UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-QSB
-------------------------------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
incorporation or organization) Identification No.)
142 East First St., Mountain Grove, MO 65711
--------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(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: 1,551,715 shares outstanding
on November 7, 2006
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
1
FIRST BANCSHARES, INC. AND SUBSIDIARIES
FORM 10-QSB
September 30, 2006
INDEX PAGE
----- ----
PART I-FINANCIAL INFORMATION
----------------------------
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited) 3
CONSOLIDATED STATEMENTS OF INCOME (unaudited) 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 5-6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited) 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 8-11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 11-15
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 18
SIGNATURES
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
September 30, June 30,
2006 2006
(Unaudited) (Unaudited)
(In thousands)
ASSETS
------
Cash and cash equivalents $ 17,330 $ 23,474
Certificates of deposit purchased 3,866 3,827
Securities available-for-sale 20,853 20,884
Securities held-to-maturity 18,246 19,210
Federal Home Loan Bank stock, at cost 1,695 1,612
Loans receivable, net 147,459 141,987
Accrued interest receivable 1,329 1,178
Prepaid expenses 333 292
Property and equipment 8,063 8,028
Real estate owned 574 497
Intangible assets 323 336
Deferred tax asset, net 721 718
Income taxes recoverable 195 317
Bank-owned life insurance 5,760 5,705
Other assets 332 330
-------- --------
Total assets $227,079 $228,395
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $174,704 $179,141
Advances from Federal Home Loan Bank 25,000 22,000
Accrued expenses and accounts payable 924 963
-------- --------
Total liabilities 200,628 202,104
-------- --------
Preferred stock, $.01 par value; 2,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 8,000,000 shares
authorized, 2,895,036 issued at September 30 and
June 30, 1,551,715 and 1,552,480 outstanding at
September 30 and June 30, respectively 29 29
Paid-in capital 17,864 17,852
Retained earnings - substantially restricted 27,713 27,703
Treasury stock - at cost; 1,343,321 and 1,342,556
shares at September 30 and June 30, respectively (19,098) (19,085)
Accumulated other comprehensive income (loss) (57) (208)
-------- --------
Total stockholders' equity 26,451 26,291
-------- --------
Total liabilities and stockholders' equity $227,079 $228,395
-------- --------
See notes to the consolidated financial statements
3
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Quarter Ended
September 30,
2006 2005
------ ------
(Dollars in thousands)
Interest Income:
Loans receivable $2,568 $2,760
Securities 454 401
Other interest-earning assets 204 110
------ ------
Total interest income 3,226 3,271
------ ------
Interest Expense:
Deposits 1,303 924
Borrowed funds 324 406
------ ------
Total interest expense 1,627 1,330
------ ------
Net interest income 1,599 1,941
Provision for loan losses 110 793
------ ------
Net interest income after
provision for loan losses 1,489 1,148
------ ------
Noninterest Income:
Service charges and other fee income 445 483
Gain (loss) on sale of property and
equipment and real estate owned 47 (52)
Income from bank-owned life insurance 54 58
Other 45 22
------ ------
Total noninterest income 591 511
------ ------
Noninterest Expense:
Compensation and employee benefits 1,165 1,018
Occupancy and equipment 329 297
Customer deposit account processing fees 2 60
Deposit insurance premiums 6 6
Professional fees 59 74
Other 416 383
------ ------
Total noninterest expense 1,977 1,838
------ ------
Income (loss) before taxes 103 (179)
Income Taxes 31 (137)
------ ------
Net income (loss) $ 72 $ (42)
------ ------
Earnings (loss) per share - basic $ .05 $ (.03)
====== ======
Earnings (loss) per share - diluted .05 (.03)
====== ======
Dividends per share .04 .04
====== ======
See notes to the consolidated financial statements
4
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
Three Months Ended
September 30,
2006 2005
------- ------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 72 $ (42)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 162 174
Amortization of intangible assets 13 17
Premium amortization 2 16
Increase in cash surrender value of bank-
owned life insurance (55) (58)
Loss (gain) on sale of property and equipment
and real estate owned (47) 53
Provision for loan losses 110 793
Stock-based compensation 13 -
