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 September 30, 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 November 13, 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 September 30, 2007 and June 30, 2007 (Unaudited) 3
Consolidated Statements of Income for the Three Months
Ended September 30, 2007 and 2006 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended September 30, 2007 and 2006 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2007 and 2006 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 16
Part II. Other Information
----------------------------
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
Exhibit Index 19
Certifications 20
2
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, June 30,
2007 2007
------ ------
ASSETS
------
Cash and cash equivalents $ 19,187,490 $ 21,030,321
Certificates of deposit 651,532 746,632
Securities available-for-sale 37,207,433 31,321,225
Securities held-to-maturity 10,676,496 10,786,182
Federal Home Loan Bank stock, at cost 1,613,200 1,613,800
Loans receivable, net 157,272,239 158,992,921
Accrued interest receivable 1,340,220 1,259,460
Prepaid expenses 503,579 360,375
Property and equipment 7,124,176 7,506,862
Real estate owned 831,563 293,337
Intangible assets 273,056 285,584
Deferred tax asset, net 775,818 707,066
Income taxes recoverable 49,480 196,687
Bank-owned life insurance 5,972,934 5,919,973
Other assets 1,617,273 310,334
------------ ------------
Total assets $ 245,096,489 $ 241,330,759
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 193,729,044 $ 190,090,359
Retail repurchase agreements 1,683,865 2,103,105
Advances from Federal Home Loan Bank 22,000,000 22,000,000
Accrued expenses and accounts payable 792,170 669,202
------------ ------------
Total liabilities 218,205,079 214,862,666
------------ ------------
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 September 30,
2007 and June 30, 2007, 1,550,815 shares
outstanding at September 30, 2007 and June
30, 2007 28,950 28,950
Paid-in capital 17,960,819 17,936,224
Retained earnings - substantially restricted 28,076,935 27,850,962
Treasury stock - at cost; 1,344,221 shares at
September 30, 2007 and June 30, 2007 (19,112,627) (19,112,627)
Accumulated other comprehensive loss (62,667) (235,416)
------------ ------------
Total stockholders' equity 26,891,410 26,468,093
------------ ------------
Total liabilities and stockholders' equity $ 245,096,489 $ 241,330,759
============ ============
See notes to consolidated financial statements.
3
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
September 30,
2007 2006
------ ------
Interest Income:
Loans receivable $ 2,954,211 $ 2,568,174
Securities 585,073 454,077
Other interest-earning assets 205,536 204,088
--------- ---------
Total interest income 3,744,820 3,226,339
Interest Expense: --------- ---------
Deposits 1,732,306 1,302,590
Retail repurchase agreements 16,780 -
Borrowed funds 323,257 323,526
--------- ---------
Total interest expense 2,072,343 1,626,116
--------- ---------
Net interest income 1,672,477 1,600,223
Provision for loan losses 7,500 110,000
Net interest income after --------- ---------
provision for loan losses 1,664,977 1,490,223
Non-interest Income: --------- ---------
Service charges and other fee income 500,949 444,818
Gain on sale of loans 152,929 -
Gain (loss) on sale of property and
equipment and real estate owned 36,793 47,086
Income from bank-owned life insurance 52,961 54,278
Other 41,080 45,258
--------- ---------
Total non-interest income 784,712 591,440
Non-interest Expense: --------- ---------
Compensation and employee benefits 1,136,681 1,165,670
Occupancy and equipment 393,587 329,567
Professional fees 146,948 58,865
Deposit insurance premiums 27,063 5,909
Other 427,601 418,667
--------- ---------
Total non-interest expense 2,131,880 1,978,678
--------- ---------
Income before taxes 317,809 102,985
Income taxes 92,437 31,273
--------- ---------
Net income $ 225,372 $ 71,712
========= =========
Earnings per share basic $ 0.15 $ 0.04
========= =========
Earnings per share diluted 0.15 0.04
========= =========
Dividends per share 0.00 0.04
========= =========
See notes to consolidated financial statements
4
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended
September 30,
2007 2006
------ ------
Net Income $ 225,372 $ 71,712
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available-for-sale, net of
deferred income taxes 172,749 151,082
--------- ---------
Comprehensive income $ 398,121 $ 222,794
========= =========
See notes to consolidated financial statements
5
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
September 30,
2007 2006
------ ------
Cash flows from operating activities:
Net income $ 225,372 $ 71,712
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 211,283 161,951
Amortization 12,528 12,529
Premiums and discounts on securities (43,078) 1,674
Stock based compensation 24,595 13,125
Provision for loan losses 7,500 110,000
Proceeds from sales of loans originated for sale 6,029,047 -
Loans originated for sale (5,876,118) -
Deferred income taxes (47,452) (92,420)
(Gain) loss on sale of property and equipment
and real estate owned (36,793) (47,086)
Loss on the sale of other repossessed assets 1,237 -
