UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
[ ] 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 registrant 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer ( ) Accelerated filer ( )
Non-accelerated filer ( ) Smaller reporting company (X)
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 1,550,815 shares outstanding as of November 1, 2008.
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
--------
Part I. Financial Information
---------------------
Item 1. Financial Statements:
Consolidated Statements of Financial Condition
at September 30, 2008 and June 30, 2008 (Unaudited) 3
Consolidated Statements of Income for the Three Months
Ended September 30, 2008 and 2007 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended September 30, 2008 and 2007 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2008 and 2007 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results Of Operations 12
Item 3. Controls and Procedures 20
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
Exhibit Index 24
Certifications 25
2
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, June 30,
2008 2008
---- ----
ASSETS
------
Cash and cash equivalents $ 16,492,023 $ 17,010,093
Certificates of deposit purchased 472,166 566,800
Securities available-for-sale 45,210,717 40,830,284
Securities held to maturity 4,065,082 4,174,886
Federal Home Loan Bank stock, at cost 1,325,500 1,613,200
Loans receivable, net 158,329,357 167,034,726
Loans held for sale 634,859 755,357
Accrued interest receivable 1,154,755 1,135,894
Prepaid expenses 313,879 243,368
Property and equipment, net 6,907,930 6,913,125
Real estate owned and other repossessed assets 1,427,563 1,205,737
Intangible assets, net 222,941 235,470
Deferred tax asset, net 780,911 795,688
Income taxes recoverable - 57,653
Bank-owned life insurance 6,174,726 6,121,360
Other assets 438,083 538,121
------------- -------------
Total assets $ 243,950,492 $ 249,231,762
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 189,338,599 $ 194,593,283
Retail repurchase agreements 4,372,834 4,647,587
Advances from Federal Home Loan Bank 22,000,000 22,000,000
Accrued expenses 935,532 891,320
------------- -------------
Total liabilities 216,646,965 222,132,190
------------- -------------
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,
2008 and June 30, 2008, 1,550,815 shares
outstanding at September 30, 2008 and June
30, 2008 28,950 28,950
Paid-in capital 18,033,100 18,019,852
Retained earnings - substantially restricted 28,303,837 28,214,183
Treasury stock - at cost; 1,344,221 shares (19,112,627) (19,112,627)
Accumulated other comprehensive income (loss) 50,267 (50,786)
------------- -------------
Total stockholders' equity 27,303,527 27,099,572
------------- -------------
Total liabilities and stockholders' equity $ 243,950,492 $ 249,231,762
============= =============
See notes to consolidated financial statements
3
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
September 30,
2008 2007
---- ----
Interest Income:
Loans receivable $ 2,731,075 $ 2,954,211
Securities 617,400 585,073
Other interest-earning assets 68,645 205,536
----------- ------------
Total interest income 3,417,120 3,744,820
----------- ------------
Interest Expense:
Deposits 1,157,592 1,732,306
Retail repurchase agreements 26,481 16,780
Advances from Federal Home Loan Bank 323,239 323,257
----------- ------------
Total interest expense 1,507,312 2,072,343
----------- ------------
Net interest income 1,909,808 1,672,477
Provision for loan losses 149,197 7,500
----------- ------------
Net interest income after
provision for loan losses 1,760,611 1,664,977
----------- ------------
Non-interest Income:
Service charges and other fee income 554,774 500,949
Gain on sale of loans 105,341 152,929
Gain (loss) on sale of property and
equipment and real estate owned (1,520) 36,793
Income from bank-owned life insurance 53,366 52,961
Other 45,395 41,080
----------- ------------
Total non-interest income 757,356 784,712
----------- ------------
Non-interest Expense:
Compensation and employee benefits 1,128,628 1,136,681
Occupancy and equipment 479,807 393,587
Professional fees 114,250 146,948
Deposit insurance premiums 26,720 27,063
Other 407,792 427,601
----------- ------------
Total non-interest expense 2,157,197 2,131,880
----------- ------------
Income before taxes 360,770 317,809
Income taxes 116,031 92,437
----------- ------------
Net income $ 244,739 $ 225,372
=========== ============
Basic earnings per share $ 0.16 $ 0.15
=========== ============
Diluted earnings per share 0.16 0.15
=========== ============
Dividends per share 0.10 0.00
=========== ============
See notes to consolidated financial statements
4
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended
September 30,
2008 2007
---- ----
Net Income $ 244,739 $ 225,372
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available-for-sale, net of deferred
income taxes 101,053 172,749
----------- -----------
Comprehensive income $ 345,792 $ 398,121
=========== ===========
See notes to consolidated financial statements
5
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
September 30,
2008 2007
---- ----
Cash flows from operating activities:
Net income $ 244,739 $ 225,372
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 164,893 211,283
Amortization 12,529 12,528