Net change in operating accounts:
Accrued interest receivable and other
assets (194) (85)
Deferred loan costs - 9
Income taxes recoverable - current 122 (397)
Deferred income taxes (93) 258
Accrued expenses and accounts payable (39) (34)
------- ------
Net cash from operating activities 66 704
------- ------
Cash flows from investing activities:
Purchase of securities held-to-maturity (345) -
Proceeds from redemption of Federal Home Loan
Bank stock - 4
Purchases of Federal Home Loan Bank stock (83) -
Proceeds from maturities of securities
available-for-sale 272 664
Proceeds from maturities of securities held-to-
maturity 1,306 477
Net change in certificates of deposits (39) (20)
Net change in loans receivable (5,809) 4,718
Purchases of property and equipment (197) (176)
Proceeds from sale of property and equipment and
real estate owned 197 45
Other - 1
------- ------
Net cash from (used in) investing activities $(4,698) $5,713
------- ------
continued
5
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(Unaudited)
Three Months Ended
September 30,
2006 2005
------- -------
(In thousands)
Cash flows from financing activities:
Net change in deposits $(4,437) $(4,755)
Proceeds from borrowed funds 3,000 100
Payments on borrowed funds - (61)
Proceeds from sale of common stock - 15
Purchase of treasury stock (13) -
Cash dividends paid (62) (62)
------- -------
Net cash used in financing activities (1,512) (4,763)
------- -------
Net increase (decrease) in cash and cash
equivalents (6,144) 1,654
Cash and cash equivalents - beginning of period 23,474 20,617
------- -------
Cash and cash equivalents - end of period $17,330 $22,271
======= =======
See notes to the consolidated financial statements
6
FIRST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
(Unaudited)
Quarter Ended
September 30,
2006 2005
----- -----
(In thousands)
Net income (loss) $ 72 $ (42)
---- -----
Unrealized gains (losses) on securities
Gains (losses) arising during period, net
of tax 151 (129)
---- -----
Other comprehensive income (loss) 151 (129)
---- -----
Comprehensive income (loss) $223 $(171)
==== =====
See notes to the consolidated financial statements.
7
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE A - Significant Accounting Policies
----------------------------------------
The accompanying consolidated statements of financial condition as of
September 30, 2006 and June 30, 2006, and the consolidated statements of
income, comprehensive income, and cash flows for the three months ended
September 30, 2006 and 2005, include the accounts and transactions of First
Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries, First Home
Savings Bank ("Bank") and SCMG, Inc. All material intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. The financial statements and notes thereto should be read in
conjunction with the Company's June 30, 2006 Annual Report on Form 10-KSB.
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly these consolidated financial statements.
The results for these interim periods may not be indicative of results for the
entire year or for any other period.
NOTE B - Earnings per Share
---------------------------
Basic earnings per share excludes dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted average number
of shares outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or resulted in the issuance of common stock
that would share in the earnings of the Company. Dilutive potential common
shares are added to weighted average shares used to compute basic earnings per
share. The number of shares that could be issued as a result of the exercise
of stock options has been reduced by the number of shares that could have been
purchased using the proceeds from the exercise of the options at the average
market price of the Company's stock.
Dilutive
Weighted Average Number Shares
Of Common Shares Issuable
---------------- --------
Quarter ended September 30, 2006 1,552,373 -
Quarter ended September 30, 2005 1,553,401 -
8
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE C - Employee Benefit Plans
-------------------------------
The Company's 2004 Management Recognition Plan ("MRP") authorizes the award of
shares to certain officers, employees and directors for up to 50,000 shares of
the Company's common stock. All shares awarded will have a restricted period
to be determined by the Corporation's Compensation Committee, who administers
the Plan. The restricted period shall not be less than three years if the
award is time based, or not less than one year if performance based. This
Plan was approved by shareholders in October 2004. As of September 30, 2006
there have been no awards made under the MRP .