Income from bank-owned life insurance (52,961) (54,278)
Net change in operating accounts:
Accrued interest receivable and other assets (1,675,942) (194,083)
Deferred loan costs (6,977) -
Income taxes recoverable 36,900 122,455
Accrued expenses and accounts payable 122,968 (38,626)
Net cash provided by(used in) operating --------- ---------
activities (1,067,891) 66,953
--------- ---------
Cash flows from investing activities:
Purchase of securities available-for-sale (8,569,757) -
Purchase of securities held to maturity - (345,335)
Proceeds from maturities of securities available-
for-sale 2,988,893 272,411
Proceeds from sales of securities available-for-sale - 1,305,618
Proceeds from maturities of securities held to
maturity 109,160 -
Purchase of Federal Home Loan Bank stock - (83,400)
Proceeds from redemption of Federal Home Loan Bank stock 600 -
Net change in certificates of deposit purchased 95,100 (38,773)
Net change in loans receivable 1,147,969 (5,809,118)
Purchases of property and equipment (71,323) (197,027)
Net proceeds from the sale of property and equipment 276,293 -
Net proceeds from sale of real estate owned 28,680 197,036
Net cash provided by (used in) investing --------- ---------
activities (3,994,385) (4,698,588)
Cash flows from financing activities: --------- ---------
Net change in deposits 3,638,685 (4,436,907)
Net change in retail repurchase agreements (419,240) -
Proceeds from borrowed funds - 3,000,000
Cash dividends paid - (62,095)
Purchase of treasury stock - (12,764)
Net cash provided by (used in) financing --------- ---------
activities 3,219,445 (1,511,766)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,842,831) (6,143,401)
Cash and cash equivalents - beginning of period 21,030,321 23,473,645
--------- ---------
Cash and cash equivalents - end of period $19,187,490 $17,330,244
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 2,025,801 $ 1,540,518
========== ==========
Income taxes - -
========== ==========
Supplemental schedule of non-cash investing and financing activities:
Loans transferred to real estate acquired in
settlement of loans $ 565,213 $ 227,500
========== ==========
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, 2007,
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 10-KSB for the year ended
June 30, 2007 (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 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. Management has implemented FIN 48 effective as
of July 1, 2007, and knows of no uncertain tax position that would require
additional tax accruals for tax liabilities.
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, 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 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
7
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.
The table below presents the numerators and denominators used in the basic
earnings per common share computations for the three months ended September 30,
2007 and 2006. For both periods presented, no dilutive effect would result from
the issuance of shares eligible to be issued pursuant to stock option agreements
due to the fact that the exercise prices, for all options that could be
exercised, exceeded the average market price during the period.
Three Months Ended
September 30,
-------------
2007 2006
Basic earnings per common share: ------ ------
Numerator:
Net income $ 225,372 $ 71,712
Denominator: ======= ======
Weighted average common shares outstanding 1,550,815 1,552,373
========= =========
Basic earnings per common share $ 0.15 $ 0.04
====== ======
4. COMMITMENTS
At September 30, 2007 and June 30, 2007, the Company had outstanding commitments
to originate loans and fund unused lines of credit totaling $2.9 million and
$5.1 million, respectively. It is expected that outstanding loan commitments
will be funded with existing liquid assets.
5. STOCK OPTION PLAN
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-month periods ended September 30, 2007
and 2006 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).
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
8
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 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. There were no grants made during the first quarter ended
September 30, 2007.
A summary of option activity under the Plan as of September 30, 2007, and
changes during the three months ended September 30, 2007, is presented below:
Weighted-
Weighted- Average
Average Remaining
Exercise Contractual
Options Shares Price Term
------- ------ -------- -----------
(in months)
Outstanding at beginning of period 64,500 $ 16.76 113
Granted - -
Exercised - -
Forfeited or expired - -
------ -------
Outstanding at end of period 64,500 $ 16.76 110
A summary of the Company's non-vested shares as of September 30, 2007, and
changes during the three months ended September 30, 2007, is presented below:
Weighted-
Average
Grant Date
Non-vested Options Options Fair Value
------------------ ------- ----------
Outstanding at beginning of period 61,100 $ 6.02
Granted - -
Exercised - -
Forfeited or expired - -
------ ------
Outstanding at end of period 61,100 $ 6.02
====== ======
As of September 30, 2007, there was $158,000 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 17 months.
