UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number: 0-22842
FIRST BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Missouri 43-1654695
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
142 East First Street, Mountain Grove, Missouri 65711
-----------------------------------------------------
(Address of principal executive offices)
(417) 926-5151
--------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class: Outstanding at May 10, 2007:
Common Stock, $.01 par value 1,550,815 Common Shares
Transitional Small Business Disclosure Format Yes No X
----- -----
1
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page No.
Part I. Financial Information ---------
-------------------------------
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
at March 31, 2007 and June 30, 2006 (Unaudited) 3
Consolidated Statements of Income for the Three
and Nine Months Ended March 31, 2007 and 2006
(Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended March 31,
2007 and 2006 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2007 and 2006
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis or Plan
of Operation 11
Item 3. Controls and Procedures 19
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index 22
Certifications 23
2
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, 2007 June 30, 2006
(In thousands)
ASSETS
------
Cash and cash equivalents $ 27,817 $ 23,474
Certificates of deposit 1,731 3,827
Securities available-for-sale 27,366 20,884
Securities held-to-maturity 10,967 19,210
Federal Home Loan Bank stock, at cost 1,696 1,612
Loans receivable, net 154,394 141,987
Accrued interest receivable 1,346 1,178
Prepaid expenses 537 292
Property and equipment 7,963 8,028
Real estate owned 367 497
Intangible assets 298 336
Deferred tax asset, net 673 718
Income taxes recoverable 68 317
Bank-owned life insurance 5,867 5,705
Other assets 499 330
--------- ---------
Total assets $ 241,589 $ 228,395
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 188,089 $ 179,141
Retail repurchase agreements 1,133 -
Advances from Federal Home Loan Bank 25,000 22,000
Accrued expenses and accounts payable 729 963
--------- ---------
Total liabilities 214,951 202,104
--------- ---------
Preferred stock, $.01 par value;
2,000,000 shares authorized, none issued - -
Common stock, $.01 par value; 8,000,000
shares authorized, 2,895,036 issued at
March 31, 2007 and June 30, 2006, 1,551,315
and 1,552,480 outstanding at December 31
and June 30, respectively 29 29
Paid-in capital 17,908 17,852
Retained earnings - substantially
restricted 27,844 27,703
Treasury stock - at cost; 1,343,721 and
1,342,556 shares at March 31, 2007 and
June 30, 2006, respectively (19,105) (19,085)
Accumulated other comprehensive
loss (38) (208)
--------- ---------
Total stockholders' equity 26,638 26,291
--------- ---------
Total liabilities and stockholders'
equity $ 241,589 $ 228,395
========= =========
See notes to consolidated financial statements
3
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands,
except per share data)
Interest Income:
Loans receivable $ 2,733 $ 2,504 $ 8,075 $ 7,890
Securities 478 473 1,390 1,286
Other interest-earning assets 226 202 616 494
------- ------- ------- -------
Total interest income 3,437 3,179 10,081 9,670
------- ------- ------- -------
Interest Expense:
Deposits 1,551 1,172 4,299 3,195
Retail repurchase agreements 10 - 11 -
Borrowed funds 352 383 1,037 1,198
------- ------- ------- -------
Total interest expense 1,913 1,555 5,347 4,393
------- ------- ------- -------
Net interest income 1,524 1,624 4,734 5,277
Provision for loan losses 40 77 280 914
------- ------- ------- -------
Net interest income after
provision for loan losses 1,484 1,547 4,454 4,363
------- ------- ------- -------
Non-interest Income:
Service charges and other fee
income 426 429 1,372 1,394
Gain on sale of securities
available-for-sale 177 - 177 -
Gain (loss) on sale of property and
equipment and real estate owned - (111) 94 (141)
Income from bank-owned life
insurance 53 64 162 182
Other 35 56 114 112
------- ------- ------- -------
Total non-interest income 691 438 1,919 1,547
------- ------- ------- -------
Non-interest Expense:
Compensation and employee
benefits 978 963 3,207 3,008
Occupancy and equipment 387 262 1,146 812
Professional fees 220 62 440 241
Customer deposit account processing
fees - 50 - 167
Deposit insurance premiums 5 6 17 19
Other 385 371 1,270 1,320
------- ------- ------- -------
Total non-interest expense 1,975 1,714 6,080 5,567
------- ------- ------- -------
Income (loss) before taxes 200 271 293 343
Income taxes (benefit) 8 (5) 28 (51)
------- ------- ------- -------
Net income $ 192 $ 276 $ 265 $ 394
======= ======= ======= =======
Earnings per share - basic $ 0.12 $ 0.18 $ 0.17 $ 0.25
======= ======= ======= =======
Earnings per share - diluted 0.12 0.18 0.17 0.25
======= ======= ======= =======
Dividends per share 0.00 0.04 0.08 0.12
======= ======= ======= =======
See notes to consolidated financial statements
4
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2007 2006 2007 2006
---- ---- ---- ----
(Dollars in thousands)
Net Income $ 192 $ 276 $ 265 $ 394
Other comprehensive income,
net of tax:
Change in unrealized gain (loss)
on securities available-for-
sale, net of deferred
income taxes (54) (46) 170 (198)
------- ------- ------- -------
Other comprehensive income (loss) (54) (46) 170 (198)
------- ------- ------- -------
Comprehensive income $ 138 $ 230 $ 435 $ 196
======= ======= ======= =======
See notes to consolidated financial statements
5
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
2007 2006
---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income $ 265 $ 394
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 567 486
Amortization 38 51
Premiums and discounts on securities 28 38
Provision for loan losses 280 914
Stock based compensation 56 -
Deferred income taxes (55) (440)
(Gain) loss on sale of property and equipment
and real estate owned (94) 141
Gain on the sale of securities available-for-sale (177) -
Income from bank-owned life insurance (162) (183)
Net change in operating accounts:
Accrued interest receivable and other assets (582) (41)
Deferred loan costs 6 18
Income taxes recoverable 249 240
Accrued expenses and accounts payable (234) (125)
-------- --------
Net cash provided by operating
activities 185 1,493
-------- --------
Cash flows from investing activities:
Purchase of securities available-for-sale (12,115) (11,160)
Purchase of securities held to maturity (345) (2,000)
Proceeds from maturities of securities available-
for-sale 4,070 2,124
Proceeds from sales of securities available-for-
sale 1,986 -
Proceeds from maturities of securities held to
maturity 8,584 5,709
Purchase of Federal Home Loan Bank stock (84) -
Proceeds from redemption of Federal Home
Loan Bank stock - 25
