as
Overland Park, Kansas
Pulaski Financial Corp. (NASDAQ: PULB)
Company Description
Pulaski Financial Corp., operating in its 85th year through its subsidiary,
Pulaski Bank, serves customers throughout the St. Louis metropolitan area.
The bank offers a full line of quality retail-banking products through ten
full-service branch offices in St. Louis and three loan production offices in
Kansas City and the Illinois portion of the St. Louis metroplex. The
company's website can be accessed at www. pulaskibankstl.com.
First Federal Bancshares of Arkansas, Inc. (NASDAQ: FFBH)
Company Description
First Federal Bank is a community bank serving consumers and businesses with a
full range of checking, savings, investment and loan products and services.
The Bank, founded in 1934, conducts business from 18 full-service branch
locations, one stand-alone loan production office, and 29 ATMs located in
Northcentral and Northwest Arkansas.
Liberty Bancorp, Inc. (NASDAQ: LBCP)
Company Description
Liberty Bancorp, Inc. through its subsidiary, BankLiberty, offers banking and
related financial services to both individual and commercial customers. The
Bank is headquartered in Liberty, Missouri, with branches in Kansas City,
Plattsburg, Platte City and Independence.
Lexington B&L Financial Corp. (Pink: LXMO)
Company Description
The Company, a Missouri corporation, is the holding company for B & L Bank
(B&L), a Federal savings bank, and B & L Mortgage, Inc. (MTG), which
originates and sells loans primarily in the secondary market. MTG correctly
retains no servicing rights on loans originated. The Company, through its
subsidiaries, provides a variety of financial services to individual and
corporate customers including checking, money market and savings accounts and
certificates of deposit. Its primary lending products are one- to four-family
residential mortgage, commercial, agriculture and consumer loans.
CCSB Financial Corp. (OTCBB: CCFC)
Company Description
CCSB Financial Corp. (the "Company"), a Delaware corporation, was incorporated
in September 2002 it facilitate the conversion of Clay County Savings and Loan
Association form a mutual savings association to a stock savings bank (the
"Conversion"). The Company does not engage in any significant business other
than serving as the holding company for Clay County Savings Bank (the "Bank")
following the conversion. The Company's assets consist of the Company's
investment in the Bank, deposits in the Bank, a participation in a loan with
the Bank, and the Company's loan to the employee stock ownership plan of the
Bank. The Company's executive office is located at 1178 West Kansas, Liberty,
Missouri 64068. As per link
http:/www.claycountysavings.com/CCSB%20Financial%20Corp.htm.
EXHIBIT III
COMPANY PROFILE - INDEX CAPITAL, LLC
APPRAISER QUALIFICATIONS
COMPANY PROFILE - INDEX CAPITAL, LLC
------------------------------------
Index Capital provides comprehensive investment banking services to financial
institutions and their shareholders. Our understanding of financial
institutions, our commitment to long-term client relationships and our
sensitivity to confidentiality ensure a successful transaction with every
assignment. We provide a variety of services in the following areas:
* Buy-side M & A assignments
* Sell-side M & A assignments
* Branch acquisition & divestiture
* Branch divestiture analysis
* Bank charter transactions
* Restructurings
* Strategic ownership planning
* Management consulting
* Buy-outs
* Regulatory applications
* Fairness opinions & valuations
Buying or selling a financial institution is a very complex decision. We can
assist with this decision and develop the proper approach to make it happen.
We also provide services for secondary transactions including minority stock
transactions, ESOP formations, and recapitalizations. Our extensive
experience with financial institutions brings with it the knowledge of
structuring transactions, valuations and pricing, financing alternatives,
strategies prior to or after the completion of a transaction, appropriate
regulatory approval processes, and the assurance of confidentiality.
Our professionals have been involved with the formation of more than 250
holding companies, more than 15 newly chartered banks, served as board members
and turn-around consultants, prepared stock valuations for hundreds of banks
and holding companies and served as experts on numerous banking litigation
matters.
APPRAISER QUALIFICATIONS
------------------------
Mr. O'Toole currently serves as Managing Member and President of INDEX
CAPITAL, LLC. In this capacity he represents clients in assessing corporate
development opportunities, structuring merger, acquisition and divestiture
transactions, resolving complex due diligence and organizational issues,
preparing enterprise valuations and developing and executing shareholder exit
strategies.