Net premium amortization and (discount accretion)
on securities (28,357) (43,078)
Stock based compensation 13,248 24,595
Provision for loan losses 149,197 7,500
Provision for loss on real estate owned 8,000 -
Gain on the sale of loans (105,341) (152,929)
Proceeds from sales of loans originated for sale 4,039,530 6,181,976
Loans originated for sale (3,574,656) (5,876,118)
Deferred income taxes (11,386) (47,452)
Gain on sale of property and equipment
and real estate owned (6,480) (36,793)
Loss on the sale of other repossessed assets - 1,237
Increase in cash surrender value of bank-owned
life insurance (53,366) (52,961)
Net change in operating accounts:
Accrued interest receivable and other assets (228,370) (1,675,942)
Deferred loan costs 18,883 (6,977)
Income taxes recoverable/payable 138,900 36,900
Accrued expenses (62,613) 122,968
------------ ------------
Net cash provided by (used in) operating
activities 719,350 (1,067,891)
------------ ------------
Cash flows from investing activities:
Purchase of securities available-for-sale (6,862,679) (8,569,757)
Purchase of securities held to maturity - -
Proceeds from maturities of securities
available-for-sale 2,664,142 2,988,893
Proceeds from sales of securities
available-for-sale - -
Proceeds from maturities of securities
held to maturity 109,377 109,160
Proceeds from redemption of Federal Home
Loan Bank stock 287,700 600
Net change in certificates of deposit purchased 94,634 95,100
Net change in loans receivable 8,242,079 1,147,969
Purchases of property and equipment (159,698) (71,323)
Proceeds from the sale of property and equipment - 276,293
Proceeds from sale of real estate owned 71,549 28,680
------------ ------------
Net cash provided by (used in) investing
activies 4,447,104 (3,994,385)
------------ ------------
Cash flows from financing activities:
Net change in deposits (5,254,684) 3,638,685
Net change in retail repurchase agreements (274,753) (419,240)
Cash dividends paid (155,087) -
------------ ------------
Net cash provided by (used in) financing
activies (5,684,524) 3,219,445
------------ ------------
Net increase (decrease) in cash and cash
equivalents (518,070) (1,842,831)
Cash and cash equivalents - beginning of period 17,010,093 21,030,321
------------ ------------
Cash and cash equivalents - end of period $ 16,492,023 $ 19,187,490
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowed funds $ 3,433,947 $ 2,025,801
============ ============
Income taxes - -
============ ============
Supplemental schedule of non-cash investing
and financing activities:
Loans transferred to real estate acquired in
settlement of loans $ 295,210 $ 565,213
============ ============
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, 2008, 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-K for the year ended June 30, 2008
(Form 10-K). The results for these interim periods may not be indicative of
results for the entire year or for any other period.
2. ACCOUNTING DEVELOPMENTS
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. However,
in February 2008, FASB decided that an entity need not apply this standard to
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis until the
subsequent year. The adoption of this standard on July 1, 2008 is limited to
financial assets and liabilities, and any non-financial assets and liabilities
recognized or disclosed at fair value on a recurring basis. See Note 6 of the
Notes to Consolidated Financial Statements.
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. The Company did not elect any fair
value options as of July 1, 2008.
7
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 month period ended
September 30, 2008 and 2007.
Three Months Ended
September 30,
-------------
2008 2007
---- ----
Basic earnings per common share:
Numerator:
Net income $ 244,739 $ 225,372
Denominator: ========== ==========
Weighted average common shares
outstanding 1,550,815 1,550,815
========== ==========
Basic earnings per common share $ 0.16 $ 0.15
========== ==========
Diluted earnings per common share:
Numerator:
Net income $ 244,739 $ 225,372
========== ==========
Denominator:
Weighted average common shares
outstanding 1,550,815 1,550,815
========== ==========
Basic earnings per common share $ 0.16 $ 0.15
========== ==========
4. COMMITMENTS
At September 30, 2008 and June 30, 2008, the Company had outstanding
commitments to originate loans and fund unused lines of credit totaling $2.5
million and $793,000, 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 SFAS No. 123R, Share-based
Payments, using the modified prospective transition method. Prior to that date
the Company accounted for stock option awards under APB Opinion No. 25,
Accounting for Stock Issued to Employees. In accordance with SFAS No. 123R,
compensation expense for stock-based awards is recorded over the vesting
period at the fair values of the award at the time of the grant. The recording
of such compensation began on July 1, 2006 for shares not yet vested as of
that date and for all new grants subsequent to that date. The exercise price
of options granted under the Company's incentive plans is equal to the fair
market value of the underlying stock at the grant date. The Company assumes no
projected forfeiture rates on its stock-based compensation.
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 in effect on the date of grant.