Net change in certificates of deposit purchased 2,096 29
Net change in loans receivable (13,182) 15,635
Purchases of property and equipment (541) (523)
Proceeds from payment on note receivable - 3
Net proceeds from the sale of property and
equipment 42 -
Net proceeds from sale of real estate owned 710 362
-------- --------
Net cash provided by (used in) investing
activities (8,779) 10,204
-------- --------
Cash flows from financing activities:
Net change in deposits 8,948 (5,209)
Net change in retail repurchase agreements 1,133 -
Payments on borrowed funds - (1,174)
Proceeds from borrowed funds 3,000 100
Proceeds from sale of common stock - 15
Cash dividends paid (124) (186)
Purchase of treasury stock (20) (24)
-------- --------
Net cash provided by (used in) financing
activities 12,937 (6,478)
-------- --------
Net increase in cash and cash
equivalents 4,343 5,219
Cash and cash equivalents - beginning of period 23,474 20,617
-------- --------
Cash and cash equivalents - end of period $ 27,817 $ 25,836
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 5,343 $ 4,274
======== ========
Income taxes 18 -
======== ========
Supplemental schedule of non-cash investing
and financing activities:
Loans transferred to real estate acquired in
settlement of loans $ 495 $ 188
======== ========
See notes to consolidated financial statements
6
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for interim reporting by First
Bancshares, Inc. (the "Company") and its consolidated subsidiaries, First
Home Savings Bank (the "Bank") and SCMG, Inc. are consistent with the
accounting policies followed for annual financial reporting. All
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the periods reported have been included
in the accompanying unaudited consolidated financial statements, and all
such adjustments are of a normal recurring nature. The accompanying
consolidated statement of financial condition as of June 30, 2006, which
has been derived from audited financial statements, and the unaudited
interim financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading. It is suggested that
these consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's
latest shareholders' Annual Report on Form 10KSB for the year ended June
30, 2006 (Form 10-KSB). The results for theses interim periods may not be
indicative of results for the entire year or for any other period.
2. ACCOUNTING DEVELOPMENTS
In February 2006, FASB issued SFAS 155, "Accounting for Certain Hybrid
Financial Instruments", which permits, but does not require, fair value
accounting for any hybrid financial instrument that contains an
embedded derivative that would otherwise require bifurcation in
accordance with SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities". The statement also subjects beneficial interests
in securitized financial assets to the requirements of SFAS 133. For the
Company, this statement is effective for all financial instruments
acquired, issued, or subject to remeasurement after the beginning of its
fiscal year that begins after September 15, 2006, with earlier adoption
permitted. The Company does not expect that the adoption of this
Statement will have a material impact on its financial position, results
of operation or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes." This interpretation
applies to all tax positions accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes." FIN 48 clarifies the application of
SFAS No. 109 by defining the criteria that an individual tax position
must meet in order for the position to be recognized within the financial
statements and provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition for tax positions. This interpretation is
effective for fiscal years beginning after December 15, 2006, with
earlier adoption permitted. The Company does not expect that the adoption
of this interpretation will have a material impact on its financial
position, results of operation or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." This Statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. It clarifies that fair value is the price that would
be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the market in which
the reporting entity transacts. This Statement does not require any new
fair value measurements, but rather, it provides enhanced guidance to
other pronouncements that require or permit assets or liabilities to be
measured at fair value. This Statement is effective for fiscal years
beginning after November 15, 2007,
7
with earlier adoption permitted. The Company does not expect that the
adoption of this Statement will have a material impact on its financial
position, results of operation or cash flows.
In September 2006, the FASB issued Statement No. 158, ("SFAS No. 158"),
"Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements No. 87, 88, 106
and 132(R)." SFAS No. 158 requires a company that sponsors a
postretirement benefit plan to fully recognize, as an asset or liability,
the overfunded or underfunded status of its benefit plan in its balance
sheet. The funded status is measured as the difference between the fair
value of the plan's assets and its benefit obligation (projected benefit
obligation for pension plans and accumulated postretirement benefit
obligation for other postretirement benefit plans). Currently, the
funded status of such plans is reported in the notes to the financial
statements. This provision is effective for public companies for fiscal
years ending after December 15, 2006. In addition, SFAS No. 158 also
requires a company to measure its plan assets and benefit obligations as
of its year end balance sheet date. Currently, a company is permitted to
choose a measurement date up to three months prior to its year end to
measure the plan assets and obligations. This provision is effective for
all companies for fiscal years ending after December 15, 2008. The
Company does not expect that the adoption of this Statement will have a
material impact. on its financial position, results of operation or cash
flows.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 108 to require quantification of
financial statement misstatements under both the "rollover approach" and
the "iron curtain approach". The "rollover approach" quantifies a
misstatement based on the amount of the error originating in the current
year income statement, but ignores the effects of correcting the portion
of the current year balance sheet misstatement that originated in prior
years. The "iron curtain approach" quantifies a misstatement based on the
effects of correcting the misstatement existing in the balance sheet at
the end of the current year, irrespective of the misstatement's year(s)
of origination. The provisions of SAB No. 108 must be applied to
financial statements for fiscal years ending after November 15, 2006.