Mr. O'Toole has over 30 years of experience in all aspects of accounting,
management, tax, financial advisory, valuation and investment banking with
financial institutions and closely held businesses. During Mr. O'Toole's
career, he has periodically served as an interim CEO or board member to banks
and companies in turn-around situations.
In 1995, Mr. O'Toole acquired a financial advisory and business valuation firm
with offices in Kansas City and Houston. Mr. O'Toole served as Chairman and
CEO of the firm until its business was merged with another company in December
2000. In 1977, Mr. O'Toole co-founded and, for 17 years, served in several
capacities including President of GRA, Inc., a nationally recognized Kansas
City based bank accounting, consulting and management advisory service firm.
Additionally, Mr. O'Toole was Managing Director of GRA, Thompson, White & Co.,
P.A., a related entity that provided accounting, tax, valuation and regulatory
services to more than 400 financial institutions.
Mr. O'Toole received his Bachelor of Science degree in Business and Accounting
from Fort Hays State University in 1973. In addition to his formal education,
Mr. O'Toole has attended accounting/management classes offered by the major
accounting associations and numerous professional development seminars
sponsored by various professional organizations and associations.
Mr. O'Toole has served on the Board of Directors of several banks and private
companies, including a three year term as advisory director on the Continental
Airlines, Inc. travel agency advisory board. He is currently a member of the
Kansas City Chapter of the Association for Corporate Growth and a founding
board
member of CrossPoint Bank in Overland Park, Kansas. Mr. O'Toole was also a
faculty member for three years at the Mid-South School of Banking in Memphis,
Tennessee where he taught bank valuations and a member of TEC for nine years.
Exhibit 99.4
Stinson, Morrison Hecker LLP Memorandum, "Possible Structures for
Taking a Corporation Private" dated May 21, 2007
[STINSON MORRISON HECKER LLP LETTERHEAD]
Memo
To: The Going Private Committee of the Board of Directors of First
Bancshares, Inc. (the "Committee")
From: Bob Monroe
Jack Bowling
Date: May 21, 2007
Re: Possible Structures for Taking a Corporation Private
------------------------------------------------------------------------------
It is our understanding that the Board of Directors (the "Board") of
First Bancshares, Inc. (the "Company") authorized the formation of the
Committee whose charge is to investigate ways for the Company to go private.
It is our further understanding that the Company owns all of the capital
common stock of Home Savings Bank, a Missouri state chartered savings bank
(the "Bank"). The Company is incurring hundreds of thousands of dollars in
expenses each year as a result of being a publicly-held entity, which amounts
to an extraordinary expense for the size of the Company.
This Memorandum summarizes the various transaction structures that can be
utilized for taking a publicly-held corporation private, including outlining
certain advantages, disadvantages and other issues for the Committee to
consider. This summary is intended to provide only general information
regarding a proposed going private transaction and is not intended to be a
detailed analysis of the specific issues to be considered with respect to
taking the Company private. If the Committee deems it advisable to focus on a
particular structure for going private, we will be happy to assist the
Committee in performing an in-depth analysis of a possible going private
transaction. In this case, this Memorandum would be supplemented by another
memorandum responsive to such request. In preparation of the possibility of
such request, we have also included in this Memorandum a list of information
we need the Company to provide relevant to such a review.
The most common methods for taking a company private are (1) acquisition
of the company by controlling shareholder(s) or management, via a merger or a
tender offer followed by a merger, (2) an issuer tender offer, or (3) a
reverse stock split. The going private transaction may be financed by one or
more of the following strategies (i) utilizing the Company's working capital,
(ii) the Company incurring debt or (iii) funding from a sophisticated third
party financier. The purpose of the going private transaction is generally to
either (a) reduce the number of shareholders of record to less than 300 in
order to suspend filing reports with the SEC, i.e.
"going dark," or (b) eliminate all shareholders other than members of the
buyout group, i.e. "going private."
Set forth below are summaries of these transaction structures. In
addition to federal securities law considerations, a corporation would also
have to evaluate which option to pursue in light of the corporate law of its
jurisdiction of organization, which in the case of the Company would be
Missouri. As with most jurisdictions, Missouri corporate law lacks
significant guidance regarding going private transactions and, as a result, it
is reasonable to assume that a Missouri court evaluating any going private
transaction may look to Delaware corporate law for guidance given that
Delaware has the most robust case law on the topic. The discussion that
follows outlines in a general sense certain legal principles which may be
applicable to each transaction structure.