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.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
General
First Bancshares, Inc. (the "Company") 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 September 30, 2007, the Company had total assets of $245.1 million, loans
receivable, net of $157.3 million, total deposits of $193.7 million and
stockholders' equity of $26.9 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 September 30, 2007, compared to June 30, 2007,
and the consolidated results of operations for the three months ended September
30, 2007, compared to the three months ended September 30, 2006. This discussion
should be read in conjunction with the Company's consolidated financial
statements, and notes thereto, for the year ended June 30, 2007.
Corporate Developments and Overview
During the quarter ended September 30, 2007, the Company entered into a lease
agreement for approximately 5,100 square feet of office space in Springfield,
Missouri. The new space will house the Bank's Loan Production Office, which has
been operating out of a much smaller location since it was approved by the State
of Missouri during the third quarter of fiscal 2007. In addition to the Loan
Production Office, there will be offices for senior officers of the Company and
the Bank, who spend time in Springfield, as well as, the Company home office in
Mountain Grove, Missouri.
During the quarter ended September 30, 2007, the operations of the in-house
brokerage service, which was based in Mountain Grove, Missouri, were
discontinued due to staffing difficulties.. This brokerage service operated
under a Bank subsidiary, First Home Investments. The Company entered into an
agreement with an outside company based in Springfield, Missouri to provide
brokerage services to the Bank's customers
The Bank continues to operate under a Memorandum of Understanding (the "MOU")
with the Office of Thrift Supervision (the "OTS"). The MOU was entered into
during the December 31, 2006 quarter. The MOU dealt with various issues
affecting the operations of the Bank. While the Bank has sought to resolve all
the issues raised in the MOU. at September 30, 2007, there was one item of the
MOU outstanding, namely the completion and filing with the OTS of a three-year
business plan for the Bank. The business plan was due by October 31, 2007. The
three year business plan was approved by the Bank's board of directors at its
meeting on October 26, 2007, and was submitted to the OTS on October 29, 2007.
For more information concerning the MOU or the activities of and developments
about the Company during the fiscal year ended June 30, 2007, please refer to
the sections titled "Corporate Developments and Overview" and "Risk Factors" on
pages one through three of the Company's Form 10-KSB, which was filed with the
Securities and Exchange Commission on September 28, 2007.
Financial Condition
As of September 30, 2007, First Bancshares, Inc. had assets of $245.1 million,
compared to $241.3 million at June 30. 2007. The increase in total assets of
$3.8 million, or 1.6%, was primarily the result of an increase in securities as
a result of the deposit growth during the quarter as well as an increase in
Other Assets, which was the result of an
10
increase in loans originated for sale which were not yet funded by the
purchasers. These increase were partially offset by a decrease in loans
receivable, net of $1.7 million during the three-month period ended September
30, 2007. Total investments increased $5.7 million, during this period. Deposits
increased by $3.6 million and were partially offset by a decrease in retail
repurchase agreements which decreased by $419,000. Advances from the Federal
Home Loan Bank of Des Moines remained constant during the quarter.
Loans receivable, net totaled $157.3 million at September 30, 2007, a decrease
of $1.7 million from $159.0 million at June 30. 2007. The decrease in loans is,
in part, the result of decreased originations because of the current uncertainty
in the economy, both local and national, brought about by problems in the sub-
prime mortgage market. These problems have affected many sectors of the economy
and created concerns for individuals and businesses. Housing sales, both new and
existing, consumer confidence and other indicators of economic health in our
market area have decreased over the last few months.
The Company's deposits grew $3.6 million from $190.1 million as of June 30, 2007
to $193.7 million as of September 30, 2007. The growth is the result of efforts
made by the Company to attract core deposits through new products introduced
during fiscal 2007 and internal emphasis on business development. The Company's
retail repurchase agreements, introduced during fiscal 2007, decreased by
$419,000 from $2.1 million at June 30, 2007 to $1.7 million at September 30,
2007.
Advances from the Federal Home Loan Bank of Des Moines remained constant at
$22.0 million during the quarter ended September 30, 2007
As of September 30, 2007 the Company's stockholders' equity totaled $26.9
million, compared to $26.5 million as of June 30, 2007. The increase of
$423,000 was due to net income of $225,000 during the first quarter of the
fiscal year and a positive change in the mark-to-market adjustment, net of
taxes, of $173,000 on the Company's available for sale securities portfolio. In
addition, there was a $25,000 increase resulting from the accounting treatment
of stock based compensation. There were no dividends paid during the period and
the Company does not currently have a stock buyback program in place.