The Company does not anticipate that the quantification of financial
statement misstatements pursuant to the provisions of SAB No. 108 will
result in any material impact on its financial position, results of
operation or cash flows.
In February 2007, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities - Including an amendment of FASB Statement No. 115,
which provides all entities, including not-for-profit organizations, with
an option to report selected financial assets and liabilities at fair
value. The objective of the Statement is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in
earnings caused by measuring related assets and liabilities differently
without having to apply the complex provisions of hedge accounting.
Certain specified items are eligible for the irrevocable fair value
measurement option as established by Statement No. 159. Statement No.
159 is effective as of the beginning of an entity's first fiscal year
beginning after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007
provided the entity also elects to apply the provisions of Statement No.
157, Fair Value Measurements. The Company is currently evaluating the
impact that the adoption of this Statement will have on its financial
position, results of operation or cash flows.
3. EARNINGS PER SHARE
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings
per share includes the effect of the issuance of shares eligible to be
issued pursuant to stock option agreements.
8
The table below presents the numerators and denominators used in the
basic earnings per common share computations for the three and nine month
periods ended March 31, 2007 and 2006. For all periods presented, no
dilutive effect would result from the issuance of shares eligible to be
issued pursuant to stock option agreements.
Three Months Ended Nine Months Ended
March 31, March 31,
-------- --------
2007 2006 2007 2006
Basic earnings per common share: ---- ---- ---- ----
Numerator:
Net income $191,895 $276,022 $264,564 $394,155
======== ======== ======== ========
Denominator:
Weighted average common
shares outstanding 1,551,666 1,552,610 1,551,917 1,553,153
========= ========= ========= =========
Basic earnings per common
share $0.12 $0.18 $0.17 $0.25
===== ===== ===== =====
4. COMMITMENTS
At March 31, 2007 and June 30, 2006, the Company had outstanding
commitments to originate loans and fund unused lines of credit totaling
$5.4 million and $6.3 million, respectively, excluding undisbursed
portions of loans in process. It is expected that outstanding loan
commitments will be funded with existing liquid assets.
5. STOCK OPTION PLAN
Prior to July 1, 2006, the Company accounted for its stock option plans
under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees and related Interpretations, as
permitted by SFAS No. 123, Accounting for Stock-Based Compensation. No
stock-based employee compensation cost was recognized for stock options
in the Statement of Income for the year ended June 30, 2006 or prior
years, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. Effective July 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in the three- and nine-month periods ended
March 31, 2007 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of July 1, 2006, based
on the grant date fair value estimated in accordance with the original
provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to July 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of
Statement 123(R). Results for prior periods have not been restated. As
a result of adopting Statement 123(R) on July 1, 2006, the Company's
pre-tax net income for the three and nine month periods ended March 31,
2007 were $14,000 and $56,000 lower, respectively, than if the Comapny
had continued to account for share-based compensation under Opinion 25.
The Company uses historical data to estimate the expected term of the
options granted, volatilities, and other factors. Expected volatilities
are based on the historical volatility of the Company's common stock over
a period of time. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at
the time of grant. The dividend rate is equal to the dividend rate
9
in effect on the date of grant. The Company used the following
assumptions for grants in fiscal 2007, respectively: dividend rates of
.00% to .99%, price volatility of 18.36% to 20.29%, risk-free interest
rates of 4.58% to 5.02%, and an expected life of 7.5 to 10 years.
A summary of option activity under the Plan as of March 31, 2007, and
changes during the nine months ended March 31, 2007, is presented below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value
------- ------ -------- ----------- ---------
(in years)
Outstanding at beginning
of period 48,000 $ 17.46
Granted 47,500 16.76
Exercised - -
Forfeited or expired (31,000) 17.78
Outstanding at end of period 64,500 $ 16.76 9.70 -
Exercisable at end of period 400 $ 17.79 8.90 -
A summary of the Company's nonvested shares as of March 31, 2007, and
changes during the nine months ended March 31, 2007, is presented below:
Weighted-
Average
Grant-Date
Nonvested Shares Shares Fair Value
---------------- ------ ----------
Nonvested at July 1, 2006 43,000 $ 6.25
Granted 47,500 6.92
Vested (5,400) 6.22
Forfeited (21,000) 6.22
------
Nonvested at March 31, 2007 64,100 6.78
======
As of March 31, 2007, there was $210,000 of total unrecognized
compensation cost related to nonvested share-based compensation
arrangements granted under the Plan. That cost is expected to be
recognized over a weighted-average period of approximately 1.5 years.
The pro forma disclosures previously permitted under SFAS No. 123 are no
longer an alternative to financial statement recognition. SFAS No. 123
established a fair value based method for financial accounting and
reporting for stock-based employee compensation plans and for
transactions in which an entity issued its equity instruments to acquire
goods and services from nonemployees. However, the standard allowed
compensation to continue to be measured by using the intrinsic value
based method of accounting prescribed by APB No. 25, but required
expanded disclosures. The Company had elected to apply the intrinsic
value based method of accounting for stock options issued to employees.
Accordingly, prior to July 1, 2006, no compensation cost had been
recognized by the Company in its financial statements. Had compensation
cost for the Plan been determined based on the grant date fair values of
awards (the method described in SFAS No. 123), the approximate reported
net income and earnings per share would not have been materially
different from amounts reported in the consolidate statements of income.
6. RECLASSIFICATIONS
Certain amounts in the prior period financial statements have been
reclassified, with no effect on net income or stockholders' equity, to be
consistent with the current period classification.