I. Merger.
------
Classic going private transactions, where all shareholders other than
members of the buyout group are to be eliminated, are usually conducted
pursuant to a merger transaction in which the stock held by shareholders who
are being eliminated is converted into cash. The entity with which the
corporation is being merged is closely-held, meaning it is owned by a very
limited number of owners. To accomplish the merger under state law, generally
all that is needed is approval of the boards of directors of the merging
companies and a vote of the shareholders approving the transaction.
A. Advantages.
----------
If the requisite shareholder vote is obtained, a long-form merger
provides assurance that all of the shareholders other than members of the
buyout group will be eliminated. It also follows a clear and well-accepted
path for going private.
B. Disadvantages.
-------------
1. Standard of Judicial Review. A long-form merger is typically
subject to the "entire fairness" standard and the directors would have the
burden of proof to demonstrate its fairness. This generally involves the
procedural and substantive fairness of the transaction in question.
Procedural fairness, or "fair dealing," refers to how a transaction is
initiated, structured, negotiated, disclosed to directors and shareholders,
discussed, and decided. Substantive fairness, or "fair price," addresses the
economic and financial considerations of the deal (e.g., the price, assets,
market value, earnings, future prospects, and any other elements affecting
intrinsic or inherent value). However, the test for entire fairness is not a
bifurcated one as between fair dealing and fair price. Rather, all aspects of
the issue must be examined as a whole since the question is one of entire
fairness.
2. Price. A fair price would be required to be paid. We would
recommend seeking a fairness opinion from an independent financial advisor
opining to the fairness of the price paid to shareholders. This fairness
opinion could be obtained by the Committee or the Board.
3. Process, Expense and Timing. To satisfy the standard, it is
common to appoint a special committee of independent directors of the board of
directors to represent the interests of the shareholders being squeezed out in
the transaction. The special committee usually retains independent legal
counsel and an independent financial advisor to assist it in negotiating the
transaction and evaluating its fairness.
The transaction would require the approval of the holders of outstanding
shares required by state law and the corporation's charter. However, as part
of the negotiations, the special committee would likely seek to condition the
merger on the approval of a majority of the shareholders being squeezed out in
order to provide additional evidence of "entire fairness". All shareholders
would likely have dissenters' rights with respect to the merger.
Under federal securities law, the corporation would be required to file
with the SEC and send to shareholders a detailed proxy statement and would be
required to simultaneously file with the SEC a Schedule 13E-3 Transaction
Statement relating to shareholder approval of the going private transaction.
Failure to comply with this standard may result in an injunction
preventing completion of the transaction or liability of the board of
directors for any damages incurred by minority shareholders in connection with
the merger. The transaction would be subject to considerable delay in order
to prepare and distribute a proxy statement, obtain SEC review and clearance
of the proxy statement before it is mailed, and to hold a meeting of
shareholders after a reasonable notice period (usually 30 days) has expired.
The long-form merger is thus the most expensive and time consuming
structure for going private.
Controlling shareholders of Delaware corporations will often use a tender
offer followed by a merger to effect a going private transaction in order to
avoid the entire fairness standard. The controlling shareholder will attempt
to acquire more than 90% of the outstanding shares in the tender offer and
follow up immediately with a short-term merger, which does not require
shareholder approval. Delaware courts have ruled that the entire fairness
standard will not apply to this transaction if (1) the tender offer is subject
to a non-waivable condition that a majority of the minority shares be
tendered, (2) the controlling shareholder agrees to effect a short-form merger
at the same price immediately after the tender offer, and (3) the controlling
shareholder does not make "retributive threats" to the special committee. It
is not clear whether Missouri courts would apply this exception to the entire
fairness standard.
II. Issuer Tender Offer.
-------------------
If the goal is to reduce the number of shareholders rather than to go
completely private, another transaction structure that can be utilized is an
issuer tender offer targeted to reduce the number of shareholders a
corporation to less than 300. The company would make a tender offer to all
holders of shares, or in some circumstances, the company may limit the offer
to odd-lot holders.
A. Advantages.
----------
1. Standard of Review. If the tender offer is not coercive and
full disclosure is provided, the tender offer should be evaluated under the
business judgment rule. The business judgment rule is a legal presumption of
validity that prevents a court from substituting its judgment for that of the
board of directors when there is a business decision made on an informed
basis, in good faith, and in the honest belief that the action taken was in
the best interests of the corporation and its shareholders. In order to
invoke the business judgment rule, directors must act consistently with their
fiduciary duties of care, good faith and loyalty. Any plaintiff would have
the burden of proof to shift the presumption of validity created under the
business judgment rule.