There were no grants made during either the fiscal year ended June 30, 2008 or
the three months ended September 30, 2008.
8
A summary of option activity under the 2004 Stock Option Plan ("Plan") as of
September 30, 2008, and changes during the three months ended September 30,
2008, is presented below:
Weighted-
Weighted- Average
Average Remaining
Exercise Contractual
Options Shares Price Term
------- ------ ----- ----
(in months)
Outstanding at beginning of period 60,500 $ 16.73 100
Granted - -
Exercised - -
Forfeited or expired (5,000) 16.24
------ -------
Outstanding at end of period 55,500 $ 16.76 97
====== =======
Exercisable at end of period 14,425 $ 16.72
====== =======
A summary of the Company's non-vested shares as of September 30, 2008, and
changes during the three months ended September 30, 2008, is presented below:
Weighted-
Average
Grant Date
Non-vested Options Options Fair Value
------------------ ------- ----------
Outstanding at beginning of period 45,075 $ 5.99
Granted - -
Exercised - -
Vested - -
Forfeited or expired (4,000) 5.84
------- ----------
Outstanding at end of period 41,075 $ 6.00
======= ==========
As of September 30, 2008, there was $73,000 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 15 months.
6. FAIR VALUE MEASUREMENTS
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157,
"Fair Value Measurements," for financial assets and financial liabilities. In
accordance with Financial Accounting Standards Board Staff Position (FSP) No.
157-2, "Effective Date of FASB Statement No. 157," the Company will delay
application of SFAS 157 for non-financial assets and non-financial
liabilities, until July 1, 2009. SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell
the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the principal (or
most advantageous) market used to measure the fair value of the asset or
liability shall
9
not be adjusted for transaction costs. An orderly transaction is a transaction
that assumes exposure to the market for a period prior to the measurement date
to allow for marketing activities that are usual and customary for
transactions involving such assets and liabilities; it is not a forced
transaction. Market participants are buyers and sellers in the principal
market that are (i) independent, (ii) knowledgeable, (iii) able to transact
and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and liabilities. The
income approach uses valuation techniques to convert future amounts, such as
cash flows or earnings, to a single present amount on a discounted basis. The
cost approach is based on the amount that currently would be required to
replace the service capacity of an asset (replacement cost). Valuation
techniques should be consistently applied. Inputs to valuation techniques
refer to the assumptions that market participants would use in pricing the
asset or liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical
assets or liabilities that the reporting entity has the ability to access at
the measurement date.
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These
might include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are
observable for the asset or liability (such as interest rates, volatilities,
prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair values of assets
or liabilities that reflect an entity's own assumptions about the assumptions
that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of the Company's financial assets and financial
liabilities carried at fair value effective July 1, 2008.
In general, fair value is based upon quoted market prices, where available. If
such quoted market prices are not available, fair value is based upon
internally developed models that primarily use, as inputs, observable
market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. These adjustments may
include amounts to reflect counterparty credit quality, the Company's
creditworthiness, among other things, as well as unobservable parameters. Any
such valuation adjustments are applied consistently over time. The Company's
valuation methodologies may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values. While
management believes the Company's valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies
or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
10
Securities Available for Sale. Securities classified as available for sale are
reported at fair value utilizing Level 1 and Level 2 inputs. For equity
securities, unadjusted quoted prices in active markets for identical assets
are utilized to determine fair value at the measurement date. For all other
securities, the Company obtains fair value measurements from an independent
pricing service. The fair value measurements consider observable data that may
include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond's terms and conditions, among other
things.
Impaired Loans. The Company does not record impaired loans at fair value on a
recurring basis. However, periodically, a loan is considered impaired and is
reported at the fair value of the underlying collateral, less estimated costs
to sell, if repayment is expected solely from the collateral. Impaired loans
measured at fair value typically consist of loans on non-accrual status, $2.9
million at September 30, 2008, and loans with a portion of the allowance for
loan losses allocated specifically to the loan, $5.6 million at September 30,
2008. Collateral values are estimated using level 2 inputs, including recent
appraisals and Level 3 inputs based on customized discounting criteria. Due
to the significance of the level 3 inputs, impaired loans fair values have
been classified as level 3.
The following table summarizes financial assets and financial liabilities
measured at fair value on a recurring basis as of September 30, 2008,
segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
Level 1 Level 2 Level 3 Total
Inputs Inputs Inputs Fair Value
------------------------------------------------
(dollars in thousands)
Securities-available-for-sale $ - $ 45,211 $ - $ 45,211
Impaired Loans - - 3,949 3,949
Certain financial assets and financial liabilities are measured at fair value
on a nonrecurring basis; that is, the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). Financial
assets and financial liabilities, excluding impaired loans, measured at fair
value on a non-recurring basis were not significant at September 30, 2008.