10
Item 2. Management's Discussion and Analysis or Plan of Operation
General
First Bancshares, Inc. is a unitary savings and loan holding company whose
primary assets are First Home Savings Bank and SCMG, Inc. The Company was
incorporated on September 30, 1993, for the purpose of acquiring all of the
capital stock of First Home Savings Bank in connection with Bank's conversion
from a state-charted mutual to a state-chartered stock form of ownership. The
transaction was completed on December 22, 1993. On March 31, 2007, the Company
had total assets of $241.6 million, total net loans of $154.4 million, total
deposits of $188.1 million and stockholders' equity of $26.6 million. The
Company's common shares trade on The Nasdaq Global Market of The NASDAQ Stock
Market LLC under the symbol "FBSI."
The following discussion focuses on the consolidated financial condition of
the Company and its subsidiaries, at March 31, 2007, compared to June 30,
2006, and the consolidated results of operations for the three and nine month
periods ended March 31, 2007, compared to the three and nine month periods
ended March 31, 2006. This discussion should be read in conjunction with the
Company's consolidated financial statements, and notes thereto, for the year
ended June 30, 2006.
Corporate Developments and Overview
As discussed in the Company's Form 10-QSB filing for the quarter ended
December 31, 2006, the Bank entered into a memorandum of understanding ("MOU")
with the Office of Thrift Supervision (the "OTS"). The MOU resulted from
issues noted during the most recent examination of the Bank by the OTS, and
includes deficiencies in 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 Bank
established a schedule, during which the issues noted in the MOU have been or
will be addressed and resolved. The schedule is consistent with the
requirements set forth by the OTS, and management believes that most of the
issues raised by the OTS have been addressed and resolved. The few remaining
issues are scheduled to be resolved by the end of fiscal 2007.
During the second quarter of fiscal 2007, there were several changes in
composition of senior management of both the Company and the Bank. In
November, Ronald J. Walters was named Chief Financial Officer of both the
Company and the Bank. In December, James W. Duncan resigned as President and
Chief Executive Officer of both the Company and the Bank. Daniel P. Katzfey,
Executive Vice President and Chief Lending Officer, was named Interim
President and CEO. On January 19, 2007, Mr. Katzfey became President and Chief
Executive Officer of both the Company and the Bank. The Boards of Directors of
the Company and the Bank were expanded in connection with the addition of a
sixth person and the appointment of an advisory director. During the quarter
ended March 31, 2007, James W. Duncan resigned as a director of both the
Company and the Bank. Mr. Daniel P. Katzfey, the Chief Executive Officer of
both the Company and the Bank, was appointed to both boards.
As the result of the personnel changes and the MOU, both of which were
discussed above, and other changes in products, operations and procedures, the
Bank needed to fill several positions, including Chief Lending Officer, credit
analyst and controller. In March 2007, Mr. Dale W. Keenan, was named Executive
Vice President and Senior Loan Officer of the Bank, and Mr. John K. Francka,
was named Senior Vice President-Chief Credit Officer of the Bank. Both Messrs.
Keenan and Francka have extensive experience in lending and management. In
addition, Mr. Jeffrey Palmer was named Controller of the Bank.
During the quarter March 31, 2007, the Bank obtained permission from the State
of Missouri to open a loan production office in Springfield, Missouri. This
office complements the full-service branch office opened in Springfield in
July 2006. The Bank has added two lenders and two loan processors in the loan
production office
11
who have extensive experience in the origination and sale into the secondary
market of single-family mortgage loans. Loans sold into the secondary market
will be sold with servicing released.
The Bank has continued to seek opportunities to reduce its non-interest
expense and improve customer service through the utilization of technology. At
the beginning of the current fiscal year, the Bank went from manual posting of
all customer transactions to branch capture with electronic settlement with
the Federal Reserve. This eliminated courier expenses to route checks and
other items from the branches to the Mountain Grove office, and to the Federal
Reserve. In addition, the Bank also utilized imaging features of branch
capture, along with auto-mail technology, to bring customer statement
processing in-house. Third party processing costs were eliminated, postage
expense decreased, and statement delivery time to customers decreased from
approximately three weeks to three days.
During the quarter ended March 31, 2007, the Bank began to extend this
technology to customers with high volumes of check deposits, allowing for
remote image capture with equipment located at the customer facilities. In
addition, remote image capture provides a powerful marketing tool when calling
on prospective customers.
Financial Condition
As of March 31, 2007, First Bancshares, Inc. had assets of $241.6 million,
compared to $228.4 million at June 30, 2006. The increase in total assets of
$13.2 million, or 5.8%, reflects the Company's planned strategy to increase
loans receivable by utilizing excess cash, a portion of cash flows from
maturities and paydowns on securities and increases in deposits. Net loans
receivable increased $12.4 million during the nine-month period ended March
31, 2007, while total investments decreased $3.9 million, during this period.
Deposits and advances from the Federal Home Loan Bank of Des Moines increased
by $8.9 million and $3.0 million, respectively.
Net loans receivable totaled $154.4 million as of March 31, 2007, an increase
of $12.4 million from $142.0 million at June 30, 2006. The increase in loans
is, in part, the result of capitalizing on new lending opportunities brought
about by the opening of the Bank's branch in Springfield, Missouri during the
first quarter of the current fiscal year.
The Company's deposits grew $8.9 million from $179.2 million as of June 30,
2006 to $188.1 million as of March 31, 2007. The growth is the result of new
deposit products and changes in existing deposit products which were initiated
during the quarter ended December 31, 2006. In addition, the Company began to
offer retail repurchase agreements during the quarter ended December 31, 2006,
to enhance the Bank's product mix and as an additional tool to attract
business customers. At March 31, 2007, retail repurchase agreements totaled
$1.1 million.
Advances from the Federal Home Loan Bank of Des Moines increased by $3.0
million to $25.0 million at March 31, 2007 from $22.0 million at June 30,
2006. The increase was the result of deposit outflows during the quarter ended
September 30, 2006 which necessitated additional borrowing.