2. Price. Delaware courts have held that the purchase price need
not be "fair" as long as there is full disclosure and the offer is not
coercive. Negotiation of the purchase price with a special committee of
outside directors is not required; however, it may provide an additional level
of comfort.
3. Process, Expense and Timing. If the tender offer is made to
holders who include those holding more than 100 shares, the Company will have
to file with the SEC a Schedule TO and Schedule 13E-3 (which may be combined
in the Schedule TO) and must comply with the issuer tender offer rules in Rule
13e-4. If the tender offer is limited to odd-lot holders, the Company will be
required to file with the SEC a Schedule 13E-3, but would not be subject to
all of the issuer tender offer rules. The odd-lot tender offeror is generally
not subject to withdrawal rights or proration requirements.
B. Disadvantages.
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Each shareholder makes an individual determination as to whether to
tender or hold its, his or her shares. Unlike a merger or reverse stock
split, shareholders who do not elect in favor of the transaction are not
forced out. In order to help ensure that the business judgment rule standard
is applied, companies will often include a non-waivable condition in the
tender offer that a majority of shares subject to the offer be tendered before
the tender offer can be accepted. While the tender offer alternative provides
less assurance of achieving the objective of getting the number of record
holders below 300, this disadvantage is also the basis for finding a lack of
coercion which results in greater legal protection for the corporation, its
board of directors and management.
III. Reverse Stock Split.
-------------------
Another transaction structure is to reduce the number of shares
outstanding, and the number of shareholders, through a reverse stock split.
The reverse stock split can be used to reduce the number of shareholders below
300 and also to go completely private. In order to avoid disruption to
continuing shareholders, a reverse stock split will often be combined with a
subsequent forward stock split so that the holdings of continuing shareholders
are not changed.
A. Advantages.
----------
This structure provides a higher level of assurance than the tender offer
that the objective of getting the number of record holders below 300 will be
accomplished. This level of assurance would decline, but the legal protection
would go up, if a condition were added to the vote on the charter amendment
effecting the reverse stock split that the reverse split be approved by a
majority of the minority shareholders.
B. Disadvantages.
-------------
1. Standard of Review. Whether the entire fairness standard or
business judgment rule applies depends upon whether a public market still
exists after completion of the transaction. A 2002 decision by the Delaware
Supreme Court case, suggests that the business judgment rule standard should
apply, at least where there is a liquid market for the stock, and thus the
shareholders that were eliminated can easily get back into ownership of the
stock at or close to the same price he or she was paid in the reverse stock
split. On the other hand, a Delaware Chancery Court case indicated the
statutory standard would not be met where a reverse stock split eliminated
holders constituting approximately 80% of all public shareholders based on a
market price that was not determined by a liquid market. It is likely in this
case that the entire fairness standard would apply.
2. Price. If a corporation's charter authorizes the corporation
to pay cash, in lieu of issuing a fractional share, the corporation would have
the authority to achieve going private objectives through a reverse stock
split. The amount of cash to be paid under that relevant statute is generally
equal to the "value" of the fractional share that is acquired.
3. Process, Expense and Timing. A reverse stock split is effected
by an amendment to the charter which reduces the number of outstanding shares
by a specified proportion (e.g., 1 for 100) and correspondingly increases the
par value of the remaining shares. Generally, it would require approval of
the amendment by the board of directors and the holders of at least a majority
of the outstanding shares. In order to increase the likelihood that the
business judgment rule standard would apply, it could be advisable that
approval of the amendment be conditioned on also receiving the affirmative
vote of a majority of the odd-lot shares proposed to be cashed-out by the
reverse stock split.
Conducting a reverse stock split requires preparation of a Schedule 13E-3
and proxy statement, SEC review and clearance of the Schedule 13E-3 and of the
proxy statement before it is mailed, and a reasonable notice period (usually
30 days) before the meeting of shareholders to approve the charter amendment
is held. It should be less expensive and time-consuming than a long-form
merger.