Non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first
step of a goodwill impairment test. Non-financial assets measured at fair
value on a non-recurring basis include non-financial assets and non-financial
liabilities measured at fair value in the second step of a goodwill impairment
test, as well as intangible assets and other non-financial long-lived assets
measured at fair value for impairment assessment. As stated above, SFAS 157
will be applicable to these fair value measurements beginning July 1, 2009.
7. 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.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, 2008, the Company had total assets of $244.0 million, net
loans receivable of $158.3 million, total deposits of $189.3 million and
stockholders' equity of $27.3 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, 2008, compared to June 30,
2008, and the consolidated results of operations for the three-month period
ended September 30, 2008, compared to the three-month period ended September
30, 2007, respectively. This discussion should be read in conjunction with the
Company's consolidated financial statements, and notes thereto, for the year
ended June 30, 2008.
Recent Developments and Corporate Overview
Recent events in the U.S. and global financial markets, including the
deterioration of the worldwide credit markets, have created significant
challenges for financial institutions such as First Home Savings Bank.
Dramatic declines in the housing market during the past year, marked by
falling home prices and increasing levels of mortgage foreclosures, have
resulted in significant write-downs of asset values by many financial
institutions, including government-sponsored entities and major commercial and
investment banks. In addition, many lenders and institutional investors have
reduced, and in some cases, ceased to provide funding to borrowers, including
other financial institutions, as a result of concern about the stability of
the financial markets and the strength of counterparties.
In response to the crises affecting the U.S. banking system and financial
markets and attempt to bolster the distressed economy and improve consumer
confidence in the financial system, on October 3, 2008, the U.S. Congress
passed, and the President signed into law, the Emergency Economic
Stabilization Act of 2008 (the "Stabilization Act"). The Stabilization Act
authorizes the Secretary of the U.S. Treasury and the Federal Deposit
Insurance Corporation (the "FDIC") to implement various temporary emergency
programs designed to strengthen the capital positions of financial
institutions and stimulate the availability of credit within the U.S.
financial system. Pursuant to the Stabilization Act, the U.S. Treasury will
have the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.
On October 14, 2008, the U.S. Treasury announced that it will purchase equity
stakes in eligible financial institutions that wish to participate. This
program, known as the Capital Purchase Program, allocates $250 billion from
the $700 billion authorized by the Stabilization Act to the U.S. Treasury for
the purchase of senior preferred shares from qualifying financial
institutions. Eligible institutions will be able to sell equity interests to
the U.S. Treasury in amounts equal to between 1% and 3% of the institution's
risk-weighted assets. In conjunction with the purchase of preferred stock,
the U.S. Treasury will receive warrants to purchase common stock from the
participating institutions with an aggregate market price equal to 15% of the
preferred investment. Participating financial institutions will be required
to adopt the U.S. Treasury's standards for executive compensation and
corporate governance for the period during which the U.S. Treasury holds
equity issued under the Capital Purchase Program. Many financial institutions
have already announced that they will participate in the Capital Purchase
Program. We have not applied to participate in the Capital Purchase Program.
12
Also on October 14, 2008, using the systemic risk exception to the FDIC
Improvement Act of 1991, the U.S. Treasury authorized the FDIC to provide a
100% guarantee of newly-issued senior unsecured debt and deposits in
non-interest bearing accounts at FDIC insured institutions. Initially, all
eligible financial institutions will automatically be covered under this
program, known as the Temporary Liquidity Guarantee Program, without incurring
any fees for a period of 30 days. Coverage under the Temporary Liquidity
Guarantee Program after the initial 30-day period is available to insured
financial institutions at a cost of 75 basis points per annum for senior
unsecured debt and 10 basis points per annum for non-interest bearing
deposits. After the initial 30-day period, institutions will continue to be
covered under the Temporary Liquidity Guarantee Program unless they inform the
FDIC that they have decided to opt out of the program. We have determined
that we will participate in the insurance program covering the non-interest
bearing deposits. Neither the Company nor the Bank have unsecured senior debt.
Under the Troubled Asset Auction Program, another initiative based on the
authority granted by the Stabilization Act, the U.S. Treasury, through a
newly-created Office of Financial Stability, will purchase certain troubled
mortgage-related assets from financial institutions in a reverse-auction
format. Troubled assets eligible for purchase by the Office of Financial
Stability include residential and commercial mortgages originated on or before
March 14, 2008, securities or obligations that are based on such mortgages,
and any other financial instrument that the Secretary of the U.S. Treasury
determines, after consultation with the Chairman of the Board of Governors of
the Federal Reserve System, is necessary to promote financial market
stability. The U.S. Treasury has not issued any definitive guidance regarding
this program and we have not determined whether or not we will participate.