The Company's 2004 Stock Option and Incentive Plan ("Plan") authorizes the
grant of options to certain officers, employees and directors for up to
100,000 shares of the Company's common stock. The Plan is intended to promote
stock ownership by directors and selected officers of the Company to increase
their proprietary interest in the success of the Company and to encourage them
to remain in the employment of the Company or its subsidiaries. Awards
granted under the Plan may include incentive stock options or nonqualified
stock options. The Plan provides for the grant of options at an exercise
price equal to the market price of the Company's stock on the date of grant.
All options granted have ten year terms and vest and become exercisable
ratably over five years following the date of grant. This Plan was approved
by shareholders in October 2004.
On July 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payment." This Statement revised
SFAS No. 123, "Accounting for Stock-Based Compensation," amends SFAS No. 95,
"Statement of Cash Flows," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Upon adoption of SFAS No. 123(R), the Company
used the modified prospective transition method. The modified prospective
method requires that compensation expense be recorded for all non-vested
options beginning with the first quarter after adoption. SFAS No. 123(R)
requires that all share-based compensation now be measured at fair value and
recognized as an expense in the income statement. The Company estimates the
fair value of each option award on the date of grant using the Black-Scholes
method. 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 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. The Company used the following weighted-average assumptions for
grants in 2006, respectively: dividend rates of .9%, price volatility of
20.38%, risk- free interest rates of 4.47%, and expected lives of 10 years for
all periods. The share-based compensation charged against income was $13,125
for the three months ended September 30, 2006.
9
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE C - Employee Benefit Plans (Continued)
-------------------------------------------
A summary of option activity under the Plan as of September 30, 2006, and
changes during the quarter ended September 30, 2006, is presented below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term Value
------- ------ --------- ----------- ---------
(in years)
Outstanding at beginning of
period 48,000 $17.46
Granted - -
Exercised - -
Forfeited or expired (1,000) 17.50
------
Outstanding at end of period 47,000 $17.46 9.42 -
====== ====== ==== ====
Exercisable at end of period 5,000 $17.79 9.25 -
====== ====== ==== ====
A summary of the Company's nonvested shares as of September 30, 2006, and
changes during the quarter ended September 30, 2006, is presented below:
Weighted-
Average
Grant-Date
Nonvested Shares Shares Fair Value
---------------- ------ ----------
Nonvested at July 1, 2006 43,000 $ 6.25
Granted - -
Vested - -
Forfeited 1,000 6.25
------
Nonvested at September 30, 2006 42,000 6.25
======
As of September 30, 2006, there was $231,421 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 4.5 years.
The pro forma disclosures previously permitted under SFAS No. 123 are no
longer an alternative to financial statement recognition. SFAS No. 123
established a fair value based method for financial accounting and reporting
for stock-based employee compensation plans and for transactions in which an
entity issued its equity instruments to acquire goods and services from
nonemployees. However, the standard allowed compensation to continue to be
measured by using the intrinsic value based method of accounting prescribed by
APB No. 25, but required expanded disclosures. The Company had elected to
apply the intrinsic value based method of accounting for stock options issued
to employees. Accordingly, prior to July 1, 2006, no compensation cost had
been recognized by the Company in its financial statements. Had compensation
cost for the Plan been determined based on the grant date fair values of
awards (the method described in SFAS No. 123), the approximate reported net
income and earnings per share would not have been materially different from
amounts reported in the consolidate statements of income.
10
FIRST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE D - Regulatory Supervision
-------------------------------
First Home Savings Bank is a Missouri state-chartered savings and loan
association, and is subject to the regulation of and examination by the
Missouri Division of Finance, the Federal Deposit Insurance Corporation and
the Office of Thrift Supervision ("OTS"). The OTS recently completed an
examination of the Bank and determined that certain of the Bank's lending
policies and procedures were deficient, and that, as a result of the Bank's
recent operating losses, the Bank needs to revise its business plan and budget
to enhance profitability. In connection with OTS' determinations and other
issues noted in the examination, the Bank anticipates that it will be entering
into a memorandum of understanding with the OTS in the near future. At this
time management believes this agreement will not have an affect on how the
Company operates and it should not have an impact on earnings.