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 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 $3.3 million, or 1.4% of total assets at
June 30, 2007 to $4.1 million, or 1.7% of total assets at September 30, 2007.
The Bank's non-performing assets 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 increase in non-performing assets
was the result of four loans, totaling $866,000, to four separate borrowers
being placed on non-performing status during the quarter ended September 30,
2007, at which time they were placed on non-accrual status. All four of these
loans were considered loans of concern at June 30, 2007 and were included in the
analysis of loss reserves at that time. One is collateralized by a small resort
property. One is a floor plan on used vehicles. One is collateralized by
equipment related to recycling. One is a large home equity line of credit.
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
11
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 September
30, 2007, the Company had classified a total of $3.0 million of its assets as
substandard, $547,000 as doubtful and none as loss. This compares to
classifications at June 30, 2007 of $4.2 million substandard, $101,000 doubtful
and none as loss. This reduction is primarily due to the transfer of two of the
loans discussed earlier, which totaled $440,000, moving from substandard to
doubtful, and to the transfer to real estate owned of one loan totaling
$412,000.
In addition to the classified loans, the Bank has identified an additional $2.0
million of credits at September 30, 2007 on its internal watch list compared to
$4.8 million at June 30, 2007 and $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
decrease in the internal watch list is the result of the stricter internal
policies relating to the identification and monitoring of problem loans. During
the quarter ended September 30, 2007, six loans totaling $2.7 million were
removed from the watch list due to the resolution of the reasons they were on
the watch list.
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 September 30, 2007, the Company has established an allowance for loan losses
totaling $2.5 million compared to $2.6 million at June 30, 2007. The allowance
represents approximately 76.4% and 82.4% of the total non-performing loans at
September 30, 2007 and June 30, 2007, 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.
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
12
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 September 30, 2007 and June 30, 2007 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 September 30, 2007 Compared to
the Three Months Ended September 30, 2006
General. For the three months ended September 30, 2007, the Company reported
net income of $225,000, or $0.15 diluted share, compared to net income of
$72,000, or $0.04 per diluted share, for the same period in 2006. The increase
in net income for the 2007 period included increases in net interest income and
non-interest income, and a decrease in the provision for loan losses, which were
partially offset by increases in non-interest expense and income taxes.
Net interest income. The Company's net interest income for the three months
ended September 30, 2007 was $1.7 million, compared to $1.6 million for the same
period in 2006. The increase reflects a $519,000 increase in interest income
partially offset by a $464,000 increase in interest expense.
Interest income. Interest income for the three months ended September 30, 2007
increased $519,000, or 16.7%, to $3.7 million compared to $3.2 million for the
same period in 2006. Interest income from loans increased $386,000 to $3.0
million from $2.6 million in 2006. This was attributable to an increase in
average loans to $157.4 million during the 2007 period from $144.3 million
during the comparable 2006 period, and to an increase in the yield on loans to
7.44% during the three months ended September 30, 2007 from 7.06% during the
comparable period in 2006. The increase in average loans was the result of an
increase in lending volume during the last six months of fiscal 2007, 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 September 30, 2007 increased $133,000 to $791,000 from
$658,000 for the same period in 2006. The increase was the result of an increase
in the average balance of these assets of $6.3 million to $64.6 million for the
quarter ended September 30, 2007 from $58.3 million for the same period in 2006,
and to an increase in the yield on these assets to 4.85% for the 2007 period
from 4.48% for the 2006 period.
Interest expense. Interest expense for the three months ended September 30, 2007
increased $446,000 or 27.4%, to $2.1 million from $1.6 million for the same
period in 2006. Interest expense on deposits increased $430,000 to $1.7 million
in the three months ended September 30, 2007 from $1.3 million in the same
period in 2006. The increase resulted from an increase in average
interest-bearing deposit balances of $15.8 million to $179.6 million in the 2007
period from $163.8 million in the 2006 period. The increase was also
attributable to an increase in the average cost of deposits to 3.83% in the
2007 period from 3.16% in the 2006 period. Interest expense on other
interest-bearing liabilities increased $17,000 to $340,000 in the three months
ended September 30, 2007 from $324,000 in the comparable period in 2006.
Virtually all of the increase in interest expense on other interest-bearing
liabilities was due to retail repurchase agreements which the Company did not
offer during the 2006 period.