Under the Stabilization Act, the U.S. Treasury is also required to establish a
program that will guarantee principal of, and interest on, troubled assets
originated or issued prior to March 14, 2008, including mortgage-backed
securities. The program may take any form and may vary by asset class, but it
must be voluntary and self-funding. The U.S. Treasury has the authority to
set premiums to reflect the credit risk characteristics of the insured assets.
The U.S. Treasury has solicited requests for comments on how the program
should be structured but no program has been implemented to date. The
Stabilization Act also temporarily increases the amount of insurance coverage
of deposit accounts held at FDIC-insured depository institutions, including
First Home Savings Bank, from $100,000 to $250,000. The increased coverage is
effective during the period from October 3, 2008 until December 31, 2009.
It is not clear at this time what impact the Stabilization Act, the Capital
Purchase Program, the Temporary Liquidity Guarantee Program, the Troubled
Asset Auction Program, other liquidity and funding initiatives of the Federal
Reserve and other agencies that have been previously announced, and any
additional programs that may be initiated in the future will have on our
future financial condition and results of operations.
The preceding is a summary of recently enacted laws and regulations that could
materially impact our results of operations or financial condition. This
discussion is qualified in its entirety by reference to such laws and
regulations and should be read in conjunction with "Regulation of First Home"
discussion contained in our 2008 Annual Report on Form 10-K.
The Savings 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 resulted from issues noted
during the examination of the Savings Bank conducted by the OTS, the report on
which was dated in July 2006, and included deficiencies in lending policies
and procedures, recent operating losses, and the need to revise both the
business plan and the budget to enhance profitability. The corrective actions
required to be taken by the Savings Bank under the MOU include, among others:
(1) developing procedures concerning ongoing credit administration and
monitoring; (2) continuing to identify, track and correct credit and
collateral documentation exceptions and loan policy exceptions; (3) preparing
and submitting to the Savings Bank's Board of Directors an accurate and
complete loan-to-one borrower report; (4) preparing and
13
updating, where appropriate, a workout plan for each classified asset over
$250,000; (5) adopting a revised loan loss allowance policy; (6) amending the
Savings Bank's appraisal policy to require written review of all appraisals
prior to final loan approval; (7) adopting a revised loan policy that provides
for underwriting guidelines, loan documentation, and credit administration
procedures for unsecured loans; (8) either request the consent of the FDIC for
the Savings Bank's subsidiary, FYBAR Service Corporation, to hold real estate
for investment or approve a plan for divestiture of such investment by June
30, 2007; (9) implementing corrective actions with respect to the previously
conducted independent information technology audit; and (10) preparing,
adopting and submitting to the OTS a comprehensive three year business plan
and budget. The Company believes that the Savings Bank has satisfactorily
addressed all of the issues raised by the MOU. During July 2007, the OTS
performed an on-site review of the progress made on resolving the issues
discussed in the MOU. The Savings Bank did not receive a formal report from
the OTS on the results of this review.
Since the end of fiscal 2008, the Company and the Bank have had changes in
senior management. On September 23, 2008, as was noted in the Company's Annual
Report to the SEC on Form 10-K, filed on September 26, 2008, Adrian C.
Rushing, the Bank's Chief Operating Officer, resigned his position to pursue
another opportunity. The Bank is in the process of reviewing the position
description for the Chief Operating Officer, to determine what, if any,
changes should be made, prior to interviewing candidates.
On October 28, 2008, Daniel P. Katzfey, President and Chief Executive Officer
of both the Company and the Bank, and a director of both the Company and the
Bank, resigned his positions.
The Company appointed Thomas M. Sutherland, Chairman of the Company's and
Bank's Boards of Directors, to serve as the interim Chief Executive Officer of
the Company and the Bank. Mr. Sutherland has served as Chairman of the Board
of the Company's and Bank's Boards of Directors since 2005. In addition, the
Company appointed Lannie E. Crawford, a Senior Vice President of the Bank, to
serve as interim President of the Company and the Bank. Mr. Crawford joined
the Bank in November 2007 and has more than 30 years of experience with
financial institutions. The interim appointments of Mr. Sutherland as Chief
Executive Officer of the Company and the Bank, and of Mr. Crawford as
President of the Company and the Bank, were made permanent at the
organizational meeting of the board of the Company and a special board meeting
of the Bank on November 6, 2008.
R.J. Breidenthal had been selected to fill the vacancy created on the Boards
of Directors of Company and the Bank by Mr. Katzfey's resignation. Mr.
Breidenthal has served as an advisory director of the Company and the Bank
since December 2006. Mr. Breidenthal serves on the Bank's Loan Committee. Mr.
Breidenthal is the first cousin of Thomas M. Sutherland, the Chairman of the
Board and Interim Chief Executive Officer of the Company and the Bank.