NOTE E - 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
General
The discussion and analysis included herein covers those material changes in
liquidity and capital resources that have occurred since June 30, 2006, as
well as certain material changes in results of operations during the three
month periods ended September 30, 2006 and 2005.
The following narrative is written with the presumption that the users have
read or have access to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2006, which contains the latest audited financial
statements and notes thereto, together with Management's Discussion and
Analysis of Financial Condition and Results of Operations as of June 30, 2006,
and for the year then ended. Therefore, only material changes in financial
condition and results of operations are discussed herein.
Forward-Looking Statements
This report contains certain "forward-looking statements." These
forward-looking statements, which are included in Management's Discussion and
Analysis, describe future plans or strategies and include the Company's
expectations of future financial results. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. The Company's ability to predict results or the
effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, changes in demand
for loans and other services, competition from other institutions, the credit
and other risks posed by the Company's loan portfolio and loan loss
experience, the quality or composition of the Company's investment portfolios,
the general economic climate in the Company's market area and the country as a
whole, changes in federal and state regulation and other factors detailed from
time to time in our filings with the Securities and Exchange Commission. These
factors should be considered in evaluating the forward-looking statements, and
undue reliance should not be placed on such statements.
11
Critical Accounting Policies
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. Management of the Company must use assumptions and estimates to
apply these principles where actual measurement is not possible or practical.
For a complete discussion of the Company's significant accounting policies,
see "Notes to the Consolidated Financial Statements" in the Company's 2006
Annual Report. Certain policies are considered critical because they are
highly dependent upon subjective or complex judgments, assumptions and
estimates. Changes in such estimates may have a significant impact on the
financial statements.
Financial Condition
Total assets remained constant during the quarter with a decrease of $1.3
million to $227.1 million at September 30, 2006. Loans receivable increased
$5.5 million during the quarter due to the recent opening of the Springfield,
Missouri branch. This increase was funded by a $6.1 million decrease in cash
and cash equivalents. Customer deposits decreased $4.4 million from June 30,
2006 to September 30, 2006 as the Bank lost deposits to new competition in its
market area. This decrease was partially offset by an increase of $3.0
million in advances from the Federal Home Loan Bank.
Non-performing assets decreased to $1.2 million, or .5% of total assets at
September 30, 2006 from $1.3 million, or .6% of total assets, at June 30,
2006. The ratio of non-performing assets to total assets was 2.2% at June 30,
2005. The Bank's non-performing loans consist of non-accrual loans, past due
loans over 90 days and impaired loans not past due or past due less than 60
days. The decrease in non-performing assets does not necessarily indicate an
improvement in the quality of the Bank's loan portfolio as evidenced by
classified loans increasing $2.2 million from $6.1 million at June 30, 2005 to
$8.3 million, at June 30, 2006. Classified loans at September 30, 2006
amounted to $6.1 million. This reduction is primarily due to a decrease in
past due loans and to a lesser extent payoffs of problem credits. The Bank
has implemented stricter internal policies relating to the identification and
monitoring of its problem loans due to the problems experienced in the
commercial, commercial business and consumer loan portfolios.
In addition to the classified loans, the Bank has identified an additional
$5.3 million of credits at September 30, 2006 on its internal watch list.
Management has identified these loans as high risk credits and any
deterioration in their financial condition could increase the classified loan
totals.
12
The Office of Thrift Supervision requires institutions such as the Bank to
meet certain tangible, core, and risk-based capital requirements. Tangible
capital generally consists of stockholders' equity minus certain intangible
assets. Core capital generally consists of stockholders' equity. The
risk-based capital requirements presently address risk related to both
recorded assets and off-balance sheet commitments and obligations. The
following table summarizes the Bank's capital ratios and the ratios required
by the Financial Institutions Reform, Recovery and Enforcement Act and
subsequent regulations at September 30, 2006.