As of March 31, 2007 the Company's shareholders' equity totaled $26.6 million,
compared to $26.3 million as of June 30, 2006. The increase of $300,000 was
due to net income of $265,000 during the first nine months of the fiscal year
and a positive change in the mark-to-market adjustment, net of taxes, of
$170,000 on the Company's available for sale securities portfolio. This
increase was partially offset by the payment of dividends on common stock
during the first and second quarters of the current fiscal year.
Non-performing Assets and Allowance for Loan Losses
Generally, when a loan becomes delinquent 90 days or more, or when the
collection of principal or interest becomes doubtful, the Company will place
the loan on non-accrual status and, as a result of this action, previously
accrued interest income on the loan is reversed against current income. The
loan will remain on non-accrual
12
status until the loan has been brought current or until other circumstances
occur that provide adequate assurance of full repayment of interest and
principal.
Non-performing assets increased from $1.3 million, or 0.5% of total assets at
June 30, 2006 to $3.5 million, or 1.5% of total assets, at March 31, 2007.
The Bank's non-performing loans consist of non-accrual loans, past due loans
over 90 days, impaired loans not past due or past due less than 60 days, real
estate owned and other repossessed assets. The significant increase in
non-performing assets was the result of loans to two borrowers becoming
non-performing during the quarter. One borrower, with loans totaling $1.6
million filed for bankruptcy protection. Losses on these loans are anticipated
to be limited due to Small Business Administration ("SBA") guarantees and have
been included in the analysis of the allowance for loan losses. A $620,000
loan to another borrower became non-performing when the sale of the collateral
property did not take place. This loan also carries an SBA guarantee and was
included in the analysis of the allowance for loan losses.
Classified assets. Federal regulations provide for the classification of
loans and other assets as "substandard", "doubtful" or "loss", based on the
level of weakness determined to be inherent in the collection of the principal
and interest. When loans are classified as either substandard or doubtful,
the Company may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem loans. When assets are classified as loss, the
Company is required either to establish a specific allowance for loan losses
equal to 100% of that portion of the loan so classified, or to charge-off such
amount. The Company's determination as to the classification of its loans and
the amount of its allowances for loan losses are subject to review by its
regulatory authorities, which may require the establishment of additional
general or specific allowances for loan losses.
On the basis of management's review of its loans and other assets, at March
31, 2007, the Company had classified a total of $3.7 million of its assets as
substandard, $87,000 as doubtful and $20,000 as loss. This compares to
classifications at June 30, 2006 of $5.9 million substandard, $686,000
doubtful and none as loss. This reduction is primarily due to a decrease in
past due loans and to a lesser extent payoffs of problem credits. The Bank
has implemented stricter internal policies relating to the identification and
monitoring of its problem loans due to the problems experienced in the
commercial, commercial business and consumer loan portfolios.
In addition to the classified loans, the Bank has identified an additional
$6.3 million of credits at March 31, 2007 on its internal watch list compared
to $5.3 million at September 30, 2006. Management has identified these loans
as high risk credits and any deterioration in their financial condition could
increase the classified loan totals. The increase in the internal watch list
is the result of the stricter internal policies relating to the identification
and monitoring of problem loans.
Allowance for loan losses. The Company establishes its provision for loan
losses, and evaluates the adequacy of its allowance for loan losses based upon
a systematic methodology consisting of a number of factors including, among
others, historic loss experience, the overall level of classified assets and
non-performing loans, the composition of its loan portfolio and the general
economic environment within which the Bank and its borrowers operate.
At March 31, 2007, the Company has established an allowance for loan losses
totaling $2.6 million compared to $2.5 million at June 30, 2006. The
allowance represents approximately 83% and 186% of the total non-performing
loans at March 31, 2007 and June 30, 2006, respectively.
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
Future additions to the allowance for loan losses may become necessary based
upon changing economic conditions, increased loan balances or changes in the
underlying collateral of the loan portfolio.
13
Critical Accounting Policies
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The financial
information contained within these statements is, to a significant extent,
financial information that is based on approximate measures of the financial
effects of transactions and events that have already occurred. Based on its
consideration of accounting policies that involve the most complex and
subjective decisions and assessments, management has identified its most
critical accounting policy to be the policy related to the allowance for loan
losses.
The Company's allowance for loan loss methodology incorporates a variety of
risk considerations, both quantitative and qualitative, in establishing an
allowance for loan loss that management believes is appropriate at each
reporting date. Quantitative factors include the Company's historical loss
experience, delinquency and charge-off trends, collateral values, changes in
non-performing loans, and other factors. Quantitative factors also incorporate
known information about individual loans, including borrowers' sensitivity to
interest rate movements. Qualitative factors include the general economic
environment in the Company's markets, including economic conditions throughout
the Midwest and, in particular, the state of certain industries. Size and
complexity of individual credits in relation to loan structure, existing loan
policies, and pace of portfolio growth are other qualitative factors that are
considered in the methodology. As the Company adds new products and increases
the complexity of its loan portfolio it will enhance its methodology
accordingly. Management may have reported a materially different amount for
the provision for loan losses in the statement of operations to change the
allowance for loan losses if its assessment of the above factors were
different. This discussion and analysis should be read in conjunction with
the Company's financial statements and the accompanying notes presented
elsewhere herein, as well as the portion of this Management's Discussion and
Analysis section entitled "Non-performing Assets and Allowance for Loan
Losses." Although management believes the levels of the allowance as of both
March 31, 2007 and June 30, 2006 were adequate to absorb probable losses
inherent in the loan portfolio, a decline in local economic conditions, or
other factors, could result in increasing losses.