IV. Sale of the Company to a Third Party.
------------------------------------
For a number of reason, including, without limitation, protection of
Directors and management, the Committee should consider whether the sale of
the entire Company to a third party is a viable option. The Committee could
hire an investment banking firm to provide a "fairness opinion" (see IB2
above) as to the price being offered to shareholders of the Company
stock and to determine the market for the Company and the pool of potential
suitors that might be in the market. Obviously, this structure, among others
set out in this Memorandum puts the entire Company at risk to hostile bidders,
but we suggest that the Committee consider this option.
The sale option would require due diligence by a potential bidder(s),
which can be time consuming and costly.
V. Information Required to Perform a Tailored Analysis.
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Should the Committee decide to continue to investigate the Company's
options with respect to a going private transaction (or sale), we request the
Committee provide us with the following information and documentation:
A. Any regulatory order issued against the Company and the Bank in the
last three years;
B. Shareholder profile (number of shareholders owning less than 50
shares, 100 shares, 200 shares, etc.);
C. List of non-objecting beneficial owners;
D. List of street name holders;
E. Copies of the Articles of Incorporation and Bylaws of the Company
and the Bank;
F. Any indications of interest for a purchase of the Company in the
last three years (oral or written);
G. The number of copies of the proxy statement that were requested by
street name holders for the last annual meeting;
H. Any recent valuations;
I. Copies of any stock option agreements and stock awards;
J. Copies of the employee stock option plan, if any;
K. Copies of any retirement plan, especially ones that hold stock of
the Company; and
L. Copies of any shareholder agreements.
Following review of the foregoing, we may determine that additional
documentation should be reviewed. To that end, we will formulate a follow-up
request list as necessary. In addition, shortly after our review of the
foregoing, we would like to meet with members of the Committee.
Exhibit 99.5
Stinson, Morrison Hecker LLP Memorandum, "Summary of July 3, 2007
Meeting and Summary Action Items" dated July 6, 2007
[STINSON MORRISON HECKER LLP LETTERHEAD]
Memo
To: The Going Private Committee of the Board of Directors of First
Bancshares, Inc. (the "Committee")
From: Bob Monroe
Jack Bowling
Date: July 6, 2007
Re: Summary of July 3, 2007 Meeting and Summary Action Items
------------------------------------------------------------------------------
This Memorandum summarizes our initial meeting with the Committee to
discuss our Memorandum of May 21, 2007 (the "May 21 Memo") summarizing the
various structures a corporation can utilize for "going private." In
addition, this Memorandum summarily outlines certain action items for the
Committee to consider.
Our initial meeting with the Committee took place on July 3, 2007 with
all members of the Committee present (in person or by phone), as well as,
members of the Board of Directors in attendance at the invitation of the
Committee. The purpose of the meeting was to discuss the May 21 Memo and to
ask questions regarding the various structures outlined in the May 21 Memo.
Based on the discussions at the meeting, the Committee indicated that although
an issuer tender offer may pose less risk to the Company and the Board of
Directors, the certainty of result provided by a reverse stock split (assuming
the necessary votes are garnered for approval of such split) outweighed any
potential exposure. We explained to the committee the differing standards of
review a court would utilize depending on whether a "going private"
transaction was effected via an issuer tender offer or a reverse stock split.
Based on the fact that the meeting was not a formal meeting of the Committee
and was merely an informational meeting to help the Committee and the other
members of the Board of Directors better understand their options, no formal
resolutions were passed and no actions were sanctioned.
Based on the meeting, we believe the following actions should be taken in
order to initiate the information gathering process necessary for the
Committee to ultimately render a recommendation to the Board of Directors.
1. Please direct Company counsel to provide us with the resolution
and/or charter authorizing the Committee and outlining its powers
and responsibilities. We need to review this in order to make sure
it adequately covers the intended scope of the Committee.
2. On a confidential basis, the Committee should begin to identify and
contact potential financial advisors that will consult on any going
private transaction and ultimately will be requested to render a
fairness opinion. We would be more than happy to recommend
financial advisors and to assist in the interview process.
3. Please provide us with the DTC report showing the total number of
beneficial holders of Company stock. This report should be as of
the most recent practicable date.
4. Please direct Company counsel to assess and summarize the voting
requirements and approval process for the various transaction
potential structures based on their review of the Company's
governance documents. We will also undertake the same action.
5. Please provide us with the anticipated date for mailing the proxy
statement for this year and please confirm the date of the annual
meeting.
6. Please establish a meeting of the Committee sometime next week.
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