(Unaudited)
Percent of
Adjusted
Amount Total Assets
------ ------------
(Dollars in thousands)
Tangible capital $22,829 10.2%
Tangible capital requirement 3,358 1.5
Excess $19,471 8.7%
Core capital $22,829 10.2%
Core capital requirement 8,955 4.0
Excess $13,874 6.2%
Risk-based capital $24,611 17.4%
Risk-based capital requirement 11,344 8.0
Excess $13,267 9.4%
Results of Operations
Net Income. Net income for the quarter ended September 30, 2006 was $72,000,
an increase of $114,000 from a loss of $42,000 for the quarter ended September
30, 2005. The increase was the result of a $683,000 decline in the provision
for loan losses. During the quarter ended September 30, 2005 the Bank engaged
a third party to review major loan credits and implemented stricter internal
standards in identifying and analyzing classified loans. As a result of the
outside review and the stricter internal standards non-performing and
classified loans significantly increased. The decrease in the provision for
loan losses was offset by a $342,000 decrease in net interest income and an
increase of $139,000 in noninterest expense.
Net Interest Income. Net interest income decreased $342,000, or 17.6%, to
$1.6 million for the quarter ended September 30, 2006 from $1.9 million for
the quarter ended September 30, 2005. This was primarily the result of an
increase in interest expense of $297,000.
13
Interest Income. Interest income decreased $45,000, or 1.4%, from $3.3
million for the quarter ended September 30, 2005 to $3.2 million for the
quarter ended September 30, 2006. Interest income from loans receivable
decreased $192,000 from $2.8 million for the quarter ended September 30, 2005
to $2.6 million for the quarter ended September 30, 2006. The decrease was
attributable to a $13.9 million decrease in average loans outstanding.
However, the average yield earned on loans increased from 7.02% for the
quarter ended September 30, 2005 to 7.30% for the quarter ended September 30,
2006. The decrease in average loans was primarily the result of declining
interest rates and the Bank's competition refinancing loans with fixed-rate
loan products. The Bank has historically not offered fixed-rate loans.
However, with the opening of the Springfield branch loans increased $5.5
million during the quarter ended September 30, 2006.
Interest income from securities was $454,000 for the quarter ended September
30, 2006, an increase of $53,000 from $401,000 for the quarter ended September
30, 2005. This increase resulted from the average interest rate earned on
securities increasing from 3.34% for the quarter ended September 30, 2005 to
4.37% for the quarter ended September 30, 2006. The increase in the average
interest rate earned was due to the Company selling $7.0 million of securities
during the quarter June 30, 2006 and reinvesting the proceeds in securities
with higher yields. Income from other interest-earning assets increased
$94,000 from $110,000 for the quarter ended September 30, 2005 to $204,000 for
the quarter ended September 30, 2006. The average rate earned on these assets
increased from 2.72% for the quarter ended September 30, 2005 to 3.56% for the
quarter ended September 30, 2006 and the average balance of these assets
increased from $16.1 million for the quarter ended September 30, 2005 to $23.0
million for the quarter ended September 30, 2006 as funds from loan payoffs
were redeployed in other interest-earning assets.
Interest Expense. Interest expense increased $297,000, or 22.3%, from $1.3
million for the quarter ended September 30, 2005 to $1.6 million for the
quarter ended September 30, 2006. This increase was due to a $379,000 increase
in the cost of customer deposits primarily caused by average rates paid on
customer deposits increasing from 2.12% for the quarter ended September 30,
2005 to 3.04% for the quarter ended September 30, 2006. A decrease of $7.1
million in the average outstanding balance of FHLB advances reduced interest
expense by $82,000.
Provision for Loan Losses. The provision for loan losses decreased $683,000,
from $793,000 for the quarter ended September 30, 2005 to $110,000 for the
quarter ended September 30, 2006. During the quarter ended September 30, 2005
the Bank engaged a third party to review major loan credits and implemented
stricter internal standards in identifying and analyzing classified loans. As
a result of the outside review and the stricter internal standards
non-performing and classified loans significantly increased. The allowance
for loan losses was $2.5 million, or 1.67%, of gross loans at September 30,
2006. Loan losses, net of recoveries, were $66,000 for the quarter ended
September 30, 2006 compared to $1.6 million for the quarter ended September
30, 2005.