Results of Operations for the Three Months Ended March 31, 2007 Compared to
the Three Months Ended March 31, 2006
General. For the three months ended March 31, 2007, the Company recorded net
income of $192,000, or $0.12 diluted share, compared to net income of
$276,000, or $0.18 per diluted share, for the same period in 2006. Earnings
in the quarter were reduced by a decrease in net interest income and an
increase in non-interest expense, which were partially offset by an increase
in non-interest income, which included a gain on the sale of securities
available-for-sale, and a decrease in the provision for loan losses.
Net interest income. The Company's net interest income for the three months
ended March 31, 2007 was $1.5 million, compared to $1.6 million for the same
period in 2006. The decrease in net interest income is primarily the result
of an increase in the cost of funds for the 2007 period compared to the same
period in 2006.
Interest income. Interest income for the three months ended March 31, 2007
increased $258,000, or 8.1%, to $3.4 million compared to $3.2 million for the
same period in 2006. Interest income from loans increased $229,000 to $2.7
million from $2.5 million in 2006. This was attributable to an increase in
average loans to $155.4 million during the 2007 period from $145.3 million
during the comparable 2006 period, and to an increase in the yield on loans to
7.13% during the three months ended March 31, 2007 from 7.03% during the
comparable period in 2006. The increase in average loans was the result of an
increase in lending volume during the 2007 period, and the increase in yield
was the result of an upward trend in interest rates between periods.
Interest income from investment securities and other interest-earning assets
for the three months ended March 31, 2007 increased $29,000 to $704,000 from
$675,000 for the same period in 2006. The increase was the result of an
increase in the yield on these assets to 6.41% for the 2007 period from 3.83%
for the 2006 period, which was
14
partially offset by a decrease in the average balance of these assets to $44.5
million during the three months ended March 31, 2007 from $70.5 million during
the comparable period in 2006.
Interest expense. Interest expense for the three months ended March 31, 2007
increased $358,000 or 23.0%, to $1.9 million from $1.6 million for the same
period in 2006. Interest expense on deposits increased $379,000 to $1.6
million in the three months ended March 31, 2007 from $1.2 million in the same
period in 2006. The increase resulted from an increase in average deposit
balances of $3.0 million to $185.3 million in the 2007 period from $182.3
million in the 2006 period, and to an increase in the average cost of deposits
to 3.39% in the 2007 period from 2.61% in the 2006 period. Interest expense on
other interest-bearing liabilities decreased $21,000 to $362,000 in the three
months ended March 31, 2007 from $383,000 in the comparable period in 2006.
Net interest margin. Net interest margin increased to 3.09% for the three
months ended March 31, 2007 from 3.06% for the three months ended March 31,
2006. Income from interest-earning assets increased by $258,000, or 8.1%, and
expense on interest-bearing liabilities increased by $358,000, or 23.0%, from
the 2006 period to the 2007 period.
Provision for loan loss. During the quarter ended March 31, 2007, the
provision for loan losses was $40,000, compared to $77,000 for the quarter
ended March 31, 2006. See "Non-performing Assets and Allowance for Loan
Losses" herein.
Non-interest income. For the three months ended March 31, 2007, non-interest
income totaled $691,000, compared to $438,000 for the three months ended March
31, 2006. The increase during the three month period resulted primarily from
a gain of $177,000 on the sale of assets, compared to a loss of $111,000
during the same period in the prior year. This increase was partially offset
by decreases of $3,000, $11,000 and $21,000 in services charges, income from
bank owned life insurance and other non-interest income, respectively.
Non-interest expense. Non-interest expense for the third fiscal quarter of
2007 totaled $2.0 million, compared to $1.7 million for the same quarter in
fiscal year 2006. Higher compensation expense and legal and consulting
expense were the main contributors to this increase.
The Company's compensation expense for the third fiscal quarter of 2007
totaled $978,000, which reflected a $15,000 increase compared to the same
quarter in fiscal 2006. The increase was primarily the result of staff
additions for the new branch office in Springfield, Missouri which opened in
July 2006 and for the loan production office which opened in March 2007. These
increases were partially offset by staffing changes during the last half of
fiscal 2006 and the first three quarters of fiscal 2007.
The Company also incurred higher expenses for occupancy and equipment and
professional fees during the three month period ended March 31, 2007 compared
to the same period in 2006. These were the result of the opening of the new
branch and new loan production office, costs related to system upgrades,
including the branch capture and electronic settlement upgrade discussed
earlier, and accounting and consulting expenses incurred during the third
quarter of fiscal 2007. The accounting and consulting expenses were, in part,
for outside services were related to internal audit and the MOU.
Income tax expense. State income tax expense and income tax benefits were
recorded based on the taxable income or loss of each of the companies. Federal
income taxes are calculated based on the combined income of the consolidated
group. Pre-tax net income is reduced by non-taxable income items and increased
by non-deductible expense items.
15
Results of Operations for the Nine Months Ended March 31, 2007 Compared to the
Nine Months Ended March 31, 2006
General. Earnings for the nine month period ended March 31, 2007 were
$265,000, or $0.17 per diluted share, compared to net income of $394,000, or
$0.25 per diluted share for the same period last year. Earnings for the nine-
month period were reduced by a decrease in net interest income and an increase
in non-interest expense, which were partially offset by an increase in
non-interest income, which included a gain on the sale of securities
available-for-sale, and a decrease in the provision for loan losses.
Net interest income. The Company's net interest income for the nine month
period ended March 31, 2007 totaled $4.7 million compared to $5.3 million for
the same period in 2006. The decrease in net interest income is primarily the
result of an increase in the cost of funds for of the 2007 period compared to
the same period in 2006.