Net interest margin. Net interest margin decreased to 2.99% for the three months
ended September 30, 2007 from 3.13% for the three months ended September 30.
2006.
13
Provision for loan loss. During the quarter ended September 30, 2007, the
provision for loan losses was $7,500, compared to $110,000 for the quarter ended
September 30. 2006. For a discussion of this change, see "Non-performing Assets
and Allowance for Loan Losses" herein.
Non-interest income. For the three months ended September 30, 2007,
non-interest income totaled $785,000, compared to $591,000 for the three months
ended September 30. 2006. The $193,000 increase between the two periods
resulted primarily from profit of $153,000 on the sale of loans, and to an
increase in service charges and fee income of $56,000. There was no profit on
the sale of loans during the 2006 period. It is expected that we will continue
to generate profit on the sale of loans, but in light of the current real estate
climate it is likely that the amount of profit will be less than anticipated
over the balance f the fiscal year. These increases were partially offset by
decreases of $10,000, $1,000 and $4,000 in gain on the sale of property and
equipment and real estate owned, income from bank owned life insurance and other
non-interest income, respectively.
Non-interest expense. Non-interest expense for the three months ended September
30, 2007 totaled $2.1 million, compared to $2.0 million for the same quarter in
fiscal year 2006. This increase of $153,000 was the result of increases of
$64,000, $88,000, $21,000 and $9,000 in occupancy and equipment expense,
professional fees, deposit insurance premiums and other non-interest expense,
respectively. These increases were partially offset by a decrease of $29,000 in
compensation expense. The increase in occupancy and equipment expense was the
result of the operations of the loan production office and additional costs
related to information technology upgrades. The increase in professional fees
was due to additional internal audit work performed during the period, compared
to the prior year and other accounting and legal issues. The increase in deposit
insurance premiums was the result of an increase in the assessment rates by the
Federal Deposit Insurance Corporation.
Income tax expense. State income tax expense and income tax benefits are
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. The increase in income taxes is primarily the
result of the increase in pre-tax income.
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 September 30, 2007, the Company
had commitments to originate loans and fund unused lines of credit totaling $2.9
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 September 30, 2007 which, at that date, exceeded
the minimum capital adequacy requirements.
14
Minimum
Requirement To Be
Minimum Well Capitalized
Requirement For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
------ -------- ----------
At September 30, 2007 Amount Ratio Amount Ratio Amount Ratio
--------------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Tangible Capital (to
adjusted total assets) $24,548 10.11% $ 3,642 1.50% - -
Tier 1 (Core) Capital (to
adjusted total assets) 24,548 10.11 9,713 4.00 $12,141 5.00%
Total Risk Based Capital(to
risk weighted assets) 26,447 15.97 12,299 8.00 15,373 10.00
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 September 30, 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.
15
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, the Company's Chief Executive Officer and Chief
Financial Officer concluded that as of September 30, 2007 the Company's
disclosure controls and procedures were effective to provide reasonable
assurance that (i) the information required to be disclosed by the Company 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 the Company in the reports that its files or submits under the
Exchange Act is accumulated and communicated to its management, including its
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, 2007, there have been no changes in our
internal control over financial reporting (as defined in Rule 13a-15(f) of the
Act) that has materially affected, or is reasonably likely to materially affect,
our 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.
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.
Item 3A(T). Controls and Procedures
Not applicable.
16
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
----------------------------------------------------------
(a) Recent sales of unregistered securities - None.
(b) Use of proceeds - None.
(c) Stock repurchases - None
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.
---------------------------------
17
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: November 13, 2007 By: /s/ Daniel P. Katzfey
----------------- -----------------------------
Daniel P. Katzfey, President,
and Chief Executive Officer
Date: November 13, 2007 By: /s/ Ronald J. Walters
----------------- ----------------------------
Ronald J. Walters, Senior Vice President,
Treasurer and Chief Financial Officer
18
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.
19
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: November 13, 2007 /s/ Daniel P. Katzfey
----------------- -----------------------
Chief Executive Officer
20
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: November 13, 2007 /s/ Ronald J. Walters
----------------- -----------------------
Chief Financial Officer
21
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 September 30,
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.
November 13, 2007 By: /s/ Daniel P. Katzfey
------------------------
Name: Daniel P. Katzfey
Chief Executive Officer
22
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 September 30,
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.
November 13, 2007 By: /s/ Ronald J. Walters
--------------------------
Name: Ronald J. Walters
Chief Financial Officer
23