Noninterest Income. Noninterest income increased $80,000, from $511,000 for
the quarter ended September 30, 2005 to $591,000 for the quarter ended
September 30, 2006. The increase was due to a gain of $47,000 being
recognized from the sale of real estate owned during the quarter ended
September 30, 2006 compared with a loss of $52,000 being recorded in the
quarter ended September 30, 2005. This increase was offset by a reduction in
service charges and other fee income of $38,000. The decline in service
charges and other fee income is the result of the decline in customer deposit
accounts.
14
Noninterest Expense. Noninterest expense was $2.0 million for the quarter
ended September 30, 2006, an increase of $139,000, or 7.6%, from $1.8 million
for the quarter ended September 30, 2005. This increase was due to increased
compensation costs and occupancy and equipment costs of $179,000 of which
$118,000 related to the new Springfield branch. The remaining $61,000 was due
to annual salary increases and stock-based compensation of $13,000 being
recognized during the quarter ended September 30, 2006. A reduction in
customer deposit account processing fees of $58,000 helped to offset these
increased costs. This reduction was due to the elimination of outsourcing the
processing of customer deposit account transactions in late June 2006. This
function is now be performed in-house by Bank employees.
Net Interest Margin. The Company's net interest margin decreased from 3.51%
for the three months ended September 30, 2005 to 3.10% for the three months
ended September 30, 2006 primarily due to a 40 basis point decline in the
Company's net interest spread and a $12.8 million, or 5.9%, decline in average
interest earning assets.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, securities, FHLB advances and net operating
income. While maturities and scheduled amortization of loans and securities
are a somewhat predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure availability
of sufficient funds to support loan growth and deposit withdrawals, satisfy
financial commitments and take advantage of investment opportunities. At
September 30, 2006, $15.5 million of additional funds can be drawn on the FHLB
as an alternative source of funds. During the three months ended September 30,
2006, the Bank used its sources of funds primarily to fund loan commitments,
and pay maturing savings certificates and deposit withdrawals.
Liquid funds necessary for normal daily operations of the Bank are maintained
in two working checking accounts, a daily time account with the FHLB of Des
Moines and a repurchase agreement account with a regional bank. It is the
Bank's current policy to maintain adequate collected balances in those two
checking accounts to meet daily operating expenses, customer withdrawals, and
fund loan demand. Funds received from daily operating activities are
deposited, on a daily basis, in one of the working checking accounts and
transferred, when appropriate, to the daily time account or the repurchase
account to enhance income or to reduce any outstanding advances from the FHLB
or purchase securities.
At September 30, 2006, certificates of deposit amounted to $89.1 million, or
51% of the Bank's total deposits. Historically, the Bank has been able to
retain a significant amount of its deposits as they mature. Management
believes it has adequate resources to fund all loan commitments from savings
deposits, loan payments and FHLB advances and adjust the offering rates of
savings certificates to retain deposits in changing interest rate
environments.
15
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934 (Act) was carried out as
of the end of the period covered by the report under the supervision and
with the participation of the Company's Chief Executive Officer, Chief
Financial Officer and other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as
currently in effect are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or
submits under the Act is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief
Financial Officer) to allow timely decisions regarding required
disclosure, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls over Financial Reporting: During the
quarter ended September 30, 2006, the Company remediated the material
weakness reported as of June 30, 2006 in which the Company did not
identify or record certain transactions related to the other than
temporary impairment of certain equity securities. To remediate the
material weakness in the Company's internal control over financial
reporting, the Company has implemented controls to quantify and record
the impairment of the debt and equity securities and evaluate the near
term prospects of the issuer in relation to the severity, duration and
materiality of the unrealized losses. No other changes have occurred in
the Company's internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures
and internal control over financial reporting will prevent all error and
all fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any control
procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control procedure, misstatements due to error or fraud may
occur and not be detected.