Interest income. Interest income for the nine months ended March 31, 2007
increased $411,000, or 4.3%, to $10.1 million compared to $9.7 million for the
same period in 2006. Interest income from loans increased $185,000 to $8.1
million for the nine months ended March 31, 2007 from $7.9 million for the
same period in 2006. This was attributable to an increase in the yield on
loans to 7.15% for the nine months ended March 31, 2007 from 6.98% during the
same period in 2006, which was partially offset by a decrease in average loans
to $150.5 million during the 2007 period from $151.2 million during the 2006
period The decrease in average loans was the result of a decrease in lending
volume during the three months ended September 30, 2006, which reflected a
trend noted during the year ended June 30, 2006, and which was reversed during
the six months ended March 31, 2007. The increase in yield was the result of
an upward trend in market interest rates between these periods.
Interest income from investment securities and other interest-earning assets
for the nine months ended March 31, 2007 increased $226,000 to $2.0 million
from $1.8 million for the same period in 2006. The increase was the result of
an increase in the yield to 5.92% from 3.48% between periods, which was
partially offset by a decrease in the average balance of these assets to $45.1
million during the nine months ended March 31, 2007 from $66.9 million during
the comparable period in 2006.
Interest expense. Interest expense for the nine months ended March 31, 2007
increased $954,000, 21.7%, to $5.3 million from $4.4 million for the same
period in 2006. Interest expense on deposits increased $1.1 million to $4.3
million in the nine months ended March 31, 2007 from $3.2 million in the same
period in 2006. The increase resulted from an increase in the average cost of
deposits to 3.17% in the 2007 period from 2.31% in the 2006 period which was
partially offset by a decrease in the average deposit balances of $3.5 million
to $180.6 million in the 2007 period from $184.1 million in the 2006 period.
Interest expense on other interest-bearing liabilities decreased $150,000 to
$1.0 million in the nine months ended March 31, 2007 from $1.2 million in the
comparable period in 2006.
Net interest margin. Net interest margin decreased to 3.22% for the nine
months ended March 31, 2007 from 3.24% for the nine months ended March 31,
2006. Income from interest-earning assets increased by $411,000, or 4.3%, and
expense on interest-bearing liabilities increased by $954,000, or 21.7%, from
the 2006 period to the 2007 period.
Provision for loan loss. During the nine month period ended March 31, 2007,
the Company recorded a loan loss provision of $280,000, compared to a
provision of $914,000 during the same period in 2006. See "Non-performing
Assets and Allowance for Loan Losses" herein.
Non-interest income. Non-interest income for the nine months ended March 31,
2007 totaled $1.9 million compared to $1.5 million for the same period of
2006. The increase during the nine month period was the result of a positive
change in gain on the sale of assets of $410,000, including a $177,000 gain on
the sale of securities available-for-sale, and a $2,000 increase in other
non-interest income, which were partially offset by decreases of $22,000 and
$20,000 in service charges and income from bank owned life insurance,
respectively.
16
Non-interest expense. For the nine months ended March 31, 2007, non-interest
expense totaled $6.1 million, compared to $5.6 million for the same period in
the prior year. For the first nine months of fiscal 2007, compensation
expense totaled $3.2 million, which reflected an increase of $199,000 compared
to the same period in fiscal 2006. The increase was primarily the result of
staff additions for the new branch office in Springfield, Missouri which
opened in July 2006 and for the loan production office which opened in March
2007. These increases were partially offset by staffing changes during the
last half of fiscal 2006 and the first three quarters of fiscal 2007.
The Company also incurred higher expenses for occupancy and equipment and
professional fees during the nine months ended March 31, 2007 compared to the
same period in 2006. These were the result of the opening of the new branch
office and new loan production office, costs related to system upgrades,
including the branch capture and electronic settlement upgrade discussed
earlier, accounting and consulting expenses incurred during the second and
third fiscal quarters of 2007. The accounting and consulting expenses were,
in part, for outside services required as the result of the Company and Bank
being without a Chief Financial Officer for approximately two months and for
services related to internal audit and the MOU.
Income tax expense. State income tax expense and income tax benefits were
recorded based on the taxable income or loss of each of the companies. Federal
income taxes are calculated based on the combined income of the consolidated
group. Pre-tax net income is reduced by non-taxable income items and increased
by non-deductible expense items.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, principal and
interest payments on loans, investments, and mortgage-backed securities, and
funds provided by other operating activities. While scheduled payments on
loans, mortgage-backed securities, and short-term investments are relatively
predictable sources of funds, deposit flows and early loan repayments are
greatly influenced by general interest rates, economic conditions, and
competition.
The Company uses its capital resources principally to meet ongoing commitments
to fund maturing certificates of deposits and loan commitments, to maintain
liquidity, and to meet operating expenses. At March 31, 2007, the Company had
commitments to originate loans and fund unused lines of credit totaling $5.4
million. The Company believes that loan repayment and other sources of funds
will be adequate to meet its foreseeable short- and long-term liquidity needs.
Regulations require First Home Savings Bank to maintain minimum amounts and
ratios of total risk-based capital and Tier 1 capital to risk-weighted assets,
and a leverage ratio consisting of Tier 1 capital to average assets. The
following table sets forth First Home Savings Bank's actual capital and
required capital amounts and ratios at March 31, 2007 which, at that date,
exceeded the minimum capital adequacy requirements.
Minimum
Requirement To Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
At March 31, 2007 Amount Ratio Amount Ratio Amount Ratio
----------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Tangible Capital (to
adjusted total
assets) $23,143 9.71% $3,576 1.50% - -
Tier 1 (Core)
Capital (to adjusted
total assets) 23,143 9.71 9,536 4.00 $11,920 5.00%
Total Risk Based
Capital (to risk
weighted assets) 24,972 16.83 11,867 8.00 14,834 10.00
17
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five regulatory capital categories and authorized the banking
regulators to take prompt corrective action with respect to institutions in an
undercapitalized category. At March 31, 2007, First Home Savings Bank
exceeded minimum requirements for the well-capitalized category.