Financial Condition
As of September 30, 2008, First Bancshares, Inc. had assets of $244.0 million,
compared to $249.2 million at June 30, 2008. The decrease in total assets of
$5.3 million, or 2.1%, was primarily the result of a decrease in loans
receivable of $8.7 million and a decrease in cash and cash equivalents of
$518,000. These decreases were partially offset by an increase in securities
of $4.3 million during the quarter ended September 30, 2008. In addition, the
Company experienced decreases in deposits and retail repurchase agreements of
$5.3 million and $275,000, respectively, during the quarter. At September 30,
2008, there were $635,000 in loans originated for sale which were not yet
funded by the purchasers. Advances from the Federal Home Loan Bank of Des
Moines remained constant during the quarter.
Loans receivable, net totaled $158.3 million at September 30, 2008, a decrease
of $8.7 million from $167.0 million at June 30. 2008. The decrease in loans
is the result of a decrease in loan originations for all types of loans during
the quarter ended September 30, 2008, and an effort by management to encourage
certain borrowers, whose financial status did not meet the Company's current
requirements, to move their loans to other lenders. The
14
level of uncertainty in the economy, both locally and nationally, initially
brought about by problems in the sub-prime mortgage market, increased during
the quarter. Measurements of economic health such as housing sales, both new
and existing, consumer confidence and others have deteriorated over the last
several months. There remain opportunities for new lending primarily as a
result of the lower interest rate environment and the fact that the Company's
primary market area for loans, namely Springfield, Missouri, has remained
relatively strong. Management, however, has decided to be less aggressive in
its attempts to attract new borrowers.
The Company's deposits decreased by $5.3 million from $194.6 million at June
30, 2008 to $189.3 million at September 30, 2008. The decrease in deposits is
the result of the Company taking a conservative stance in the interest rates
being offered on its deposit products. While we continue to offer competitive
products and specials, as to rates and terms, on certificates of deposit, we
generally price our products at or below the mid-point among the institutions
with whom we compete. The balance of the Company's retail repurchase
agreements, first introduced during fiscal 2007, decreased by $275,000 from
$4.6 million at June 30, 2008 to $4.4 million at September 30, 2008.
As of September 30, 2008 the Company's stockholders' equity totaled $27.3
million, compared to $27.1 million as of June 30, 2008. The increase of
$204,000 was due to net income of $245,000 during the first three months of
the fiscal year and a positive change in the unrealized gain on
available-for-sale securities, net of taxes, of $101,000 on the Company's
available for sale securities portfolio. In addition, there was a $13,000
increase resulting from the accounting treatment of stock based compensation.
There was a dividend of $0.10 per share of common stock, which totaled
$155,000, paid during the quarter ended September 30, 2008 and, although the
Company currently has a stock repurchase program in place, no shares of common
stock were purchased during the quarter.
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 $3.9 million, or 1.6% of total assets, at
June 30, 2008 to $5.4 million, or 2.2% of total assets at September 30, 2008.
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 consisted of an increase of $542,000 in non-accrual loans, an increase
of $734,000 in loans 90 days or more delinquent and still accruing interest,
and an increase of $222,000 in real estate owned and other repossessed assets.
The increase in non-accrual loans consisted of increases of $328,000 in
non-accrual residential mortgages, $529,000 in non-accrual land loans,
$163,000 in non-accrual second mortgages, $290,000 in non-accrual commercial
business loans and $33,000 in non-accrual consumer loans. These increases were
partially offset by a decrease of $800,000 in non-accrual commercial real
estate loans. There were three loans totaling $360,000 past due 90 days or
more and still accruing at June 30, 2008. All three became non-accrual loans
during the quarter ended September 30, 2008. At September 30, 2008, loans 90
days past due and still accruing consisted of $337,000 in residential
mortgages, $336,000 in commercial real estate loans, $406,000 in commercial
business loans and $14,000 in consumer loans. Almost all of the loans that
were moved to non-accrual or became 90 days or more delinquent and still
accruing as of September 30, 2008, were loans that had been on the Company's
list of watch credits as of June 30, 2008. The increase in non-performing
assets is primarily the result of the current economic crisis which has
negatively impacted individuals and businesses in the Company's primary market
areas. As discussed below, management believes the allowance for loan losses
as of September 30, 2008, was adequate to absorb the known and inherent risks
of loss in the loan portfolio at that date.
15
As of June 30, 2008, there were twelve foreclosed properties held for sale
totaling $1.2 million. During the quarter ended September 30, 2008 two
properties with a book value of $65,000 were sold resulting in a gain of
$6,000, and six properties totaling $295,000 were foreclosed and added to real
estate owned. At September 30, 2008, there were sixteen foreclosed properties
held for sale totaling $1.4 million.