The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve
its controls and procedures over time and to correct any deficiencies
that it may discover in the future. The goal is to ensure that senior
management has timely access to all material financial and non-financial
information concerning the Company's business. While the Company
believes the present design of its disclosure controls and procedures is
effective to achieve its goal, future events affecting its business may
cause the Company to modify its disclosure controls and procedures.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal proceedings
at this time. From time to time the Bank is involved in various claims and
legal actions arising in the ordinary course of business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the stock repurchase program information for
the three months ended September 30, 2006:
Maximum
Number of
Total Number of Shares that
Shares Purchased may yet be
as Part of Purchased
Total Number of Average Price Publicly Under the
Period Shares Purchased Paid per Share Announced Plan Plan(1)
--------- ---------------- -------------- --------------- -----------
July 1-31,
2006 - $ - - 70,583
August 1-
31, 2006 - $ - - 70,583
September
1-30, 2006 765 $16.68 765 69,818
--- ------ --- ------
Total 765 $16.68 765 69,818
=== ====== === ======
(1) The Company completed ten separate stock repurchase programs between March
9, 1994 and May 28, 2004. On May 28, 2004, an eleventh repurchase program of
164,336 shares was initiated. As of November 7, 2006, 69,818 shares remained
available for repurchase under the eleventh repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
None
17
ITEM 6. EXHIBITS
3.1 Articles of Incorporation of First Bancshares, Inc. (1)
3.2 Bylaws of First Bancshares, Inc.(1)
4.1 Specimen stock certificate of First Bancshares, Inc. (1)
10.1 First Home Savings Bank 1994 Employee Stock Ownership
Plan (1)
10.2 First Bancshares, Inc. 1993 Stock Option Plan (2)
10.3 First Home Savings Bank Management Recognition and Development
Plan (2)
10.4 First Bancshares, Inc. 2004 Management Recognition
Plan (3)
10.5 First Bancshares, Inc. 2004 Stock Option Plan (3)
10.6 Form of Incentive Stock Option Agreement (4)
10.7 Form of Non-Qualified Stock Option Agreement (4)
10.8 First Bancshares, Inc. 2004 Management Recognition
Plan (3)
10.9 Severance Agreement between First Bancshares, Inc. and
First Home Savings Bank and Charles W. Schumacher (5)
10.10 Employment Agreement with James W. Duncan (6)
31. Rule 13a-14(a) Certification (Chief Executive Officer and
Interim Chief Financial Officer)
32 Section 1350 Certifications
-------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 File No. 33-69886.
(2) Incorporated by reference to the Company's 1994 Annual Meeting Proxy
Statement dated September 14, 1994.
(3) Incorporated by reference to the Company's 2004 Annual Meeting Proxy
Statement dated September 15, 2004.
(4) Filed as an exhibit to the Current Report on Form 8-K dated February 22,
2006 and incorporated herein by reference.
(5) Filed as an exhibit to the Current Report on Form 8-K dated October 31,
2005.
(6) Filed as an exhibit to the Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2005.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
First Bancshares, Inc.
Date: November 14, 2006 By: /s/James W. Duncan
------------------------
James W. Duncan
President, CEO and Interim
Chief Financial Officer
19
Exhibit 31
CERTIFICATION OF
PRINCIPAL EXECUTIVE AND INTERIM PRINCIPAL FINANCIAL OFFICER
I, James W. Duncan, 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 small
business issuer as of, and for, the periods presented in this report.
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business issuer
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b. Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
c. Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's fourth fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of
the small business issuer's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's ability
to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 14, 2006 /s/James W. Duncan
--------------------------------------
James W. Duncan
President, Chief Executive Officer and
Interim Chief Financial Officer
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND INTERIM CHIEF FINANCIAL OFFICER
OF FIRST BANCSHARES, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certifies, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-QSB, that:
1. the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
Date: November 14, 2006 /s/ James W. Duncan
----------------------------------
James W. Duncan
President, Chief Executive Officer
and Interim Chief Financial Officer