Forward Looking Statements
The Company, and its wholly-owned subsidiaries, First Home Saving Bank and
SCMG, Inc., may from time to time make written or oral "forward-looking
statements," including statements contained in its filings with the Securities
and Exchange Commission, in its reports to shareholders, and in other
communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates and intentions that are subject to
significant risks and uncertainties, and are subject to change based on
various factors, some of which are beyond the Company's control. Such
statements may address: future operating results; customer growth and
retention; loan and other product demand; earnings growth and expectations;
new products and services; credit quality and adequacy of reserves;
technology; and our employees. The following factors, among others, could
cause the Company's financial performance to differ materially from the
expectations, estimates, and intentions expressed in such forward-looking
statements: the strength of the United States economy in general and the
strength of the local economies in which the Company conducts operations; the
effects of, and changes in, trade, monetary, and fiscal policies and laws,
including interest rate policies of the Federal Reserve Board; inflation,
interest rate, market, and monetary fluctuations; the timely development of
and acceptance of new products and services of the Company and the perceived
overall value of these products and services by users; the impact of changes
in financial services' laws and regulations; technological changes;
acquisitions; changes in consumer spending and saving habits; and the success
of the Company at managing its "litigation", improving its loan underwriting
and related lending policies and procedures, collecting assets of borrowers in
default, successfully resolving the MOU and managing the risks involved in the
foregoing.
The foregoing list of factors is not exclusive. Additional discussions of
factors affecting the Company's business and prospects are contained in the
Company's periodic filings with the SEC. The Company expressly disclaims any
intent or obligation to update any forward-looking statement, whether written
or oral, that may be made from time to time by or on behalf of the Company.
18
Item 3. Controls and Procedures
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures, as such term is defined
in Rules 13a 15(e) and 15d 15(e) of the Securities Exchange Act of 1934
(Exchange Act) as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2007 our disclosure controls and
procedures were effective to provide reasonable assurance that (i) the
information required to be disclosed by us in this Report was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (ii) information required to be disclosed by us in
our reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
During the quarter ended September 30, 2006, the Company remediated the
material weakness reported as of June 30, 2006 in which the Company did not
identify or record certain transactions related to the other than temporary
impairment of certain equity securities. To remediate the material weakness
in the Company's internal control over financial reporting, the Company has
implemented controls to quantify and record the impairment of the debt and
equity securities and evaluate the near term prospects of the issuer in
relation to the severity, duration and materiality of the unrealized losses.
During the nine month period ended March 31, 2007, no other changes have
occurred in the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and
internal control over financial reporting will prevent all error and all
fraud. A control procedure, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control procedure are met. Because of the inherent limitations in all control
procedures, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any control procedure also
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due
to error or fraud may occur and not be detected.
The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has
timely access to all material financial and non-financial information
concerning the Company's business. While the Company believes the present
design of its disclosure controls and procedures is effective to achieve its
goal, future events affecting its business may cause the Company to modify its
disclosure controls and procedures.
19
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
FORM 10-QSB
Item 1. Legal Proceedings
-----------------
There are no material pending legal proceedings to which the Company or
its subsidiaries is a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
----------------------------------------------------------
The following table summarizes the stock repurchase program information
for the three months ended March 31, 2007:
Total Number
of Shares Maximum Number
Purchased of Shares
Total Number Average As part of that may yet
of Shares Price Paid Publicly be purchased
Period Purchased per Share Announced Plan Under the Plan(1)
------------------------------------------------------------------------------
January 1-31,
2007 - - - 69,618
February 1-28,
2007 - - - 69,618
March 1-31,
2007 400 $16.65 400 69,218
(1) The Company completed ten separate stock repurchase programs between
March 9, 1994 and May 28, 2004. On May 28, 2004, an eleventh repurchase
program of 164,336 shares was initiated. The Board of Directors
terminated the eleventh repurchase program on April 27, 2007. A total of
95,618 shares were purchased under the plan.
Item 3. Defaults Upon Senior Securities - None
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders - None
---------------------------------------------------
Item 5. Other Information - None
-----------------
Item 6. Exhibits
--------
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FIRST BANCSHARES, INC.
Date: May 10, 2007 By: /s/ Daniel P. Katzfey
------------ ----------------------------
Daniel P. Katzfey, President,
and Chief Executive Officer
Date: May 10, 2007 By: /s/ Ronald J. Walters
------------ ----------------------------
Ronald J. Walters, Senior Vice
President, Treasurer and Chief
Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
22
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel P. Katzfey, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter ended (the registrant's
fourth fiscal quarter in the case of an annual report), that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2007 /s/ Daniel P. Katzfey
------------ ----------------------------
Chief Executive Officer
23
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald J. Walters, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of First
Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this report any changes in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter ended (the registrant's
fourth fiscal quarter in the case of an annual report), that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 9, 2007 /s/ Ronald J. Walters
------------ -----------------------------
Chief Financial Officer
24
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18USC SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-QSB of First
Bancshares, Inc. (the "Company") for the quarterly period ended March 31, 2007
(the "Report"), I, Daniel P. Katzfey, Chief Executive Officer of the Company,
hereby certify, pursuant to 18 USC Section 1350, as adopted, pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
May 10, 2007 By: /s/ Daniel P. Katzfey
------------ --------------------------
Name: Daniel P. Katzfey
Chief Executive Officer
25
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18USC SECTION 1350 AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Quarterly Report on Form 10-QSB of First
Bancshares, Inc. (the "Company") for the quarterly period ended March 31, 2007
(the "Report"), I, Ronald J. Walters, Chief Financial Officer of the Company,
hereby certify, pursuant to 18 USC Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
May 10, 2007 by: /s/ Ronald J. Walters
------------------------
Name: Ronald J. Walters
Chief Financial Officer