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
September 30, 2008, the Company had classified $4.7 million of its assets as
substandard, $876,000 as doubtful and none as loss. This compares to
classifications at June 30, 2008 of $5.1 million substandard, $718,000
doubtful and none as loss. This reduction in classified loans to $5.5 million
from $5.8 million is the result of transfers to real estate owned and other
repossessed assets of loans totaling $295,000 and to loan write-offs of
$40,000 during the three month period. In addition, classified assets at
September 30, 2008 and June 30, 2008 included real estate owned and other
repossessed assets of $1.4 million and $1.2 million, respectively.
In addition to the classified loans, the Bank has identified an additional
$6.0 million of credits at September 30, 2008 on its internal watch list
compared to $4.8 million at June 30, 2008. 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 primarily the result of the current state of the economy which had a
negative impact on cash flows for both individuals and businesses. This, along
with stricter internal policies, which have been in place during the last
year, relating to the identification and monitoring of problem loans, has
resulted in an increase in the number and the total dollar amount of loans
identified as problem loans. During the three months ended September 30, 2008,
twelve loans totaling $858,000 were removed from the watch list as a result
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, 2008, the Company has established an allowance for loan
losses of $2.9 million compared to $2.8 million at June 30, 2008. The
allowance represents approximately 73.1% and 103.9% of the total non-
performing loans at September 30, 2008 and June 30, 2008, respectively.
The allowance for loan losses reflects management's best estimate of probable
losses inherent in the portfolio based on currently available information.
The Company believes that the allowance for loan losses as of September 30,
2008 was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. While the Company believes the estimates and
assumptions used in the determination of the adequacy of the allowance are
reasonable, there can be no assurance that such estimates and assumptions will
not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased
provisions that may be required will not adversely impact the Company's
financial condition and results of operations. Future additions to the
allowance may become necessary based upon changing economic conditions,
16
increased loan balances or changes in the underlying collateral of the loan
portfolio. In addition, the determination of the amount of the Bank's
allowance for loan losses is subject to review by bank regulators as part of
the routine examination process, which may result in the establishment of
additional reserves based upon their judgment of information available to them
at the time of their examination.
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
September 30, 2008 and June 30, 2008 was 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, 2008 Compared
to the Three Months Ended September 30, 2007
General. For the three months ended September 30, 2008, the Company had net
income of $245,000, or $0.16 diluted share, compared to net income of
$225,000, or $0.15 per diluted share, for the same period in 2007. The
increase in net income for the 2008 period included an increase in net
interest income which was substantially offset by a decrease in non-interest
income, and increases in the provision for loan losses, non-interest expense
and income taxes.
Net interest income. The Company's net interest income for the three months
ended September 30, 2008 was $1.9 million, compared to $1.7 million for the
same period in 2007. The increase in net interest income reflects a $565,000
decrease in interest expense which was partially offset by a $328,000 decrease
in interest income.
Interest income. Interest income for the three months ended September 30, 2008
decreased $328,000, or 8.8%, to $3.4 million compared to $3.7 million for the
same period in 2007. Interest income from loans decreased $223,000 to $2.7
million from $3.0 million in 2007. This was attributable to a decrease in the
yield on loans to 6.68% during the three months ended September 30, 2008 from
7.44% during the comparable period in 2007 which was partially offset by an
increase in average loans to $162.1 million during the 2008 period from $157.4
million during the comparable 2007 period. The increase in average loans was
the result of an increase in lending volume during the last three quarters of
fiscal 2008, although the net loan portfolio shrank by $8.7 million during
17
the quarter ended September 30, 2008. The decrease in yield was the result of
a downward trend in interest rates between the two periods, including several
reductions in prime rate, which is the base from which many of our loan
products are priced.
Interest income from investment securities and other interest-earning assets
for the three months ended September 30, 2008 decreased $105,000 to $686,000
from $791,000 for the same period in 2007. The decrease was the result of a
decrease in the yield on these assets to 4.32% for the 2008 period from 4.85%
for the 2007 period and by a decrease in the average balance of these assets
of $1.5 million to $63.1 million for the quarter ended September 30, 2008 from
$64.6 million for the same period in 2007.
Interest expense. Interest expense for the three months ended September 30,
2008 decreased $565,000 or 27.3%, to $1.5 million from $2.1 million for the
same period in 2007. Interest expense on deposits decreased $575,000 to $1.2
million in the three months ended September 30, 2008 from $1.7 million in the
same period in 2007. The decrease resulted from a decrease in the average cost
of deposits to 2.57% in the 2008 period from 3.83% in the 2007 period, and by
a decrease in average interest-bearing deposit balances of $1.1 million to
$178.5 million in the 2008 period from $179.6 million in the 2007 period.
Interest expense on other interest-bearing liabilities (Advances from Federal
Home Loan Bank and retail repurchase agreements) increased $9,000 to $349,000
in the three months ended September 30, 2008 from $340,000 in the comparable
period in 2007. The increase in interest expense on other interest-bearing
liabilities was due to an increase in the average outstanding balances of
other interest-bearing liabilities to $26.4 million during the 2008 period
from $24.0 million during the 2007 period, which was substantially offset by a
decrease in the average cost of these funds to 5.25% during the 2008 period
from 5.62% during the 2007 period. The average outstanding balance of retail
repurchase agreements increased by $2.4 million to $4.4 million from $2.0
million during the three months ended September 30, 2008 compared to the
comparable period in 2007. Just prior to the end of fiscal 2008, a significant
new retail repurchase account of $4.2 million was opened which maintained a
high balance during the quarter.
Net interest margin. The Company's net interest margin and interest rate
spread increased to 3.37% and 3.10%, respectively, for the three months ended
September 30, 2008 from 2.99% and 2.65%, respectively, for the three
months ended September 30, 2007.
Provision for loan loss. During the quarter ended September 30, 2008, the
provision for loan losses was $149,000, compared to $8,000 for the quarter
ended September 30, 2007. 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, 2008,
non-interest income totaled $757,000, compared to $785,000 for the three
months ended September 30, 2007. The $28,000 decrease between the two periods
resulted primarily from a decrease of $48,000 in profit on the sale of loans,
and from a change in the net gain on the sale of property and equipment and
real estate owned from a gain of $37,000 during the 2007 period to a loss of
$2,000 during the 2008 period. These decreases in non-interest income were
partially offset by increases of $54,000 in service charges and other fee
income and an increase of $4,000 in other income. The decrease in profit on
the sale of loans is the result of the current economy which has slowed the
residential real estate market significantly. The increase in services charges
and fee income is due, in part, to an increase in checks presented on accounts
with insufficient funds.
Non-interest expense. Non-interest expense increased by $25,000 to $2.2
million during the three months ended September 30, 2008 from $2.1 million for
the three months ended September 30, 2007. This increase was primarily the
result of an increase of $86,000 in occupancy and equipment expense. This
increase was partially offset by decreases of $8,000, $33,000 and $20,000 in
compensation and employee benefits, professional fees and other non-interest
expense, respectively. The increase in occupancy and equipment expense is
primarily the result of an ongoing effort to upgrade the appearance and
functionality of the Company's home office and branch offices. While a
significant portion of costs related to these efforts has been capital in
nature, a lesser portion has been for repairs and maintenance, and has been
expensed.
18
Income tax expense. Income tax expense for the three months ended September
30, 2008 increased by $24,000 to $116,000 from $92,000 for the three months
ended September 30, 2007. Most of the increase is 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, 2008, the Company
had commitments to originate loans and fund unused lines of credit totaling
$2.5 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, 2008 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 September 30, 2008 Amount Ratio Amount Ratio Amount Ratio
--------------------- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Tangible Capital (to
adjusted total
assets) $24,577 10.18% $ 3,621 1.50% - -
Tier 1 (Core)
Capital (to ad-
justed total
assets) 24,577 10.18 9,656 4.00 $12,070 5.00%
Total Risk Based
Capital (to risk
weighted assets) 26,531 15.55 12,646 8.00 15,808 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, 2008, 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
19
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.
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, 2008 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, 2008, 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
20
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.
21
FIRST BANCSHARES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
FORM 10-Q
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 1A. Risk Factors
------------
There have not been any material changes to the risk factors previously
disclosed in the Form 10-K for the year ended June 30, 2008.
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.
22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
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, 2008 By: /s/ Thomas M. Sutherland
-------------------------------------
Thomas M. Sutherland, Chairman of the
Board and Chief Executive Officer
Date: November 13, 2008 By: /s/ Ronald J. Walters
-------------------------------------
Ronald J. Walters, Senior Vice
President, Treasurer and Chief
Financial Officer
23
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.
24
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas M. Sutherland, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended September 30, 2008 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, 2008 /s/ Thomas M. Sutherland
----------------- --------------------------------
Chief Executive Officer
25
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-Q for the quarterly
period ended September 30, 2008 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, 2008 /s/ Ronald J. Walters
----------------- ---------------------------------
Chief Financial Officer
26
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 USC 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-Q of First
Bancshares, Inc. (the "Company") for the quarterly period ended September 30,
2008 (the "Report"), I, Thomas M. Sutherland, Interim 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, 2008 By: /s/ Thomas M. Sutherland
-------------------------------
Name: Thomas M. Sutherland
Chief Executive Officer
27
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 USC 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-Q of First
Bancshares, Inc. (the "Company") for the quarterly period ended September 30,
2008 (the "Report"), I, Thomas M. Sutherland, Interim 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, 2008 By: /s/ Ronald J. Walters
-------------------------------
Name: Ronald J. Walters
Chief Financial Officer
28